sure, but they made it seem like they really just need a round of payroll for their companies and stuff can get sorted out after, or did I miss something?
This seems like a great opportunity for investors to signal to founders what type of partners they are in times of need.
Zach Coelius nailed it:
> I am telling all my companies that even in the worst case scenario and there is no buyer (highly unlikely), they will still get the vast majority of their money back and this just becomes a short term issue.
> I, for one, certainly plan to fund my companies through this.
> What is your congressman going to do?! Nothing meaningful unless society starts calling for the end of fractional reserve lending.
... What?
If you think this is an economic catastrophe, just wait until you see what happens if we get rid of fractional reserve banking. It'd be a nuclear bomb in a china shop.
You tell me - what do you think would happen to the economy if lending ground to a stand-still (Which is exactly what would happen, with a double whammy of the money supply massively contracting[1] as loans are paid off, but not rolled over)?
Like, sure, I'm willing to entertain the idea that its possible to come up with some kind of planned steady-state economy that does not require speculative allocation of capital to drive production. But you're going to have to present a much more compelling vision of that future than 'Just get rid of lending.'
(Also, housing prices would collapse overnight[2], boomers and other retirees will lynch anyone responsible for something like that.)
For another argument, note that the health of the economy is a function of how quickly money moves through it. Fractional reserve banking is the engine that moves that money. Stop the movement of money, and you'll stop the economy.
All in all, I think we're better off with having the occasional bank go bust, and its customer funds getting frozen for a few weeks while the FDIC unfucks the bank's balance sheets, pays dollar-for-dollar cash for its illiquid, currently underwater long-term bonds, holds them until maturity for a profit, and then destroys the money they made in that profit. It's an infrequent failure case, it doesn't result in money getting lost, and the bank gets punished enough that most of its compatriots think twice before YOLOing the farm on long-term treasuries.
[1] This is called deflation, and if you think inflation is bad, imagine living in a world where nobody spends or invests money on anything, because you can become richer by doing nothing, and just sitting like a dragon on a hoard of gold.
[2] Heaven knows, I rail against housing price inflation all the time, but you are going to have a bad political time if you just pull the rug out from under homeowners.
The rate of lending will drop by an order of magnitude without fractional reserve banking. As will the money supply (hence, defulation), because most of the world's money is created by fractional-reserve lending.
> Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Why would you need a bank to do that, you can go buy treasuries on any brokerage that have that property right now.
The problem wouldn't be on the deposit side, it would be on the lending side.
No bank would offer a prime + 3% mortgage without fractional reserve lending. Housing prices would immediately collapse.
No bank would offer anyone a low-APR loan - you'd only get utterly usurious terms. How well do you think the economy would react to the cost of borrowing money going up by 5, or 10%?
> So is the issue that we are so deep in a fractional reserve system that any change would cause a blow up?
For half of those things, yes, the issue is that it would be a dramatic change that leaves a lot of people holding the bag. But, you are correct, it doesn't have to be this way.
> In other words could an economy started from scratch function with a fully backed reserve system?
Unfortunately, you'll still have problems with the other half of those issues.
Low velocity of money depresses the economy. This wasn't a concern back when most people were subsistence peasants, and were just toiling to physically grow and put food on the table. All very inelastic demand sort of stuff.
This is a pretty big concern when the way most people put food on the table is a 'job', most of which are heavily affected by elastic demand for various goods and services. A peasant doesn't care much about the health of the 'economy', a worker does.
For another problem, high cost of borrowing significantly advantages the wealthy, and incumbents. Higher spreads between prime and actual interest rates will siphon more money into the pockets of lenders. This significantly amplifies the rich-get-richer winners-win-more problem.
Like, sure, you could build a society like that. Historically, a lot of societies looked like this. They were not very productive, prosperous, and all of their wealth was consolidated in the hands of a few oligarchs.
The brakes have to match the accelerator on the car, or you're going to be in for a hard time -- even if that means the car will go slower. You have to figure it out differently. Things will go fine (really well, in fact) during expansion, but come contraction, all hell breaks loose.
And what's coming isn't just an indictment of all of that. We're about to find out what happens when you go Full Monty off of commodity-based currency such as the US with the Nixon Shock in 1971. It's a multi-generational event, so most of us alive don't know. But we all will soon.
> The brakes have to match the accelerator on the car, or you're going to be in for a hard time -- even if that means the car will go slower. You have to figure it out differently
There's so many problems with this analogy you should just state what you're trying to go for.
All respect to Gary, I feel like "extinction level event" is quite hyperbolic. Obviously he cares about seeing YC companies survive but this is not going to wipe out the US startup scene.
As bad as it sounds, even if it was an ELE*, I think killing off what has become a monoculture will not necessarily be all that bad for innovation or the ecosystem (it will be bad for the people at the companies that die obviously).
Tan makes it sound like it will favor the balance of power to big tech. I think big tech is irrelevant here, and it may actually shift the balance of power away from SV stereotype startups and give some oxygen to other businesses.
* honestly I think most solvent startups will find workarounds, it's more going to be a big stress than actual destruction
It is an "extinction level event" for those whose bank accounts went to zero. We are talking about a large number of jobs and people effected. Its pretty sad really.
> If you or your company are affected, I recommend that you reach out to your local congressman to get this on their radar TODAY.
No this is complete and utter bull hockey, this is 2008 all over again in every concievable way except this time instead of mortagages and housing it is tech that is begging for a bailout. This is nonsense, for years all the SV tech bros were bragging about "changing the world through arbitaging pizza delivery misinformation ML." getting paid ridiculous salaries, and playing foosball. I don't have sympathy for them, at all.
Most of the "startup" companies had the end goal of simply being bought out they never wanted to actually do anything they were just a get quick rich scheme.
Quite frankly this correction was long overdue and obvious to everyone who thought about it for even a moment. Now that the limitless capital has stopped (because of the fed rate hikes and because of the boomer retirement) it turns out it isn't profitable to have a buinsess model where you are loosing money on every transaction.
The curtain is pulled down, the emperor has no clothes, the chickens are coming home to roost. Deal with it.
EDIT:
As a followup I don't give a damn about the jobs lost, bailouts are the worst possible thing a government can do, all it does is screw the little people over while the owners keep the wealth and use it as an excuse to cut pay and lay people off.
My understanding may be incorrect (if so, someone please correct me), but I thought this was caused by SVB buying long-term bonds which fell in value after interest rates went up. I don't think this has anything having to do with unprofitable zombie startups being kept alive by "free" money (which roughly ended at the end of 2021). It seems you're angry at tech folks, but they didn't do anything wrong. They're just the victims of SVB's bad bet.
I'm not saying a bailout is justified either (I have no opinion on that), just pointing out who's responsible here.
Also if the FDIC just buys these assets at non firesale prices, and eventually sells them to other banks, SVB depositors could easily come out of this whole, with no damage to anyone.
I think everyone is being way too hysterical. This isn’t a massive bank run.
I don't think this is really comparable to 2008. Grossly simplified 2008 for me is more about bad debt, while this is around bad risk management...svb bought too many long term bonds which was a bad bet given current rates and an industry "correction" as you put it.
They just didn't manage the risk of a market "correction" and high interest rates. The tech sector was/is due a correction, but this isn't 2008
Hear me out: shouldn't venture capital be providing backstop capital for it's ventures? The money is there, and will eventually be unfrozen; the individual startups only need access to make the next one or 2 payroll runs.
VC firms don't hold capital either - LPs do. They may be able to do a capital call, but it'll take time.
Many SVB startups with more than 20 - 30 employees can't make payroll on Monday.
Edit: It's also unclear today whether the assets held by SVB can cover all the missing deposits, since they will likely need to be sold under market rates to liquidate all of them in the near-term.
> VC firms don't hold capital either - LPs do. They may be able to do a capital call, but it'll take time.
Are you (and the YC boss) suggesting that the government is more nimble than VC machinery at deploying capital when shit hits the fan?
Re: your edit: how is it unclear? There are no allegations of fraud or other irregularities- the thesis that they put depositors funds in long-term bonds (with positive interest) and then had a run
> Are you (and the YC boss) suggesting that the government is more nimble than VC machinery at deploying capital when shit hits the fan?
I can't speak for YC. VC is almost certainly faster, but it's not built to wire money over the weekend. The issue happens when the FDIC insurance isn't enough make payroll on Monday. I don't think the government can bail anyone out in that time period either, but a lack of solutions doesn't make it any less of a problem.
> How is it unclear?
On paper, they have enough in assets (as of Dec), but there's no way to know if the market takes that price as the FDIC sells it off to cover the deposits in the coming months. Typically liquidating a position impacts the price of an asset.
Maybe with 'mark to maturity' accounting which banks can use in some circumstances. But T-bonds aren't cash in hand. There is a loss to be realized when selling before maturity. This leads to using 'mark to market' accounting which helps to ensure more prudent reserves.
There are times when government intervention and bailouts are appropriate, in order to prevent some greater bad for society, or in order to ease the effects of some kind of large-scale economic change.
Bailing out startups is dead last on that list. That is absolutely not something the government should spend tax money on.
