> The people in the VC community who triggered the bank run did the right thing by their startups.
How do you arrive at this conclusion? Without a run on the bank none of this would have happened.
How do you arrive at this conclusion? Without a run on the bank none of this would have happened.
The bank was appears to have been insolvent (from the currently available information), though they avoided their books showing the fact by having bonds marked as “HTM”.
When a bank is insolvent, it’s best to shut it down as soon as possible, to avoid the bank engaging in risky behavior to ‘make back’ the missing money.
But without that pressure, there probably would have been enough time for this to have been a much more orderly transition. The panic didn't help anyone, it just made SVB's existing problems more difficult to manage.
To put it another way -- SVB went bankrupt the old fashioned way... slowly and then all at once. The bank run was the inflection point.
The only way to make back the $100 they spent on a 1.25% 10 year $100 treasury was to wait 8 more years.
Those 8 years they'd either have to become slowly become insolvent by offering their depositors 3-4% savings accounts like every other bank, or become illiquid because what depositor would keep their money in an account earning 0.5% so that SVB can keep the lights on. They had to sell and book the loss eventually.
If it were only illquid, it would be far easier to find a buyer and it would have already been sold by now.
[1] https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
So, only after the run did they become insolvent. The change from illiquid to insolvent happened quickly, but without those withdrawals, the illiquidity could have likely been managed to avoid an outright insolvency (probably through a sale).
If you’re going to take a loss by selling an asset prematurely, it is illiquid. Otherwise you’d have to say things like the houses people own are liquid because the person could sell it in a day if they were willing to do so for 80 cents on the dollar.
That is not the financial world’s definition of “liquid”
Things one can sell at fair value in a few mins are liquid, and things one has to sell slowly or take 80 cents on the dollar to get rid of it fast (like a house in your example) are illiquid. It's a function of buyers and process, not my accounting treatment or tax treatment or whatever other treatment might make me not like the idea of selling right now.
What's next? The FX markets aren't liquid because I don't feel like realizing a gain from a tax perspective?
>> That is not the financial world’s definition of “liquid”
Yeah, it is, to us in the financial world.
>Yeah, it is, to us in the financial world.
I get the feeling we're talking around each other, your response indicates that we (probably) agree, and I'll assume it was my own communication failure, so I won't otherwise remark on this snarky & somewhat inaccurate (in its implications) comment.
The comment you were replying to said "quickly and at fair value".
At a simple scale, If I own a $200k home outright and have $50k in credit card debt that I cant pay then I file for bankruptcy, negotiate with creditors to sell my home and pay the debts, and come out with $150k in assets with no liabilities. I was always solvent.
This happens daily in the business world’s bankruptcy courts. (Of course some of them are also insolvent)
My small scale example illustrated the concept, my large-scale citation of bankruptcy courts show a bit of how it plays out in real life & validates the analogy.
A bank run is an almost inevitable consequence of a loss of confidence in a bank.
The loss of confidence was caused by their $1.8B loss on securities sales and plan to go to the market for $2B in funding.
The next day shares plummeted, and people began to remove their money (including those advised by VCs)[1]
Given the fact that only $250K of funds is FDIC guaranteed, in the face of a balance sheet crisis at the bank the withdrawal of funds was entirely rational. Arguably not doing it would have been irresponsible.
Even if there hadn't been a bank run it's pretty easy to see cases where the bank would have "temporarily restricted the amount of money an entity can withdraw in a day" or something. That potential restriction on liquidity is something any responsible business owner would want to avoid.
[1] https://abcnews.go.com/Business/timeline-silicon-valley-bank...
Ugly, but rational.
However it was not the rational decision for a fund to do so. You have a) substantially larger voice and also ability to coordinate for better outcomes, for a fund it is no longer a gamer theory 101 standard prisoner's dilemma.
The larger funds could have
- Banded together and made a joint statement ( like they were able to organize and do after the run) reassuring every startup of their confidence in the bank
- Participated in the equity infusion into the bank
- Organized and bought debt in the bank to give it liquidity
- Simply moved their own money as new deposits into the bank.
Just doing a joint statement - which wouldn't have costed them a single penny would have gone long way to reassure the markets and also gained the key guys a lot of clout and established their influence J P Morgan style.
Unless those first people were actively trying to create an insolvency crisis, it seems to me they were either being prudent or prescient. There's a reason it's called the "tragedy" of the commons, and not the "tyranny" of the commons.
https://www.bloomberg.com/news/articles/2023-03-11/thiel-s-f...