That interview with the chairman (chairwoman?) is just great. She straight up says that maybe they shouldn't bail out the big banks and instead apply a similar process to them.
I just watched it -- aside from the very interesting mechanics of the FDIC coming in and taking over a bank, I thought Sheila Bair (the then FDIC chair) came off as very knowledgeable, realistic, and critical of the risks posed by big banks. She went on to become a university president after the recession / banking bailout.
I know a couple bank VPs who have been the representative of the take-over bank in absorbing failed banks. They describe it in terms that most of us would recognize as taking over a failed project and re-architecting/refractoring it so that it can succeed (or making the call to discard all work to date and start over with a workable solution).
This case is unique because of the sheer volume of non-FDIC insured deposits. Substantial risk of depositors not being made whole for a while, they’ll probably get all their money but it will still be bad
Possibly forever, if the assets aren't there. A senior claim on $0 is still worth $0. There may be sufficient assets to pay back depositors, but we don't really know at this point.
Given that they had only $5bn of long-term debt - and $173bn of deposits - it seems that bond holders cannot absorb much (even though it's not very likely that they receive anything).
SVB owned a bunch of mortgage backed securities and treasuries - both of which are down 30-50% from their peaks, which coincides with our last venture capital boom. SVB was buying at the top because they had so much capital to deploy.
Maybe instead of cashing it out, depositors could be given a treasury worth 30% less than SVB paid for it, that pays out 1% a year in interest, redeemable at face value in just 20 short years.
They weren’t insolvent yesterday, they just had a rush of withdrawals. It will probably be upwards of 90 cents on the dollar, but that amount of money locked up in a possible credit crunch coupled with a loss of confidence in banks and the current startup environment is very bad
They weren’t insolvent because banks are allowed to pretend treasuries haven’t lost value so long as they intend to hold them to maturity.
Across all banks, there are over $600b in such losses. If they can hold those securities until they mature, all is good. If they need to sell them earlier, the losses become real.
In SVB's case I believe they are mostly mortgage backed securities (ironic, eh) rather than treasuries but yes. I wonder if this will spur any reflection on the accounting rules for HTM securities.
I bet they bought mortgage-backed securities because returns on everything safer were essentially zero. Crazy-low interest rates for too long created this problem.
> If they can hold those securities until they mature, all is good.
That's an odd bit of logic. If interest rates stay the same and nothing of interest happens for the next 20-30 years, then those banks will lose the spread between the interest on those instruments and the interest they're paying (SVB was paying 4.5% on savings!) for 20-30 years. That money needs to come for somewhere. The net present value of that loss is a very similar number to the unrealized mark-to-market loss of value of those instruments.
It's almost tautological that being able to hold those instruments to maturity requires that they remain solvent for the term of those instruments, which means that the money to cover their losses must come from somewhere.
Now everyone involved can gamble that interest rates will go back down in a few years and those short interest rate positions will recover, but that's a gamble, not a certainty. Of course, the Fed does have a bit of an interest in pushing rates down if needed to avoid bank failures...
Didn't management/CEO/someone high up in the company say something like "We're safe unless everyone pulls out their money" the other day, indicating that they were de facto insolvent?
That just indicates they didn't have liquidity to cover every deposit, which is true for basically every bank that doesn't charge you to store your money in a vault.
Which I guess makes it about semantics. If everyone takes out there money one at a time, one person each week, over years, they would be solvent. But if everyone did it at the same day, they wouldn't be able to handle it, making them insolvent.
i think by that definition all fractional reserve banks are 'de facto insolvent', which would make this a definition of 'de facto insolvent' that isn't useful for fractional reserve banks, since it doesn't distinguish among classes of fractional reserve banks
and yes, the ceo did say that yesterday, which is likely why this happened
Yes but supposedly if you mark their balance sheet to market, the net is approximately zero, i.e. they have just enough assets to cover liabilities with no reserve. In this case you could say that the reserve requirement is serving its purpose. The stockholders may be wiped out (depending on how much a potential buyer values the goodwill), but the depositors should get all their money back. Worst case I think depositors would take a small haircut.
Yes so the key distinction is this bank had a bank-run against it that forced their hand. Fair to say any number of banks would fail if they faced a bank-run in current environment (depending on proportion of long dated bonds they hold)?
If they have to liquidate their assets (mbs/treasuries) they’ll probably create at least some slippage, moreso in MBS, that may prevent them from recouping their value at current prices. Alternatively they can try to hold to maturity or spread out their selling but that will make depositors illiquid
I don't think that holding to maturity really solves the fundamental problem though. The reason the MBS have lost value is because they have a low coupon compared to what you can get now. To execute the hold to maturity strategy, they would have to pay the depositors interest with the coupons from the MBS.
Under ZIRP, the depositors weren't getting anything, and so making 1.5% on MBS was fine. In the current interest rate environment, depositors won't be satisfied with a zero yield on their deposit accounts, and the MBS don't pay enough to cover it, so either they lose depositors because they're not paying competitive interest, or they take a loss every day because their investments don't cover the cost of the deposits.
Ultimately keeping the bonds on the books as HTM just spreads out the loss over the lifetime of the bonds rather than recognizing it right when interest rates change, but the result is the same.
Oh fully agreed. They fundamentally lost depositors’ money by making bad investments - holding to maturity is just a way to argue that depositors will be made whole. The depositors may as well just be given the bonds/mbs themselves and allowed to hold to maturity or sell them to meet immediate needs.
But if you put in $250k because you're responsibly splitting things across banks, and the interest you've made on it raised you to $252k, you're counted amongst the 97.3% and it's not a big deal.
I'm sure some people are out meaningful amounts of money, but I'm not sure what a typical account looks like.
Clawbacks are only poised to happen for big crypto failures (FTX) because the people who held money in those institutions aren't technically "depositors," and are considered a more generic type of creditor (which has a bankruptcy clawback).
Bank deposits are special and there will be no clawback. However, depositors who lost money will be first in line at the bankruptcy court.
note there is no bankruptcy court here. SVB will go into fdic receivership and almost certainly be sold off to another bank. Depositors are still first in line to get stuff back, but it's not through bankruptcy court. There is no court involved.
Possibly a forced rush job after that comment about solvency. I think the FDIC usually prefers to do secret operations under the cover of night to avoid problems. With everyone's eyes on the bank, that wouldn't be an option.
When the FDIC takes over a bank, they usually have some local cops around, to deal with crowd control and calm down upset depositors. See the 60 minutes video. There's a police car parked in front of the bank, but the cops are not doing much.
Not quite, the uninsured money will be partially paid out depending on how the books look (since the FDIC has to liquidate the bank), however a chunk of the money can be in limbo for now via receivership certificate that tracks the amount you have claim to.
From the PR
>The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds
This is a 100% standard FDIC statement and not unique to SVB btw.
> All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week.
So you'll get 250k plus an unspecified percentage of the other 93% of deposits the bank is holding. Startups have millions in SVB, it will be at least months before they have access to that.
Yep, the additional percentage paid out in advance will be based on the bank's books once the FDIC digs into it to estimate what can be recovered. The rest is after liquidation.
...per ownership category, of which their are, I think 14, and sometimes the insured party isn’t the depositor (e.g., “Employee Benefit Plans” are a category, and the plan participants are treated as the insured party for calculations in that category—and since its a separate category, it doesn't effect any single or joint accounts those participants happen to have at the same institution.)
I had it in my comment initially and removed it. When the bank's deposits are several magnitudes more than the limit, I don't think that distinction will do anything but muddy the waters.
Even if each owner had all 14 types, they only get $3.5mil in insurance. And the bank has, allegedly, somewhere around $200bil in deposits.
FDIC is federal insurance and it's for the individual entities that deposited the money. It's capped at $250k per account at the failing bank. It's meant to protect the little guy and not the big guy that failed. It also encourages users to diversify their financial institutions if you are really packing money away in accounts that exceeds $250k.
Otherwise no financial institution is actually insured against it's entire book. That would be insanely expensive and financially complicated at the scale banks operated at. For example, JP Morgan Chase has $3.7 TRILLION in liabilities on the books. Where the hell is an insurer going to get $3.7 trillion to gamble?
By the government. Because government insurance is designed to protect individual accounts as that provides the greatest ratio of impacted voters/exposure.
Could be some of these companies have other types of insurance against this, but for a lot of small startups this is way down the list of things you'd get private insurance for.
The issue is in trust. Banking's value proposition is trust. The bank is trusted to hold deposits and to process withdraws. Adding insurance just changes the trusted entity. FDIC insurance exists to increase trust for individual deposits.
1. FDIC insurance only covers $250k. FDIC insurance is mostly to reduce personal risk, so individuals feel comfortable keeping their own money in the bank. This is key to the banking industry because individuals are much more likely to horde physical currency than businesses are.
2. Who would insure the bank for unlimited deposits? If it's a non-governmental organization how would depositors know the insurance company is good for it? If it's a governmental organization then the taxpayer would essentially be a codified safety net for corporate risk taking. The insurance is more political palpable (and affordable) if it's seen as protecting individuals from bad banking practice then if it's seen as a bailout.
3. Banks ideally are the safe organization to hold cash. A bank failing is seen as a failure not only for the individual bank, but for the set of regulations that banks must follow. One bank failing reduces trust in all other banks, so it's in the industry's best interest to accept regulations that prevent bank failures.
FDIC insurance is to protect consumers and small businesses. I think of it as the same concept as accredited investors, once you have a certain amount of money, you get the freedom to dive into the shark pool and responsibility to manage that risk yourself. SVB was a high yield (4.5%!) bank. That comes with some risk.
"Uninsured" doesn't mean "all of your money is gone, sucks to be you", it means "you'll take a haircut proportional to the amount of missing assets from the pool." And yes, if the bank is a Ponzi scheme, then that pool is empty, but SVB's problem is liquidity, not overall solvency. The money is there, it's just locked at a suboptimal interest rate, which may cost you 10 - 20%.
This isn't like FTX where your "assets" are worthless IOUs written to yourself.
May also be solvency - their assets are MBSes whose market value went down with the interest rate rise, that being the proximate cause of the panic that set off the bank run.
No. If I crash my car into a $80,000 BMW and totaling it—and I have no insurance—the other party will still be able to sue me and partially recover their losses. Maybe they get $63k from me and eat the other $17k.