Bailing out uninsured accounts in a failed bank may not be, even if they happen to be startups, depending on the form of the bailout. Favorable term government bridge loans against the receivership certificates (perhaps limited to some reasonable expectation of what will eventually be realized on those) would not be unreasonable, and would mitigate the worst short-term impacts.
OTOH, the problem is that for it to work, you’d [EDIT: probably; maybe there is a means to do this under executive authority] need immediate legislative action, involving both the Republican-majority House and the Democratic-majority Senate, and that seems improbable.
This is nowhere NEAR 2008. The financial crisis affected pretty much every bank on Wall St. This is localized to a small network of regional banks. Absolutely nothing indicates contagion.
not sure why all the schadenfreude, a bank going crazy and collapsing has nothing to do with quality of startups
at any rate, at least in that thread he's not even talking about a bailout, but asking to speed up the usual FDIC process so that people can get at least a small part of their money back to make the ends meet:
It is not just 30% of YC alone.
YC startups tend to be on average more successful than others, so number probably much higher for other startups.
Not making payroll is just the first problem. Vendors are the next ,
many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too
a lot of products such as saas apps , cloud services are sold to startups extensively.
If collectively startups stop making payments, those businesses become unsound even big tech like AWS will feel pain and mean layoffs everywhere.
Not making payroll for tech and tech adjacent people also means lot of local business will be distressed in those communities think your grocers and barbers etc.
> many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too
I don't know how this works in the US, but there not some kind of clause or law which basically prevents critical companies from becoming bankrupt like this?
In my country, vital infrastructure is supposed to have money on hand to keep the infra chugging along while the company gets put under administration. (or nationalized, depending on the political climate and what it provides).
We used to use regulations to limit this kind of damage, but those have been removed to allow for money to be made. So instead of proactively preventing these tragedies the government is there to help clean up the mess.
It is very hard to keep supply chains segregated like that and also expensive.
Even military industrial complex which have a sharp focus on kind of independence and budgets to see it through trips up constantly and just find out some core components are coming from foreign sources that can be fragile or threat .
Just as we are discovering last couple of years whether with baby formula or chips sometimes there are risks in the system which no one knows or can’t do anything about .
Not to mention such reliability costs money no one is ready to pay for .
> It is not just 30% of YC alone. YC startups tend to be on average more successful than others, so number probably much higher for other startups.
It's the opposite. 99% of startups do not bank with SVB and/or have less than $250K in SVB.
If this were a public ledger we could talk about exactly what the situation is. Instead we'll get lies and half truths from those jockeying to tilt things in their favor.
YC startups tend to be on average more successful than others,
Is this true? It it true for the median? YC appears to have a portfolio of startups that has better returns than average seed VCs. This means that somewhere in the huge number of companies they fund, there are some massive wins. But way more often, they just lose a few 100k on a startup that goes nowhere.
So even if it's true that the average return is better, the median return is probably similar or even worse (seems YC can probably afford to take bigger bets than smaller less known funds, resulting in bigger wins as well as more failures- the latter all having a capped downside).
Anyway, maybe I'm wrong, but it's not obvious to me that if you picked 10 yc startups and 10 other vc backed startups, the yc ones would be likely to be in better financial shape, even if the portfolio returns are better
Though it is widely publicized that he was pretty aggressive at getting YC startups to move their money out yesterday.
It's not altogether unlikely that other groups of startups, without an aggressive push to pull out of SVB, are in more trouble.
That is also a lot of startups in a very short window of time. Startups don't exist in isolation, and, for better or worse, often actively try to purchase each others products when possible. It is an ecosystem.
I work at an IPO'd SaaS company, but a lot of our customers are startups. If 30% of our startup customers suddenly can't pay their bills that impacts us in a big way. On top of this, like most companies, we were already concerned about how we were going to meet profitability goals.
And again, the short time frame means not a lot of time to respond and adapt.
Given the # of startups the YC program creates with every new batch, and proportionally the success of YC to all other types of startups, this seems more fair to say, though it does seem a bit hyperbolic.
SVB made bad bets and mismanaged risk. These firms should fail to make room for better firms. And people that work with mismanaged firms will often take a loss, often via bankruptcy.
Startups liked SVB because they would take risks big banks wouldn’t. Well risk comes at a cost.
The government’s role here isn’t to make everyone whole. It’s to prevent contagion.
I think BruceS warned us all about this at south by about ten years ago [0]. Forget exactly where it happens in this talk but he basically tells the audience that if they want to live by disruption, they will die by disruption, and that they have built their castles on shifting sand. Great talk imho
edit: this is actually a long now talk, will edit later if I find exactly the talk am looking for, but should be close
It asked specifically if they couldn't make payroll for the next 30 days
Also -- it's 30% of those who responded to the survey. So lots of startups could be banking with SVB and have not bothered to fill it out. Maybe those less likely to make payroll would be more likely to fill out the survey
Indeed. The situation was caused by a combination of the reckless investing that SVB did, the FED failing to raise interest rates earlier, and irresponsible amounts of government spending.
The situation was triggered by the government's rate change, but not really caused by it. The government did a normal fiscal policy action and effectively set off a land mine that SVB had set up for itself and its depositors.
The situation was created by SVB irresponsibly locking most of their money into 10-year mortgage-backed securities a couple of years ago when interest rates were historically low, plus the affected startups irresponsibly locking most of their cash into a single bank that took such irresponsible actions, without that one bank being systemically too-big-to-fail from a nationwide policy perspective.
Expecting the government to keep interest rates historically low for another decade or else to bail the bank out is an unreasonable expectation on the part of SVB and the ecosystem that over-relied on it, not the fault of the government.
You could argue that ending zirp isn't a normal policy action because zirp itself was totally abnormal and crazy. There's also the issue that svb did these things due to the massive flow of money into tech caused by the lockdowns combined with money printing that went with them, also abnormal.
Simply because SVB should have planned for it doesn't absolve the fed of its role. Its a single incredibly powerful decision maker. The fed is notoriously difficult to anticipate.
If someone is being reckless with fireworks right before the Enola Gay flies overhead and drops Little Boy its clear who did the killing.
Stanning for SVB when every single media outlet and signal from the Fed at the time of the purchases of those bonds was that there would be increasing rates for the forseeable future. My mom saw it coming, everyone who was thinking of buying a house saw it coming, damn near everyone on the planet saw it coming.
Other banks were not sitting with +40% of their assets in 10yr term low interest securities... try more like 25%
The one redeeming quality of corporate Democrats is that they have zero sense of personal loyalty. It’s why no one of the left or right respects them. It sucks when they turn on a good man who made mistakes like Al Franken. But it’s fun to watch them fail to circle the wagons when it’s Theranos or FTX or Y Combinator.
Privatized profits, socialized risk. The VCs have plenty of money to backstop a month of payroll for their portfolio companies, taxpayers should not be paying for this one.
It sucks for customers that SVB chose greed over risk management, had they invested in short duration treasuries they would be fine. It’s time to let risk actually have consequences instead of big daddy Fed/Gov coming to the VCs rescue.
Regarding "socializing" I should point out that silicon valley bank had about 34 billion more assets than deposits at the time they were taken over by the FDIC. In percentage terms their assets were 119% of their deposits. So not only are they not in the red, there is a 19% cushion.
So I am not sure there even are losses to socialize. There is the uncertainty with marking to market instead of marking cost of purchase but even then I am not sure the assets will shrink to the point where anyone is losing money.
Furthermore, from everything I have read about it the assets of the safest type. They are either US treasuries or Fannie and Freddy issued mortgage backed securities. Even if marking to market would make these be worth less than they were initially purchased for, there is little doubt that they will be paid back in full if held to full term, and thus eventually make more money than they were purchased for. The problem is that it will take a while for that money to be paid back, while all the depositors want to withdraw their money now.
So I understand that people are still feeling anger from the 2008 bailout. But this is not the case here (as far as I know). There has been no excessive risk taking, there are no hidden losses. It is just the well known case that even the best and best run bank will fail if all their depositors decide to demand their money at the same time.
The FDIC should take over the assets and pay the depositors as soon as possible. If necessary, the FDIC should take a loan from the FED against the assets. And no, it does not seem that there will be any cost to the taxpayer.
It may help to call your congressman, to urge the FDIC to move fast and make people's money available quickly. It may also help to try to nudge your congressman to urge the FED to stop this interest raising cycle which is obviously affecting the health of the banking system.
Teaching companies lesson about diversifying their finances is probably worth few startups going down (...which they might anyway). VS robbing taxpayers for another private corporation mistake
No it wasn't conservative. It was very risky completely based on assuming almost 0% interest rates over 10 years and fully locked in. That's clearly a crazy position to take. Every small increase in interest rates has a outsized effect on these bonds.
It's not that crazy considering we saw 10 years of 0% interest rates... well for the past 10 years. If anything it was the status quo. Only in hindsight does it look crazy.
That the interest rates were at 0% for so long implies that the rates will have to be going up in the near future. They can't stay at 0 forever, and 10 years is a very long time.
The obviously risky bet is that the rates would stay 0.
