Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of your deposits in a single day you're not a bank anymore. That is a money market account or some other product, which doesn't lend long. It's a bit apropos that those who started the run will pay part of the price, although there's a LOT of collateral damage, and I don't doubt those who started it will ultimately turn that to their advantage since they have the deepest pockets.
https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.htm...
BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes (not raising short rates would increase inflation expectations and push 10y rates even higher!). And there is no hard line between solvency and liquidity, because it all has to do with time scale. If I say you have to give me $1000 in the next 3 seconds or I take your car, you can't do it because you can't reach your wallet fast enough.
I blame the bank management. They left the risk management position open and spent way too much time, money and effort on marketing during that period of time rather than shoring up their shaky position.
The problem is apparently that some VCs invested in banks - and banks are about to be more heavily regulated. That's a good thing -- it will get banks implementing the backstops they should've had all along. I really don't mind if some VCs make less money than they'd hoped on their investments in risky banks.
Also, this $500B number is spread across the entire VC industry. And even then, most VCs have heavily diversified portfolios. Just for example, one investor in SVB was Insight Partners -- but their web site lists 800 different investments. They're part of that $500B number, but it will have very little effect on their overall portfolio.
We're seeing old lessons from the 80's being retaught in the banking world.
Never put all of your cash in one bank. Keep your debt and your liquidity held in separate banks because if you don't and your bank goes under, your bank debt is written off against your balance when the bank liquidates.
The hyper-connected world we've created prioritizes efficiency and optimization at the expense of operational redundancy, which leads to people getting caught doing stupid things like putting all of their money into one business bank that had no visibility into their own risk profile.
Closer to a year, I believe. On the back of lobbying for exemptions from Basel III adequacy requirements.
There was no moral hazard created because bank shareholder equity got zeroed out.
Bank management and shareholders were not protected against the 'find out' phase.
The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete.
A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.
So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.
Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.
When you sell your liquid portfolio to Goldman at a $2bn loss and then announce non-binding equity commitments, you’re going to lose 20% of your deposits. Now that banks can borrow against the face value of their Treasuries, the same duration problem shouldn’t recur. (That said, we’re stuffing an ungodly amount of crap into the FHL bank.)
Can't we sort of blame the Fed for that [yield curve inversion and long rates] too? It undertook massive quantitative easing during the pandemic, which depressed the yield of long-term bonds such as those bought by SVB. Perhaps if it hadn't done so much QE, the yield on SVB's long-term bonds would have gone from, say, 3% to 4% instead of 1.56% to 4%.
Edit to clarify: I'm not saying that the Fed deserves blame for SVB taking such a risky long-term position, I'm saying the Fed deserves some blame for long-term bonds being risky.
No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up.
SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.
The BTFP does it for one year without a haircut. Is it long enough? Depends on where long term rates go. If they fall a couple of points in the next year, it could, but if the Fed fails to beat inflation and they rise... then it wouldn't.
I've been around and around on this question. Insolvent or illiquid, illiquid or Insolvent... etc. It was solvent on paper, by what it had to record on it's books. But it was insolvent by mark-to-market (which it didn't have to use but which the sophisticated but not-that-sophisticated investors, say venture capitalists, would assume is the reality). But hey, you could say it was solvent by the Fed supporting every bank it's size. Then again, the Fed didn't come through in time, so maybe the run was the reality [1].
And you could say "this was a run 'cause picking on SVB in particular was unfair since a significant portion of all bank capital in long term bonds that put them on an "overhang" of unrealized losses. [2] But maybe, the Fed needed to cool the economy so killing a few banks was needed and SVB and signature were the most logical.
[1] Matt Levine in Bloomberg https://archive.ph/uIYtY [2] https://finance.yahoo.com/news/u-banks-sitting-1-7-211212318...
It seems like you're implying that a truly sophisticated investor would view this differently, but I don't see how. By all indications, the MTM price was economically correct--bid/ask spreads and trading volumes were normal, and the price was very close to what a simple NPV model would predict. There are cases where the market price is economically wrong (in a "liquidity crisis", "fire sale", etc.), but there's no evidence of that here.
Managers and shareholders of the SVB and other banks with similar losses have strong self-interest in arguing otherwise, and they're doing so quite successfully. It's particularly easy to confuse people about interest rate risk, since it's so abstract--you're still getting the same future cash flows, and it's hard to explain why they're less valuable without a concept of NPV or other bond math, which relatively few people understand. The economic loss is just as real as with any other risk though, regardless of what the accounting says.
Just making sure I understand your point here, are you just against "banking"? Unhedged duration risk w/ LOLR backup is essentially "the banking business".
What's the moral hazard? The equity is wiped out, most of the debtors are wiped out.
The only moral hazard I see is we've disincentivized individual depositors from assessing the financial strength of their banks. To me, this is a good thing. I hope we can bring similar moral hazards to choosing a plane to fly on, bridge to cross, building to enter, restaurant to eat in, hospital to go to, etc.
What’s your take on the observation that historically after the yield curve inversion ends, it’s 3-6 months until a recession?
If deposit accounts were held at the Fed, and investment and loans were kept separate, there would be no possibility of bank run.
Proxy war in eastern Europe, with USA dumping big $ there, is causing price rises.
So be careful what you wish for
We also will now see which startups can afford to hire developers at over $350K/yr + bonus + stock options in an adverse, unfavourable market without VC capital. Oh wait...
None.I conjecture a huge fraction are entirely independent of SVB FDIC shenanigans.
Wrong. You should, and I always bite that bullet.