The bank has assets. Just not enough to cover all liabilities. That's why you see the term "haircut" being used a lot in these threads.
the assets the bank held are worth some % less than the amount they took in deposits but its not 90% less, its something like 20%. so on average, people will get something like 80% of their money back. I dont think the asset price declines were catastrophic.
I thought it was 2.7% of accounts are fully covered by FDIC? That's only going to be 2.7% of deposits by coincidence, and what it means for the others depends on just how dramatically over the limit they are... unless I miss something (which is plenty possible).
> The difference is that SVB's depositors will see most of their money back
Depositors will see all of their insured money back, uninsured deposits will be recovered based on available assets and/or terms of any resale by the FDIC, but could be lost in whole or substantial part. Large depositors could potentially see substantial losses.
Many bank's terms are if you get a loan from them, you need to use them as your only bank (or only accounts receiving deposits, or something). It is negotiable but it is the norm.
For full precision, if you're concerned about this, be aware that it's 250K per depositor at a given bank, rather than per account. That is, all your qualifying accounts at the bank are considered as one pool and 250K of that is insured. More detailed information, including how joint accounts are handled, here: https://www.fdic.gov/resources/deposit-insurance/financial-p...
SVB's assets will be divided up and given back to creditors (including depositors). So remaining depositors likely will get something back eventually, but we don't know how much yet (10%? 50%? 85%). There will also likely be a delay in getting those funds back as the process plays out, which is probably more dangerous to many companies than the haircut (assuming the hair-cut isn't too severe).
That amount of confidence on the fact that the music would never stop is... I dunno, I don't get any good adjectives. I can't understand it.
It's not even the case that they did it for the returns, because the returns were negative. Is it a regulation thing that forced banks to overinvest in long-term bounds?
You're getting downvoted because people are upset, but this is a real problem that could have been avoided. We'll come out of it stronger, but its going to hurt.
Only 3% of deposits in the bank are FDIC insured; other depositors will need to wait for the receivership process to run to get access to (what remains) of their deposits.
edit: replace "bankruptcy" with "receivership" as the latter is usually a faster process than the former.
Where'd you get the 3% figure? The only thing I saw in the article was that it was not determined.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Is the 3% figure from SVB or an estimate from another source?
Why would someone keep more than $250K in bank deposits? Isn't it more prudent (looking back no more than 15 years) to keep T-Bills or some other liquid security that isn't subject to a bank run?
Is it not possible to meet short term expenses with a short term loan which is discharged over a few days by selling liquid assets? Maybe banks just don't want to let you do that.
It is, and no prudent company should have lost their entire war chest unless their funding arrived just yesterday. But when you're spending $10M or $100M a year, it's operationally challenging to make sure you never have more than $250K in the bank while you're doing it. (It's much, much better to be imprudent and have too much in bank deposits than miss payroll because you have too little.)
I think the asset figure did not include unrealized losses on bonds that they intended to hold to maturity as banks are not required to deduct those from their total assets. As deposits flowed out of the bank, they sold some assets and realized those losses.
This isn't true. The bank is in receivership and which is a different form of bankruptcy. The FDIC will liquidate assets or find a buyer relatively quickly. Depositors will end up getting most or all of their money back.
What are you talking about? Pretty much everyone I've seen has called this a bank run and said to get your money out since SVB announced they were trying to raise money. Techcrunch called the announcement shooting yourself in the foot.
"SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment)"
Investment products are not FDIC insured; Accounts over 250k are not FDIC insured; In this case, that's probably the bulk of 'uninsured' - large accounts, or creatively sold investment products.
Investment products can (and often are) FINRA and SIPC insured - but this is NOT an insurance against loss (FDIC doesn't insure your interest, just the principal which changes each time interest is paid, the moment FDIC steps in your interest-earning can go to zero) - it is insurance that you actually own what the investment says it is.
So if you buy stock via Vanguard, and Vanguard mismanages itself into death, you still own the stock and eventually it'll be at another broker.
I'm not sure if this helps answer your question, but coverage is automatic if you have your funds in an FDIC insurance bank (most all of them) and if it's in a normal savings type account and then any amount 250k or less.
The fed's move in interests rates was bound to break something. This is the first big name and, while banks are taken over by the FDIC often and it never makes the news, this one will be especially interesting bc it is Silicon Valley Bank. Naturally, people and the media will associate with the rest of silicon valley, bringing extra scrutiny to every brand name tech company, especially the ones that are still barely profitable.
And any accounts over $250K, poof.
Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.
It’s not interesting because of its name, it’s the 18th largest bank in the US. A domino that big usually doesn’t fall alone. Also, FDIC hasn’t taken over a bank since 2020. This isn’t exactly a common occurrence.
"Since 2020" is not a great metric, since a lot happened in 2020.
Here is a chart that shows the number of bank failures over the past decade [0]. As you can see, having a year with 0 failures is actually the outlier. The average annual bank failure over the past 20 years is roughly 20 per year and the median number is 8 per year.
Note that FDIC has a precise meaning for a "bank failure" - many more "failures" occur but FDIC gets there early enough and arranges for another bank to "take over" - more or less quietly. These are usually tiny community banks.
It’s also the second largest U.S. bank failure. WaMu was considerably larger when adjusted for inflation - $300B in 2008 dollars (> $400B in 2023) vs SVB at $200B in 2023 dollars.
I think big question really is has any other banks "invested" their deposits in similar manner. So could there be others that will go down if bank run is encouraged?
I know very little about this, but the wikipedia page says it's the second largest bank failure in the history of the US, so maybe you're underselling it a bit?
The reality is they try to protect as much of the assets as they can and even those over 250k will probably not lose as much as they would have without the FDIC
Maybe smart for orgs to do their payroll on a Tuesday or Wednesday instead of down to the wire on friday with everyone else.
Sure you get to hold onto funds for a day or two later, but it also puts your payroll at risk if the bank is failing.
(Seriously I worked for an org that changed payroll from Thursday to Friday and I’d be first to file with the labour board for missed employment payment if they blamed the weekend or bank failure for missing a payment).
Re Bear Sterns, there were lots of political reasons it was allowed to fail while others were protected. If I remember right something about them not helping with the Long Term Capital Management collapse for example. There will have been people who had the opportunity to help SVB and collectively decided it was better to let it fail. It will be interesting to understand the decisions that were made when the dust settles
They did intervene with Bear. The JPM acquisition came with all sorts of backstops and guarantees from the Fed. Lehman was the one where they didn't intervene, which is why there was no acquisition.
Management at the now FDIC-controlled bank will estimate the value of SVB’s assets, such as loans and bonds, and give depositors a fraction of that value to be paid in advance of the sale of those assets. They do this to prevent the collapse of all those companies who were SVB clients, which would be bad for the economy.
"advance dividend: A payment made to an uninsured depositor after a bank or thrift failure. The amount of the advance dividend represents the FDIC’s conservative estimate of the ultimate value of the receivership. Cash dividends equivalent to the board-approved advance dividend percentage (of total outstanding deposit claims) are paid to uninsured depositors, thereby giving them an immediate return of a portion of their uninsured deposit. Sometimes when it is projected that all depositor claims will be paid in full an advance dividend will be provided to unsecured creditors."
Early repayment of some percentage of the uninsured deposits, prior to full liquidation and/or acquisition. Depositors have first access to funds either way.
most likely a partial payment - i.e. you have 500K in the bank, 250K is insured and you know you will get it back - the other $250K nobody knows how much will be available when the dust settles, but maybe they (FDIC) feels confident they can give you 10% of that now, and keep making more payments as the picture becomes clearer on how much you can eventually get back. You won't get any final payments for many many months when everything is fully resolved.
It is. It's also a prediction that a lot of executives and CEO's and pundits and politicians and bank managers are marking right now.
I'm not claiming it's definitely going to happen, but if it is about to happen, we can expect to see a lot more of these failures to start happening, based on that graph.
I didn't realize there were that many bank failures during the Great Recession myself. I thought it was only a handful, just a few high profile ones.
Is total assets a useful measure here? I would be more interested in a chart that showed budgetary shortfalls. It sounds like SVB is only short about 10% of total assets if I am remembering what I read earlier this morning.
I mean, you could argue that relatively speaking you're better off, since you're probably not suddenly trying to satisfy champagne tastes on a malt liquor budget.
Does this mean that depositors have lost access to their funds until the bankruptcy process, with the exception of $250k which will be available on Monday?
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined.
What are the insurance limits for companies? Same as individuals? I get the sense that most of SVB's deposits were from startups and small companies. And I also get the sense that $250K is not much room for a startup trying to make payroll to employees with Silicon Valley wages.
Bank runs are always caused by memes -- the change is bank runs powered by image macros, but memetic spread of the idea "this bank may fail" is always what causes a run.
I'm not sure how true this is. I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.
I'm sure a lot of startups will be in trouble, but those that are working with decent investors probably had help protecting the assets.
The FDIC covers $250k per depositor, not per account, and specifically does not cover bond investments. Either your startup created 200+ entities to pull this off (good luck with the rest of compliance) and didn't do bonds at all, or the founder is misled.
> Either they created 200+ entities to pull this off
That's literally what they told me they did, and what I was trying to say happened here. It's possible he was misled, but he seemed pretty knowledgeable about this. The money initially came from Softbank, who helped with the process.
Also, $250k per depository per bank. You can also distribute the money across multiple banks to get higher insurance levels.
Why didn’t they just use https://en.m.wikipedia.org/wiki/Certificate_of_Deposit_Accou...? I haven’t used it I just read about it in a Taleb book but it seems like it would be much easier than creating all the accounts yourself and you can interact with just one bank account instead.
I'll be honest, there's a chance that this is exactly what they did but that they didn't understand it or describe it properly. My main point was that there are ways to get protection beyond the FDIC limit, and your link shows a pretty reasonable way to do that.
Assuming legitimate operations, this strategy is highly atypical in corporate finance. There is no scenario where this setup has less cumulative risk than keeping cash reserves spread evenly across the top 2-3 banks. For a startup, this is a red flag about the founders' priorities, risk management, and ability to find professional advice.
As an intuitive measure, extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand and also need to protect it.
To be fair the founder was really incompetent, and the money was pretty much wasted. When the company finally sold it was well worth what my strike price was.
They either made the story up based on what they read on reddit or you are making it up now based on what you have read on reddit. There is a third possibility that that person being incredibly dumb and they actually believed what they read - but I give that a slim chance.
Why would someone lie about that? Having 30 bank accounts does not confer any prestige upon you. There are companies that do this for people (https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...) and if you Google "FDIC sweep" or "insured cash sweep" there are a bunch of banks talking about how they support automatically moving money out when an account gets more than $250000 in it.
