SVB was particularly poorly run
fedguy.com
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VCs received cheap loans and financial services from SVB if they got their portfolio companies to bank with SVB. There were in some sense backdoor deals, which resulted in these odd loans and bad portfolios. It was all built on an assumption of cheap capital. People are not discussing how incestuous SVB was with VCs, and many will get off the hook for unethical financial behavior.
I dont think calling SVB poorly run is accurate, it was run for profits. The decision making is opaque at this point, and my guess is if the curtain is pulled back, it was run exactly as intended.
If you watch the most recent episode of the AllIn podcast, they hint at this being the case. Clearly they know there was bad behavior, but dont discuss it at length. This is just another case of wealthy people gambling, with the common man absorbing the losses.
If SVB can't offer better deals for VCs then nobody can?
Sounds pretty close to an investment where the investor shouldn't be made whole.
It's just that we've decided that this time the risk mustn't be carried by those that profited from the deal.
Companies put money in SVB because it was often the default option that everyone used that understood how startups operate.
Then in some cases, companies would raise additional venture debt from SVB and for that you had to park money there. I got invited to events too and rep pushed the debt as “dilution free money” (as opposed to normal money for equity vc deal).
I never took it as didn’t need it.
When you're mixing private deals (for investores and founders) with company deals, you're usually on the hook for something. Letting them off the hook is nice, but it sends a terrible message and will only lead to greater implosions later.
If you claim VCs were demanding portfolio companies use svb, then let's hear names. I've raised money from multiple VCs and that's never been even hinted at.
We used svb because I've used Chase in the past. I know a bunch of stories that I'm not interesting in sharing publicly, but they're terrible. Here's one public story about what the "service" at Chase is like: the morons lost an updated phone number and almost shut down a small business with kyc inquiries dropped on them day of: https://twitter.com/joshtpm/status/1635083618380025858
The value of svb to us was they were a bank with a glowing rep, glowing ratings, good service when we called and asked for stuff, albeit with not particularly good software.
What SVB did was that they know your are vc/founder who raised from a16z or whatever and have this many assets etc. Because of that information they were willing to give you a loan on favorable terms because see low risk defaulting on your loans. Based on quick google search Jason Calacanis net worth around is $60-120M. It seems reasonable that he should be able to pay mortgage with that net worth and SVB might want to come by his house to maintain the relationship.
How every other bank does it: they look at your credit score, ask 2 years salary, ask if you own 20% of any company and some other basic questions. The feed it to some algorithm running in cobalt which gives them answer if it’s good to go or no. They don't care about your profession (except if it's something illegal or qustionable), the fact that you run $100M business or your personal assets. You might have $10M equity portfolio but normal bank doesn’t care because it’s not part of their mortgage/model questionnaire. If you say yes to 20% company ownership question, their model then tells them to in the company revenue (again not assets but taxes and revenue) and the answer likely might be no because ge banks don’t like bank entrepreneurs (even if company has $100M in their bank account).
IMO SVB knew much more about the people they were making loans for than most common banks. Their main risk there was that they had huge tech industry concentration that could hurt them if tech completely melts down).
Common banks models optimized to dealing with companies and people who are cash poor who then need loans to bridge whatever they are trying to do. The primary way to asses risk is look at their cashflow the past 2 years.
(Disclaimer: I don’t have loans or deposits in SVB. I did apply for the mortgage with but didn’t take it)
that's called fleecing the rubes and scamming the noobs
FDIC insurance is not there to insure most commerical banking.
There's absolutely nothing wrong with banks or any other business giving better deals to more valuable customers.
But I wouldn't say this clip is stunning (other than the temporal proximity). Sounds like this dude likes to run his mouth. He's bragging about his 3k sqft loft and these weird loan deals in front of strangers... I have no idea who he is, but if you showed me this clip and asked me to guess what he did when things went down, I'd tell you he said some (probably dumb) off-the-cuff stuff.
The MBS at least though is tradable and has a market price. Their own book of loans though is much larger and is subject to the same interest rate problems as their MBS and treasuries, and in addition to having lost value due to interest rate issues, it may now have default issues as well. Not a good combination.
The people running SVB were not stupid and were very aware of this risk, yet they chose to take it. There is a reason for this which we will find out in the fullness of time.
