> The board was asleep at the switch. They are now unemployable.
That's not really how this works. The CAO of the bank was CFO of Lehman. People in these positions just get credit for the fact that they had a front row seat for this sort of financial implosion, so they can (theoretically) help whoever else's board they join avoid that sort of thing.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability.
The people in the VC community who triggered the bank run did the right thing by their startups. They don't have a responsibility to SVB. If they saw a run on the bank starting, it was in their best interests and the best interests of the startups in which they invested for those startups to get their money out as quickly as possible.
They ostensibly noticed the bank was insolvent and shared that important information with their startups. The bank should never have been anywhere near insolvent.
The bank run seems to have occurred after the insolvency.
The bank was appears to have been insolvent (from the currently available information), though they avoided their books showing the fact by having bonds marked as “HTM”.
When a bank is insolvent, it’s best to shut it down as soon as possible, to avoid the bank engaging in risky behavior to ‘make back’ the missing money.
The FDIC take over only happened after the massive amount of withdrawals/bank run the day before. Which is the nuance in the above statements... they had assets, but after selling what they could to meet immediate withdrawal obligations, the assets they had left (HTM) weren't worth as much if sold immediately than their booked value. If the assets could have been held until maturity (HTM), they would have been worth their book value.
So, only after the run did they become insolvent. The change from illiquid to insolvent happened quickly, but without those withdrawals, the illiquidity could have likely been managed to avoid an outright insolvency (probably through a sale).
They were liquid. They could sell the $80 bill or so of bonds they had quickly and at fair value. Their problem was selling forced them to face the reality that they'd lost $12 or $13 bill on a wrong way interest rate bet.
Under that interpretation nearly everything is liquid.
If you’re going to take a loss by selling an asset prematurely, it is illiquid. Otherwise you’d have to say things like the houses people own are liquid because the person could sell it in a day if they were willing to do so for 80 cents on the dollar.
That is not the financial world’s definition of “liquid”
I said nothing about profit. I can sell my house today, yet houses are one of the prototypical examples of something that is illiquid. The ability to sell something fast is not the definition of liquid. Liquidity is specifically the ease (or difficulty) with which you can sell something without taking a haircut.
Things one can sell at fair value in a few mins are liquid, and things one has to sell slowly or take 80 cents on the dollar to get rid of it fast (like a house in your example) are illiquid. It's a function of buyers and process, not my accounting treatment or tax treatment or whatever other treatment might make me not like the idea of selling right now.
What's next? The FX markets aren't liquid because I don't feel like realizing a gain from a tax perspective?
>> That is not the financial world’s definition of “liquid”
Taking 80 cents on the dollar == illiquid is exactly the point I was making. Selling quickly is a necessary but not sufficient condition to meet the definition of liquid. That 80 bil in bonds isn't liquid if they had it on the books as hold-to-maturity and took a haircut to sell it early.
>Yeah, it is, to us in the financial world.
I get the feeling we're talking around each other, your response indicates that we (probably) agree, and I'll assume it was my own communication failure, so I won't otherwise remark on this snarky & somewhat inaccurate (in its implications) comment.
No, it really isn’t. It may lead to insolvency, but that is by no means a foregone conclusion and can play out in different ways.
At a simple scale, If I own a $200k home outright and have $50k in credit card debt that I cant pay then I file for bankruptcy, negotiate with creditors to sell my home and pay the debts, and come out with $150k in assets with no liabilities. I was always solvent.
This happens daily in the business world’s bankruptcy courts. (Of course some of them are also insolvent)
The math & definitions of solvency & liquidity don't change with scale. They are separate things even if the mechanics of how they influence each other put them in such close proximity to each other that some people confuse the two.
My small scale example illustrated the concept, my large-scale citation of bankruptcy courts show a bit of how it plays out in real life & validates the analogy.
Illiquid and insolvent play off each other to the point that one implies the other at this state.
The only way to make back the $100 they spent on a 1.25% 10 year $100 treasury was to wait 8 more years.
Those 8 years they'd either have to become slowly become insolvent by offering their depositors 3-4% savings accounts like every other bank, or become illiquid because what depositor would keep their money in an account earning 0.5% so that SVB can keep the lights on. They had to sell and book the loss eventually.
Bonds that are HTM would have been profitable. They just weren't sellable for a profit on the open market (at the time they needed to sell them), because their yield was too low. So, as far as I have read, it wasn't until there was a run that they needed to dramatically increase liquidity. With so much of their holding being HTM, they were stuck. The issue was a mismatch in the timeframes (which was the fatal problem, and should not have happened).
But without that pressure, there probably would have been enough time for this to have been a much more orderly transition. The panic didn't help anyone, it just made SVB's existing problems more difficult to manage.
To put it another way -- SVB went bankrupt the old fashioned way... slowly and then all at once. The bank run was the inflection point.
You are in charge of a startup and are responsible for its finances and the jobs of the people who work there. You can see that a bank run is starting. If you don’t pull out your money, what are the chances this will prevent the bank run happening?
Nobody is blaming any startup who took that decision, the rational decision is to take out the money.
However it was not the rational decision for a fund to do so. You have a) substantially larger voice and also ability to coordinate for better outcomes, for a fund it is no longer a gamer theory 101 standard prisoner's dilemma.
The larger funds could have
- Banded together and made a joint statement ( like they were able to organize and do after the run) reassuring every startup of their confidence in the bank
- Participated in the equity infusion into the bank
- Organized and bought debt in the bank to give it liquidity
- Simply moved their own money as new deposits into the bank.
Just doing a joint statement - which wouldn't have costed them a single penny would have gone long way to reassure the markets and also gained the key guys a lot of clout and established their influence J P Morgan style.
Rumor is uncontrollable and often unattributable – and each organization acted in the best interests of its employees and shareholders, as is their duty.
> Without a run on the bank none of this would have happened.
A bank run is an almost inevitable consequence of a loss of confidence in a bank.
The loss of confidence was caused by their $1.8B loss on securities sales and plan to go to the market for $2B in funding.
The next day shares plummeted, and people began to remove their money (including those advised by VCs)[1]
Given the fact that only $250K of funds is FDIC guaranteed, in the face of a balance sheet crisis at the bank the withdrawal of funds was entirely rational. Arguably not doing it would have been irresponsible.
Even if there hadn't been a bank run it's pretty easy to see cases where the bank would have "temporarily restricted the amount of money an entity can withdraw in a day" or something. That potential restriction on liquidity is something any responsible business owner would want to avoid.
Once the run started then VCs who had not previously had a negative stance on SVB may have done right by their startups, but yeah not the ones who actually started it in the first place.
I have no idea if this is correct or not, but by some accounts, there were noticeable issues with regular transfers which caused the initial concern about the bank. It's not like someone started this out of boredom.
They lost $12 billion on an interest rate bet. The fact they didn't need to mark it to market under an accounting rule didn't mean people ignored it. It was a giant, known problem. It's why they were out trying to raise capital.
I'm talking about the "rumors" that caused the bank run. From what I've read (quoted above), these weren't really rumors but problems with day-to-day transfers that prevented the fund(s) from completing their deals, in which case one has to be insane not to let their friends know that the bank is not transferring money like they are supposed to. In hindsight we know they had problems like you said, but the "spread rumors" part seems to have been triggered by legitimate problems with regular transfers.