[Edited for typo]
HN'rs love to criticize financial analysts, but this is precisely the thing that they would typically look at (whether they actually did on Roku is another question) when analyzing the overall value of a business. Meaning, they don't just look at the company's financials, but also the management team, their performance, their controls, processes, etc. (and arguably their treasury management). We also love to criticize MBAs and finance people, but this is exactly the type of thing that is optimized with experienced business/finance professionals.
You might be thinking "how on earth does X big company operate this way?". The same way a company like Equifax who literally provides all of its FICO scoring via computers, was running outdated Java components that led to a serious ransomware hack.
[0] - https://www.cnn.com/2023/03/10/business/roku-svb-cash/index....
I suspect vcs were telling the companies to bank with svb as some sort of mutual backscratching.
A lot of their contracts with SVB involved exclusivity clauses apparently. I'm not sure what SVB gave them in return.
Trade treaties and WTO rules cover dumping in international trade for obvious reasons, but to my knowledge, there's no law in the major western jurisdictions covering domestic dumping.
Now they're coming down to more reasonable levels, in fits and starts.
VCs and their LPs don't want the write-offs. They're painful.
But ultimately, I think the write-offs will prove healthy.
The current crop of startups have largely been pioneers, but usually, the settlers take away the bulk of the spoils.
In India, Uber got everyone used to the idea of app based cabs. Now newer players are eating away Uber’s lunch with newer models and without having to spend any money on educating customers or drivers.
It depends how unprofitable. Well-established products like Twitter and Reddit are big, have an established user base, and while not particularly profitable, I also don't see them getting disrupted by a rising competitor.
What possible value is there for entrepreneurs of a secular reduction in valuations?
Currently those of us in tech are suffering due to the absurdities of the SaaS obsession.
Edit: I mean developing technology, what has to be called “deep tech” these days.
If the valuations were just speculative, then it could represent a return to a world where cause and effect and value are more rational, which is theoretically far better for a smart investor/entrepreneur to participate in than something between a game of craps and a ponzi scheme.
I don't mean to assert that any of that is reality, but that's a possible avenue for value to be found in a reduction of valuations.
> But ultimately, I think the write-offs will prove healthy.
Yeah this was happening with or without the SVB collapse. In fact, I really don't see much of a correlation to any of this (between lower valuations and the SVB collapse). But I couldn't read the article as it's behind a paywall and the archive.is version got cut off.
Valuations from late 2020 to early 2022 were so radically insane for later stage startups that we will likely see a mass extinction event in another 12-18 months when they all either run out of money, or shrink by 90%+. Series A and B companies getting 100-200x on revenue is simply unimaginable for me even in the best of times. VCs that invested at these valuations are likely also going to die off as they'll be unlikely to raise future funds. Only time will tell.
This has created a divide and widens the inequality gap on a scale not seen before in our lifetimes.
The rich get extremely rich, because they don't pay the same taxes as labour and they have so much money they own politicians and can make sure the status quo never changes.
This has caused things like "quiet quitting", because people no longer see work is worth anything anymore if you can't progress your life in any meaningful way.
All ladders to wealth and fulfilment that our parents and grandparents had have been destroyed.
Agree here. If you ever want to ruin a fancy dinner party say this: "We should tax capital gains at the highest rates, and tax labour the lowest."
Or what is the alternative, if they didn't get their tax breaks they would do what? Stop wanting money? I don't think so
What does this mean? Assuming you are referring to earned income tax, I do not understand how income tax is a way to make companies pay tax.
Also we are coming on the debt ceiling limit at some point in the next few months, which might trigger a crisis of its own. If I were a VC I wouldn’t play my one-time hyper-risky card before seeing how the debt ceiling shenanigans play out.
> It’s important to take the time to celebrate that the VC’s attempt to gin up a banking crisis to pause rate increases failed and now they’re well and truly boned
[1]: https://twitter.com/SMTuffy/status/1638609733702524936?s=20
SVB has nothing to do with that problem. It's about higher interest rates. The end of free money for stupid stuff. Now companies have to make money.
So who's going down? TSLA, UBER, and RBLX already made it to the public markets; they're out of the VC sector. Those are the biggest ones. What are the remaining big money-losers still owned by VCs?
If you're a business with 30 employees all making 150k/yr you have 375k in payroll costs every month. Holding even 1 months payroll in cash puts you above the FDIC limit of 250k. Normal people rarely need more than 250k in cash so the ratio of business to normal people in customer base matters.
To make things worse let's say you're VC funded and you don't have monthly revenue to put towards your payroll. Instead you have X months of payroll/runway in cash in an account being slowly drawn down. Now you might have 1 year of payroll in cash. Nearly all of that is uninsured.
Quick googling shows me that SVB was only 15% insured. Likely because of their focus in startups with large balances vs regular ppl with low balances. For context BOFA is 40% insured and JP morgan is 35%.
https://time.com/6262009/silicon-valley-bank-deposit-insuran... https://www.forbes.com/advisor/banking/bank-of-america-revie...
But I do see your point, short term treasuries probably would make sense for startups right now. With a 4.2% rate on the 1 month treasuries it would make sense to setup a ladder with bonds coming due as you needed them. But in the very recent low interest rate past this probably wasn't worth the hassle for many startups.
imagine if you will, some kind of place you could deposit your money, and they WOULDNT get to gamble with it, outside of with consent.
imagine the depositor being able to say "i wish to allow the depositors to be used for whatever the bank pleases", or "i wish to not participate in this"
Don't get me wrong I agree with you, I just think they would get steamrolled by those who use depositors' money to gamble.
https://medium.com/prime-movers-lab/venture-backed-startups-...