In 2018 some countries had started experimenting with negative interest rates, so 0 isn’t the lower bound. Secondly, you would have been wrong for the next ~3 years. That’s a long time to be on the wrong side of a bet. Long term nothing is guaranteed of course.
I know this is (was) downvoted a lot, but I understand this sentiment. If you read the comments above, it's a "sky is falling" situation for many startups in the Silicon Valley sphere of influence. How is it that the silicon valley tech ecosystem could be in a position where one singular bank failure could wipe out so many startups? Pretty remarkable how fragile the ecosystem is if that's all it takes.
Is this from personal experience? I can tell you a lot of East Coast, Southern US, non-Silicon Valley and non-US Startups have no problems finding banking partners outside of SVB. The adage that only SVB knows how to bank startups hasn't been true for decades.
> I know this is (was) downvoted a lot, but I understand this sentiment. If you read the comments above, it’s a “sky is falling” situation for many startups in the Silicon Valley sphere of influence. How is it that the silicon valley tech ecosystem could be in a position where one singular bank failure could wipe out so many startups?
From most accounts it seems to be a very tight ecosystem with a lot of close relationships between VCs, service providers, and serial founders. Very easy to see how it could develop high-impact dependencies that are very close to single points of failure.
Much of the Silicon Valley ecosystem are these sort of tight loops: VCs / law firms / banks / accounting firms / HR firms / marketing agencies / senior management / key hires / etc. It's a tight clique. If you're in with the right circles, you're in with all of it. For a community that prides itself on innovation and disruption, there's remarkably very little of it when it comes to operations. Much of it is herd mentality, from the investing decisions to even the structure of HR. C-level execs also float between these circle of companies, bringing the same decisions with them everywhere.
As of right now, yes. Give it a week, and it will get sorted out. In all likelihood, the bank will have a new owner by coming Monday/Tuesday and everyone will be able to make the transactions.
Agreed. Given that this seems like primarily a timing issue (i.e. SIVB being forced to liquidate bonds at a loss because their tech-heavy depositor base needed their cash), I'd think that a better capitalized and more broadly diversified bank (i.e. not just tech or crypto depositors) would be salivating at the chance to buy these assets up on the cheap.
The government buying those bonds at face value would be ridiculous. They're worth 80% of face value or less on the open market. So buying them at face value would be a 25% subsidy... Billions of tax money flowing to VC funded startups. That's an absolute no-go.
The solution is to wipe out the SVB shareholders, that's the only way to make sure other banks don't have an incentive to do these things. Then pay the startups whatever part of the funds you can recover on the market (may be close to 90% if some comes from SVB shareholders).
The VCs may have to step in at a few companies for loosing 10%, but that's likely the ones that weren't doing great anyway.
Using tax payer money to save SVB shareholders and some VCs is ridiculous. These guys have enough money, they're all professionals, it's a risk they took and unfortunately they lost this round. Better luck next time.
Why is it so ridiculous to buy it at face value? They aren't losing the 25% you're quoting, they are just holding the bonds till maturity. In the worst case they are losing the what they could have "made" on that money in the interim. But realistically this is kind of the governments job no? Put cash where it can help society the most - making the depositors (who are mostly startups) seems like a great use of capital - it ensures employees get paid payroll AND makes sure a bunch of startups don't die (who would have gone on to create a bunch of value/jobs/etc).
If this were the Bank of Omaha and a bunch of cattle ranches and soy farms were at risk, would you still feel the same way?
It is in the governments best interest for people to have faith in banks, regardless of what industry they serve. The FDIC was created because a run on one bank, once it becomes public knowledge, always turns into a run on more banks. They don't want this turning into a line of dominoes.
A lot of the people who could suffer because of this are not the people who caused the problems.
The biggest risk is that this leads to runs on other banks. People are already looking pretty closely at a few others like First Republic. Deposit insurance exists to reassure people that they won't lose their money, to reduce the temptation to start a bank run.
The workers who might not get their next paychecks or could lose their jobs entirely are not to blame for the problem either.
VCs will be fine no matter what happens, because they are billionaires. Trying to hurt them will fail and will result in other people getting hurt too. Moral outrage shouldn't be used as an excuse to make a bad problem worse.
Sure, but this isn't about it being fair or not. This is about a group of professionals making an investment decision that turned out to be wrong. Laymen then saying "let the government eat their 25% loss" based on the (wrong) idea that it isn't a real loss doesn't make sense.
Because then even more people that did not cause this would be paying for it.
A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."
It actually happens all the time with FDIC takeover banks. They run a bidding process so the buyers are pressured to act, you can be sure they are already preparing everything to do this ASAP.
They understand timing is really important to rescue these banks, they need to get stability ASAP or tons of value gets destroyed. Potential buyers know this too.
SVB's failure means that anything over $250k that a startup had there is not currently accessible. They'll probably be made whole in a couple of months by FDIC, but payroll, along with rent and the cloud bill won't wait and can't be paid via IOUs.
You're right that FDIC doesn't have to, but it's in everyone's interest that people keep keeping their money in a bank, so the long and the short of it is that the FDIC's playbook is to find another bank to buy SVB (for pennies on the dollar), and as part of that deal the purchaser bank will make them whole. FDIC doesn't necessarily have to do that, but it's what they've done in the past, so guessing that they will do something similar this time around isn't out of the question.
For your explained meaning, it is in depositor's individual interest to remove their money. Get cash or t-bills. Also get a credit union account where they work for the members.
FDIC is in receivership of the bank, so they can sell off assets or do whatever they need to do to recover money to pay out depositors. If you had a million dollars and they are able to recover 90 cents on the dollar - your $100k "loss" would be covered by the insurance.
Thinking back to the financial crisis when the idea of protecting home owners was floated and we had to endure finance guys ranting about greedy home owners and their 2nd bathrooms.
Gary is currently on CNBC giving a pretty good interview. He's actively pitching for government intervention and bailout. I'm torn on this stance, why should taxpayers bail out banks who continue to make poor decisions, but as a small business owner and former SVB customer I completely sympathize with the plight of the founders. They did nothing wrong, they followed the rules, they thought they were being responsible using SVB, and here we are the small companies, founders, and potential employees pay the price.
Ultimately I am sick and tired of my hard earned money going to the government for them to redistribute it, whether it be bailouts, stimulus payments, student loan forgiveness.
They wouldn't be bailing out the bank here.. at least not in any normal sense of the word. People who owned the bank (equity holders) are going to be zeroed out, people who lent money to the bank (creditors) are going to be nuked too. The people being bailed out are individuals and companies who had deposits with them.
If the government can make all of the depositors whole, take the associated amount of capital off their balance sheet and hold onto it until it matures, thus costing the taxpayers $0, that seems mostly okay to me? There's the opportunity cost of money blah blah but total increase to the deficit would be $0 and all of these companies would be able to continue operating.
What's the point of a Federal gov / lender of last resort if they can't keep depositors in solvent banks whole?
There is a reason why the FDIC limit is $250k and not a infinity symbol. The Fed's job is not to bail out every single entity that knowingly held assets in a risky manner.
Seems super short sighted - there’s no real world benefit into forcing companies to spread their checking accounts over hundreds or thousands of banks. Also seems like a good way to ensure that all of the business concentrates with the biggest banks.
The only people doing anything risky were the executives at SVB, and they’re going to be wiped out completely. Its a terrible idea to punish depositors for the crime of leaving their funds in a checking account at one of the top 20 largest banks in the country.
I suspect we’ll see a “Fannie Mae” for checking accounts in the future and that seems like a good idea.
If you are risk averse have your money at a big global systemic bank with a big customer base and therefore deposit base, not a bank focused on holding money for high-risk ventures.
There’s nothing unique about SVB - and their customer makeup was only obliquely related to this failure. The “high risk” nature of their customers had nothing to do with why the bank failed. Letting depositors lose money here would send a signal that any bank smaller than something like B of A is at risk.
Funny you mention BofA. They have $116 billion in unrealized losses. What all these banks are doing is very typical. If you've ever worked in the industry, you would know that.
I work in treasury and need to find a safe place for $150M in cash… there’s no universe in which I’ll spread that across $250k tranches in hundreds of other banks, so in your vast experience in the matter that’s evident from your confidence here, what would you recommend we do?
When did I ever say that you should do that? We know that the government will backstop BofA. They aren't going to backstop SVB. FDIC is only intended for regular people as you imply.
There kind of is - formerly called CDARS, but it goes by IntraFi now. You establish a “home” bank and they dump your balance into their network and they set up the hundreds or thousands of other accounts. It’s dumb and expensive and shouldn’t be necessary..
Why bail out what are essentially high risk ventures? Seems like the money would be much better spent with the aforementioned loan forgiveness to people who are actually hurting rather than 20-something YC founders who will easily land on their feet.
>> They did nothing wrong, they followed the rules, ...
Most people are willing to follow the rules for what is essentially 'free money'.
If the reason things don't work out for them is beyond their control that still does not mean they should be bailed out by the 99% of people who would never have used their product in the first place.
what about people losing their housing, financial security and destroyed their lives during the great recession?
they also played by the rules. Why did they not receive a bailout, but SVB somehow does?