It wasn't hindsight though. They filed their 10-k well before the run and it showed a disaster of a situation. Their balance sheet was progressively getting worse, it was already bad the 10-q before. People knew it was problematic months ago, this didn't come out of nowhere.
This seems like distinguishing between the snowflake that falls on a sheet of snow and starts an avalanche, and the snow that collects along the way. Both were necessary conditions for the avalanche, but is either more to blame? It's an imperfect analogy but my point is this: the problem is all the loose snow sitting on a slope in the first place.
Unless those first people were actively trying to create an insolvency crisis, it seems to me they were either being prudent or prescient. There's a reason it's called the "tragedy" of the commons, and not the "tyranny" of the commons.
> The people in the VC community who triggered the bank run did the right thing by their startups.
I don't really have a horse in this race, but: while the above argument makes sense, what about all their future startups? Everyone says nice things about how it was good to have this bank that understood startups and treated them well, and now that is all gone. And no one who had deposits lost their money anyway.
It seems to me that everyone is worse off. It was a lose/lose move.
This is incorrect. such coordination was possible and did happen, only in the opposite direction.
A relatively small group of VC firms effectively did coordinate the depositors very effectively to organize except it was to take money out
Saying coordination wasn’t possible is therefore incorrect. And had it not occurred, getting people to keep their money in would have been a moot point, the whole thing a non issue.
Propagating a run simply takes propagating the info that a run is happening. No other communication is necessary. That signal is enough.
Coordinating stopping a run would take a huge amount of much more sophisticated and time consuming back and forth communication and negotiation, reassurance and confidence building. You’d have to convince people that together right now in this situation you can stop the run. How would you do that? That coordinated consensus building would have to happen and propagate through the community, all of the community, at least as fast as the news of a run in order to stop the run. If it’s slower it’s too late, the people that heard there’s a run before they heard there was a movement to stop it already pulled out their money.
I'm not quite ready to embrace that line of thinking, but the thought did cross my mind. Regardless, if someone was trying to maneuver things that way it may have backfired, making it more difficult for alternatives:
First, the speed of action & (so far) efficacy of containing and stabilizing things while keeping all depositor money safe is both an endorsement of traditional regulated finance as well as a sharp counterpoint to recent crypto collapses that were neither contained nor safeguarded customer money.
Second, some of the most crypto friendly finance partners are now gone.
Sure, Bitcoin is up, but from the point of view of growing an alternative I think crypto as a whole has taken yet another hit. Whatever struggle the sector would have had regaining momentum after the past year now just got at least a little harder.
Coordinating action in one direction can be trivial while coordinating in the opposite is nearly impossible. It takes years of engineering and construction to build a dam but only a few critical mistakes to break it down. The same amount of water is involved in either case, but it's a lot harder to hold it back than it is to let it loose.
And yet they were coordinated enough to tip off their mates to pull out.
In previous generations the industrial titans had a sense of nobless oblige, or at least pretended to; they knew their lucrative position came with responsibilities, and in times of crisis they would step up to do their share. Whereas when a crisis hits Silicon Valley, apparently you look after number 1 and when you reach out to the government it's not to ask how you can help but to ask them to bail you out.
You are on a boat that hit an iceberg. There are enough lifeboats for half the people. If everyone bails water together, you will just barely be able to keep the boat afloat.
What do you think is easier to coordinate - a dash to the lifeboats, or getting everyone to bail water?
You're right, but it is entirely prisoner's dilemma.
The rational decision, when you know you cannot control how others will act, is to minimize the pain. If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
And it is not a personal decision, continuity of business is a pretty big deal. Nobody in the company would forgive you for missing their payroll, because you thought it was the ethical thing to do.
It is, but also it's even worse. The usual prisoner's dilemma is explained with 2 parties. In this case, it was thousands of parties with a choice of: a) do what's best for your business, b) bet that almost all the other parties with also choose b.
2-person prisoner's dilemma is a fun game theory exercise. "All the customers" prisoner's dilemma is a social "have you met other business people" exercise.
FYI: prisoners dilemma is an interesting game theory experiment where you do better if everyone cooperates. You do better than your "opponent" if you don't. The wikipedia explains it well.
Wouldn't this not be prisoner's dilemma then? If I pull my money out, I'm in the same spot as before with my money parked at a different bank. If I don't pull my money out, I'm either in the same spot as before or even worse off.
In this case, starting from the perspective I have a choice (and thus the bank is still liquid), I can only do at best the same as I would have done if I pulled out.
The famous example illustrating PD created by Albert W. Tucker does have no communication - so that parties don't coordinate and cooperate with each other - but in this case with thousands of parties, there was no way to coordinate them all, or communicate with them all in time, or trust them all, so it still counts. It's possible to set up prisoner's dilemmas with communication, say in cases where it's a one off and the parties have every reason not to trust each other's word.
What does Friday matter? Friday was when the cynics would rejoice in righteous indignation. Monday was when responsible people were redeemed; when society through its government recognized that the real moral dilemma here was whether or not to vindicate the cynics.
There is a solution to the Prisoner's Dilemma, and it's called civilization, known in the modern era as institutional government. Like their communist cousins, die-hard libertarians should be forced to live in truly libertarian countries (i.e. those with extremely weak governmental institutions where wealth is safeguarded primarily through a web of private arrangements) and only then be allowed to opine on what's rational. For some reason libertarians can't often be found in those countries; not by choice, at least; and certainly they don't park their wealth there.
On Friday I was feeling that Circle/USDC was wrong that those who initiated transfers on Thursday should have them completed even if others with uninsured (above $250K) lost theirs.
> We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally.
In other words it shouldn't be entirely dependent on whether they were in the bank run. Earlier transfers, yeah.
In a bank run situation people were rushing to the bank and tying up the phone lines. Panicking shouldn't be encouraged to such a degree as to make millions of dollars depend on it.
The amount recoverable ended up not depending on whether an SVB customer attempted a late withdrawal. And that's good. I would have expected it even if depositors had to settle for a portion of their funds.
>You're right, but it is entirely prisoner's dilemma.
But part of what makes that whole bit of game theory interesting is that it has a lot more complexity then just the simple version. Yes in a plain prisoner's dilemma betray can make sense, but in an iterated prisoner's dilemma that's no longer true. That's been part of the debate around the whole debacle, for much of SV's history it was very much iterated, it wasn't just about any one company for VCs or even founders, there was some interest in the overall ecosystem. Some very successful people only found success after multiple failures, but success could pay for it all in the end. VCs too, maintaining the ecosystem mattered. In that sense, killing the goose laying the golden eggs, even if there is some short term payoff, is still clearly a poor idea.
There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game. If it only took a single megahit to cash out forever, then incentives might be more towards selfishness vs thinking about the next company and the next after that.
>If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
Sure, but how do you think they were feeling Monday? Or now? Zero threat to deposits after all for anyone including those who sat tight, but they lost a valuable service and icon, invited other problems and scrutiny, etc. While I'm sure lots will confidently say they did the right thing and that purely looking out for #1 was "responsible" I suspect there are at least a few who have some real regrets, even if SVB absolutely made very stupid choices as well.
I don’t understand how the iterated prisoner’s dilemma makes a difference.
If you are a founder who withdrew all your company’s money, then your reputation is neutral or perhaps positive. You saved your company. You did “whatever it takes”. These are good qualities in a founder.
