Silicon Valley Bank SIVB - $270 to $30 in 48 hours

[disneysteve]

Is the the beginning of a new, better and effective set of oversights?

Restoring Dodd-Frank to its original form would help. In 2010 the stress test limit was $50 B. In 2016 the regulations were weakened to $250 B. Had they not changed the law, we might not be having this conversation.

 

[pb4uski]

Restoring Dodd-Frank to its original form would help. In 2010 the stress test limit was $50 B. In 2016 the regulations were weakened to $250 B. Had they not changed the law, we might not be having this conversation.

Good point. A stress test would have likely flagged the amount of interest rate risk that they were assuming.

 

[marko]

Good point. A stress test would have likely flagged the amount of interest rate risk that they were assuming.

True, but those at the wheel of the ship didn't need a stress test. They knew they were in trouble months ago as bonds kept dropping.

 

[Car-Guy]

I agree, and when Chairman Powell calls me to ask if they should bail out the depositors, my answer will be “no”.

But I'd say no too.

 

[pb4uski]

True, but those at the wheel of the ship didn't need a stress test. They knew they were in trouble months ago as bonds kept dropping.

I agree. Given the positions that they took, I'm surprised that they didn't have some derivatives hedging the interest rate risk on the asset side or sold out and reinvested in less interest sensitive assets much earlier. They had to have had a sense that their demand deposits were less sticky than typical demand deposits.

 

[MichaelB]

Please remind him that he still owes me $20 on that bet I won from him!

Done. He said he transferred the money to your account in Silicon Valley Bank.

 

[marko]

Done. He said he transferred the money to your account in Silicon Valley Bank.

THAT'S where it went! Thanks.

 

[MichaelB]

Here’s a thorough and very detailed summary of Silicon Valley Bank by Joe Politano, who publishes a column on Substack. Politano has a good reputation as an economist and the analysis is data driven. https://www.apricitas.io/p/the-deat...id=107480909&isFreemail=true&utm_medium=email

 

[Closet_Gamer]

I agree, and when Chairman Powell calls me to ask if they should bail out the depositors, my answer will be “no”.

I think I disagree with this.

The equity and debt holders of the bank should get crushed. They are investors in a business that was mis-managed. Too bad, so sad.

But I have a lot of sympathy for depositors and that includes the venture firms.

You're a venture firm with maybe $10-50M you raised in the last round. You're off working on your idea. Hiring people, running R&D, building sales, trying to build out marketing, etc. You're busy and far more likely that not you're a decent person pouring a lot of blood, sweat and tears into something.

Or you're also a young/smallish public company in much the same situation.

You should not also need to be a bank analyst or have to hire an expensive CFO to do your own liabilty matching. Or try to park $30M in 120 different accounts to get FDIC protection?

You should be able to count on a bank being ... a properly run bank.

And as shareholders in public companies, it's ludicrous that we are exposed to losses because we can't bring ourselves to properly run banks.

Should someone bail depositors out? That's a hard one for me. Maybe we should as a societal penalty for mis-managing basic tenants of the banking system. The societal version of what happens to the shareholders in the bank.

What needs to happen is reform where FDIC covers 100% of deposits with commensurate insurance rate increases & required bank risk behaviors to warrant the insurance. It is insane that we have to go through the silliness of parking money all over the place just to manage FDIC caps.

And all banks need to be able to survive a stress test because while they may not be systemically important to the nation, they are certainly "too big to fail" for their depositors.

 

[pb4uski]

.... You're a venture firm with maybe $10-50M you raised in the last round. You're off working on your idea. Hiring people, running R&D, building sales, trying to build out marketing, etc. You're busy and far more likely that not you're a decent person pouring a lot of blood, sweat and tears into something.

Or you're also a young/smallish public company in much the same situation.

You should not also need to be a bank analyst or have to hire an expensive CFO to do your own liabilty matching. Or try to park $30M in 120 different accounts to get FDIC protection?

You should be able to count on a bank being ... a properly run bank. ...