What's more likely being lost in translation is that they have an insured cash sweep account and explained how that works, and who exactly is creating the 30 bank accounts is what's being misunderstood in this game of telephone.
What SIPC does is similar to FDIC but it basically comes down to "If you buy stocks via Vanguard, Vanguard guarantees that those stocks actually exist and that if they fail you get them, and SIPC helps with that".
Making sure that if there's X in cash or cash equivalent at noon on March 9th, 2023 PST there's still X in cash or cash equivalents at noon on March 10th, 2023
Something to note: This list is not exhaustive. There was about 3.8k companies with svb as their servicer. That also doesn't mean all of their money was in SVB.
> To protect insured depositors, the FDIC created a new entity called the Deposit Insurance National Bank of Santa Clara, or DINB. DINB will maintain Silicon Valley Bank’s normal business hours, with banking activities resuming no later than Monday, including online banking and other services, the FDIC said. Customers with accounts in excess of $250,000 are being told to contact FDIC direclty
> The company’s main office and all Silicon Valley Bank branches will reopen on Monday,
> Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the FDIC said
Keep in mind 93% of SVB's assest were not FDIC insured.
> Silicon Valley Bank Had About $209.0B in Assets
> Svb Is First FDIC-Insured Institution to Fail This Year
Their recent attempt to raise money via shares and debt sales failed,
Not sure about banking rules but in general accounting terms: The deposited amount is an asset (the bank has got the cash) and a liability (the bank owes that amount to the person who made the deposit) and neutral on the balance sheet.
Edit: Seems that this is what's explained in the investopedia article you linked to:
"When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
Yes, but the OP comment conflated assets (cash and securities as you mention) with FDIC insurance which only concerns liabilities due to depositors who qualify for FDIC insurance.
> I think this is Google's first hit when one searches this, but I do not believe this is correct.
So, I think the person you are responding to is trying to explain the distinction between a bailment and a loan.
Let's pretend that someone had a safety deposit box with $1B at SVB. They'd get to keep the full amount, because that is a bailment. The money never becomes the bank's.
In contract, if someone deposited $1B at SVB, then the actual money becomes the property of SVB. And the depositor then is a creditor to SVB - they have an unsecured load to SVB of that amount. But after SVB gets taken over by the feds, they have to stand in line with the other creditors and get what they get. They aren't guaranteed to be made whole.
The another, more reputable source says exactly what I said.
"The deposit itself is a liability owed by the bank to the depositor. Bank deposits refer to this liability rather than to the actual funds that have been deposited. When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
The ACCOUNT is the liability, the CASH is the asset.
For a bank deposits are liabilities and loans are assets.
edit: Judging by a quick downvote trigger-finger, there seems to be some folks having trouble believing this; check this out from the source: https://www.federalreserve.gov/releases/h8/current/ ... look at the category names of where deposits and loans are listed.
The deposit itself is not a liability. The deposit account is. There are many ways to get money into a DDA. The bank will never give you your original paper currency back.
I agree with everything you say, but at a high level they "owe" you the money that you deposited. Which is a liability. They (generally) are not allowed to just go spend your money on anything they like (in the same way you could if you got a business loan, which is an asset and a liability), but it is prescribed how they can create assets with the deposits.
The (say) $100 cash I deposited to the bank becomes both an asset (they have "my" $100 in the vault) and a liability (they own me $100). So the accounting equation still balances.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
When Alice deposits $100 into a bank, the bank gains a $100 liability (owes Alice $100), and then a $100 asset (the cash). The asset is likely traded for a bond of some kind, in this case a US 10Y treasury.
The 10Y treasury was worth $100 in 2021, but today is only worth $80. The bank still owes Alice $100 (a $100 liability), but the asset's value has declined. This has caused... issues... culminating in the past week of events.
It's somewhat confusing to me, because a $100 treasury note is only worth less than $100 if you try to sell it today. You still will get your $100 back if it matures.
Bank runs happens when you create conditions that can't handle bank runs. Nobody would worry about keeping assets at a Bank that wouldn't get destroyed if people started asking for their money.
Therefore although bank runs aren't normal, they will almost surely happen to you if you put yourself in a situation where a bank run would destroy you. So you have to work as if bank runs are normal, or they will be normal.
I'm not super familiar with the intricacies of banking, so my guess is that this is simply due to part of it I don't know about, but...given all the "creative financial instruments" I've heard about since the runup to the 2008 crash, I have to wonder if this "market force" was at least partly due to something SVB was doing that wasn't terribly wise.
> was at least partly due to something SVB was doing that wasn't terribly wise.\\\
A startup-focused bank probably shouldn't have been investing into 10Y, 20Y, or 30Y US Treasuries, when their customers might only have 2 or 3 years worth of life in them.
So yeah, there's a bit of stupidity here for sure. But its the kind of stupid that I can imagine a lot of banks making.
Aside from all those tech founders (today's LP VCs) from 2008-2020 likely held equity/deposits at SVB, and the sheer call out by them to make a run on the bank yesterday just broke the bank. The speed of fintech makes it feel coordinated.
Funny it seems like VC GPs were on the horn yesterday to withdraw, and I know a number of LPs telling me last Sun/Mon they'll be "out of the country" next month. Looks like some folks had early info.
@danaris - if you are a bank and people want to withdraw money, you need cash to pay them. By "the market" we mean the banks depositors who withdrew their case (partially due to these very concerns, hence why bank runs are called bank runs)
So, first off, I am not very literate when it comes to the comings and goings of banking procedures, so forgive me if this is a dumb question.
Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?
Well a defense might be to increase their liquidity by selling those treasury bills, which would drive their price even lower, making other banks also be illiquid on paper.
So yeah I imagine all the banks nervously looking at eachother. Who is going to pussy out the first and cause them all to tumble over.
Yes, this may trigger many banks to sell off long term underwater assets which would further reduce their prices, incentivizing further sales. It can also trigger more bank runs that put time pressure on banks to do this. Bad situation overall
Not entirely correct. There is still a "bad bank" which is the SVB entity (and will be wound up in bankruptcy), and the "new bank" which has all of the insured deposits.
"This was a learning experience that will provide velocity in our continued disruption of the finance space for startups. We look forward to continuing to maintain a growth mindset as we ~cash your checks~ earn your trust."
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Isn't the investor justification for taking a huge chunk of profits "we take risk"? I fail to see how this is unfunny just because the risk you took played out in the bad way.
Tons of VCs had their assets there too. It could lead to serious ramifications, anyone with substantially more than $250k in that bank is out a lot and only time will tell how much they’ll be able to recoup. It’s not an FTX situation, the assets are somewhat there, but the losses in securities look extreme and unwinding them at a fair price may take months, if not years
There is a very large difference between FTX and SVB. The people behind FTX will probably go to jail because they committed crimes and effectively stole money. SVB mismanaged interest rate risk and ended up on the wrong side of interest rate hikes. They had similar results of people quickly trying to pull all their money out, but it's not "exactly an FTX situation".
My reading is that the long term book value of those assets is bigger than the deposits. And now that the deposits are withdrawn, SVB ahs to liquidate thise assets at current market value, which is (maybe?) lower than deposits. So, at the least, it looks like a strange risk management approach on behalf of SVB. And those clients that kept most of their money at this one, single bank.
I see it as very different from FTX. In SVB there was no fraud and no criminal wrongdoing; there may be no moral wrongdoing either. SVB was a chartered bank, subject to all regulation and reserve balance rules that other banks follow. As far as we know they followed all regulation to a letter.
Two things got SVB down. First, a rapid change in interest rate got their assets repriced down. It did not need to be fatal, this happens to all banks when interest rates rise quickly.
Second, its customers did a ran and went to pull their money. If all depositors of the BoA or Chase pull money out, those banks will collapse, too. This is highly unlikely for the BoA -- if folks start saying that BoA will collapse most depositors would shrug it off; the diversity of its base will make a run highly unlikely.
But as SVB was a much smaller bank and had a lot of similar customers (startups advised by similar VCs) the ran was seen as plausible at which point it was over -- customers pulled enough money to kill the bank. This is the price we pay for the flexibility of the current banking system that allows people to get loans and free checking accounts. My 2c.
There may be no moral wrongdoing but it seems quite dumb to be so heavily in securities that massively lose value when rates go up and rates are at historic lows, no?
The only job for these execs was to know which way the wind is blowing and they showed themselves to be not much better than every other rabid fool that bought GME etc. thinking things would never change and bull runs and low rates would last forever.
To be fair, it sounds like some shockingly negligent management on SVB's part. Obviously thats orders of magnitude off from the complete lack of management w/ SBF.
The VC fund only has a tiny fraction of their fund as cash because most of it is loaned to to their portfolio companies, which have it in cash at the bank their VC partners told them to (because you can't pay payroll with Tbills), which, to a large degree (judging from the comments on the thread from last night) was SVB. It's going to be brutal for every company who didn't get their funds out before this morning's announcement, not to mention the possible contagion risks.
Yes, the companies will be screwed but that’s not what I meant.
What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.
That's right. Although there is an interesting thing to consider: if you look at page 13 of the deck they shared on Wednesday[1], it says 56% of SVB's total loans are in the form of lines of credit issued to PE/VC funds, secured by their LP commitments. I imagine many if not most of those are fairly small in size, but it's possible some funds took out much larger lines of credit, secured by their future LP commitments, and were holding that cash at SVB. So we could definitely see some funds affected to varying extents.
What is this? Does this mean that if PensionFundFoo invests in VCFundX as a LP, that PensionFundFoo never actually has to fork over cash to VCFundX to give to StartupZ? Does this mean SVB accepted PensionFundFoo's commitment to VCFundX as collateral and gave a loan to VCFundX to invest in StartupZ?
Yeah, more the latter. VCFundX goes out and raises capital for a new fund, which includes PensionFundFoo as one of the LPs, and once closed, goes to SVB and says, 'hey look we have $100M in signed LP commitments for this fund we just closed' and SVB says 'great - we'll set up a line of credit for you at [x]% of that $100M that you can draw down now (or later) to do with what you want' (obviously to invest in startups, but that would also include their management fees which GPs can pull forward and use to fund their lifestyles and/or invest). And then the future capital calls from LPs, including PensionFundFoo, go to SVB to pay down any amount of that loan outstanding.
The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.
At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?
I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?
Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?