I really can't wrap my head around holding $500M earning almost no interest (>$10M annual) in an uninsured account. Why? It's not like they had that much in monthly expenses or income. Was it just more incompetence or as has been suggested in other posts were there "benefits" of doing this that may not have accrued to the corporation?
Of course it was the run of those giant uninsured depositors that caused the immediate cash. Of course it's not clear (had all depositors not been bailed out) that anyone withdrawing within the last 90 days would have not had their withdrawals clawed back... we'll never know. If that had happened, I think we would see a lot fewer flash runs.
edit: https://www.thestreet.com/banking/svb-collapse-roku-had-487-...
It's also weird that we expect large depositors to think about it. If we created the system today, we would never think it okay to just destroy people's money at scale. Large depositors get almost nothing (very low interest rate) in return for that immense risk.
It could have provided 5-10% of (their negative) net income.
Companies and individuals are not trying to invest in their bank when they open a checking account. Does it really make sense that they need to dive into their bank's financials?
We're not talking about a special fintech, we're talking about a MoneyMarket or Treasury account, which are higher interest and lower risk than a bank account, but you're limited to a withdrawal or two a week.
I think everyone would be served by a frank examination and critical review of buddy-buddy networks and "incestuous" relationships in the finance industry generally. Not just SVB and VCs.
Smells of that too big to fail BS all over again.
It's not true, I think, but it makes for a neat movie plot idea?
However, I’m not sure what percent SVB kept. Some are saying zero, is this true?
There is a requirement but not sure if easing of Dodd-Frank allowed SVB to bypass it. https://www.federalregister.gov/documents/2022/12/01/2022-26...
additionally it seems the US made their fractional reserve requirement 0% in 2020
Well, are they profitable? If they are currently failing to achieve what they supposedly aim for, surely the way they are run leaves something to be desired?
It may be tempting to argue that "they were well run until the bad thing happened" but that is a fairly low bar for running things well.
Most of your comment seemed reasonable, if a tad speculative given a lack of insider knowledge. But the last part feels like unnecessarily searching for a class warfare argument.
To date, said execs have lost their equity, and liabilities have been transferred. It remains to be seen if any more losses will be absorbed, and by whom and how much.
A counter argument is that a bunch of bank runs will destroy the "common man" and small businesses a lot more than folks parking money in hedge funds. The FDIC insurance pool works fine for a small number of regional banks, but it really is not that large.
It's the way the entire world works and there's nothing wrong with it in general.
SVB did not collapse because of this, the collapsed because of bad risk management, a lot of money that they could not lend out in low yield bonds they were locked into. It wasn't even that bad.
The VCs decided to shoot themselves in the foot by creating a run on their own banks.
Their hypocrisy is stunning.
But Calacanis talking about getting sweetheart attention is a nothingburger.
That said, it seems the core of the issue was that SVB wasn't properly hedged against interest rate hikes.
My question is: why not? I understand that they were without a Chief Risk Officer for the last 10-11 months, but that's not really a problem if you think about it on a more macro-scale - as we've had a near-zero-interest-rate environment for a lot longer than that, so wouldn't the most basic plan of action when rates first hit that low for some officer of the bank to say "gee, these rates are dangerously low...and one day before these 10-year bonds fully mature, rates will probably go up, so shouldn't we take the obvious step to ensure we don't get absolutely fucked if rates go higher again?". I mean, these are bankers we're talking about...their whole job is to identify and manage risks.
EDIT: I am aware there are financial instruments and vehicles that banks' trading desks can't trade, so buying specific ETFs or stocks as a hedge is off the table - but that begs the question - why not go and buy some shorter-dated vehicles such as Treasury Notes that mature a lot faster and are much more liquid?
Having a hedge and not needing it is kind of a good problem to have, assuming they didn't overleverage on that hedge. But if the hedge is overleveraged, I am not sure if it can be called a hedge anymore. Because that would make the position it was supposed to offset the hedge position instead.
SVB did have other investments and some hedge. One of the core issues is that the Fed raised rates faster than any time in history and starting from some of the lowest interest rates in history. That's very difficult to predict and hedge against.