I disagree. If you have raised $10, $30 or $50 million then you sould be able to afford a decent CFO who would know enought to assess the risk. To me this goes to prove that brokered money market funds are safer than bank deposits in excess of the FDIC limit. With the former, at least there are rules that result in prudent asset/liability matching via the various don't break the buck rules. As we now know and should have known, deposits in excess of the FDIC limit are at risk. Besides, there are products out there where you have you money deposited at one bank but the underlying deposits are spread out to stay within the FDIC limits.

NFW we taxpayers should be guaranteeing deposits greater than $250k or bailing out depsositors who ignored the coaverage limits.

Now all of that said, I think that many of the uninsured depositors will be made whole or close through the runoff of SVB's assets after then insured depositors are paid.

 

[pb4uski]

+1

 

[Spock]

I think I disagree with this.


You're a venture firm with maybe $10-50M you raised in the last round. You're off working on your idea. Hiring people, running R&D, building sales, trying to build out marketing, etc. You're busy and far more likely that not you're a decent person pouring a lot of blood, sweat and tears into something.

Or you're also a young/smallish public company in much the same situation.

You should not also need to be a bank analyst or have to hire an expensive CFO to do your own liabilty matching. Or try to park $30M in 120 different accounts to get FDIC protection?

If your firm is has raised $10M-50M through venture funding you already have a CFO. The $3M startup I worked for had a CFO. And you don't need to spread it across 120 accounts nor do you need FDIC protection. Hundreds of Joe/Jane Sixpacks on this board manage to budget a savings burn rate and park $ not needed this month into a 4 week treasury for next month.
This isn't that complicated.

You should be able to count on a bank being ... a properly run bank.

If every bank was a "properly run bank" there wouldn't be a need for the FDIC.

 

[bobandsherry]

I totally disagree. SVB is a victim of their own flawed asset-liability management practices... borrowing short and investing long... it's that simple. It was about duration mismatching and interest rate risk, not credit quality. They were both reckless and unlucky.

+1! Having worked in banking for my entire career I've seen first hand and actively participated in A/L committee. This apparent huge A/L mismatch has me wondering how SVB could have been so mismanaged, they didn't see rates rising?

 

[bobandsherry]

Will there be a clawback for the execs who sold their shares recently or got big bonuses?

This should definitely be on the table. I had read, haven't substantiated, that SVB paid out annual bonuses just prior to being closed. That, as well as up to 5 prior years, should be clawed back for executives. As for sold shares, minimally any gains within some recent period of time.

 

[Winemaker]

Since the "Golden Period" thread started, I, for the life of me, was trying to figure out why all of a sudden, these big banks are offering so many CDs and bonds. I see why now, they're shoring up their capital base to make up for the losses on their HTM bond portfolios. It wasn't making any sense with these depositors getting 0.2% interest on their deposits, and then paying up to 5% on CDs.

 

[Spock]

Here’s a thorough and very detailed summary of Silicon Valley Bank by Joe Politano, who publishes a column on Substack. Politano has a good reputation as an economist and the analysis is data driven. https://www.apricitas.io/p/the-deat...id=107480909&isFreemail=true&utm_medium=email

The charts in that link really tell a story.
And here is why SVB will bailed out:

"SVB was also borrowing a large amount from the Federal Home Loan Banks (FHLBs), government-sponsored member-owned banks that offer liquidity through secured loans. In fact, as of Q3 SVB alone was responsible for 20% of FHLB San Francisco's loans outstanding".

I wonder if the feds money printer runs on diesel or has been upgraded to rocket fuel.

 

[Freedom56]

Monday will be a start of a long term bloodbath for regional banks as large accounts flee to larger banks. The top 15 banks will become the "really big" top 15 banks as more people flee smaller banks. Now it's more than likely that the Fed will pause interest rate hikes as the Bank of Canada is doing and wait for inflation drop over time. However, pausing or cutting interest rates won't stop the floodgates of depositors fleeing to the larger money center banks. Investors and businesses have seen the dangers of doing business with a largely unregulated mid sized bank.

 

[JoeWras]

+1! Having worked in banking for my entire career I've seen first hand and actively participated in A/L committee. This apparent huge A/L mismatch has me wondering how SVB could have been so mismanaged, they didn't see rates rising?

I've been wondering this too. The only thing that comes to mind is culture.

Having been employed by a SV tech firm for 25 years before I retired, I saw all kinds of "fake it until you make" it behavior. It is baked into the culture of VCs and SV.