If you are a founder who left your company’s money in SVB, nobody is going to give you a medal for that. Instead it exposes you to questions such as “Why did you have so much cash in one place?”. If depositors hadn’t gotten bailed out then you also face the collapse of your startup, your coworkers losing their jobs, etc. So this is definitely a much more negative outcome iterated or not.
I wouldn't look so much at the founders as the folks higher up the food chain.
I'm not sure they deserve quite so much vitriol as that website directs at them, but it really does seem to be a lose/lose situation for all the people who claimed to be fans of that bank. No one seems to be better off.
And while it's not hard to explain this outcome as 'the rational thing', it's also easy to imagine a different outcome where some more courageous leaders got together and held things together.
Replying to this as it's the top one right now, but also to siblings after:
>I don’t understand how the iterated prisoner’s dilemma makes a difference.
SVB isn't fungible, this isn't the case of "a bank is a bank", it was heavily used for a reason and that was it had developed specialized services, expertise, and culture around supporting startups. Losing it may mean that SV as a whole is permanently, or at least temporarily but significantly, impoverished. New startups may become harder to start and operate. This doesn't mean the end for existing businesses, certainly not already grown successful ones with stable income and sufficient size for in-house expertise, so in a singular game it's not a big deal. But to the extent VCs or founders care about the next game and the one after, the startups to come that don't yet exist even on napkins, they may now be worse off than if through cooperation SVB had been saved and reformed.
You're missing the entire point of iteration, that it's not just about this one game. Startups fail for all sorts of reasons, what has made SV successful long term wasn't the success or failure of any single startup but that there was an overall environment where it was straight forward to have new ones try again and again.
tobyjsullivan sibling wrote:
>Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
Historically though SV has indeed been relatively consistent players, from VCs to founders to employees to, well, services like SVB! Silicon Valley Bank was founded in 1983, not yesterday. What is that to Silicon Valley itself if not consistent?
The iterated game here is all the startups after the current batch. Where do VCs and founders go to and deal with in Fall 2023? In March 2024? Will it be exactly and perfectly as good as SVB, or better? If so then sure, no problem. If not, they've sacrificed advantage in future iterations for the short term.
RyanGWU82 wrote:
>The Prisoners' Dilemma analogy was covered in Ben Thompson's Stratechery article this week
Thank you! There it is, glad I can read it now. Much better than anything I wrote. And to add on for the future here is the HN discussion on it:
Are you conflating theories here? Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
I’m not in the field but I’ve never heard a theory that a generous strategy works in a game between an arbitrary number of (mostly) anonymous players.
And to call this event part of an iterated game at all seems… unusual.
> There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game.
The way I understand it, young people heading startups are often financially and businesswise naive, and SVB would hand-hold them through a lot of things they had to do regarding banking. You could walk in with your documents and they would set everything up for you with enthusiasm. This is difficult to find in classical banking.
It is. But if life has taught me anything it is that there’s enough irrational actors that the sane ones have to act exactly the same to get their own.
The founders represented by the VCs were looking at a company they spent years building and all its money potentially disappearing overnight. They had to act quickly under a lot of uncertainty and took the decision that minimized risk. I guarantee if SVB hadn't been bailed out people here would be questioning the VCs who didn't pull out instead.
I don't blame them. It was irrational if they were omniscient beings with knowledge of what would happen.. they aren't.
But within 24 hours we had VCs from Founder’s Fund and the All In podcast personas who intentionally and knowingly fueled a panic on social media.
That panic was designed to benefit them and it worked, to the detriment of everyone reading this who has a deposit at a US bank, and who will now be assessed a fee to cover the cost.
>Joseph Gentile, the subject of the viral tweets, is currently the Chief Administrative Officer at SVB Securities, which is an investment firm. SVB Securities is a subsidiary of Silicon Valley Bank’s former parent company that is financially independent from the collapsed bank. He had previously been the CFO of a division within the greater Lehman Brothers’ bank and left about a year and a half before the bank filed for bankruptcy.
Isn't this misinformation? The Chief Admin Officer of SVB Securities was an exec at Lehman, but SVB Securities is independent of SVB. If you Google [svb lehman], you get pages and pages debunking this.
The fact that SVB securities is independent is irrelevant to the point, which is that people who play roles in financial catastrophes do not become unemployable as a result.
It's unknown whether it was in their best interest, because we can't observe the alternate reality where 42 billion dollars wasn't withdrawn in one day.
The raindrop never feels responsible for the flood, but it is.
It was 100% possible to genuinely hold the belief that "Silicon Valley Bank is safe" and to advise portfolio companies to remove money to reduce risk.
In-fact, that looks like it was the prudent way to behave: depositors probably haven't lost their money but it sure is a lot less liquid.
And this is exactly why bank runs are dangerous - once there is risk of one the safe thing to do is to remove your money as well. The only way to stop one is for an institution with a LOT of money to step in an guarantee it.
The best way to prevent a bank run is not to run. A stampede isn't caused by the movement of a lone animal, but by the herd. It's a classic feedback loop.
Metaphorically you should aim to be the second out the door really. It’s the first person out the door who starts the run, and starting the run is rarely rational. Once the run has begun, yeah you should aim to be out the door fast.
Unfortunately it’s very rare to have the knowledge and/or connections necessary to guarantee that you can not instigate a run, but still withdraw before the collapse.
That's not a way to prevent the bank run. That's just choosing to not be a part of it. Unless you can both coordinate with and convince others to do the same, you're not preventing anything.
It sure seems that of all the people who could coordinate and convince others not to run, this list of investors with several thousand overall portcos would be just the right people. A moment of stability at a time of crisis would sure be better than a run for the doors NOW approach that set off the stampede.
Imagine the ALL-CAPS tweets and backdoor phone calls that could have been possible if these very same investors (who now rally behind the shuttered and reopened bank) could have called for calmness instead of panic. But that's not what happened. Once the run starts, you can't stop it.
Put another way, this is a list of VCs that prioritize their portfolio companies health and success more than their personal banking relationships or public perception.
That’s a pretty strong signal to future startups they’ve got your back when the shit hits the fan.
I’m not saying it’s good, but I’m betting a lot of founders are feeling pretty thankful. The bailout was never guaranteed.
No. There was only a 1.8 billion dollar temporary hole in the books. If they wanted to they could have plugged this in minutes and ensured their partner in banking survived. Then cashed out with 1:1.01 tbills or whatever in its stead. Follow on benefits would have been a statement of strength and cooperative SV culture.
Instead they panicked like children and told everyone else to panic too
yep, even though it seems "can't find their own mouth" level incompetence to try to raise cash through equity sale (which prompts everyone to think about their situation) instead of getting a loan, but they may have already exhausted that option.
... though finance is very much about connections, charisma and acting tough, and backchannels. aaand sometimes fundamentals. it's very hard to know if they could have organized/coordinated/managed to put together a rescue package.
by forcing a bank run and crying about payroll they managed to get the government to step in and basically undo SVB's bad deals, at the cost of sacrificing SVB itself. but VCs are happy now, they had the opportunity to both enjoy SVB up to now and have a financially zero-cost exit.
if the fallen SVB management gets the same treatment as the fallen WeWork management their egos will be fine at the golf courses.
As a former SVB customer, they understood the needs of startups like no other bank, and this will have adverse implications for the startup ecosystem, innovation and future economic growth not just in the US but also China and Europe. The incompetent top management who invested deposits in long-maturity T-bills with mediocre rates are not the same as the front-line personnel who had the relationships with the startups.