Oh for sure. LPs would wire money to SVB and that money may be frozen/will be returned at less than par. Loss of relationship will also hurt. But for the biggest funds LPs are like pension funds, and that money will be available. One thing to consider is that VCs may need to call on their LPs to recapitalize their existing portcos which may leave less space for new investment.
They’ll most likely be made whole or close to whole. It’ll just take time, so as long as that startup doesn’t have a huge burn already, should be fine. Anyway you bought % in their company which you still own, the cash was gone when you wired it.
Yep traditional advice is don't burn > 100k / mo when early stage, and most lower. So 2mo+ payroll fine for a normal seed, early A. Later stage are normally more sensitive. It's also a real issue with profitable companies whose outflows are at that level and are considering bigger purchases -- I'd be bailing if we were there just bc that.
Except the last couple years have been bonkers with little revenue / spending alignment during fundraising. Early stage burns are above that level, which makes the situation worse for current crop of co's. Ouch and good luck :(
For sure. The post I was replying to was for a seed stage company though. They’ve got $250k secured by Monday. My point was small firms can meet payroll and bills just fine with only $250k
A company with 26 people, each making $120k (pre-tax), or a company with 51 people, each making $60k/yr pre-tax is enough to miss payroll this week if there's only $250k to draw from, and that's not accounting for any other expenses (like, say an AWS/GCP bill, though hopefully you're net-60 with them). CEO/CFO's also now got two weeks to come up with another $250+k in a complex environment.
but do you automatically get access to the insured part, or do you have to sit around and wait for a few months until FDIC hashes it out with whoever? it could be really a matter of life and death for some startups.
Update: yes, seems like the insurance part is pretty quick
The parent didn't say everyone would get their money back. It said the friend who took a seed-stage investment will likely get most of their money back. I don't know the odds of that (most uncertain about the amount of money involved) but it's definitely much higher than "everyone gets all of their money back".
It's how the FDIC does things. They pay what are called "dividends" on your previous deposits from the successor bank as they sell off assets.
But if you're curious, and want a layman no-jargon version the press release from the FDIC is pretty good.
I mean this in no uncertain terms. HN users know nothing about this and are regurgitating pure rubbish over and over again in this thread. If you're concerned, don't even trust me, but go read the press release. CA put out one too.
> All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. ...
Thing is, it's probably true for 1% of the cases, that things are slow for no good reason. Trick is how to identify that 1% of times when you can truly make something better. But 99% of the times, it's all shit and ends up like this, or similarly.
The irony is that, as near as I can tell, they cratered their balance sheet because they were heavily into long maturity bonds (i.e. super conservative).
The problem isn’t what they bought it’s what they sold. It was all correlated. Loans to startups were going bad while startups were pulling deposits since they weren’t getting funded. So you’re taking losses while losing capital. Doesn’t really matter what else you’re holding at that point if it doesn’t happen to be skyrocketing right now. Long term bonds will never be that thing, but at any point in time almost nothing else would be, either.
Full quote: "The irony is that, as near as I can tell, they cratered their balance sheet because they were heavily into long maturity bonds (i.e. super conservative)."
What exactly makes you think that the "(i.e. super conservative)" remark is not about "long maturity bonds" - which is the think that he just referenced?
He didn't mention Treasuries at all. I find quite difficult to interpret the "super conservative" as being about some kind of long-maturity bonds relative to another kind of long-maturity bonds.
Correct. They were doing the same thing every other bank was doing, and an unnecessary panic run did them in. Depositors will get their money back because my bet is SVB gets acquired, as their balance sheet was actually fairly healthy (relative to other banks) pre-panic, but it's gonna have ripple effects for sure.
They've been acquired by a newly formed bank from the FDIC. I'm not sure that bank will be around much longer than it takes to mark their assets to market, since the press release said they didn't know:
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
No bank is gonna buy another bank until that is cleared up.
I love the optics of remnants of Silicon Valley bank being owned by the gov alongside Fannie and Freddie. Behold the graveyard of poor risk management.
They had massive asset / liability duration mismatch. That’s gambling on low rates for an extended period of time.
It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.
No bank is healthy once all its depositors pull their cash out. What their balance sheet looked like before the panic is what I'm talking about. Every bank dies from a bank run, period.
This one is largest than the 100 previous ones combined.
And the point is that there may be many reasons why a bank may want to acquire a smaller failed one to integrate it in its operations but "the previous owners used to have a well-capitalized business until they somehow lost it all" is not a strong reason on its own.
Wasn't their balance sheet before the panic what caused the panic? It wasn't some WSB meme that drove the bank run, they couldn't cover their normal day to day operations and started a bond fire sale and desperate equity raise.
IIUC: they could definitely cover their normal day-to-day. The thing that broke down is they had to announce true things that made investors conclude that their money wouldn't grow as fast as investors expected, and investors (understandably / justifiably) wanted to pull it out to somewhere it would grow faster.
(The investors don't actually know the money won't grow as fast... the Fed could decide to drop interest rates tomorrow, or something else could intervene making it sensible to drop interest rates. But "not growing as fast" was the very likely scenario).
Once everyone decided to pull, they were tanked because no bank keeps 100% liquidity.
No bank keeps 100% liquidity, but my understanding is that most banks are capable of getting liquidity -- at least from the lender of last resort (LoLR) -- for massive withdrawals based on the value of their loan portfolio, and SVB's portfolio had tanked too low to do this based on interest rates the LoLR would lend to them at.
Won't lots of investors (aka depositors) start making this same analysis? Whether you have $10K or $10M, right now you don't want your cash anywhere it's not earning 3%+. So it's back to whether they're unique in finding themselves uncompetitive as a place to park cash at a market rate.
> The thing that broke down is they had to announce true things that made investors conclude that their money wouldn't grow as fast as investors expected, and investors (understandably / justifiably) wanted to pull it out to somewhere it would grow faster.
SVB disclosed they took massive losses from high risk, high duration assets and were desperate for cash. Investors took large (up to 60% over 24h!) losses, paper or otherwise, to get out of the stock. That can't be just concern over not growing as fast, that's concern about solvency. VC's and depositors saw the same writing on the wall, but it was SVB who wrote it there.
If they were able to cover their normal operations, they wouldn't have needed the emergency equity raise.
High duration, yes, but actually extremely low risk.
The thing that killed SVB was the bank run. They would have been fine with the raise. Panic set in and killed them. FRB is not in a better position, but nobody is panicking, so they’ll survive.
Didn’t SVB directly cause the bank run that killed them though? It wasn’t some externally driven event outside the scope of risk management. The assets were fine but the high duration was the risk. They took it purposely and lost billions when their risky bets turned against them. The emergency equity raise and sale attempts were desperation, and seen as such.
Doesn’t feel much different than a yield farming crypto bank going under when they are forced to fire-sale thinly traded sh*tcoins and take a beating.
How is the panic "unnecessary"? Are you saying that if your personal bank told you that you could get your money back, but just not right now, that you'd be ok with that?
Liquidity is a key feature of banks and it relies on trust. Without it, they have nothing. Trust isn't some ancillary thing for a bank. It is almost everything.
I would not find it surprising if bank liquidity was actually historically low, especially considering that many banks do maintain buffers _of the same covaried assets_ and that banks _induce covariance when they choose to use an asset class for liquidity_.
Say you are a Small Company with $5mm in a recent fund raise that you have at SVB. You use that $5mm to make payroll, pay amazon, your office, AT&T for your fiber, buy macbook airs for your employees, etc...
Now - you are listening to the recent news, and it looks like SVB is going to be taken over by the FDIC. If that happens, you will be insured up to $250K, but the rest of your $5mm, all $4.75mm is now frozen. You will be given a certificate for the uninsured funds, and you will be in line to be paid back, but (A) Not immediately, and (B) you may lose part of your funds.
You, as a rational CEO, would probably want to put your money in, say, Wells Fargo, where it wouldn't be frozen, and you wouldn't lose any of it.
That was the basis of the liquidity event that just happened.
In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately account for duration risk.
There's a big difference between accounting for KNOWN risks wrt managing your treasury - something that every bank does as a matter of course - and trying new things.
That's what I'm saying. That's not the bank doing anything fancy and failing because of it, it's them not doing the basic things every bank should be doing.
Duration risk is risk. Bonds are not risk free. Buying treasuries at ~0% rates was frankly stupid. The narrative going around that there was adequate risk management here and at Silvergate is not correct.
The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.
The weird thing about all this to me is that the bank got sunk because they... Invested in very solid, predictable assets with guaranteed-except-for-apocalypse ROI.
They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster.
I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
If you buy bonds you can lose money. To say they're risk free is wrong. Treasuries carry no credit risk, but they do carry duration risk. If you buy treasury bonds above par, you can also lose money even if you hold to maturity (though it would be illogical to buy them with negative yield. However we have seen this being done in Europe anyway)
Duration risk is risk. Taking on 10-30y maturity is not "risk free"
Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
In this context, "lose" money means "You won't get as much money out as you would have if you had invested the money in something else?" Because if I buy a t-bond at $5, I'm expecting to get at least $5 back when it matures unless Uncle Sam has died.
If you buy a T-Bond at 110 the treasury will pay you back 100 at maturity, thus you lost money in nominal terms (depending on coupon rate). This has been happening in Europe with their previously negative yielding debt
What you mean to say is there's no credit risk. Not the same thing as you can't lose money. Saying you are guaranteed X dollars 30 years from now does not mean much at all if people need money today. This is not "safe" or prudent
Yes, but you would get more than that if you bought an (equally safe) treasury bond today. So it doesn’t make sense to claim that your bond is “still worth $5”.
Also, $5 today is not the same currency as $5 in ten years.
No, you’re fundamentally misunderstanding that a bank needs to be able to pay people when they withdraw their money. You can’t sell a bond that will be worth $5 in 30 years to get $5 in cash now when people can buy them from the fed for $3.
This has nothing to do with America, this is you not understanding duration risk.
Right, but the bank didn't invest 100% of its funds in MBS and t-bills; IIUC they had plenty to manage their projected operations cost and regular withdrawal / deposit activity. What changed is the panic / bank run. The panic sank them, but it'd sink basically any bank because no bank keeps enough liquid assets to clear all its deposit obligations.
... so SVB not only didn't have cash, it didn't have assets people were willing to buy / loan against to cover enough withdrawals to stop the run even though those assets had guaranteed ROI, which is interesting to me. Not enough lenders / potential creditors think some 10-year T-bills (and bailing out one of the biggest banks in the country on the lender's terms) is worth it?
