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Comment by boc | Hacker News Reader

It's objectively hilarious that the top VCs put on their "banking expert" hats and misdiagnosed SVB's public statements so badly that they created a run on their own bank.

Let's be honest, very few of the VCs calling their founders telling them to pull their accounts had any clue about what "held-to-maturity" vs "available for sell" meant in the context of SVB's investment portfolio, or had any real knowledge about what the actual issue was within the bank. They were just hearing rumors/reading tweets that the bank was going to collapse and taking it at face value without any diligence.

They made the calls, retweeted the tweets, and then read the explainers on substack the following day to figure out what was actually happening. It was pure herd panic behavior and should make a great case study some day.

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This is a classic prisoner's dilemma and has been studied to death already. Pulling your money out is rational behavior as soon as there is any risk that you won't be able to in the future - yes, even if that behavior is what causes it.

The subtext of your comment is that it would have been smarter to leave money in the bank. That's not how the world works.

There's an interesting discussion around how social institutions can coordinate mutual non-defection (hint: it probably looks a lot like the recently announced "government guarantees deposits"). But "lol dumb VCs" just shows lack of understanding.

Explain how burning the system your community depends on to the ground when it wouldn't have burned otherwise is "rational"

Because there is no “community” in this situation, just individual actors in a life and death situation, running for the exits

The bank provided many benefits unique to the startup/VC community, otherwise people would not have stashed dumb amounts of uninsured cash there. Those benefits are now gone.

It may be rational to withdraw money from the bank (which raises risk for everyone), but it would be superrational [1] to buy 10-year bonds from the bank (which lowers risk for everyone). Yes it is dumb for VCs to not understand this basic principle.

[1] https://en.wikipedia.org/wiki/Superrationality

This little round of prisoner's dilemma had thousands of participants. It would be irrational to assume all the other players are superrational.

Since you bring up game theory, the optimal strategy is to defect (withdraw your money) SECRETLY so that the bank has the highest chance of survival and your venture debt loans, relationships, etc all survive. Instead, some VCs PUBLICLY/LOUDLY withdrew their money and created a panic, which doomed the bank to a massive bank run.

You're wrong: https://news.ycombinator.com/item?id=35103411

And how poorly does it reflect on the SV venture capital community that they couldn't muster that kind of cooperation?

> Let's be honest, very few of the VCs calling their founders telling them to pull their accounts had any clue about what "held-to-maturity" vs "available for sell" meant in the context of SVB's investment portfolio

Uh, the fact that they knew what it meant was why they freaked out. They knew the bank was not liquid.

Plus you don't need to be a finance professor to know that if a bank is having trouble doing normal bank stuff like processing transactions, something is wrong. And a lot of people were going to notice that in the next few days. If it wasn't Thiel it would have been someone else the next day realizing that the bank was screwed.

Don't blame people for starting a bank run. Blame the bank for making a run the rational thing to do for anyone who cares about their money.

No bank is infinitely liquid. Processing transactions at the volume that happened during the run is the opposite of "normal bank stuff." Neither of those points make any sense, and they reinforce the point the original poster was making. If you think that a bank is in trouble because they can't handle a huge percentage of their depositors pulling out their money, you don't understand how banks work.

The bank was having trouble processing routine transactions for Thiel's fund. That is definitely normal bank stuff. The bank was illiquid to the extent that it was impacting day to day operations.

The events are described here: https://news.yahoo.com/thiel-founders-fund-withdrew-millions...

It’s fun to call elite people foolish and sometimes they are, but your picture of what was going on at SVB is not accurate.

SVB was not guaranteed to collapse, but their marginal solvency relied on depositor behavior that was already changing. They had complementary problems on both sides of the business and were getting squeezed by it. Nobody can know how long they would have lasted without last week’s run, but things were looking dicey and they easily could have failed to satisfy withdrawals even if there was no public knowledge of their situation. The publicity and run just resolved the genuine underlying tension that was already there.

There has been some unsourced reporting from insiders saying there were only about 20 minutes away from raising the required capital necessary before the VCs rang the alarm on Twitter.

SVB mismanaged the situation by announcing the raise before it was happening, maybe in the name of transparency, but that doesn't mean they didn't have a workable plan for patching the situation. What they (and no bank anywhere) had a plan for was a massive coordinated bank run within a single day.

>It's objectively hilarious that the top VCs put on their "banking expert" hats and misdiagnosed SVB's public statements so badly that they created a run on their own bank.

I appreciated another comment that shared the same sentiment, but said something along the lines of, "Tech companies DDOS'd their own bank".

> misdiagnosed SVB's public statements

What's misdiagnosed? That SVB is holding half its assets in 1.5% long term HTM bonds in a 4.5% interest rate environment?

That should only be a concern for investors, not depositors. The HTM lockup is only a concern for depositors if they all start trying to withdraw at once...which is exactly what happened due to the VC-fueled panic.

The depositors were all trying to withdraw all at once, because the depositors were startups that are spending money, but aren't getting any new funding injections or revenue.