As for moral hazard, past bonuses for executives including the past Chief Risk Officer who left a year ago and cashed in her chips can and should be clawed back.
Lots of cash, lumpy or no revenue, no credit history, need to lease equipment like servers for those that run in a data center. Mitchell Hashimoto of HashiCorp describes it here, even if his is an extreme example:
But that's not really different from boring low-volume high-margin retail. Let's say a car dealership. Or basically consumer banking for anyone without a biweekly/monthly income. Or anyone who goes on vacation. Let's say I open a bank account, put my savings there and go on a long unpaid leave and spend a lot of it.
Banks are just picky, because they can be (and because regulation makes it hard to have a boring bank, so there's no competition). Because banks still don't understand the business they are in (because they can be dumb, because regulation, etc), as the Hashicorp story illustrates.
People want dumb banks, but banks make money buy upselling shit to people. So banks are basically evil MLM machines instead of trusted/trustable financial partners for people. (Because the people who actually need financial support will get taken advantage of in less time than it takes me to type this. And those who don't need it are constantly annoyed by the scam machine. Rightfully.)
And, ridiculously, Chase spent time and effort educating tellers in case the next startup ends up opening an account at them ... instead of making sure that they provide a good service so that founders choose them.
And that story is perfect. Everything went as expected. Nobody bothered the startup. Yes, closing the account was harder than imagined, because they were impatient, still they got it done in 2 days.
If you read the SEC filings, there was a 12-13 billion hole in their balance sheet. The 1.8 was simply accounting rules which say they only have to recognize the giant hole when they sell and they sold some of the assets in question. Marked to market, ie assets marked to real prices instead of fantasy prices, they were toast.
People who looked at SVB financials knew it was a train wreck. They behaved like serious investment professionals and pulled their money.
No, a strong signal would have been providing material support to portfolio companies harmed by the collapse, instead of just signing an empty statement.
I admire that it can get to the top of HN, though, in that there is no heavy-handed moderation coming from the top. It shows a good working knowledge of the Streisand effect.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability. Future founders will know your worth.
Future founders will know that the VCs helped them protect their cash?
The single largest learning point from this experience was how entirely hollow the whole Silicon Valley libertarian ethos really was.
And yet again, another group that claims to say "leave us be, take away restrictions and oversight we'll take care of ourselves, be more efficient an ask nothing of you", turnouts to be just another form of "leave us along so we can benefit, and then come save us when we need help".
And to be very clear, the lesson to take away from this isn't: don't save a group when it needs help - because in the end the Yellen and FDIC did the right thing. To do any differently would have been to cut off our nose to spite our face. The lesson is stop letting groups be allowed to be build these fake worlds. Every single time it works out to be "libertarian when convenient and socialist when suffering".
As we saw with the "code is law", and other cases - as much as people like the concepts it never holds up when people's assets/health are actually at stake. It is human nature they will always turn back to society for help after having refused to pay into it to get there (or directly taking advantage of it to profit).
If you want to profit off of the hard work of an existing society, you must also pay the costs of maintaining society. Anything otherwise is just a "free rider" problem waiting to explode. We're simply lucky we could contain it this time (so far).
There is a reason why every long-run solution to the prisoners dilemma is to cooperate. There is a reason why every society since antiquity has been based on society cooperation. The only long term stable solution is cooperation and eliminating free-riders who claim to be exempt from rules.
The same people who cry to be bailed out of a bank run are the same people who wring their hands about the moral hazard of student debt relief. You will find that theme repeated. Any government money spent on poor people we simply cannot afford.
The rich never stop asking the government for money. They expect it. They certainly never refuse it. Never forget that.
"Libertarians" are pretty much just Reagan-era deregulation conservatives. It is utterly self-serving.
The amount of victim-blaming astroturfing I've seen on hn this week has been quite surprising. Depositors are never, ever to blame for bank runs.
Edit: From the about page:
> Who I am is not important. Holding accountable the hypocrites responsible for Silicon Valley Bank’s collapse is. I can be reached at svbhallofshame@protonmail.com. All correspondence will be kept anonymous.
It's just missing a PAC called something like "Citizens for Depositor Accountability."
I don't think that's true? SVB was insolvent because they had to sell bonds at a massive loss in order to cover illiquidity that was a problem due to the bank run.
What is your source for this? From everything I have read, the first point at which they were clearly insolvent was what I mentioned previously, when they sold a huge swath of bonds at a massive loss at or around March 8th 2023, which was less than two weeks ago.
My read is that they were either holding the MBSs as tradeable assets (in which case they had taken a massive real loss that wiped out their equity) or until maturity decades away (in which case they didn't have enough current assets to remain solvent as a bank).
The depositor withdrawals forced them to admit that they had taken a massive loss because of insufficient hedging against interest rate hikes, but they didn't really seem to have a path to unwinding their underwater positions in any realistic timeframe. HTM was an accounting misdirection to try to hide the hole in their ship while they bailed water, but it was a massive hole and they had a tiny bucket.
But the withdrawals didn't force them to admit they had taken a massive loss, the withdrawals forced them to take the massive loss at all. It's not a loss until you sell, right? They sold to cover withdrawals.
Apparently they had $48B in withdrawals in a one-day period. Trying to imagine any bank that wouldn't need to take losses (to the point of being potentially insolvent) in order to deal with that. Yes, obviously SVB was still very poorly hedged given current interest rates, but they probably could've unwound their position in a much, much more favorable way without the run, to the point where it's possible they could've done so without ever being "insolvent".
There are two different definitions of the same word.
One is balance sheet insolvency, the other is cash flow insolvency.
But it’s two forms of the same thing! Cash flow insolvency is usually a result of holding illiquid assets that can’t be turned into cash. In this case the assets were perfectly liquid though, so it wasn’t just a cash flow insolvency.
The bank was reporting the future value of the bonds, the problem was the present value was much lower.
I don't disagree with you on the topic, but I promise you that the volcano of anger and indignation that spewed forth about this is basically all from entirely legitimate users.
Here's a defense of those critiqued here (I am uninformed, so please correct me with more nuance):
Bank runs are similar to prisoners' dilemmas. If all depositors could agree to not bank run, then they would have. Without this agreement, it does make sense to participate in the bank run (earlier is better), since if the bank run happens and you tried to be "good" by not running, you could be the one holding the bag at the end. And if the bank run doesn't happen, then no cost is incurred.
So unfortunately, a bank run is one of those situations where everyone makes really rational decisions in the absence of coordination, but the outcome is bad.
If Bloomberg is to be believed, the run started after the funds started experiencing real problems with regular money movement. In which case, it is kind of an emergency?
> But the firm learned that its limited partners were encountering issues using SVB services as they tried to transfer the funds — they weren’t immediately going through as expected, the person said.
But the funny part is that this story is still unfolding. The bank's new management is soliciting new business under the same "startup-friendly" pitch (and presumably a large number of the same assets and liabilities), and again vulnerable to _the same exact run on a small-ish number of uninsured deposits_ (as opposed to diversified banks with lots of insured accounts across many industries). Except, now they also pitch it as fully insured! So how does this even end? Is it a temporary thing until the bridge bank gets acquired by somebody, or do they have now perpetual 100% protection from the FDIC? Really trying to understand. What good is a friendly bank that collapses from mismanagement and is propped up to serve the same small segment, vulnerable to the same run again?