It was a known unknown you could hedge. You know your account is not insured above $250k so you make sure you prevent the loss in the unlikely event that...
> He’s actively pitching for government intervention and bailout.
FDIC takeover is a government intervention and bailout. One systematically programmed and under rules laid out in advance, but an intervention and bailout nonetheless.
>They did nothing wrong, they followed the rules, they thought they were being responsible using SVB, and here we are the small companies, founders, and potential employees pay the price.
The rules are FDIC insurance up to $250k. That's the world where the game is played. This is real life and life isn't fair.
I think the idea that tech is going to be set back a decade if a load of YC companies fail is an interesting assesment from the head of YC, and might be interpreted by some as hyperbolic and self-aggrandizing.
How could someone think that this was a really good idea? It's like joining a pension fund with the average insured being over 50. Distribute risk whenever possible.
Generally agree. I run a startup and we have a few bank accounts. Luckily we were able to pull what we had in SVB (around 35% of cash reserves) on Thursday.
I think a lot of startups are in this situation. They have SVB accounts, but likely don’t have all of their money in there.
One thing to remember, SVB is very founder friendly. Often giving companies favorable lines of credit, giving founders favorable mortgages, etc. They helped us tremendously with our PPP loan, and are also deeply integrated with products like Stripe Atlas.
This is complete hyperbolic bullshit with the sole purpose of pushing a narrative, getting the right people concerned about their political image, and getting parachute out of this mess fast.
Can't blame the guy for doing his job, but you can call bullshit on him.
There is absolutely no evidence people above FDIC limits will recover “80-90% of the capital”. It’s a guess, a crapshoot, and it’s not taking into account historical loss rates for banks of this size that were seized by the FDIC. See also: IndyMac, WaMu, etc.
And whatever they do get back above FDIC limits, it will not be immediate. Months at a minimum.
I expect the losers in SVB will be the same as for WaMu: bondholders, shareholders, and investors. No reason yet to expect depositors will suffer anything more than inconvenience. And if, like WaMu, the FDIC can rapidly effect a sale to another bank that inconvenience could actually be quite short.
"The closure had no immediate effect on depositors. All deposits even those above the FDIC limit were transferred to Chase. As the FDIC stated, "No one lost any money that was deposited in Washington Mutual Bank." In addition, all existing WaMu CDs were honored by Chase to maturity."
Looks like for IndyMac, uninsured deposits got paid back at 50 cents on the dollar.
If this is like WaMu, the bank opens on Monday and everything goes back to normal. If this is like IndyMac (or worse, Silver State Bank, 11 cents on the dollar recovered), a bunch of startups are now fucked companies.
I honestly expect their will be an acquisition on Monday, with a lot of executive (whitehouse) pressure behind it. So much of the American economy is based on a tech advantage as is its national security. I could of course be completely wrong.
The real cost to startups is in management attention. If you're running a YC-funded startup, and got hit by this, it's going to occupy your attention for the next week at least, and probably the next month. The skills needed to deal with this are way outside the skill set of most tech founders, and even outside the skill set of most bankruptcy lawyers. You're going to need corporate lawyers and people who can evaluate deals in SVB receiver certificates. There aren't many people who do that sort of thing, and by now, they're probably all booked up.
And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.
For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.
So, priority is to get through the next two weeks while somebody works out a longer term solution.
Keep track of which founder teams deal with this well. They have potential in running a larger business.
Garry has an incentive to say the sky is falling because the sooner this is resolved the less pain it’ll cause, but to say this is an industry extinction event is a stretch.
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
The FDIC will cover the portion that they couldn't recover from bank assets. The depositors will be made whole (up to $250k), but it may take some taxpayer money to do that.
The subject of OP's post is the non-insured deposits.
No one, yet, has expressed doubt on the credit of the FDIC.
Sub 10% of SVB's deposits were insured. Meanwhile SVB's HTM bonds have taken a 20%+ loss which will, barring an acquisition, cause non-insured deposits to take a 19%+ haircut.
Combined with an indeterminate period of waiting. So start ups with cash in SVB should expect to lose 20% and find alternative sources to make payroll, pay payroll taxes, and pay suppliers. I expect we will see many startups close us shop when founders are unwilling to bail out their own company's balance sheet with personal money.
> there is no meaningful risk that these startups will not be made whole in the coming weeks.
Wow, two very bold claims here:
1. they will be made whole
2. in a few weeks
For 1. I think this is very unlikely to happen. Absolutely account holders will get some money back, but I would be pretty surprised if it was 100%. Regarding number 2. I would be even more shocked if anything more than the FDIC insured amount was returns within "a few weeks".
However you are claiming that there is "no meaningful" probability these will not both happen. Do you care to elaborate on this more because I have heard nobody with any experience in this space making claims like this?
If they sell SVB to another bank, it will probably guarantee 100% of it because the alternative makes all customers of small banks a lot more nervous about their accounts.
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
FDIC isn't stupid; they're issuing IOUs and these companies can borrow against the IOUs. It's not like this is a minor bank failure; everyone knows about it.
They're going to send out some money this week, but the value of the IOUs will depend on how much they can sell the bank's assets for. Certainly less than face value. It's going to be hard to borrow against that.
the ious are actually receiver's certificates, and as i understand it, borrowing against receiver's certificates is a commonplace thing to do in cases like this
Their assets were higher than their liabilities. This is a liquidity problem, not a solvency problem. Everyone got their money from Lehman Brothers, and everyone will get their money from SVB. But not everyone is going to get it right away, because it is invested.
“Receivership certificates” aren’t really IOUs (they are more “defunct entity owes you”). The DFPI takeover and FDIC receivership is, effectively, a kind of “bankruptcy” for the bank.
> these companies can borrow against the IOUs.
What amounts to an IOU from a bankrupt entity is…not very good collateral for a loan.
> It’s not like this is a minor bank failure; everyone knows about it.
Right, and everyone who isn’t already exposed wants to stay out of the blast radius, not jump into it.
Oh come on, uninsured creditors will get back at least 90c on the dollar when the dust has settled. Likely 100c. So yes, they can absolutely use the IOU to cover short term expenses.
Dude. Could you please tell us how much money the thousands of depositors (both individuals and companies) who were above the FDIC limits at IndyMac Bank lost in total, when the bank was taken over by FDIC in 2008?
Yup. And that was even after the FDIC limit was raised from $100k to $250k, and amazingly was even made retroactive back to January 1, 2008, to try to help those poor people out.
And lessons were learned! This is not 2008 repeating itself. SVB is unusual in how much exposure they have on interest rates, on both sides of the balance sheet. There is no contagion, and the bank is still an asset worth many billions.
The liquidity problem gets solved by merging this bank with a bigger and more liquid bank. The insolvency problem is solved by wiping out the stockholders and bond holders will get a haircut. I get why people panic, but the issues here can be resolved cleanly and speedily.
Wiping out stockholders has no effect on solvency, since stockholders only have a claim on residual assets. Bondholders getting a haircut or being wiped out addresses solvency, stockholders getting wiped out is just a side effect of dissolution without surplus assets.
Technically true, but when a distressed bank gets sold where does the money go that's paid by acquiring party? Stock holders are last in line. Employees who are due wages are first in line. We can guesstimate how large the hole is and how much SVB is worth. The money that would otherwise go to stockholders during an acquisition will now be used to fix the balance sheet.
Do keep in mind that at least in California unpaid wages are one of the only things that pierces the corporate veil, so management and investors are on the hook for them personally.
editing to add citation: California Labor Code Section 558.1
Well an amendment in 2017 to the General Corporation Law of the State of Delaware added Section 115 which explicitly permits Delaware startups to adopt in its certificate of incorporation a requirement that all internal corporate claims are exclusively held in front of a Judge in Delaware. Several cases in California have upheld this. So it's not exactly a crazy question to ask if this would work for YC startups employees.
On the one hand, of course in this case it applies. On the other hand, let's not pretend CA government doesn't sometimes pass things that aren't very effective.
Labor law generally applies where the employee lives. Otherwise companies would just incorporate in <fucked country> and be able to do whatever they want.
Yes, Delaware has no jurisdiction over events that take place in California, or vice versa. A delaware corporation hiring an employee in California means that it is subject to the laws of California solely when it comes to its relationship with that employee.
I suppose if you were about to h it a pedestrian while driving your car you could always bail out and claim you weren’t in charge of the vehicle, although that might be a bad example given Tesla’s shenanigans.
The government isn’t that simplistic that they’d accept that as a legal defense if they were going to enforce the law. Possibly if the executive could prove that they were defrauded by another exec or vendor with liability and they resigned as soon as they had information to that effect which coincidentally was on pay day, they could pull it off. Even then though as a corporate officer they have liability over how the company operates when they choose the people to do the job. As the other poster pointed out the liability for payroll pierces the corporate veil and that means they can’t just bail out and use the corporation as a legal shield.
Ahhhh. So maybe this explains why David Sacks is absolutely foaming at the mouth on twitter at the moment? Crunchbase says he sits on quite a few boards.