>they're being punished for not having the money put somewhere it could grow faster.
No, it's because they didn't properly manage their assets to serve existing depositors if those depositors wanted to withdraw. Locking up money for 10 years has obvious liquidity consequences. I knew that when I first learned what a "CD" is when I was like 10.
Yeah, arguably duration risk is pretty much the stogiest, most old-fashioned banking kind of risk that could possibly have tripped them up. Long-term loans and short-term deposits is basically what banks traditionally do.
HN really is like a ChatGPT version of itself. SVB is a 40 year old bank, bro. They are the old stodgy bank. The Meows and Mercurys are all still around.
Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).
Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.
> Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better!
SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.
Speaking of Mercury, they recently announced increasing customers FDIC insurance maximum to $1M for customer accepting to enroll in their sweep program. Not sure SVB offers this but I hope they do.
Mercury is not a bank. It keeps your funds spread across many banks where they open accounts on your behalf. Then they spread the deposits around to stay below the $250k threshold at each bank. Same as Fidelity and many others.
I would be shocked if SVB was sweeping deposit funds into other banks.
Full-reserve banking doesn't eliminate risk, it pushes it elsewhere. The nice thing about fractional reserve (yes, there are nice things about it!) is that it allows people to have a savings without completely paralyzing the money supply. Money that is "saved" can still be used for productive purposes. Yes, this introduces risk (of the sort that the FDIC is intended to ameliorate), but the alternative is to either discourage savings entirely in favor of active investments (which are themselves mostly subject to the same sort of risks as savings accounts of today), or otherwise encourage savings but let the economy be strangled by a lack of funds (which becomes a vicious cycle).
Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.
> Money that is "saved" can still be used for productive purposes.
If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.
Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.
Why does it seem the perception of the tech industry is that products are just useless devices (like what you mentioned) or scams, that its employees are lazy and entitled, and basically it's all just a giant bubble of alof elites.
The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?
Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices
LMAO. Can't even believe how many people were confidently asserting that nothing was wrong yesterday. If you had more than $250k in SVB yesterday you probably just took a huge haircut.
Hundreds of startups will become illiquid as a result of SVB's collapse, and there will be major layoffs here in the next 90 days as founders realize that they lost their funds and cannot raise in the current VC environment.
Don't know why this is being downvoted - if a bank takes $100 and keeps $20 liquid while investing $80, and then everyone comes for their money, the first $20 is available but the rest will be slower if not completely lost. If everyone tried to take their money yesterday some people will win but a large number will lose... If there wasn't a run on the bank chances are it could have (slightly?) weathered the storm.
Everyone who can read a balance sheet could figure out there was a lot of trouble after the announcement of the sold securities for a significant loss. The VCs telling portfolio companies to ride it out may have been looking for bagholders to ensure that they can get their own money out.
The trouble in a bank run is that it’s impossible for everyone to have gotten their money out yesterday. Those first in line caused the collapse, the rest are out of luck. Nice to hear you have lucky friends.
VC firms don't generally have tons of cash sitting around compared to their fund size. When you raise a fund, an LP does't just hand you $20 mil, then simply promise to send you up to $20 mil when you ask for it.
Didn't he say sometjing like "while believe we have a hell lotta smart people under this roof, it is a lot easier to be first"? After all, it wasn't brains that got him in his chair, earning the big bucks, he can assure you!
I’m here for one reason alone. To guess what the music might do a week, a month, a year from now. And standing here tonight I’m afraid that I. Don’t. Hear. A. Thing.
I think people are excited that we can get back to money tracking with actual value generation and not financial hacking.
Events like these are similar to Enron and Theranos. No, I'm not excited to see "the energy industry" or "the medical industry fail", but that's not really what it was, was it?
When you see how much of a massive everything-bubble we were (are?) in, I can see where people are coming from on this one. Time to get some sanity back into this economy, and the people who will hurt the most are those who also benefited the most in the past 3 years (crypto-bros, useless startups with dumb valuations, etc.)
>Do you think it's strange people are excited for the economy to fail?
People knew free money was dangerous, planned for a return to sanity (QT) in 2018-2019, and were financially punished for acting responsibly by believing the Fed would follow its roadmap.
They may get their day in the sun now and I cant blame them for being happy at the first signs of a temporary return to reality.
You most definitely will. SVB already fire-sold 21Bn in MBS and took a 1.8Bn loss on that. Someone is eating that loss....
Separately, this is going to cause a lot of finance vultures to look at other banks who also have MBS portfolios on their books. The show's only beginning.
No, this isn't true. SVB has some unknown amount of cash and other assets on hand. We have no idea what that is right now, or what percentage this is of the shortfall.
Someone will buy SVB, and they will put capital in as part of the purchase.
Past losses aside, the press release says that there are about $180B in deposits with the bank holding about $210B in assets. Assuming the FDIC liquidates and restructures the bank, I don’t see why deposits could not be made whole.
If there were fewer assets then deposits, then yes the 250k+ accounts are probably out of luck.
Will those assets still be worth $210B as the days tick by? I'm not a macro financial analyst, but I have to imagine trying to liquidate $210B of bonds, stocks, etc. will cause at least some of that value to fall – that's a big number.
If someone well capitalized buys the bank, then they don't need to liquidate. The bonds aren't worthless, they just trade much lower now that interest rates have risen, however if you can wait until they mature you will get your money + interest.
Once the FDIC kicks in they can sell off to a different bank which can absorb them without touching the open market. Alternatively the FDIC can guarantee the bank for the duration necessary to sell assets slowly. They could likely sell the bank as a whole to another bank if assets>liabilities without too much disruption.
The "assets" are actually held-to-maturity securities (bonds) that are yielding less than the risk free rate. Who would want to buy a bond that yields 2% when you can buy treasures that yield 4%. So while they might have $210B in paper assets but there's no chance they will be unable to unload them without taking a loss, putting the bank upside down.
> Who would want to buy a bond that yields 2% when you can buy treasures that yield 4%.
Whatever bank/organization that wants to have SVB's customers, probably. If an even bigger bank comes in, one which can take on those lukewarm assets for a decade without risk, then they can immediately position themselves as the "new SVB" and get a bunch of VCs and startups as customers. I assume that they could stand to profit some from such an arrangement, but I'm not a banker, so maybe not?
And restructuring tends not be stay “gov owned” - the government assumes ownership to stabilize the market then tries to sell off the business to another business. Often there’s some incentive to assume a massive amount of customers and assets. The gov may even take on the intermediate loss (the FCID is an insurance agency after all).
Yeah, I can see why in general the government wouldn't want to hold on to assets, but bonds are kind of a special class of asset in that they do eventually mature and will naturally just be something they don't need to manage (within a relatively short time period too). If you expect that the sell off could take years to complete, some of those bonds will be halfway to maturity by the time they're sold.
If I'm the FDIC and I have the opportunity to return 100% of the funds to depositors at the cost of just holding on to a bond for a few more years than I otherwise would, that seems like a tradeoff I'd make to stabilize a lot of companies. (I'm of course biased here)
Is there any reason the FDIC itself cant just hold onto the bonds until they mature? The federal government doesnt need liquidity the same way a bank does, they wouldn't need to sell them for less than face value.
Edit: this is actually a serious question, if someone knows the actual answer.
I understand that ideally the government wouldn't want to hold onto the bonds, but is there any statutory (or other real) reason why they would _have_ to sell them at less than face value? If you could guarantee 100% of deposits could be returned by just holding onto the bonds until maturity, that seems like a worthwhile trade.
Well, and until everything is sorted all your deposits above 250k are illiquid now. So, I guess one way to not go under is to find a bank that gives you a generous credit line against whatever deposits there are at SVB. At huge risk margin, and quite a discount on the deposits. If there are such banks willing to do so, that is.
No one knows for sure. We don't know what the value of their HTM MBS actually is on the open market.
What we do know for sure though, is that this process will take months, maybe years, to play out and many startups will run out of money long before this is resolved.
If people have to be reassured to begin with, it's already over. Money only exists because people keep believing it does. As soon as they stop believing it's gone.
What did James Ray say again about FTX? Something along the lines of "a group of highly unsophiscated people"? Man, the CFOs of the affected start-ups should all look for a new job. By the way, preventing things like that is something a good MBA does.
They become illiquid because they don't have access to their money that was in SVB. They can't make payroll, can't pay vendors and landlords. The employees will leave first. Vendors next.
But normally, they will be bought by another bank coming Monday and resume business.
The fdic assigns a buyer and pays the buyer, from what I understand.
Edit. I just realized, in the us, if there is no bidder, the fdic can close down the bank or run it itself.
Bridge loans, DES, convertible notes, etc..., I'm sure their were loan "products" for startups similar to helocs (likely what put them in the hole). The appetite for crypto/fintech startups was huge during the pandemic and likely pressured them to get creative on products and overleveraged. It's all unwinding now.
Unfortunately, harder now for startups, mind that all those startup dreams from laid off FANG staff just got their rug pulled.
No. It sounds like they bought a bunch of safe, long-term load-backed assets. When interest rates went up, the value of the assets went down. This isn't a problem if no one withdraws before the loans are due, but if they do, they have to sell the assets that declined in value.
> Hundreds of startups will become illiquid as a result of SVB's collapse,
I know SVB was like a "high tech bank" that partnered with things like Stripe Atlas, but is there any reason that startups were using it for their regular operating funds? Other than the name, was there something that actually made this bank particularly suitable for them?
They 'understand' startups. That is, they were willing to work with founders of new ventures, didn't require insane proof of provenance of funds (because suddenly millions of dollars would appear overnight), and would support founders with mortgages, for example, that were running companies that weren't yet necessarily profitable but were well-funded nevertheless.
They were proactive in incubators and allowed new companies to open accounts and make large deposits right away, when many mainstream banks wouldn’t or were too slow. I’m guessing plenty of startups stuck with them through inertia at least.
But it works better at a criminal bank. Particularly one that might open a bunch of extra accounts for you when you aren't looking. Obviously that means opening the first account won't be the problem either.
Get a big criminal bank and they won't freeze your account for dumb reasons. Or smart reasons.
So just follow the settlements with the federal government, its advertising.
Did you also deposit 100M the same day? Try opening line of credit the same day: startup banks will open it without any issues as long as you have cash.
I had to explain to chase large wire transfers after banking with them for years. I had small amounts of money held in AML lock for months with BofA and Chase.