> So how does this even end? Is it a temporary thing until the bridge bank gets acquired by somebody, or do they have now perpetual 100% protection from the FDIC? Really trying to understand.
That will depend on what the FDIC does, and I don't think even they know what the end result will be. They'd like to get it back into private hands (and to that end they want to keep it operating normally, to make it as attractive as possible to buy, at least for the time being), but that depends on finding someone willing to take it. If they can't, they might start gradually winding it down in orderly fashion (e.g. close to new accounts, start giving people a while to transition), or they might keep running it in the current limbo forever (just look at Freddy and Fannie).
SVB didn't fail because people pulled money, it failed because of a lack of risk management. Complaining about those pulling money out is silly. If anything they should have pulled it out much earlier.
If it was in a vacuum maybe they could have kept a lid on it. But I disagree that they should have stayed calm about it with what happened prior with TerraUSD, Luna, Celsius, and FTX. The length of the list shows that it would have been infeasible to collude to stay quiet.
Wait, they're trying to say that this was all the fault of the depositors? No, sorry. While I often find it hard to empathize with wealthy tech bros, I don't have much trouble at all imagining myself doing the same thing.
Wow, sad. The only thing a bank run can be on is on "DEMAND" deposits. If you have a savings account or negotiate a similar thing then no bank run possible. A bank checking (called Demand Deposits) are to be fulfilled on DEMAND.
How dare customers demand their demand deposits. how rude, right?
All the bank had to do was upsell their customers into savings accounts and then no bank run is possible.
I don't think I agree with this as a mark of "shame". Were these companies wrong to pull money out of SVB when they (correctly) thought the bank might be insolvent or headed for trouble?
Are we celebrating those who left their money in, despite the warnings, when they could have potentially lost it all if the government didn't step in and make an unprecedented promise to honor the deposits? Would that have been "heroic" in some way? I personally don't think so, that seems more like stupidity if the potential consequence is your company losing all it's money and going bankrupt for outside reasons.
SVB as an institution sponsored lobbyists to lobby against regulations meant to keep banks stable, then without those regulations they failed to self-regulate properly and failed massively. That is IMO pretty shameful. But I don't blame any clients of theirs for taking money out when they saw a potential instability. They did not create that instability; that instability created the bank run.
“Sorry team, our main VC advised us to keep our money in SVB because it’s the right thing to do. We can’t make payroll. Our VC, true to their ideals, kept their cash in SVB too. They can’t help us. Kindly cast your blame on the thousands of startup peers that withdrew and remain unscathed. Their blatant self-interest may have killed us, but we are the true moral victors.”
I'm pretty sure they mean that if the VCs hadn't advised companies to withdraw all at once, the crisis might never have happened, and March 11th might simply have been a nice day for a walk.
When the Moody's data became known it was going to happen one way or another. Well over 90% of the accounts were uninsured. Someone was going to pull money. Perfect unanimity in inaction was simply not possible. Given that scenario, it is a rational response to try and be first out the door.
The fault here is with SVB management making some very bad decisions and with VCs not looking at the publicly available data and moving away from SVB a lot sooner. Of course, hindsight is alway's 20/20. Once the Moody's trigger had happened the choices were simple.
The fault is also with VCs who mandated that portfolio companies concentrate large uninsured deposits in one bank, increasing the risk of a run. The bank to my knowledge didn’t even offer insured cash sweeps, a basic financial product for deposits above 250k.
There is a clip I saw on twitter as this was happening of Jason Calacanis bragging insufferably about his special treatment from SVB in obtaining quick and favorable terms for a private mortgage, likely thanks to the amount of business he and other investors brought the bank.
So no, I reject your claim that the same people that would design Class A shares to be inferior to Class B shares, then say “no takesy backseys!” when executing a hostile takeover of your company are not at fault here.
How can a discipline that prides itself in superior networking ability, information gathering, and prudent decision making not be at fault for pooling a stupid amount of wealth in the first bank to go broke post COVID bubble?
Yes. I agreed that the VCs are at fault for poor decisions relating to their use of SVB in the face of known issues with the bank. I also agree with your additional point that the initial concentration of uninsured funds in a single bank was also a bad idea.
Defecting is only a good strategy in a prisoner's dilemma when you don't need to cooperate in the future and can't be punished outside the scenario of the prisoner's dilemma.
If this, say, destroys public trust in Silicon Valley startups, or leads to restrictive government regulation, then it might cost more than it saved in the long run.
Sometimes they've been able to make all the depositors while by wiping out all the investors and selling all the assets (buildings, office chairs, etc.)
What was unprecedented this time was the promise that they'd do it regardless of whether or not they could recover enough assets.
When Washington Mutual and IndyMac collapsed in 2008, some depositors indeed never got all their money back from their uninsured accounts.
One big difference was that those banks were knowingly engaging in hugely risky schemes, while SVB was ultimately burned by making overly conservative investments.
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Now you may argue it is unfair to other banks to penalize them for the failings of a few. What the SVB fiasco showed is that systemic risk is not just in the too big to fail institutions, but also ones like SVB that are important to specific sectors of the economy, like SVB for Tech or GMAC for cars. As it turns out, SVB had recently gotten TBTF and started the risk management compliance process, including the so-called "living will" to give the Feds a roadmap for an orderly wind-down of the bank, which must have been well-thumbed over the weekend. I expect one of the consequences of this is that more banks will be subject to oversight.
> while SVB was ultimately burned by making overly conservative investments.
This isn't true, interest rates risk of securities of long duration (especially when current fed interest rate is zero) is well known to be risky by anyone who has a cursory understanding of the matter.
> no need for heroics, just don't "lie" about it by signing statements
Have you read the statement? There is no "lie" in pulling money and signing the statement. Here is the text:
"The events that unfolded over the past 48 hours have been deeply disappointing and concerning. In the event that SVB were to be purchased and appropriately capitalized, we would be strongly supportive and encourage our portfolio companies to resume their banking relationship with them."
The statement clearly communicates that they have ended their banking relationship (pulled their money). They are simply stating that if the finances of the bank are straightened out they will start banking there again. I don't see any disconnect or deceit between pulling their money and signing the statement. When the Moody's data came out and it was clear things were headed south, of course they transferred or at least tried to transfer their money out.
The failure of all of these financially savvy VCs was not pulling their money weeks or months ago. The data was all there as others have pointed out. They have all been whistling past the graveyard hoping the problem would go away. If there is any shame, it is in that failure to act earlier.
How is pulling money out of an insolvent bank "blindly following?" Everyone could see their deposits were decreasing for over a year and they didn't have the cash to continue to support it, there's nothing blind about following the incentives and making a good decision.
If deposits kept increasing they might've been ok, but startups had been withdrawing the cash they had raised during the pandemic, deposits were decreasing rapidly before the solvency issues were thought about. At that point there is a very real scenario where the bank runs out of money and depositors are screwed.
There's no way to "feel" this, if you can look at items on their balance sheet you can determine whether their assets at fair value covers their outstanding debt of not. IF it doesn't, it's likely the bank would break sooner or later, if there was no bank run, it would have died a slow and painful death anyway (or, more likely, somebody would try to make risky bets in attempt to recover).
There hasn't been a buyer yet, which indicates the perhaps the assets aren't that great.