He even managed to use the occasion to throw Ukraine under the tank treads, again.
So ... San Francisco USD has had payroll system issues for more than a year which have continued to cause staff to sometimes not be paid, and sometimes be underpaid. robbiet480 said that the _corporate_ veil is pierced and so manager and investors are personally on the hook for SVB-related payroll issues. Should school principals, the superintendent or London Breed be personally on the hook for making up shortfalls? Are they literally committing a crime every pay cycle that the bugs in the payroll system continue?
Realistically this encourages immediate furloughs, layoffs, firing or bankruptcy proceedings. There isn't a world where the companies actually get to the stage of "unpaid wages", there are many steps they can take to avoid getting into that legal boondogle.
Normally, yes. But in this case isn't it the upcoming payroll that's the problem? That work has already been done by employees, so the wage is already on the books. If they can't come up with the money, they'll have unpaid wages no matter how many people they fire. Right?
Sure, but then they'll just furlough or lay off everyone. So employees get one payroll paid out, but then they don't get anymore, and the company and all the economic activity it produces are gone too.
If your company is economically unviable, it's going to eventually fold anyway; that's not the workers' fault. But if it's profitable and just has fallen temporarily behind in payroll, then it's not like it has to pay back wages all at once, it can make arrangements to pay them back over a period of weeks or months. But what it can't do is just decide not to pay people for the work they have performed.
People are acting like there's some set of circumstances that makes wage theft reasonable. Situations where management forces the employees to work for free under threat of being fired are exactly why the corporate veil should be pierced in these matters.
Just because a company is unviable today doesn't mean it will be unviable a year from now, that's the whole idea behind investing. If this had happened to Google in 1999 (a year before they would eventually make money through advertisements) Google would likely not be able to make payroll, pay their server bills, or keep their office lights on.
Second, even if the company is profitable, they might rely on income from other companies screwed over today. Those companies might not be able to pay their bills. If I'm Sentry, Render, Mongo, or any other number of companies that gets most of their revenue by providing services to startups, I'd be worried right now. Even big cloud providers like AWS and GCP will likely take revenue hits. Big companies can float resources while this debacle gets sorted out, but small companies cant. I'm sure there are a bunch of startups out there that had $2 million in the bank which would give them a good 18 months of runway, and are now trying to prioritize cost cutting measures to help make that initial $250k of insured deposits last as long as possible. And that's permanent lost revenue for those companies.
Third, I'm not saying wage theft is reasonable (it's not), and I don't think anyone else is either. I'm simply trying to point out that piercing the veil isn't some magic bullet here. If a company has to close up shop that's probably the worst of all worlds. Employees lose their jobs with little notice and no severance, office owners need to find new tenants (in an already tough office real estate market), healthy companies seeing ripple effects start belt tightening as well. And in the event that the full (or majority of) deposits from SVB are eventually released to the bankrupt company, where do you think that money goes? Right back to the shareholders. Employees are still screwed.
Piercing the veil makes sense in a typical situation where a company has gone bankrupt and they need to find a way to meet their final obligations, but it's a little more complicated in this situation. There are plenty of healthy companies that will be healthy again once the FDIC is able to release deposits.
It seems like there are circumstances that make it reasonable, though. And this isn't wage theft. This is where through no fault of the company, their bank closed down and their money is no longer theirs. It is in no way reasonable to make the company owners destitute over two weeks of pay. The corporate veil should remain here.
If you are a director of a company facing such a situation, it's what you want to do. Because if you don't, you become personally liable for the missed payroll. Do you want to close up shop and say "this startup died because of SVB, on to start another one", but keep your car and your house, or do you want to risk losing literally everything you own and then end up with loads of new debt on top of that.
Depends if you think the eventual outcome is worth more. People used to second-mortgage their house to start small businesses where the best-case payoff is much less than these tech companies-- some of which are apparently the next Google or Facebook according to the head of YC on CNBC yesterday
> If this happens the companies will immediately close up shop.
If their bank accounts get frozen for a week, they'll just lay everyone off and then hire them all back a week later with a signing bonus to cover their missed days. No one is going to permanently shut down their company because their bank is closed for a couple days.
Maybe a few lucky executives will accidentally get their vesting accelerated, and a few startups that were on the brink of collapsing anyway might be pushed over the edge, but beyond that life will go on as usual.
As Garry wrote, companies would furlough before closing up shop. You get your paycheck, and then you're told you're furloughed until FDIC does their thing. This protects the company and the founders.
This may be better or worse for workers than being laid off.
That would certainly be better, but companies generally have more expenses than payroll. Lets say hypothetically I'm a healthy cloud computing provider startup and a bunch of revenue comes from startups. If those companies can't pay me, then I can't pay my own costs. That means I have to shut down and all the businesses on my platform get screwed over too.
Bigger companies will be able to float resources for a bit, but if it takes the FDIC more than a few months to sort it out there will be large second order effects.
I hope this hypothetical stays hypothetical, if the FDIC can announce that SVB has been acquired and all the deposits will be honored this will all be moot. But any company with a large deposit at SVB should probably be working off the assumption that they're going to have to make that $250k of insured deposits last for a while. At least until new information is released.
$250k will be in every account Monday morning, agreed on that.
It's everything above $250k, which is substantial, and which companies need, that will take a while to sort out. It's true that everything above $250k isn't covered by insurance, which means they may not get it, but SVB has assets, those assets will get sold, and first up to those assets is those who had bank accounts and to make them whole.
These are Chicken Little scare tactics, and it is disappointing he chose that.
I wonder how much of YC's reputation was destroyed yesterday by this self-serving attempt.
It is unlikely that these companies won't have access to enough of their deposits to make payroll, and even if that rare case occurs there are many many alternatives available to them-- bridging from their VCs, from private lenders, etc.
Tan yesterday sounded a lot like that Zero Hedge guy back in 2009.
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate.
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
You’re conflating the amount insured and the amount that will be recovered. SVB has failed as a bank, it hasn’t failed as a place to have money. The money still exists, and while there’s a hole created by recovering immediate access to that money, it represents a very small haircut — maybe a few percentage points for each customer.
sure it may (in the long term) be a few percentage points of a loss. The problem is the timeline on which you get access to it. If you are a larger company, 250k won't cover much of your payroll. No banks are going to rush to buy these low interest securities unless they get a steep discount.
A company spending millions of dollars per year on payroll will have the relationships necessary to weather a storm like this. SVB made some very poor investment decisions but they didn’t light the money on fire: it’s not going to take years to liquidate. There is huge upside opportunity for buyers of assets from a distressed bank: the assets are worth less than what SVB paid (hence the crisis) but are not worthless. We will have to wait and see, and perhaps my optimism is naive, but I struggle to see a situation in which these remaining assets can’t be liquidated in the coming weeks. Even pre-crisis, SVB held less than $200bn — that’s a small amount of money in the context of the US banking system. Apple alone has, what, $100bn?
The FDIC has taken control of the bank. In their last bond offering SVB lost 1.8bn$ from a 21bn$ sale. 8.5% seems like more than a haircut... and 8+% to get the money you need now is a steep cut that will result in larger consequences.
8% might seem like a stubbed toe, but these are _bonds_. You aren't suppose to lose anything. 8% inflation, 8% from bank failure and add-on the additional losses from non-bond related issues... S&P500 at 1% for the year but from mid-2021 it is down nearly 10%.
> It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
Why wouldn't a lender lend in this scenario? It's almost zero risk.
It wouldn't be a good negotiating position if there was no other lenders, but there would presumably be plenty of lenders interested in providing a "small" bridging loan in a situation like this. And those lenders will have to compete.
SVB’s failure is only a symptom of the wider environment in as much as it failed because of a focus on handshakes over proper management. The comments on the FT are illuminating: bankers can’t understand how they didn’t hedge for interest rate risk.
Gonna be some new faces at some board meetings soon!
And by new I mean a buncha old guys from Wall Street or private equity who are going to buy a seat at some “disruptors” and then explain how things are going to work now.
> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
Yeah, I have years worth of runway and could probably retire if I wanted to live a more frugal lifestyle, but I don't work if I'm not getting paid period.
Yep. I didn't get paid for a month once and road it out. I did get paid eventually, but in retrospect, I should've just left. There were bigger troubles down the line.
This. A company being unable to make payroll, even only one time, is a pretty huge flashing warning light that the company is very close to the edge of a cliff.
Smells like blame shifting to me.
He shouted the sky is falling.
Maybe it was, maybe it wasn't.
SVB was a pretty big bank and was clear in its representations.
Maybe he shouldn't have played Chicken Little, initiating the precise scenario the bank warned against.
I wonder if he even realizes what much of the rest of America _already_ thinks of Silicon Valley, and how much more he damaged the perception of SV / YC by basically asking for a government bailout while the ink was still wet and before any payrolls etc were missed (and which may not even happen)
In 2008, when startups started to fail, many colleagues left to work for large old established firms. Some others left banking on ne started new ventures. Turnover accelerated.
If we go through an event of the same magnitude, the economy and people will adapt, because history taught us so.
>> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
Isn't this a similar version of what happened in the Savings and Loans crisis [0]?
Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.
I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.
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[ 3.2 ms ] story [ 265 ms ] threadThings don't look good right now.
I wonder what the sentiment of YC startups that have access to bookface [0] is right now. I don't think it is happy days there.
[0] https://bookface.ycombinator.com/
But there's still no concrete end in sight for if and when non-FDIC insured amounts will be available.
Zach Coelius nailed it:
> I am telling all my companies that even in the worst case scenario and there is no buyer (highly unlikely), they will still get the vast majority of their money back and this just becomes a short term issue.
> I, for one, certainly plan to fund my companies through this.
https://twitter.com/zachcoelius/status/1634272357132165121
And even if it had had the cash, the cash might have been at SVB.
... What?
If you think this is an economic catastrophe, just wait until you see what happens if we get rid of fractional reserve banking. It'd be a nuclear bomb in a china shop.
The 'cure' is way worse than the disease.
Every. Single. Time.
I don’t see how it can make things worse in the long run
Like, sure, I'm willing to entertain the idea that its possible to come up with some kind of planned steady-state economy that does not require speculative allocation of capital to drive production. But you're going to have to present a much more compelling vision of that future than 'Just get rid of lending.'
(Also, housing prices would collapse overnight[2], boomers and other retirees will lynch anyone responsible for something like that.)
For another argument, note that the health of the economy is a function of how quickly money moves through it. Fractional reserve banking is the engine that moves that money. Stop the movement of money, and you'll stop the economy.
All in all, I think we're better off with having the occasional bank go bust, and its customer funds getting frozen for a few weeks while the FDIC unfucks the bank's balance sheets, pays dollar-for-dollar cash for its illiquid, currently underwater long-term bonds, holds them until maturity for a profit, and then destroys the money they made in that profit. It's an infrequent failure case, it doesn't result in money getting lost, and the bank gets punished enough that most of its compatriots think twice before YOLOing the farm on long-term treasuries.
[1] This is called deflation, and if you think inflation is bad, imagine living in a world where nobody spends or invests money on anything, because you can become richer by doing nothing, and just sitting like a dragon on a hoard of gold.
[2] Heaven knows, I rail against housing price inflation all the time, but you are going to have a bad political time if you just pull the rug out from under homeowners.
Just get rid of fractional reserve banking.
Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Therefore if you are a startup and just need to store money a risky bank going under won’t affect your existence.
> Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Why would you need a bank to do that, you can go buy treasuries on any brokerage that have that property right now.
The problem wouldn't be on the deposit side, it would be on the lending side.
No bank would offer a prime + 3% mortgage without fractional reserve lending. Housing prices would immediately collapse.
No bank would offer anyone a low-APR loan - you'd only get utterly usurious terms. How well do you think the economy would react to the cost of borrowing money going up by 5, or 10%?
In other words could an economy started from scratch function with a fully backed reserve system?
For half of those things, yes, the issue is that it would be a dramatic change that leaves a lot of people holding the bag. But, you are correct, it doesn't have to be this way.
> In other words could an economy started from scratch function with a fully backed reserve system?
Unfortunately, you'll still have problems with the other half of those issues.
Low velocity of money depresses the economy. This wasn't a concern back when most people were subsistence peasants, and were just toiling to physically grow and put food on the table. All very inelastic demand sort of stuff.
This is a pretty big concern when the way most people put food on the table is a 'job', most of which are heavily affected by elastic demand for various goods and services. A peasant doesn't care much about the health of the 'economy', a worker does.
For another problem, high cost of borrowing significantly advantages the wealthy, and incumbents. Higher spreads between prime and actual interest rates will siphon more money into the pockets of lenders. This significantly amplifies the rich-get-richer winners-win-more problem.
Like, sure, you could build a society like that. Historically, a lot of societies looked like this. They were not very productive, prosperous, and all of their wealth was consolidated in the hands of a few oligarchs.
not in a world where other economies exist
you'd be out-competed and completely bought up by economies operating under fractional reserve
All growth stops and you get deflation. Which isn't healthy either.
Aren’t most businesses nowadays funded by stock sales and investments instead loans either way?
Must people don't want it can't have their money tied up the full length of the loanWhich then shrinks who actually lends.
This creates wealth inequality by only allowing allowing the biggest guys too lend and access capital.
Small businesses can't get off the ground because they need a loan to buy a machine that helps automation is a classic example.
And what's coming isn't just an indictment of all of that. We're about to find out what happens when you go Full Monty off of commodity-based currency such as the US with the Nixon Shock in 1971. It's a multi-generational event, so most of us alive don't know. But we all will soon.
There's so many problems with this analogy you should just state what you're trying to go for.
the world economy would collapse, along with all supply chains including that for food production
This one is talking about removing lending in general.
Tan makes it sound like it will favor the balance of power to big tech. I think big tech is irrelevant here, and it may actually shift the balance of power away from SV stereotype startups and give some oxygen to other businesses.
* honestly I think most solvent startups will find workarounds, it's more going to be a big stress than actual destruction
> 30% of YC companies exposed through SVB can’t make payroll in the next 30 days.
https://twitter.com/garrytan/status/1634286688922132481?s=20
No this is complete and utter bull hockey, this is 2008 all over again in every concievable way except this time instead of mortagages and housing it is tech that is begging for a bailout. This is nonsense, for years all the SV tech bros were bragging about "changing the world through arbitaging pizza delivery misinformation ML." getting paid ridiculous salaries, and playing foosball. I don't have sympathy for them, at all.
Most of the "startup" companies had the end goal of simply being bought out they never wanted to actually do anything they were just a get quick rich scheme.
Quite frankly this correction was long overdue and obvious to everyone who thought about it for even a moment. Now that the limitless capital has stopped (because of the fed rate hikes and because of the boomer retirement) it turns out it isn't profitable to have a buinsess model where you are loosing money on every transaction.
The curtain is pulled down, the emperor has no clothes, the chickens are coming home to roost. Deal with it.
EDIT:
As a followup I don't give a damn about the jobs lost, bailouts are the worst possible thing a government can do, all it does is screw the little people over while the owners keep the wealth and use it as an excuse to cut pay and lay people off.
I'm not saying a bailout is justified either (I have no opinion on that), just pointing out who's responsible here.
I heard the same thing, but they took a gamble and lost. That is free enterprise. People who when to SVB will loose too, again free enterprise.
It was no secret interest rates were going to go up, so 2 years ago they should have sold those bonds and took a small loss.
I think everyone is being way too hysterical. This isn’t a massive bank run.
They just didn't manage the risk of a market "correction" and high interest rates. The tech sector was/is due a correction, but this isn't 2008
Many SVB startups with more than 20 - 30 employees can't make payroll on Monday.
Edit: It's also unclear today whether the assets held by SVB can cover all the missing deposits, since they will likely need to be sold under market rates to liquidate all of them in the near-term.
Are you (and the YC boss) suggesting that the government is more nimble than VC machinery at deploying capital when shit hits the fan?
Re: your edit: how is it unclear? There are no allegations of fraud or other irregularities- the thesis that they put depositors funds in long-term bonds (with positive interest) and then had a run
I can't speak for YC. VC is almost certainly faster, but it's not built to wire money over the weekend. The issue happens when the FDIC insurance isn't enough make payroll on Monday. I don't think the government can bail anyone out in that time period either, but a lack of solutions doesn't make it any less of a problem.
> How is it unclear?
On paper, they have enough in assets (as of Dec), but there's no way to know if the market takes that price as the FDIC sells it off to cover the deposits in the coming months. Typically liquidating a position impacts the price of an asset.
Maybe with 'mark to maturity' accounting which banks can use in some circumstances. But T-bonds aren't cash in hand. There is a loss to be realized when selling before maturity. This leads to using 'mark to market' accounting which helps to ensure more prudent reserves.
Bailing out startups is dead last on that list. That is absolutely not something the government should spend tax money on.
OTOH, the problem is that for it to work, you’d [EDIT: probably; maybe there is a means to do this under executive authority] need immediate legislative action, involving both the Republican-majority House and the Democratic-majority Senate, and that seems improbable.
not ironically, it is overpriced mortgages an interest rate increase that are at the heart of this catastrophe again.
at any rate, at least in that thread he's not even talking about a bailout, but asking to speed up the usual FDIC process so that people can get at least a small part of their money back to make the ends meet:
> make the receivership as short as possible
doesn't seem like a great reason to gloat?
Not making payroll is just the first problem. Vendors are the next ,
many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too
a lot of products such as saas apps , cloud services are sold to startups extensively.
If collectively startups stop making payments, those businesses become unsound even big tech like AWS will feel pain and mean layoffs everywhere.
Not making payroll for tech and tech adjacent people also means lot of local business will be distressed in those communities think your grocers and barbers etc.
I don't know how this works in the US, but there not some kind of clause or law which basically prevents critical companies from becoming bankrupt like this?
In my country, vital infrastructure is supposed to have money on hand to keep the infra chugging along while the company gets put under administration. (or nationalized, depending on the political climate and what it provides).
Even military industrial complex which have a sharp focus on kind of independence and budgets to see it through trips up constantly and just find out some core components are coming from foreign sources that can be fragile or threat .