Yep... I bet this is about to pull forward a lot of startup death. Gun now to VC heads to save things. Forcing decisions they were hoping they wouldn't have to make for at least another 6-12 months.
The "bad bank" (SVB) will be liquidated and the proceeds distributed to the creditors. How much that will be for depositors won't be clear until that process occurs.
Probably just a haircut. How much nobody knows yet, but according to the FDIC release, 3 months ago they actually had $209B of assets, so it's not a FTX-like 'oops we accidentally your money' scenario.
I'm copy/pasting a commend I made elsewhere, but I'm not sure this is the case.
> I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.
Basically if you have a ton of money having it sit in a bank account is one of the worst things you could do with it, so most people who bring in a lot mostly just keep operational expenses in their bank account while leaving the rest of the money in other financial instruments.
Isn't that a death sentence for a startup? Even if you get your money back years later, you're company is already dead because it can't make payroll. At that point, the money will just go back to the VCs?
basically but the FDIC usually comes in real quick if they think a collapse might happen. Rumor is there's enough assets to cover the loses but it just couldn't handle the run happening.
From the FDIC release there will be an advance payment on uninsured assets within the next week.
My guess is they take a week to look through the books, determine an absolute floor for the value of assets, and use that floor to proportionately pay out uninsured depositors.
So, some additional funds will be available soon. We don't yet know how much.
The rest will probably be locked up while the process plays out. I've heard different timelines for that.
> Silicon Valley Bank is the first FDIC-insured institution to fail this year.
Wow FDIC is fully calling it a failed bank. Just yesterday they were releasing statements saying they’re in a good position. Uncle Sam just fully opened Pandora’s box and made the judgement public!
That's pretty normal for confidence based stuff like this. There isn't really a point in regulators/insurers releasing a "well we're about half confident" message. So it flips from full confidence to zero confidence. Bit jarring but the sharp transition is not unexpected.
This is how quickly a bank run can happen. They announced they were seeking funding, people started withdrawing all their money, and the investors all pulled out, leaving SVB high and dry. Now it's dead.
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[ 0.21 ms ] story [ 621 ms ] threadEmphasis on for a while. Stock and bond holders (man, did the latter miss the ball) will absorb losses.
Market cap doesn’t matter. Balance sheet equity.
Given that they had only $5bn of long-term debt - and $173bn of deposits - it seems that bond holders cannot absorb much (even though it's not very likely that they receive anything).
SVB owned a bunch of mortgage backed securities and treasuries - both of which are down 30-50% from their peaks, which coincides with our last venture capital boom. SVB was buying at the top because they had so much capital to deploy.
Maybe instead of cashing it out, depositors could be given a treasury worth 30% less than SVB paid for it, that pays out 1% a year in interest, redeemable at face value in just 20 short years.
Across all banks, there are over $600b in such losses. If they can hold those securities until they mature, all is good. If they need to sell them earlier, the losses become real.
https://twitter.com/grdecter/status/1634091448743219201?s=46...
That's an odd bit of logic. If interest rates stay the same and nothing of interest happens for the next 20-30 years, then those banks will lose the spread between the interest on those instruments and the interest they're paying (SVB was paying 4.5% on savings!) for 20-30 years. That money needs to come for somewhere. The net present value of that loss is a very similar number to the unrealized mark-to-market loss of value of those instruments.
It's almost tautological that being able to hold those instruments to maturity requires that they remain solvent for the term of those instruments, which means that the money to cover their losses must come from somewhere.
Now everyone involved can gamble that interest rates will go back down in a few years and those short interest rate positions will recover, but that's a gamble, not a certainty. Of course, the Fed does have a bit of an interest in pushing rates down if needed to avoid bank failures...
Didn't management/CEO/someone high up in the company say something like "We're safe unless everyone pulls out their money" the other day, indicating that they were de facto insolvent?
and yes, the ceo did say that yesterday, which is likely why this happened
Under ZIRP, the depositors weren't getting anything, and so making 1.5% on MBS was fine. In the current interest rate environment, depositors won't be satisfied with a zero yield on their deposit accounts, and the MBS don't pay enough to cover it, so either they lose depositors because they're not paying competitive interest, or they take a loss every day because their investments don't cover the cost of the deposits.
Ultimately keeping the bonds on the books as HTM just spreads out the loss over the lifetime of the bonds rather than recognizing it right when interest rates change, but the result is the same.
As a whole it's like <30% FDIC insured in the whole US banking industry.
> they’ll probably get all their money but it will still be bad
They may not. Even for banks where most assets are FDIC insured, you'll see that not 100% of deposits are returned. Selecting a random recent one:
https://closedbanks.fdic.gov/dividends/bankfind/Dividendinde...
~95%.
https://twitter.com/GRDecter/status/1634208652595699713?s=20
"Only 2.7% of SVB deposits are less than $250,000. Meaning, 97.3% aren't FDIC insured."
Not a good situation at all.
I'm sure some people are out meaningful amounts of money, but I'm not sure what a typical account looks like.
https://www.depositaccounts.com/blog/indymac-depositors-are-...
Bank deposits are special and there will be no clawback. However, depositors who lost money will be first in line at the bankruptcy court.
https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...
Likely many companies won’t be able to do mid-month payroll.
Someone will setup a market for the FDIC warrant on uninsured deposits, but that will take time.
If your company can't access your money to access payroll for X months, you might as well as be dead.
And
After that its a question but typically depositors will know the answer very quickly because their claims come first.
From the PR
>The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds
This is a 100% standard FDIC statement and not unique to SVB btw.
https://www.investopedia.com/terms/a/advance-dividend.asp#:~....
Even if each owner had all 14 types, they only get $3.5mil in insurance. And the bank has, allegedly, somewhere around $200bil in deposits.
Otherwise no financial institution is actually insured against it's entire book. That would be insanely expensive and financially complicated at the scale banks operated at. For example, JP Morgan Chase has $3.7 TRILLION in liabilities on the books. Where the hell is an insurer going to get $3.7 trillion to gamble?
Could be some of these companies have other types of insurance against this, but for a lot of small startups this is way down the list of things you'd get private insurance for.
1. FDIC insurance only covers $250k. FDIC insurance is mostly to reduce personal risk, so individuals feel comfortable keeping their own money in the bank. This is key to the banking industry because individuals are much more likely to horde physical currency than businesses are.
2. Who would insure the bank for unlimited deposits? If it's a non-governmental organization how would depositors know the insurance company is good for it? If it's a governmental organization then the taxpayer would essentially be a codified safety net for corporate risk taking. The insurance is more political palpable (and affordable) if it's seen as protecting individuals from bad banking practice then if it's seen as a bailout.
3. Banks ideally are the safe organization to hold cash. A bank failing is seen as a failure not only for the individual bank, but for the set of regulations that banks must follow. One bank failing reduces trust in all other banks, so it's in the industry's best interest to accept regulations that prevent bank failures.
This isn't like FTX where your "assets" are worthless IOUs written to yourself.
The bank has assets. Just not enough to cover all liabilities. That's why you see the term "haircut" being used a lot in these threads.
The only guaranteed amount is 250k.
Depositors will see all of their insured money back, uninsured deposits will be recovered based on available assets and/or terms of any resale by the FDIC, but could be lost in whole or substantial part. Large depositors could potentially see substantial losses.
Now all those unprofitable startups will be falling like dominoes as now the money is tied up in the bank with withdrawals disabled.
[0] https://twitter.com/FedGuy12/status/1634038788468113408
Keep your accounts lower than 250k
For full precision, if you're concerned about this, be aware that it's 250K per depositor at a given bank, rather than per account. That is, all your qualifying accounts at the bank are considered as one pool and 250K of that is insured. More detailed information, including how joint accounts are handled, here: https://www.fdic.gov/resources/deposit-insurance/financial-p...
It's not even the case that they did it for the returns, because the returns were negative. Is it a regulation thing that forced banks to overinvest in long-term bounds?
edit: replace "bankruptcy" with "receivership" as the latter is usually a faster process than the former.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Is the 3% figure from SVB or an estimate from another source?
why is that?!
you have to keep some cash somewhere to meet short term expenses (like payroll)
https://twitter.com/BillAckman/status/1634032841687285761
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits
I have a hard time believing they lost 20% of their assets in the last 70 days. The shortfall, if any, should be minor.
The FT reported a couple weeks ago that they had an unrealized loss of $15B in bonds: https://www.ft.com/content/0387e331-61b4-4848-9e50-04775b4c3...
I think we'll have a much better idea of the shortfall, if any, over the weekend as the FDIC tallies up the remaining assets and deposits.
(I'm needlessly mean, I know.)
"SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment)"
https://www.fdic.gov/resources/deposit-insurance/faq/
So if you buy stock via Vanguard, and Vanguard mismanages itself into death, you still own the stock and eventually it'll be at another broker.
Details: https://www.fdic.gov/resources/deposit-insurance/
Not Covered: https://www.fdic.gov/resources/deposit-insurance/financial-p...
From the release.
https://www.fdic.gov/news/press-releases/2020/pr20119.html
The fed's move in interests rates was bound to break something. This is the first big name and, while banks are taken over by the FDIC often and it never makes the news, this one will be especially interesting bc it is Silicon Valley Bank. Naturally, people and the media will associate with the rest of silicon valley, bringing extra scrutiny to every brand name tech company, especially the ones that are still barely profitable.
And any accounts over $250K, poof.
Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.
Given how much media attention silicon valley gets, for better or worse, the name of the bank would have some affect.
Tech and fintwit are both blowing up on SVB, there are like 4 SVB related posts on HN front page, I even some reddit posts.
This will be big in the media, and therefore the public conscience.
Here is a chart that shows the number of bank failures over the past decade [0]. As you can see, having a year with 0 failures is actually the outlier. The average annual bank failure over the past 20 years is roughly 20 per year and the median number is 8 per year.
[0] https://www.fdic.gov/bank/historical/bank/
https://en.wikipedia.org/wiki/Silicon_Valley_Bank
The reality is they try to protect as much of the assets as they can and even those over 250k will probably not lose as much as they would have without the FDIC
Sure you get to hold onto funds for a day or two later, but it also puts your payroll at risk if the bank is failing.
(Seriously I worked for an org that changed payroll from Thursday to Friday and I’d be first to file with the labour board for missed employment payment if they blamed the weekend or bank failure for missing a payment).
Unless you experienced that time, it really hard to understand the pervasive denial of what was obviously happening.
You'll see the same thing happen this time around, and will have an equally hard time conveying just how strong the denial was.