Agree completely with your point. Moving their funds from the train wreck was smart.
Shaming those that withdrew their funds reminds me of meme stock culture where participants shame sellers and make holding “no matter what” the highest virtue. The suckers that listen to that bullshit are the bag holding losers.
Banks don't have to issue demand deposit accounts if they want to invest your money while you "loan it to them".
How rude for the contractual obligation of a bank be asked to uphold their end of the deal. thats rude and racist. customers at that bank were real jerks.
> Importantly, SVB was part of the network of cash sweep banks; it had an offer on its website about it. But according to Adam Levitin, there were only $469 million in reciprocal deposits, which is where cash sweep would show up. In other words, almost nobody banking at SVB used them.
Roku had nearly half a _billion_ uninsured at SVB! I get how a small startup maybe overlooks their cash management, but how do you get to the size of Roku and have that? Treasurer/CFO should be fired.
If I was a powerful VC I would have shorted the stock and then went to the latest Silicon Valley venture capital social hour event and made a point of mentioning I had with drawn my billions.
This plot right out of Billions.
Since I'm not material investor in SVB, I can't see that this would be a red flag for the SEC?
This was commented elsewhere, but the auditors were correct in that situation. This was not a case of fraud, where the bank had less money than they said they did. KPMG's job was to verify that SVB's public statements were accurate, and they were.
SVB's precarious position was not a secret - saw a good post from mid-Feb that predicted exactly how this eventually played out. The only other thing KPMG could have done is give a "going concern" warning, and that would have been incredibly reckless because it would itself have caused a run on the bank.
Well, when I was working with auditors (internal AND external) in previous roles in major financial institutions, we always performed tests if risk management tools are sufficient and reserves are proper.
In the case of SVB it would have been possible to point out the concentration risk before bringing this into the public domain.
But then, I do agree with you that the situation evolved as a sum of many parts, which included the, at the time, highly unlikely result of a bank run by the VC community. Looking back, I still shake my head how this came to be.
>>>This was commented elsewhere, but the auditors were correct in that situation
Sorry, no. Auditors are supposed to effectively run going concern tests as part of their process. Its not only fraud they are looking for. If a company fails 2 weeks after the opinion because of an act of God, thats different. In this case, it was a literal duration mismatch (interest rate risk) that was predicted by blogs elsewhere.
I maybe concede that im not sure it would be reckless to issue FS with a going concern, even if the going concern is true. A more likely scenario would be...no signed opinion. Financial filing would have been delayed. Which itself would have caused the run.
If I was KPMG, I know what scenario I would like to be in, and its certainly NOT the current one, with a signed an opinion -with a wet siganture still- for a company that melted away within 2 weeks.
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[ 4.2 ms ] story [ 243 ms ] threadThat's not really how this works. The CAO of the bank was CFO of Lehman. People in these positions just get credit for the fact that they had a front row seat for this sort of financial implosion, so they can (theoretically) help whoever else's board they join avoid that sort of thing.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability.
The people in the VC community who triggered the bank run did the right thing by their startups. They don't have a responsibility to SVB. If they saw a run on the bank starting, it was in their best interests and the best interests of the startups in which they invested for those startups to get their money out as quickly as possible.
How do you arrive at this conclusion? Without a run on the bank none of this would have happened.
The bank was appears to have been insolvent (from the currently available information), though they avoided their books showing the fact by having bonds marked as “HTM”.
When a bank is insolvent, it’s best to shut it down as soon as possible, to avoid the bank engaging in risky behavior to ‘make back’ the missing money.
If it were only illquid, it would be far easier to find a buyer and it would have already been sold by now.
[1] https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
So, only after the run did they become insolvent. The change from illiquid to insolvent happened quickly, but without those withdrawals, the illiquidity could have likely been managed to avoid an outright insolvency (probably through a sale).
If you’re going to take a loss by selling an asset prematurely, it is illiquid. Otherwise you’d have to say things like the houses people own are liquid because the person could sell it in a day if they were willing to do so for 80 cents on the dollar.
That is not the financial world’s definition of “liquid”
Things one can sell at fair value in a few mins are liquid, and things one has to sell slowly or take 80 cents on the dollar to get rid of it fast (like a house in your example) are illiquid. It's a function of buyers and process, not my accounting treatment or tax treatment or whatever other treatment might make me not like the idea of selling right now.
What's next? The FX markets aren't liquid because I don't feel like realizing a gain from a tax perspective?
>> That is not the financial world’s definition of “liquid”
Yeah, it is, to us in the financial world.
>Yeah, it is, to us in the financial world.
I get the feeling we're talking around each other, your response indicates that we (probably) agree, and I'll assume it was my own communication failure, so I won't otherwise remark on this snarky & somewhat inaccurate (in its implications) comment.
The comment you were replying to said "quickly and at fair value".
At a simple scale, If I own a $200k home outright and have $50k in credit card debt that I cant pay then I file for bankruptcy, negotiate with creditors to sell my home and pay the debts, and come out with $150k in assets with no liabilities. I was always solvent.
This happens daily in the business world’s bankruptcy courts. (Of course some of them are also insolvent)
My small scale example illustrated the concept, my large-scale citation of bankruptcy courts show a bit of how it plays out in real life & validates the analogy.
The only way to make back the $100 they spent on a 1.25% 10 year $100 treasury was to wait 8 more years.
Those 8 years they'd either have to become slowly become insolvent by offering their depositors 3-4% savings accounts like every other bank, or become illiquid because what depositor would keep their money in an account earning 0.5% so that SVB can keep the lights on. They had to sell and book the loss eventually.
But without that pressure, there probably would have been enough time for this to have been a much more orderly transition. The panic didn't help anyone, it just made SVB's existing problems more difficult to manage.
To put it another way -- SVB went bankrupt the old fashioned way... slowly and then all at once. The bank run was the inflection point.
However it was not the rational decision for a fund to do so. You have a) substantially larger voice and also ability to coordinate for better outcomes, for a fund it is no longer a gamer theory 101 standard prisoner's dilemma.
The larger funds could have
- Banded together and made a joint statement ( like they were able to organize and do after the run) reassuring every startup of their confidence in the bank
- Participated in the equity infusion into the bank
- Organized and bought debt in the bank to give it liquidity
- Simply moved their own money as new deposits into the bank.
Just doing a joint statement - which wouldn't have costed them a single penny would have gone long way to reassure the markets and also gained the key guys a lot of clout and established their influence J P Morgan style.
Ugly, but rational.
A bank run is an almost inevitable consequence of a loss of confidence in a bank.
The loss of confidence was caused by their $1.8B loss on securities sales and plan to go to the market for $2B in funding.
The next day shares plummeted, and people began to remove their money (including those advised by VCs)[1]
Given the fact that only $250K of funds is FDIC guaranteed, in the face of a balance sheet crisis at the bank the withdrawal of funds was entirely rational. Arguably not doing it would have been irresponsible.
Even if there hadn't been a bank run it's pretty easy to see cases where the bank would have "temporarily restricted the amount of money an entity can withdraw in a day" or something. That potential restriction on liquidity is something any responsible business owner would want to avoid.
[1] https://abcnews.go.com/Business/timeline-silicon-valley-bank...
https://www.bloomberg.com/news/articles/2023-03-11/thiel-s-f...