Not being sarcastic or implying anything: who could have predicted interest rate hikes at the time SVB was being pushed to generate yield/return on their assets (like 2020-2021 if I understand correctly)? In hindsight, what should they have done? Who/what forces drove them to park lots of $ into MBS yielding 1.5% or whatever? What should they have done instead once Fed start hiking interest rates, sell at a smaller loss then? Maybe they didn't believe the Fed?
One can say that maybe our regulations should be tighter. But I'm not sure if we can solve the "banks taking risks that are inappropriate for their own damn survival" problem. Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out.
If we regulate with lists of "these are safe" and "those are not safe" piles, they'll still figure out how to buy the "riskest of the safe pile", and get into trouble.
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Case in point: if they bought T-Bills instead, they would have been safe. But no, they wanted the higher risk T-Bonds.
From finance podcasts I have learned that the most important bit may have been that the Basel capital requirement for T-bonds is zero. (bonus citation)[1]. From a repayment risk perspective, that makes sense. From an FDIC puts your bank in receivership perspective, it's kind of a moral hazard.
> Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out.
Everyone says hedge risks but that costs money that will likely be equal to or in excess of the entire "go long on interest rate risk" strategy profit.
[1]: https://www.investopedia.com/terms/r/riskweightedassets.asp
Its SVB's responsibility to understand its own depositor base. It turned out that Silicon Valley was full of squeamish lemmings who'd jump off a fiscal cliff at the slightest provocation if their VC superiors told them to.
SVB needed to understand that its $100 Billion in deposits from 2020 through 2022 was based on hype, low-interest rates, and a sudden surge of VC capital. It also needed to understand that taking on more interest-rate risk in the form of buying long-term bonds was a bad idea, because you're now double-dipping in the risk pool.
SVB had something like 50%+ of those deposits in long-term held-to-maturity risky bonds (either 10Y+ Treasuries, or MBS). A more regular bank has only ~20%.
And SVB *ALSO* has a depositor-base who withdraws money as interest rates rise, because VCs lose their money / capital in rising interest rate environments. A more typical bank, like Ally Financial (risky but more typical) has a depositor base of regular ol' Joes who are well under the FDIC $250,000 limit and have no reason to withdraw their money in any economic condition.
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So we're seeing SVB's executives trying to blame everyone else, as if it were the Regulator's job to identify these risks. No you dumb dumbs, its SVB's job to figure out their unique risks associated with Silicon Valley.
And once that risk is understood, maybe then (and only then) is it appropriate to apply strategies that are happening at other banks at SVB.
And "But everyone else was doing it" and "Regulators didn't regulate this issue" are crappy reasons for doing something. No one else was serving Silicon Valley like SVB was. No one else had the stupid amounts of interest-rate risk associated with having a Silicon Valley tech-startup as their #1 depositor / typical customer. No one else had 95%+ uninsured deposits.
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Don't get me wrong. I understand that "doing things properly" would have made less money. But I also understand that "doing things properly" would have led to SVB's continued existence. This second bit is the bit that so many people seemingly forget in this discussion.
If the value of these bonds was almost certainly going to drop 10% (say), and that was going to be $x billion - then it’s not like SVB was going to find some way to hedge that and only spend $x million on it once that became obvious. Which by 2022 it was obvious.
> Its SVB's responsibility to understand its own depositor base.
Its SVB's responsibility, and they paid a price for it by getting zero'd out. But it's _also_ the regulator's job to look out for such risks, to protect deposit insurance among other things. One professor puts the blame on a shift from regulating risk to regulating process[1], promoted by Alan Greenspan. Who later said of the 2008 crises "those of us who have looked to the self-interest of lending institutions to protect shareholder's equity – myself especially – are in a state of shocked disbelief."
Said differently the regulators aren't there to protect shareholders from the risk of owning a bank. That's just a handy benefit. It seems likely though that this risk would have been easy to spot and the power prevent had regulators been motivated to do so.
For whatever reason, banking seems to attract a lot of "heads the exec suite wins, tails shareholder loses" agent-principal problems. Thats really my point: the cost of hedging risk is the profits -- and profit-sharing -- that you might have earned. Probably _all_ of it. "Not hedging your risk" then isn't just staff and execs being "dumb dumbs" who forgot about it, but a deliberate enterprise and strategy. In the fullness of time we'll probably learn how execs were incentivized to take the risks that took the company down and how they influenced the board to give them those incentives. IDK how relevant it is but Greg Becker was on the board of the SF Fed, while running a regulated institution.