Additionally, SV tech companies like to clear out the old people. Too stodgy, you know. Nevermind they have the institutional memory of when times go bad. They don't want contrary thoughts. That was then, this is now.

Did they really think long term rates at 2% or less was a forever thing?

 

[frayne]

It's anathema to capitalism for wealthy people to lose money, no doubt in my mind the uninsured depositors will be made whole, just a matter of timing, arm twisting, cajoling and finding the right institution(s) to assume SVB assets and liabilities. We've seen this scenario played out too many times before. Although SVB might not be too big to fail, it's still too big to let fail.

 

[jldavid47]

Originally posted by luckydude
svb is a victim of an unprecedented fast changing macroeconomic environment more than anything else.

... They were unlucky but hardly reckless.

i totally disagree. Svb is a victim of their own flawed asset-liability management practices... Borrowing short and investing long... It's that simple. It was about duration mismatching and interest rate risk, not credit quality. They were both reckless and unlucky.

+2

The whole idea the "this was the Fed's fault" (which is what these excuses boild down to) is just rubbish. Higher interest rates were not a Black Swan event. An eventual increase in inflation and rates was as certain as the seasons. Lacking to plan for that eventuality is just financial malpractice or pure stupidity or the ultimate in hubris or all of the above.

 

[jldavid47]

It's anathema to capitalism for wealthy people to lose money

Actually, in real capitalism it is normal for wealthy people to lose money from time to time. Whatever we're doing in the US isn't actually capitalism. I'm not sure what it is but it ain't capitalism. Seems closer to mercantilism these days.

 

[Car-Guy]

I suspect a buyer will be found before the market opens tomorrow or at the very least, an announcement from the FDIC that says "in effect", the depositors will be made whole. If that happens, the SVB depositors may turn out to be the lucky ones since more banks are likely to follow and I'm not sure how long other banks and the FDIC can keep it up.

Just me thinking out loud. YMMV

 

[Closet_Gamer]

Well, at least I posted something interesting for people to disagree with!

I'm hanging with my viewpoint.

If putting "bank" on the front of the building doesn't convey that it is a "bank" then we have a problem. FDIC should cover all deposits but insurance premiums on all those funds and require behavior to back it up. Everyone's yield on those funds will go down a smidge. Want higher yield? Explicitly buy non-FDIC products Right now we all get a little extra yield because we're counting on not being the person who has a problem. Its like a really damaging version of speeding tickets. Everyone drives 80 and knows its a bit of a lottery as to who gets the ticket.

I know lots of CFOs. Big job even in a small company. They shouldn't have to be bank analysts and 95% aren't qualified to do that. And I shouldn't have to expect them to be. Giant megacorp? Sure. Otherwise, this is why we have regulators.

I've had an idea for an insurance business for years. One of the reasons I haven't pursued it is that I don't know if I could credibly (in the eyes of regulators) put "insurance" on the product.

If people can't count on banks to be properly regulated, what else do we put in that category?

Well...people should be able to research airline safety. So they skipped on maintenance...read up...stay informed. Plane probably won't go down. And if it does and the airline can't cover the damages? You should research their financial stability before you fly. Besides, airlines aren't systemically important.

Same for drugs. Those drug disclosures are quite thorough. Do some research. Call a pharmacist friend. Caveat emptor.

(I'm intentionally stretching to make a point...)

 

[Gumby]

I find it difficult to believe that the depositors of SIVB did not know the FDIC limit was $250k. If you want to take a chance on depositing more than that, for whatever reason, then do it with your own money, not mine. I see no upside in encouraging people to disregard risk in their pursuit of riches by bailing them out with taxpayer money when things go bad.

 

[jurgs01]

I'll let you smart people ponder over what this could mean.

https://bankingjournal.aba.com/2015/11/fasb-finalizes-market-to-market-accounting/

the Financial Accounting Standards Board on Wednesday gave final approval to an accounting standard that is limited in its requirement for mark to market accounting. The final standard, “classification and measurement,” becomes effective in 2018 and does not require MTM for loans or debt securities.*

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

As*announced*on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020.* This action eliminated reserve requirements for all depository institutions.