Unless those first people were actively trying to create an insolvency crisis, it seems to me they were either being prudent or prescient. There's a reason it's called the "tragedy" of the commons, and not the "tyranny" of the commons.
I don't really have a horse in this race, but: while the above argument makes sense, what about all their future startups? Everyone says nice things about how it was good to have this bank that understood startups and treated them well, and now that is all gone. And no one who had deposits lost their money anyway.
It seems to me that everyone is worse off. It was a lose/lose move.
If all the depositors could have got together in a room, they could all have agreed to keep their money in. That coordination wasn’t possible though.
A relatively small group of VC firms effectively did coordinate the depositors very effectively to organize except it was to take money out
Saying coordination wasn’t possible is therefore incorrect. And had it not occurred, getting people to keep their money in would have been a moot point, the whole thing a non issue.
Coordinating stopping a run would take a huge amount of much more sophisticated and time consuming back and forth communication and negotiation, reassurance and confidence building. You’d have to convince people that together right now in this situation you can stop the run. How would you do that? That coordinated consensus building would have to happen and propagate through the community, all of the community, at least as fast as the news of a run in order to stop the run. If it’s slower it’s too late, the people that heard there’s a run before they heard there was a movement to stop it already pulled out their money.
You see the problem?
First, the speed of action & (so far) efficacy of containing and stabilizing things while keeping all depositor money safe is both an endorsement of traditional regulated finance as well as a sharp counterpoint to recent crypto collapses that were neither contained nor safeguarded customer money.
Second, some of the most crypto friendly finance partners are now gone.
Sure, Bitcoin is up, but from the point of view of growing an alternative I think crypto as a whole has taken yet another hit. Whatever struggle the sector would have had regaining momentum after the past year now just got at least a little harder.
Bank runs are the same way.
In previous generations the industrial titans had a sense of nobless oblige, or at least pretended to; they knew their lucrative position came with responsibilities, and in times of crisis they would step up to do their share. Whereas when a crisis hits Silicon Valley, apparently you look after number 1 and when you reach out to the government it's not to ask how you can help but to ask them to bail you out.
You are on a boat that hit an iceberg. There are enough lifeboats for half the people. If everyone bails water together, you will just barely be able to keep the boat afloat.
What do you think is easier to coordinate - a dash to the lifeboats, or getting everyone to bail water?
The rational decision, when you know you cannot control how others will act, is to minimize the pain. If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
And it is not a personal decision, continuity of business is a pretty big deal. Nobody in the company would forgive you for missing their payroll, because you thought it was the ethical thing to do.
It is, but also it's even worse. The usual prisoner's dilemma is explained with 2 parties. In this case, it was thousands of parties with a choice of: a) do what's best for your business, b) bet that almost all the other parties with also choose b.
2-person prisoner's dilemma is a fun game theory exercise. "All the customers" prisoner's dilemma is a social "have you met other business people" exercise.
https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
In this case, starting from the perspective I have a choice (and thus the bank is still liquid), I can only do at best the same as I would have done if I pulled out.
What does Friday matter? Friday was when the cynics would rejoice in righteous indignation. Monday was when responsible people were redeemed; when society through its government recognized that the real moral dilemma here was whether or not to vindicate the cynics.
There is a solution to the Prisoner's Dilemma, and it's called civilization, known in the modern era as institutional government. Like their communist cousins, die-hard libertarians should be forced to live in truly libertarian countries (i.e. those with extremely weak governmental institutions where wealth is safeguarded primarily through a web of private arrangements) and only then be allowed to opine on what's rational. For some reason libertarians can't often be found in those countries; not by choice, at least; and certainly they don't park their wealth there.
From their article:
https://www.google.com/amp/s/www.circle.com/blog/an-update-o...
> We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally.
In other words it shouldn't be entirely dependent on whether they were in the bank run. Earlier transfers, yeah.
In a bank run situation people were rushing to the bank and tying up the phone lines. Panicking shouldn't be encouraged to such a degree as to make millions of dollars depend on it.
The amount recoverable ended up not depending on whether an SVB customer attempted a late withdrawal. And that's good. I would have expected it even if depositors had to settle for a portion of their funds.
But part of what makes that whole bit of game theory interesting is that it has a lot more complexity then just the simple version. Yes in a plain prisoner's dilemma betray can make sense, but in an iterated prisoner's dilemma that's no longer true. That's been part of the debate around the whole debacle, for much of SV's history it was very much iterated, it wasn't just about any one company for VCs or even founders, there was some interest in the overall ecosystem. Some very successful people only found success after multiple failures, but success could pay for it all in the end. VCs too, maintaining the ecosystem mattered. In that sense, killing the goose laying the golden eggs, even if there is some short term payoff, is still clearly a poor idea.
There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game. If it only took a single megahit to cash out forever, then incentives might be more towards selfishness vs thinking about the next company and the next after that.
>If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
Sure, but how do you think they were feeling Monday? Or now? Zero threat to deposits after all for anyone including those who sat tight, but they lost a valuable service and icon, invited other problems and scrutiny, etc. While I'm sure lots will confidently say they did the right thing and that purely looking out for #1 was "responsible" I suspect there are at least a few who have some real regrets, even if SVB absolutely made very stupid choices as well.
He first made this argument in 2017 in an article about Uber: https://stratechery.com/2017/the-uber-dilemma/
If you are a founder who withdrew all your company’s money, then your reputation is neutral or perhaps positive. You saved your company. You did “whatever it takes”. These are good qualities in a founder.
If you are a founder who left your company’s money in SVB, nobody is going to give you a medal for that. Instead it exposes you to questions such as “Why did you have so much cash in one place?”. If depositors hadn’t gotten bailed out then you also face the collapse of your startup, your coworkers losing their jobs, etc. So this is definitely a much more negative outcome iterated or not.
I'm not sure they deserve quite so much vitriol as that website directs at them, but it really does seem to be a lose/lose situation for all the people who claimed to be fans of that bank. No one seems to be better off.
And while it's not hard to explain this outcome as 'the rational thing', it's also easy to imagine a different outcome where some more courageous leaders got together and held things together.
>I don’t understand how the iterated prisoner’s dilemma makes a difference.
SVB isn't fungible, this isn't the case of "a bank is a bank", it was heavily used for a reason and that was it had developed specialized services, expertise, and culture around supporting startups. Losing it may mean that SV as a whole is permanently, or at least temporarily but significantly, impoverished. New startups may become harder to start and operate. This doesn't mean the end for existing businesses, certainly not already grown successful ones with stable income and sufficient size for in-house expertise, so in a singular game it's not a big deal. But to the extent VCs or founders care about the next game and the one after, the startups to come that don't yet exist even on napkins, they may now be worse off than if through cooperation SVB had been saved and reformed.
You're missing the entire point of iteration, that it's not just about this one game. Startups fail for all sorts of reasons, what has made SV successful long term wasn't the success or failure of any single startup but that there was an overall environment where it was straight forward to have new ones try again and again.
tobyjsullivan sibling wrote:
>Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
Historically though SV has indeed been relatively consistent players, from VCs to founders to employees to, well, services like SVB! Silicon Valley Bank was founded in 1983, not yesterday. What is that to Silicon Valley itself if not consistent?
The iterated game here is all the startups after the current batch. Where do VCs and founders go to and deal with in Fall 2023? In March 2024? Will it be exactly and perfectly as good as SVB, or better? If so then sure, no problem. If not, they've sacrificed advantage in future iterations for the short term.