That normal behavior triggered the insolvency.

> That normal behavior triggered the insolvency.

Its not normal to have 42 billion withdraw in a day, net. That's 20% of total assets. If your hypothesis is correct, then all of the companies using SVB would have spend all their money in just over a business week.

They were insolvent before that 42 billion was withdrawn. The bank run only started after they announced their insolvency.

SVB sold all of its liquid securities to finance regular customer withdrawals, and came up short. It announced that it's going to be borrowing money, selling more shares, and that it's going to mark down it's long-term assets.

The bank run started after that announcement.

If they were insolvent before the 42 billion was withdrawn, how did the people withdraw the 42 billion?

Insolvency means that they owed 220 billion, while owning 200 billion worth of assets.

SVB had enough cash-on-hand, and could borrow money against their assets in order to serve 42 billion dollars worth of withdrawals.

Their balance sheet still had a huge hole, from the moment that they marked-to-market their long-term treasuries. Which was before those 42 billion dollars were withdrawn.

I'm being very specific here, they had ~175b in deposits. There assets may or may not have been more or less than deposits, that is immaterial. They were insolvent because they did not have enough cash/credit/liquid capital to cover the predicted withdrawals. That is the why they are insolvent.

Long term, yes, the asset state would have been a problem, and would(should) have been marked up as a ~25% loss on the bonds that were being hammered by inflation.

but at no point would that have been a big issue for the stability of the bank. It would have hammered their share price, but not deposits. It probably would have required a change of management, but again, not fatal.

The issue here is that "asset insolvent" is rarely described like that, it normally at the point where you declare bankruptcy because no-one will buy you out because you liabilities are way more than your income.

HOW do you have hundreds of portfolio companies with uninsured millions in a bank. Please can some venture capital expert explain? Tell me it's not just hubris.

Can't speak for everyone. But a train of thought I've heard from founders for years (when I've suggested moving their huge pile of investment money into something other than a bank account) goes something like this:

We are not a portfolio management company. We aren't here to manage investments, we are here to build something of value: our startup. The money that is invested in us is best spent on _us_. They view us as a good investment, and we view ourselves as the best possible return on our time and money. We are all on in our venture and our outcome is either 0 or 1, we are going to be the 1, so every dollar we get is best invested in ourselves and not [X]. No other investment will yield the same return as our outcome if the promises we've made to ourselves and our investors hold true.

So they park their money in a bank account, use that to calculate runway, and treat that runway as an ongoing investment in their startup. The bank losing their runway wasn't really a substantial risk compared to the other existential risks a startup faces on a daily basis - at least not until last week.

My understanding is that when people refer to deposits being insured in America they are nearly always referring to the FIDC insuring $250k on deposits (not for values greater than that amount, and not for stocks etc).

Is it common practice for other banks to insure deposits more than what SVB? I keep hearing the 'how could they not have insured X% of their accounts'. That question adds to the hysteria if most banks wouldn't hold insurance if they had those clients. There isn't a lot of reporting separating whether SVB was underinsured or whether the only difference is that other banks have a lot of individual depositors vs catering for businesses.

Might be a basic question from a STEM nerd with not a lot of finance background, but what are "insured" millions held in? Special class of corporate accounts?

The bank (every single bank) pays the FDIC a fee on every insured bank account. The FDIC puts all that money into a bucket and pays out from it whenever a bank fails. They also have a line of credit with the Federal Reserve that they can draw on if the bucket isn't large enough.

So the FDIC pays out everybody up to $250k, closes the bank, liquidates the assets, and then pays out the balances above $250k until they run out of money.

Sweep accounts, is one answer I’ve seen floating around

Some other suggestions here, for personal account holders who are fortunate enough to have that much cash: https://archive.ph/tyCy5

"Don't withdraw your money or you stand to lose all of the non-FDIC insured money you don't withdraw" is an absurd stance. If tomorrow I realized that, if I were too late to the withdraw party my account would turn into a $250k IOU from the FDIC, I'd absolutely move my money to another account.

The bank was belly up - placing the blame on the people who expected their bank accounts to be liquid doesn't seem like the correct take. When you put your money in a bank, you expect to be able to pull that money out at any time for any reason. One of those reasons is suspecting the bank is incapable of surviving you withdrawing your money.

Why wouldn't they? What's the worst case scenario? SVB blows up, the Fed halts hiking rates because of the fear they injected to the financial system, and they finally see the light at the end of the tunnel of rate hikes, because their entire grift is based on 0% interest rates. Sounds like a win-win to me.

Can’t wait for the day there isn’t this hive mind surrounding VCs and the tech elite at large. Bank runs, mass layoffs, etc. All of them are just copying what others are doing.

The tech industry sure has knocked their standing in other people's eyes down a ton this last little while.

These are the people who eat financial sheets and reports for their breakfast, lunch and dinner.

Do you seriously think they don't understand such basic financial assets?

Why do you say misdiagnosed in light of the scale of unrealised losses at SVB vs its equity?

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