To speculate about where that first shoe might be in this case and who's wearing it, it might help to consider where the buck ultimately stops.
Dont forget it was Lehman that failed first, Bear got special treatment amongst the Citi, AIG, et al bailouts.
That's not quite true; the FDIC will pay uninsured depositors an advance dividend within the next week.
"advance dividend: A payment made to an uninsured depositor after a bank or thrift failure. The amount of the advance dividend represents the FDIC’s conservative estimate of the ultimate value of the receivership. Cash dividends equivalent to the board-approved advance dividend percentage (of total outstanding deposit claims) are paid to uninsured depositors, thereby giving them an immediate return of a portion of their uninsured deposit. Sometimes when it is projected that all depositor claims will be paid in full an advance dividend will be provided to unsecured creditors."
[1] https://www.fdic.gov/bank/historical/reshandbook/glossary.pd...
This chart of historic bank failures paints a different picture:
https://www.fdic.gov/bank/historical/bank/
Also means we may be about to start seeing a lot more of them again, assuming we're getting closer to the next big recession.
That's a giant assumption.
I'm not claiming it's definitely going to happen, but if it is about to happen, we can expect to see a lot more of these failures to start happening, based on that graph.
I didn't realize there were that many bank failures during the Great Recession myself. I thought it was only a handful, just a few high profile ones.
https://twitter.com/alistairmbarr/status/1634275645235793920
And banks usually aren't crazy amounts short. But they're short enough to got under.
What are the insurance limits for companies? Same as individuals? I get the sense that most of SVB's deposits were from startups and small companies. And I also get the sense that $250K is not much room for a startup trying to make payroll to employees with Silicon Valley wages.
We truly live in a world.
[0] https://www.mollywhite.net/etc/ftx-contagion
I'm sure a lot of startups will be in trouble, but those that are working with decent investors probably had help protecting the assets.
That's literally what they told me they did, and what I was trying to say happened here. It's possible he was misled, but he seemed pretty knowledgeable about this. The money initially came from Softbank, who helped with the process.
Also, $250k per depository per bank. You can also distribute the money across multiple banks to get higher insurance levels.
As an intuitive measure, extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand and also need to protect it.
Literally cash, as in deposits? Or highly liquid assets such as T-Bills?
What SIPC does is similar to FDIC but it basically comes down to "If you buy stocks via Vanguard, Vanguard guarantees that those stocks actually exist and that if they fail you get them, and SIPC helps with that".
Making sure that if there's X in cash or cash equivalent at noon on March 9th, 2023 PST there's still X in cash or cash equivalents at noon on March 10th, 2023
These are companies, sorted by PPP loan size who had SVB as their servicer.
> To protect insured depositors, the FDIC created a new entity called the Deposit Insurance National Bank of Santa Clara, or DINB. DINB will maintain Silicon Valley Bank’s normal business hours, with banking activities resuming no later than Monday, including online banking and other services, the FDIC said. Customers with accounts in excess of $250,000 are being told to contact FDIC direclty
> The company’s main office and all Silicon Valley Bank branches will reopen on Monday,
> Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the FDIC said
Keep in mind 93% of SVB's assest were not FDIC insured.
> Silicon Valley Bank Had About $209.0B in Assets
> Svb Is First FDIC-Insured Institution to Fail This Year
Their recent attempt to raise money via shares and debt sales failed,
>> Silicon Valley Bank Had About $209.0B in Assets
I'm not an expert, but aren't deposits in a bank liabilities? Assets are things like treasury bills and loans held by the bank.
I think this is Google's first hit when one searches this, but I do not believe this is correct. Here is a source saying the opposite, as an example.
A liability, in general terms, is something owed to another (e.g., a deposit)
https://courses.lumenlearning.com/wm-macroeconomics/chapter/...
And another more reputable source:
https://www.investopedia.com/terms/b/bank-deposits.asp
Edit: Seems that this is what's explained in the investopedia article you linked to:
"When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
So, I think the person you are responding to is trying to explain the distinction between a bailment and a loan.
Let's pretend that someone had a safety deposit box with $1B at SVB. They'd get to keep the full amount, because that is a bailment. The money never becomes the bank's.
In contract, if someone deposited $1B at SVB, then the actual money becomes the property of SVB. And the depositor then is a creditor to SVB - they have an unsecured load to SVB of that amount. But after SVB gets taken over by the feds, they have to stand in line with the other creditors and get what they get. They aren't guaranteed to be made whole.
"The deposit itself is a liability owed by the bank to the depositor. Bank deposits refer to this liability rather than to the actual funds that have been deposited. When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
The ACCOUNT is the liability, the CASH is the asset.
edit: Judging by a quick downvote trigger-finger, there seems to be some folks having trouble believing this; check this out from the source: https://www.federalreserve.gov/releases/h8/current/ ... look at the category names of where deposits and loans are listed.
The deposit itself is not a liability. The deposit account is. There are many ways to get money into a DDA. The bank will never give you your original paper currency back.
The (say) $100 cash I deposited to the bank becomes both an asset (they have "my" $100 in the vault) and a liability (they own me $100). So the accounting equation still balances.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
The 10Y treasury was worth $100 in 2021, but today is only worth $80. The bank still owes Alice $100 (a $100 liability), but the asset's value has declined. This has caused... issues... culminating in the past week of events.
Therefore although bank runs aren't normal, they will almost surely happen to you if you put yourself in a situation where a bank run would destroy you. So you have to work as if bank runs are normal, or they will be normal.
You may hold 100K in treasuries today, but if your employer can't make payroll, you're gonna sell to pay rent.
Can you clarify this part?
I'm not super familiar with the intricacies of banking, so my guess is that this is simply due to part of it I don't know about, but...given all the "creative financial instruments" I've heard about since the runup to the 2008 crash, I have to wonder if this "market force" was at least partly due to something SVB was doing that wasn't terribly wise.
A startup-focused bank probably shouldn't have been investing into 10Y, 20Y, or 30Y US Treasuries, when their customers might only have 2 or 3 years worth of life in them.
So yeah, there's a bit of stupidity here for sure. But its the kind of stupid that I can imagine a lot of banks making.
Funny it seems like VC GPs were on the horn yesterday to withdraw, and I know a number of LPs telling me last Sun/Mon they'll be "out of the country" next month. Looks like some folks had early info.
If I deposit $100 into a demand account, I expect to get $100 when I demand it.
If you want to sell me $100 in the future for less today, that's something worth considering, but that wasn't the deal depositors had.
Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?
So yeah I imagine all the banks nervously looking at eachother. Who is going to pussy out the first and cause them all to tumble over.
Was Silvergate bank not FDIC-Insured?
"Oops, looks like Santa misplaced his bag with all your money! Don't worry, his elves are busy looking for it all over the North Pole."
So many fitting status codes to chose between I don't know what to do!
Silicon Valley Bank, founded in 1983, has had a long and incredible journey leading up to its acquisition by the FDIC in 2023. As a bank that specializes in working with the technology and innovation industries, it has been at the forefront of many of the industry's most significant developments.
The bank started its journey as a small community bank in Santa Clara, California. At that time, it was known as the Santa Clara Valley Bank. The founders, Bill Biggerstaff, Ken Wilcox, and Bob Medearis, saw an opportunity to create a financial institution that focused on serving the unique needs of the technology and innovation industries.
In the early years, the bank faced many challenges as it worked to establish itself as a leader in the industry. One of the biggest obstacles was convincing investors and regulators that the bank's specialized approach to banking was viable. The founders knew that they needed to build a strong foundation and establish a reputation for being a reliable and trustworthy financial institution.
Over the years, the bank grew and expanded its reach, opening offices across the United States and in key global markets. It also broadened its focus beyond just technology and innovation to include life sciences, healthcare, energy, and more. This diversification helped to insulate the bank from the ups and downs of any one industry and made it more resilient in the face of economic uncertainty.
Throughout its journey, Silicon Valley Bank has remained committed to its core values of innovation, excellence, and customer focus. It has always been willing to take calculated risks and to push the boundaries of what is possible. This approach has paid off in many ways, as the bank has been recognized as one of the most innovative and respected financial institutions in the world.
In 2023, Silicon Valley Bank achieved a major milestone when it was acquired by the FDIC. This acquisition was a testament to the bank's success and the strength of its business model. It also signaled a new era of growth and opportunity for the bank, as it now has the backing of one of the most respected regulatory bodies in the world.
Looking ahead, Silicon Valley Bank is poised to continue its incredible journey and to make an even greater impact on the world. As the technology and innovation industries continue to evolve and grow, the bank is well-positioned to help fuel that growth and to support the entrepreneurs and visionaries who are driving it forward. With its deep expertise, strong relationships, and unwavering commitment to excellence, Silicon Valley Bank is poised to remain a leader in the financial services industry for many years to come.
He lived truly to his name! Founded a bank that processed bills with a big number of staff.
"Dear Sveebles and Sveeblettes..."
Some gallows humor from twitter: "Imagine raising $100m for your AI enabled dog washing app - and your bank sets it on fire before you can".
Original: https://twitter.com/88888sAccount/status/1634028258500169731...
Gonna be quite a show, this.
Not as extreme maybe, and less fraud got us here, but $assets < $deposits
whereas an exchange shouldn't have a position at all
and a hedge fund normally doesn't allow withdrawals at all (without vast notice)
>> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
Two things got SVB down. First, a rapid change in interest rate got their assets repriced down. It did not need to be fatal, this happens to all banks when interest rates rise quickly.
Second, its customers did a ran and went to pull their money. If all depositors of the BoA or Chase pull money out, those banks will collapse, too. This is highly unlikely for the BoA -- if folks start saying that BoA will collapse most depositors would shrug it off; the diversity of its base will make a run highly unlikely.
But as SVB was a much smaller bank and had a lot of similar customers (startups advised by similar VCs) the ran was seen as plausible at which point it was over -- customers pulled enough money to kill the bank. This is the price we pay for the flexibility of the current banking system that allows people to get loans and free checking accounts. My 2c.
The only job for these execs was to know which way the wind is blowing and they showed themselves to be not much better than every other rabid fool that bought GME etc. thinking things would never change and bull runs and low rates would last forever.
What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.
[1] https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03...
The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.
> most LPs didn’t hold their money in SVB.
At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?
I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?
Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?
Money there to to be spent over the next six months is now not available.
Payroll in Silicon Valley is going to be a mess this week.
Companies that lend to startups short term are going to have a busy time.