> No one else had the stupid amounts of interest-rate risk associated with having a Silicon Valley tech-startup as their #1 depositor / typical customer. No one else had 95%+ uninsured deposits.
About that... if fed keeps raising rates, I expect more banks to float to the surface. Collateral damage, in both senses. SVB was hardly unique in the 'unrealized losses' category.
[1]: https://podcasts.apple.com/us/podcast/the-regulatory-blunder...
It also seems like they should have made some credible loans instead of buying bonds - that whole "reinvest in the community" thing. Although they might be required to keep some low-risk (when managed by adults) assets.
This is part of why bonds and credits cause problems that you don't find with equities. It's the normal thing to value an equity book as the market price, so if you have losses you have to do something about it. Somehow that isn't universal in credit markets (partly to do with illiquidity, sure, but some of these instruments aren't illiquid), so when there are swings you sometimes get everything being fine, other times gigantic losses that become too big to do anything about. This whole thing with having a Hold-To-Maturity book is a problem.
The image in everybody's mind should be Wiley E Coyote running off a cliff. He doesn't fall until he looks down and finds nothing under.
Of course it would be interesting to hear another perspective. I'm basically just saying "why isn't this bank just run like a hedge fund" because that's what I'm used to.
https://svb.com/startup-insights/venture-debt/how-does-ventu...
Polite way of saying 'straight up lies by the Fed'
https://apnews.com/article/signature-bank-fdic-barney-frank-...
Reforms he helped roll back for Signature. A bank whose board he was on when it went under. Why are you surprised he’s making excuses? Where do you think he’s sending his resume?
You can also observe that regulators are now making it a requirement that "Any buyer of Signature must agree to give up all the crypto business at the bank" https://www.reuters.com/business/finance/us-regulator-taps-p...
He’s been out of lawmaking for a decade and never worked for the New York DFS, the regulator that actually shut down Signature. When asked why he was on Signature’s board, he said it’s because he needs “to make money” [1].
His comments are well placed to receive sympathy from banking-naive crypto enthusiasts (I presume this describes most of them). Because, again, he needs to make money.
> regulators are now making it a requirement that "Any buyer of Signature must agree to give up all the crypto business at the bank"
The proximate reason Signature went down was because it was affiliated with crypto. Silvergate got tanked by crypto. Signature’s stock started falling simultaneously despite their crypto exposure being much smaller.
Crypto is a threat to banks that bank it. Our banking system should slough off that business, or at least charge a rate aligned with its risk. (For example, negative interest and no loans.) That doesn’t mean that’s why Signature was shut down.
[1] https://www.ft.com/content/090e081f-35b3-484b-8095-c42a3c5e4...
Former accomplishments or positions are not a good appeal to authority.
Do you believe Sam Bankman Fraud’s claims about FTX? If not, then you shouldn’t believe Barney Frank about SBNY either.
Indeed, he should be treated as a very influential grifter, with _even more_ incentive to make shit up when it benefits him.
https://www.wsj.com/livecoverage/stock-market-news-today-03-...
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https://www.forbes.com/sites/shivaramrajgopal/2023/03/15/svb...
> As pointed out in the Bloomberg piece, SVB was rated highly as a pro ESG stock by the ESG rating agencies. MSCI rated SVB an “A” stock in terms of ESG. Blackrock appears to own SVB under its Article 8 funds (“green” as per the EU labeling regime).
By the way, I don't envy the Fed's position, but they did put themselves there with 10 years of free money that they abruptly ended.
what does secular mean here?
This is similar to the use of "secular trend" in many other economics contexts to represent the overall long term trend
"In finance, secular is a descriptive word used to refer to market activities that occur over the long term."
This appears to derive from sense 6 of the adjectival form from dicationary.com:
"going on from age to age; continuing through long ages."
It has been amusing to watch the initial rampage about “Silicon Valley tech libertarians” turn into… confused silence, now that we don’t have anyone to yell at about all these other banks failing.
I did see a video of a senator yelling at Powell that he’s a big meanie destroying people’s jobs, so maybe it will be him.
Give us a credit crunch.