Just as we are discovering last couple of years whether with baby formula or chips sometimes there are risks in the system which no one knows or can’t do anything about .
Not to mention such reliability costs money no one is ready to pay for .
It's the opposite. 99% of startups do not bank with SVB and/or have less than $250K in SVB.
If this were a public ledger we could talk about exactly what the situation is. Instead we'll get lies and half truths from those jockeying to tilt things in their favor.
So even if it's true that the average return is better, the median return is probably similar or even worse (seems YC can probably afford to take bigger bets than smaller less known funds, resulting in bigger wins as well as more failures- the latter all having a capped downside).
Anyway, maybe I'm wrong, but it's not obvious to me that if you picked 10 yc startups and 10 other vc backed startups, the yc ones would be likely to be in better financial shape, even if the portfolio returns are better
Is there actually any evidence that YC startups tend to be more successful than others, and on what metrics?
It's not altogether unlikely that other groups of startups, without an aggressive push to pull out of SVB, are in more trouble.
That is also a lot of startups in a very short window of time. Startups don't exist in isolation, and, for better or worse, often actively try to purchase each others products when possible. It is an ecosystem.
I work at an IPO'd SaaS company, but a lot of our customers are startups. If 30% of our startup customers suddenly can't pay their bills that impacts us in a big way. On top of this, like most companies, we were already concerned about how we were going to meet profitability goals.
And again, the short time frame means not a lot of time to respond and adapt.
Most startups aren't even SV companies, let alone YC ones, but if your whole world is focused on YC/SV, it can be easy to forget that.
SVB made bad bets and mismanaged risk. These firms should fail to make room for better firms. And people that work with mismanaged firms will often take a loss, often via bankruptcy.
Startups liked SVB because they would take risks big banks wouldn’t. Well risk comes at a cost.
The government’s role here isn’t to make everyone whole. It’s to prevent contagion.
edit: this is actually a long now talk, will edit later if I find exactly the talk am looking for, but should be close
[0] https://soundcloud.com/longnow/the-singularity-your-future-a...
i wonder where garry is getting this 30% number or if he just made it up
Yeah, $250K isn't going to go very far.
Also -- it's 30% of those who responded to the survey. So lots of startups could be banking with SVB and have not bothered to fill it out. Maybe those less likely to make payroll would be more likely to fill out the survey
When times are good - they are the first to criticize government reach and taxes which are spend on other people. 100% capitalism etc.
When times get bad - we need government to step in and save us !
Ridiculous.
Besides, it seems the situation is nowhere near as bad as he paints it.
SVB is kindling a bank run right now.
https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...
The situation was created by SVB irresponsibly locking most of their money into 10-year mortgage-backed securities a couple of years ago when interest rates were historically low, plus the affected startups irresponsibly locking most of their cash into a single bank that took such irresponsible actions, without that one bank being systemically too-big-to-fail from a nationwide policy perspective.
Expecting the government to keep interest rates historically low for another decade or else to bail the bank out is an unreasonable expectation on the part of SVB and the ecosystem that over-relied on it, not the fault of the government.
If someone is being reckless with fireworks right before the Enola Gay flies overhead and drops Little Boy its clear who did the killing.
Stanning for SVB when every single media outlet and signal from the Fed at the time of the purchases of those bonds was that there would be increasing rates for the forseeable future. My mom saw it coming, everyone who was thinking of buying a house saw it coming, damn near everyone on the planet saw it coming.
Other banks were not sitting with +40% of their assets in 10yr term low interest securities... try more like 25%
https://www.wired.com/2008/05/peter-thiel-makes-down-payment...
It sucks for customers that SVB chose greed over risk management, had they invested in short duration treasuries they would be fine. It’s time to let risk actually have consequences instead of big daddy Fed/Gov coming to the VCs rescue.
So I am not sure there even are losses to socialize. There is the uncertainty with marking to market instead of marking cost of purchase but even then I am not sure the assets will shrink to the point where anyone is losing money.
Furthermore, from everything I have read about it the assets of the safest type. They are either US treasuries or Fannie and Freddy issued mortgage backed securities. Even if marking to market would make these be worth less than they were initially purchased for, there is little doubt that they will be paid back in full if held to full term, and thus eventually make more money than they were purchased for. The problem is that it will take a while for that money to be paid back, while all the depositors want to withdraw their money now.
So I understand that people are still feeling anger from the 2008 bailout. But this is not the case here (as far as I know). There has been no excessive risk taking, there are no hidden losses. It is just the well known case that even the best and best run bank will fail if all their depositors decide to demand their money at the same time.
The FDIC should take over the assets and pay the depositors as soon as possible. If necessary, the FDIC should take a loan from the FED against the assets. And no, it does not seem that there will be any cost to the taxpayer.
It may help to call your congressman, to urge the FDIC to move fast and make people's money available quickly. It may also help to try to nudge your congressman to urge the FED to stop this interest raising cycle which is obviously affecting the health of the banking system.
YC companies that have been exposed so badly through this are probably non-essential.
My company is also exposed and we will suffer, because we were stupid but luckily not complete morons
This is part of a healthy economic market according to market economic theory.
The obviously risky bet is that the rates would stay 0.
From most accounts it seems to be a very tight ecosystem with a lot of close relationships between VCs, service providers, and serial founders. Very easy to see how it could develop high-impact dependencies that are very close to single points of failure.
If 70% of depositors withdrew before the bank went into receivership there is nothing left.
And the assets they held were primarily treasury securities and MBS. Why would anyone sell those “on the cheap” when the market is super liquid?
If there were assets on the books left, the gov't could purchase them at face value and just hold to maturity.
The solution is to wipe out the SVB shareholders, that's the only way to make sure other banks don't have an incentive to do these things. Then pay the startups whatever part of the funds you can recover on the market (may be close to 90% if some comes from SVB shareholders).
The VCs may have to step in at a few companies for loosing 10%, but that's likely the ones that weren't doing great anyway.
Using tax payer money to save SVB shareholders and some VCs is ridiculous. These guys have enough money, they're all professionals, it's a risk they took and unfortunately they lost this round. Better luck next time.
It is in the governments best interest for people to have faith in banks, regardless of what industry they serve. The FDIC was created because a run on one bank, once it becomes public knowledge, always turns into a run on more banks. They don't want this turning into a line of dominoes.
The biggest risk is that this leads to runs on other banks. People are already looking pretty closely at a few others like First Republic. Deposit insurance exists to reassure people that they won't lose their money, to reduce the temptation to start a bank run.
The workers who might not get their next paychecks or could lose their jobs entirely are not to blame for the problem either.
VCs will be fine no matter what happens, because they are billionaires. Trying to hurt them will fail and will result in other people getting hurt too. Moral outrage shouldn't be used as an excuse to make a bad problem worse.
Because then even more people that did not cause this would be paying for it.
A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."
What due diligence can seriously be carried out by Monday/Tuesday? Especially for a messy "acquisition" like this one.
They understand timing is really important to rescue these banks, they need to get stability ASAP or tons of value gets destroyed. Potential buyers know this too.
Because their funds are frozen? Or they assume their funds are completely gone?
I never heard that before. The rich keep their money in investments.
For your explained meaning, it is in depositor's individual interest to remove their money. Get cash or t-bills. Also get a credit union account where they work for the members.
>>>/g/
edit: misread. My estimate of at least 30% of VC-funded startups in SV using SVB stands. It’s recommended as the default by most investors.
Ultimately I am sick and tired of my hard earned money going to the government for them to redistribute it, whether it be bailouts, stimulus payments, student loan forgiveness.
If the government can make all of the depositors whole, take the associated amount of capital off their balance sheet and hold onto it until it matures, thus costing the taxpayers $0, that seems mostly okay to me? There's the opportunity cost of money blah blah but total increase to the deficit would be $0 and all of these companies would be able to continue operating.
What's the point of a Federal gov / lender of last resort if they can't keep depositors in solvent banks whole?
The only people doing anything risky were the executives at SVB, and they’re going to be wiped out completely. Its a terrible idea to punish depositors for the crime of leaving their funds in a checking account at one of the top 20 largest banks in the country.
I suspect we’ll see a “Fannie Mae” for checking accounts in the future and that seems like a good idea.
https://twitter.com/zerohedge/status/1634025141540732934
http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
https://www.intrafinetworkdeposits.com/
Most people are willing to follow the rules for what is essentially 'free money'.
If the reason things don't work out for them is beyond their control that still does not mean they should be bailed out by the 99% of people who would never have used their product in the first place.
what about people losing their housing, financial security and destroyed their lives during the great recession? they also played by the rules. Why did they not receive a bailout, but SVB somehow does?
It was a known unknown you could hedge. You know your account is not insured above $250k so you make sure you prevent the loss in the unlikely event that...
Why should they get bailed out, when every 401k retirement account that lost money in the stock market today isn't getting bailed out?
FDIC takeover is a government intervention and bailout. One systematically programmed and under rules laid out in advance, but an intervention and bailout nonetheless.
The rules are FDIC insurance up to $250k. That's the world where the game is played. This is real life and life isn't fair.