Except the last couple years have been bonkers with little revenue / spending alignment during fundraising. Early stage burns are above that level, which makes the situation worse for current crop of co's. Ouch and good luck :(
Update: yes, seems like the insurance part is pretty quick
https://twitter.com/MMikeMMa/status/1634245929481175040/phot...
I've seen several versions of this sentiment here. What are people basing it on? I don't know much at all about the situation.
first HN said there was no problem
then HN said everyone will get their money back
what next?
HN is full of dreamers, the kind who wander into traffic
But if you're curious, and want a layman no-jargon version the press release from the FDIC is pretty good.
I mean this in no uncertain terms. HN users know nothing about this and are regurgitating pure rubbish over and over again in this thread. If you're concerned, don't even trust me, but go read the press release. CA put out one too.
https://www.fdic.gov/news/press-releases/2023/pr23016.html
If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)
https://www.cnbc.com/2023/03/09/svb-financial-falls-more-tha...
That seems an odd position to allow to build given the current macro. Post-Fed changing their mind on inflation, the course was charted.
I'm guessing they held to avoid taking losses, and at some point it became untenable?
Do you think that long maturity bonds are more conservative than short maturity bonds?
No. Nobody does. That’s why they typically yield more.
Why do you say that he doesn't?
Within the set of long-maturity bonds, Treasuries are conservative. That doesn’t make them conservative per se.
What exactly makes you think that the "(i.e. super conservative)" remark is not about "long maturity bonds" - which is the think that he just referenced?
He didn't mention Treasuries at all. I find quite difficult to interpret the "super conservative" as being about some kind of long-maturity bonds relative to another kind of long-maturity bonds.
We shall see.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
No bank is gonna buy another bank until that is cleared up.
Who is going to buy this bank? I wouldn’t take it if you gave me 40b. That’s why they had to make a new bank.
By a Thiel-backed company, after he initiated the bank run?
It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
Every one in the past few years looks like it was acquired.
And the point is that there may be many reasons why a bank may want to acquire a smaller failed one to integrate it in its operations but "the previous owners used to have a well-capitalized business until they somehow lost it all" is not a strong reason on its own.
(The investors don't actually know the money won't grow as fast... the Fed could decide to drop interest rates tomorrow, or something else could intervene making it sensible to drop interest rates. But "not growing as fast" was the very likely scenario).
Once everyone decided to pull, they were tanked because no bank keeps 100% liquidity.
SVB disclosed they took massive losses from high risk, high duration assets and were desperate for cash. Investors took large (up to 60% over 24h!) losses, paper or otherwise, to get out of the stock. That can't be just concern over not growing as fast, that's concern about solvency. VC's and depositors saw the same writing on the wall, but it was SVB who wrote it there.
If they were able to cover their normal operations, they wouldn't have needed the emergency equity raise.
The thing that killed SVB was the bank run. They would have been fine with the raise. Panic set in and killed them. FRB is not in a better position, but nobody is panicking, so they’ll survive.
Doesn’t feel much different than a yield farming crypto bank going under when they are forced to fire-sale thinly traded sh*tcoins and take a beating.
Liquidity is a key feature of banks and it relies on trust. Without it, they have nothing. Trust isn't some ancillary thing for a bank. It is almost everything.
Source?
SVB had an unusual amount of long-duration assets. Most banks maintain a buffer of low-yielding, highly-liquid on-the-run Treasuries.
Maybe ZFRB was just a really, really bad idea.
The only difference is that panic set in and there was a bank run, largely led by VCs telling startups to pull their money.
Say you are a Small Company with $5mm in a recent fund raise that you have at SVB. You use that $5mm to make payroll, pay amazon, your office, AT&T for your fiber, buy macbook airs for your employees, etc...
Now - you are listening to the recent news, and it looks like SVB is going to be taken over by the FDIC. If that happens, you will be insured up to $250K, but the rest of your $5mm, all $4.75mm is now frozen. You will be given a certificate for the uninsured funds, and you will be in line to be paid back, but (A) Not immediately, and (B) you may lose part of your funds.
You, as a rational CEO, would probably want to put your money in, say, Wells Fargo, where it wouldn't be frozen, and you wouldn't lose any of it.
That was the basis of the liquidity event that just happened.
The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.
They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster.
I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
Duration risk is risk. Taking on 10-30y maturity is not "risk free"
Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
What you mean to say is there's no credit risk. Not the same thing as you can't lose money. Saying you are guaranteed X dollars 30 years from now does not mean much at all if people need money today. This is not "safe" or prudent
Also, $5 today is not the same currency as $5 in ten years.
This has nothing to do with America, this is you not understanding duration risk.
... so SVB not only didn't have cash, it didn't have assets people were willing to buy / loan against to cover enough withdrawals to stop the run even though those assets had guaranteed ROI, which is interesting to me. Not enough lenders / potential creditors think some 10-year T-bills (and bailing out one of the biggest banks in the country on the lender's terms) is worth it?
Interesting.
No, it's because they didn't properly manage their assets to serve existing depositors if those depositors wanted to withdraw. Locking up money for 10 years has obvious liquidity consequences. I knew that when I first learned what a "CD" is when I was like 10.
What I'm having a hard time wrapping my head around is what the investors saw that made them decide to all withdraw at once.
Correct, but the GP’s point was that it was not “startup creditworthiness risk”, the thing SVB was most ridiculed for taking on.
This sounds like risk taking to me.
Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).
Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.
Their risk management might have overeindexed on the post recession era but the bank itself lasted through some pretty wild rate shocks.
Mostly, though, all this talk about them like they're a neobank is because everyone appears to think they are one.
SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.
Some claim that these accounts are insured/protected up to $125m, but I can't find any info online to corroborate that.
https://en.wikipedia.org/wiki/Fucked_Company
We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.
Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.
If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.
Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.
CASH is cash. Keep it in a vault. The cost of holding it is not nothing.
The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?
Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices
I’m sorry to see this happen.
Hundreds of startups will become illiquid as a result of SVB's collapse, and there will be major layoffs here in the next 90 days as founders realize that they lost their funds and cannot raise in the current VC environment.
Everyone I know pulled yesterday.
Margin Call is such a timeless, great movie!
I’m here for one reason alone. To guess what the music might do a week, a month, a year from now. And standing here tonight I’m afraid that I. Don’t. Hear. A. Thing.
Just… silence.
"And there are a lot of smart people in Silicon Valley. It's a hell of a lot easier to be first."
Slowly, then all at once.
Events like these are similar to Enron and Theranos. No, I'm not excited to see "the energy industry" or "the medical industry fail", but that's not really what it was, was it?
People knew free money was dangerous, planned for a return to sanity (QT) in 2018-2019, and were financially punished for acting responsibly by believing the Fed would follow its roadmap.
They may get their day in the sun now and I cant blame them for being happy at the first signs of a temporary return to reality.
You may not lose money. The money isn’t gone yet. The restructuring may save the money. There’s a playbook for this sort of thing.
Separately, this is going to cause a lot of finance vultures to look at other banks who also have MBS portfolios on their books. The show's only beginning.
Not all mortgage backed securities are subprime CDO squareds.
Someone will buy SVB, and they will put capital in as part of the purchase.
https://workspace.refinitiv.com/web/cms/?pageId=mbshome
If there were fewer assets then deposits, then yes the 250k+ accounts are probably out of luck.
Whatever bank/organization that wants to have SVB's customers, probably. If an even bigger bank comes in, one which can take on those lukewarm assets for a decade without risk, then they can immediately position themselves as the "new SVB" and get a bunch of VCs and startups as customers. I assume that they could stand to profit some from such an arrangement, but I'm not a banker, so maybe not?
The government, to protect the economy
If I'm the FDIC and I have the opportunity to return 100% of the funds to depositors at the cost of just holding on to a bond for a few more years than I otherwise would, that seems like a tradeoff I'd make to stabilize a lot of companies. (I'm of course biased here)
i suspect the real number will be closer to 40% than 1%
Edit: this is actually a serious question, if someone knows the actual answer.
I understand that ideally the government wouldn't want to hold onto the bonds, but is there any statutory (or other real) reason why they would _have_ to sell them at less than face value? If you could guarantee 100% of deposits could be returned by just holding onto the bonds until maturity, that seems like a worthwhile trade.
What we do know for sure though, is that this process will take months, maybe years, to play out and many startups will run out of money long before this is resolved.
Do they get the investments from the banks or do they park the investment money in this bank?
And why this bank, when there are many more risk averse institutions out there?
Many startups aren't particularly sophisticated financially and just kept their capital in cash in the bank.
John Ray?
Edit. I just realized, in the us, if there is no bidder, the fdic can close down the bank or run it itself.
Unfortunately, harder now for startups, mind that all those startup dreams from laid off FANG staff just got their rug pulled.
No. It sounds like they bought a bunch of safe, long-term load-backed assets. When interest rates went up, the value of the assets went down. This isn't a problem if no one withdraws before the loans are due, but if they do, they have to sell the assets that declined in value.
I know SVB was like a "high tech bank" that partnered with things like Stripe Atlas, but is there any reason that startups were using it for their regular operating funds? Other than the name, was there something that actually made this bank particularly suitable for them?
But it works better at a criminal bank. Particularly one that might open a bunch of extra accounts for you when you aren't looking. Obviously that means opening the first account won't be the problem either.
Get a big criminal bank and they won't freeze your account for dumb reasons. Or smart reasons.
So just follow the settlements with the federal government, its advertising.
I had to explain to chase large wire transfers after banking with them for years. I had small amounts of money held in AML lock for months with BofA and Chase.
> I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.
Basically if you have a ton of money having it sit in a bank account is one of the worst things you could do with it, so most people who bring in a lot mostly just keep operational expenses in their bank account while leaving the rest of the money in other financial instruments.
The rest is limbo until the bank is liquidated and the remaining money is distributed.
Ouch for startups that didn't pull.
I believe SVB will be open for business on Monday
My guess is they take a week to look through the books, determine an absolute floor for the value of assets, and use that floor to proportionately pay out uninsured depositors.
So, some additional funds will be available soon. We don't yet know how much.
The rest will probably be locked up while the process plays out. I've heard different timelines for that.
Wow FDIC is fully calling it a failed bank. Just yesterday they were releasing statements saying they’re in a good position. Uncle Sam just fully opened Pandora’s box and made the judgement public!
"Company is 200 years old and we will go for another 200 years more!"
2 Days later
"Whoops, all the moneys gone. Bye!"