I think a lot of startups are in this situation. They have SVB accounts, but likely don’t have all of their money in there.
One thing to remember, SVB is very founder friendly. Often giving companies favorable lines of credit, giving founders favorable mortgages, etc. They helped us tremendously with our PPP loan, and are also deeply integrated with products like Stripe Atlas.
Can't blame the guy for doing his job, but you can call bullshit on him.
And whatever they do get back above FDIC limits, it will not be immediate. Months at a minimum.
"The closure had no immediate effect on depositors. All deposits even those above the FDIC limit were transferred to Chase. As the FDIC stated, "No one lost any money that was deposited in Washington Mutual Bank." In addition, all existing WaMu CDs were honored by Chase to maturity."
-- https://www.depositaccounts.com/blog/2010/09/twoyear-anniver...
Looks like for IndyMac, uninsured deposits got paid back at 50 cents on the dollar.
If this is like WaMu, the bank opens on Monday and everything goes back to normal. If this is like IndyMac (or worse, Silver State Bank, 11 cents on the dollar recovered), a bunch of startups are now fucked companies.
Might be some politics going on this weekend.
And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.
For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.
So, priority is to get through the next two weeks while somebody works out a longer term solution. Keep track of which founder teams deal with this well. They have potential in running a larger business.
[1] https://www.svb.com/account/y-combinator
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
No one, yet, has expressed doubt on the credit of the FDIC.
Sub 10% of SVB's deposits were insured. Meanwhile SVB's HTM bonds have taken a 20%+ loss which will, barring an acquisition, cause non-insured deposits to take a 19%+ haircut.
Combined with an indeterminate period of waiting. So start ups with cash in SVB should expect to lose 20% and find alternative sources to make payroll, pay payroll taxes, and pay suppliers. I expect we will see many startups close us shop when founders are unwilling to bail out their own company's balance sheet with personal money.
Then yes, I agree they probably won't be made whole by the fed or government. Nor should they, in my opinion.
Wow, two very bold claims here:
1. they will be made whole
2. in a few weeks
For 1. I think this is very unlikely to happen. Absolutely account holders will get some money back, but I would be pretty surprised if it was 100%. Regarding number 2. I would be even more shocked if anything more than the FDIC insured amount was returns within "a few weeks".
However you are claiming that there is "no meaningful" probability these will not both happen. Do you care to elaborate on this more because I have heard nobody with any experience in this space making claims like this?
It would be unthinkable that they wouldn't, up to the $250k limit. Beyond that limit, they probably won't be made whole.
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
the ious are actually receiver's certificates, and as i understand it, borrowing against receiver's certificates is a commonplace thing to do in cases like this
Their assets were higher than their liabilities. This is a liquidity problem, not a solvency problem. Everyone got their money from Lehman Brothers, and everyone will get their money from SVB. But not everyone is going to get it right away, because it is invested.
“Receivership certificates” aren’t really IOUs (they are more “defunct entity owes you”). The DFPI takeover and FDIC receivership is, effectively, a kind of “bankruptcy” for the bank.
> these companies can borrow against the IOUs.
What amounts to an IOU from a bankrupt entity is…not very good collateral for a loan.
> It’s not like this is a minor bank failure; everyone knows about it.
Right, and everyone who isn’t already exposed wants to stay out of the blast radius, not jump into it.
(hint: three comma club, easily)
The liquidity problem gets solved by merging this bank with a bigger and more liquid bank. The insolvency problem is solved by wiping out the stockholders and bond holders will get a haircut. I get why people panic, but the issues here can be resolved cleanly and speedily.
editing to add citation: California Labor Code Section 558.1
It does not apply to claims by employees against the corporation under foreign state wage and hour laws, nor could it.
The government isn’t that simplistic that they’d accept that as a legal defense if they were going to enforce the law. Possibly if the executive could prove that they were defrauded by another exec or vendor with liability and they resigned as soon as they had information to that effect which coincidentally was on pay day, they could pull it off. Even then though as a corporate officer they have liability over how the company operates when they choose the people to do the job. As the other poster pointed out the liability for payroll pierces the corporate veil and that means they can’t just bail out and use the corporation as a legal shield.
He even managed to use the occasion to throw Ukraine under the tank treads, again.
Rather, it is illegal to not pay wages timely. It is more illegal to do it intentionally/wilfully vs. not, but it is illegal in any case.
https://www.kron4.com/news/bay-area/sfusd-still-struggling-w...
People are acting like there's some set of circumstances that makes wage theft reasonable. Situations where management forces the employees to work for free under threat of being fired are exactly why the corporate veil should be pierced in these matters.
Second, even if the company is profitable, they might rely on income from other companies screwed over today. Those companies might not be able to pay their bills. If I'm Sentry, Render, Mongo, or any other number of companies that gets most of their revenue by providing services to startups, I'd be worried right now. Even big cloud providers like AWS and GCP will likely take revenue hits. Big companies can float resources while this debacle gets sorted out, but small companies cant. I'm sure there are a bunch of startups out there that had $2 million in the bank which would give them a good 18 months of runway, and are now trying to prioritize cost cutting measures to help make that initial $250k of insured deposits last as long as possible. And that's permanent lost revenue for those companies.
Third, I'm not saying wage theft is reasonable (it's not), and I don't think anyone else is either. I'm simply trying to point out that piercing the veil isn't some magic bullet here. If a company has to close up shop that's probably the worst of all worlds. Employees lose their jobs with little notice and no severance, office owners need to find new tenants (in an already tough office real estate market), healthy companies seeing ripple effects start belt tightening as well. And in the event that the full (or majority of) deposits from SVB are eventually released to the bankrupt company, where do you think that money goes? Right back to the shareholders. Employees are still screwed.
Piercing the veil makes sense in a typical situation where a company has gone bankrupt and they need to find a way to meet their final obligations, but it's a little more complicated in this situation. There are plenty of healthy companies that will be healthy again once the FDIC is able to release deposits.
I remember the early dotcom days where a company would hold your first paycheck!
If their bank accounts get frozen for a week, they'll just lay everyone off and then hire them all back a week later with a signing bonus to cover their missed days. No one is going to permanently shut down their company because their bank is closed for a couple days.
Maybe a few lucky executives will accidentally get their vesting accelerated, and a few startups that were on the brink of collapsing anyway might be pushed over the edge, but beyond that life will go on as usual.
This may be better or worse for workers than being laid off.
Bigger companies will be able to float resources for a bit, but if it takes the FDIC more than a few months to sort it out there will be large second order effects.
I hope this hypothetical stays hypothetical, if the FDIC can announce that SVB has been acquired and all the deposits will be honored this will all be moot. But any company with a large deposit at SVB should probably be working off the assumption that they're going to have to make that $250k of insured deposits last for a while. At least until new information is released.
Why do you think it may take months for FDIC to do their job?
I think FDIC will pay the 250k on every account before Monday morning. Anything beyond 250k is not covered by 'deposit insurance'.
> acquired and all the deposits will be honored
SVB is effectively bankrupt. Buyers are going to get a good deal, and not sink their own bank.
It's everything above $250k, which is substantial, and which companies need, that will take a while to sort out. It's true that everything above $250k isn't covered by insurance, which means they may not get it, but SVB has assets, those assets will get sold, and first up to those assets is those who had bank accounts and to make them whole.
I wonder how much of YC's reputation was destroyed yesterday by this self-serving attempt.
It is unlikely that these companies won't have access to enough of their deposits to make payroll, and even if that rare case occurs there are many many alternatives available to them-- bridging from their VCs, from private lenders, etc.
Tan yesterday sounded a lot like that Zero Hedge guy back in 2009.
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
8% might seem like a stubbed toe, but these are _bonds_. You aren't suppose to lose anything. 8% inflation, 8% from bank failure and add-on the additional losses from non-bond related issues... S&P500 at 1% for the year but from mid-2021 it is down nearly 10%.
If you hold them to maturity. If you sell them early, not so much.
No, part of it disappeared when the long-term bonds were sold for a loss. That money hole is why SVB was closed today.
Why wouldn't a lender lend in this scenario? It's almost zero risk.
It wouldn't be a good negotiating position if there was no other lenders, but there would presumably be plenty of lenders interested in providing a "small" bridging loan in a situation like this. And those lenders will have to compete.
it's not
you can't predict what the unwinding of SVBs positions will produce in 6 months time (or however long it takes)
Mind you, the FT comment section is always full of people who predicted stuff like this, rather like the comments on breaches around here.
A lot of start-ups avoiding down rounds just got a great excuse to raise operating capital under the veil of liquidity.
And by new I mean a buncha old guys from Wall Street or private equity who are going to buy a seat at some “disruptors” and then explain how things are going to work now.
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
Likely event. 30% of YC companies will not make payroll in the next 30 days. Their bank accounts literally went to zero today.
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
Or several months, if not years. If SVB isn't bought by Monday those funds are going to be inaccessible for much longer than people realize.
Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.
I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.
0 - https://en.wikipedia.org/wiki/Savings_and_loan_crisis
The system that does that is named after another name for the “investor class”.