RyanGWU82 wrote:
>The Prisoners' Dilemma analogy was covered in Ben Thompson's Stratechery article this week
Thank you! There it is, glad I can read it now. Much better than anything I wrote. And to add on for the future here is the HN discussion on it:
https://news.ycombinator.com/item?id=35134608
I’m not in the field but I’ve never heard a theory that a generous strategy works in a game between an arbitrary number of (mostly) anonymous players.
And to call this event part of an iterated game at all seems… unusual.
https://stratechery.com/2023/the-death-of-silicon-valley-ban...
I mean, it was fine for them by Monday.
I don't blame them. It was irrational if they were omniscient beings with knowledge of what would happen.. they aren't.
But within 24 hours we had VCs from Founder’s Fund and the All In podcast personas who intentionally and knowingly fueled a panic on social media.
That panic was designed to benefit them and it worked, to the detriment of everyone reading this who has a deposit at a US bank, and who will now be assessed a fee to cover the cost.
>Joseph Gentile, the subject of the viral tweets, is currently the Chief Administrative Officer at SVB Securities, which is an investment firm. SVB Securities is a subsidiary of Silicon Valley Bank’s former parent company that is financially independent from the collapsed bank. He had previously been the CFO of a division within the greater Lehman Brothers’ bank and left about a year and a half before the bank filed for bankruptcy.
Was it a requirement or recommendation to concentrate cash in SVB, and why?
The raindrop never feels responsible for the flood, but it is.
It was 100% possible to genuinely hold the belief that "Silicon Valley Bank is safe" and to advise portfolio companies to remove money to reduce risk.
In-fact, that looks like it was the prudent way to behave: depositors probably haven't lost their money but it sure is a lot less liquid.
And this is exactly why bank runs are dangerous - once there is risk of one the safe thing to do is to remove your money as well. The only way to stop one is for an institution with a LOT of money to step in an guarantee it.
No, the only way to prevent a bank run is to get everyone else not to run.
And since that's impossible, there's only one rational choice to make, which is to be first out the door.
This is bad! But it's true.
Unfortunately it’s very rare to have the knowledge and/or connections necessary to guarantee that you can not instigate a run, but still withdraw before the collapse.
Imagine the ALL-CAPS tweets and backdoor phone calls that could have been possible if these very same investors (who now rally behind the shuttered and reopened bank) could have called for calmness instead of panic. But that's not what happened. Once the run starts, you can't stop it.
> The best way to prevent a bank run is not to run.
That is irrational for every individual actor. There is very little downside in withdrawing the money and huge downside in not doing so.
The best (and only?) way to really prevent a bank run is for an actor that everyone trusts to aggressively step in and provide guarantees.
See for example the situation at Credit Swisse where the Swiss National Bank had to step in on March 16 to provide $54B in loans: https://www.aljazeera.com/economy/2023/3/15/credit-suisse-sl...
Only a couple of prominent investors on that list fit the bill
That’s a pretty strong signal to future startups they’ve got your back when the shit hits the fan.
I’m not saying it’s good, but I’m betting a lot of founders are feeling pretty thankful. The bailout was never guaranteed.
Instead they panicked like children and told everyone else to panic too
It’s not a good look and it broke trust in SV.
... though finance is very much about connections, charisma and acting tough, and backchannels. aaand sometimes fundamentals. it's very hard to know if they could have organized/coordinated/managed to put together a rescue package.
there was a 15B liquidity hole after all.
https://blogs.cfainstitute.org/marketintegrity/2023/03/13/th...
by forcing a bank run and crying about payroll they managed to get the government to step in and basically undo SVB's bad deals, at the cost of sacrificing SVB itself. but VCs are happy now, they had the opportunity to both enjoy SVB up to now and have a financially zero-cost exit.
if the fallen SVB management gets the same treatment as the fallen WeWork management their egos will be fine at the golf courses.
As for moral hazard, past bonuses for executives including the past Chief Risk Officer who left a year ago and cashed in her chips can and should be clawed back.
https://mitchellh.com/writing/my-startup-banking-story
Banks are just picky, because they can be (and because regulation makes it hard to have a boring bank, so there's no competition). Because banks still don't understand the business they are in (because they can be dumb, because regulation, etc), as the Hashicorp story illustrates.
People want dumb banks, but banks make money buy upselling shit to people. So banks are basically evil MLM machines instead of trusted/trustable financial partners for people. (Because the people who actually need financial support will get taken advantage of in less time than it takes me to type this. And those who don't need it are constantly annoyed by the scam machine. Rightfully.)
And, ridiculously, Chase spent time and effort educating tellers in case the next startup ends up opening an account at them ... instead of making sure that they provide a good service so that founders choose them.
And that story is perfect. Everything went as expected. Nobody bothered the startup. Yes, closing the account was harder than imagined, because they were impatient, still they got it done in 2 days.
People who looked at SVB financials knew it was a train wreck. They behaved like serious investment professionals and pulled their money.
Future founders will know that the VCs helped them protect their cash?
And yet again, another group that claims to say "leave us be, take away restrictions and oversight we'll take care of ourselves, be more efficient an ask nothing of you", turnouts to be just another form of "leave us along so we can benefit, and then come save us when we need help".
And to be very clear, the lesson to take away from this isn't: don't save a group when it needs help - because in the end the Yellen and FDIC did the right thing. To do any differently would have been to cut off our nose to spite our face. The lesson is stop letting groups be allowed to be build these fake worlds. Every single time it works out to be "libertarian when convenient and socialist when suffering".
As we saw with the "code is law", and other cases - as much as people like the concepts it never holds up when people's assets/health are actually at stake. It is human nature they will always turn back to society for help after having refused to pay into it to get there (or directly taking advantage of it to profit).
If you want to profit off of the hard work of an existing society, you must also pay the costs of maintaining society. Anything otherwise is just a "free rider" problem waiting to explode. We're simply lucky we could contain it this time (so far).
There is a reason why every long-run solution to the prisoners dilemma is to cooperate. There is a reason why every society since antiquity has been based on society cooperation. The only long term stable solution is cooperation and eliminating free-riders who claim to be exempt from rules.
SV's VC ethos was completely hollow.
The same people who cry to be bailed out of a bank run are the same people who wring their hands about the moral hazard of student debt relief. You will find that theme repeated. Any government money spent on poor people we simply cannot afford.
The rich never stop asking the government for money. They expect it. They certainly never refuse it. Never forget that.
"Libertarians" are pretty much just Reagan-era deregulation conservatives. It is utterly self-serving.
Edit: From the about page:
> Who I am is not important. Holding accountable the hypocrites responsible for Silicon Valley Bank’s collapse is. I can be reached at svbhallofshame@protonmail.com. All correspondence will be kept anonymous.
It's just missing a PAC called something like "Citizens for Depositor Accountability."
Yes, runs can kill any bank, but insolvency killed SVB first.
The depositor withdrawals forced them to admit that they had taken a massive loss because of insufficient hedging against interest rate hikes, but they didn't really seem to have a path to unwinding their underwater positions in any realistic timeframe. HTM was an accounting misdirection to try to hide the hole in their ship while they bailed water, but it was a massive hole and they had a tiny bucket.
Apparently they had $48B in withdrawals in a one-day period. Trying to imagine any bank that wouldn't need to take losses (to the point of being potentially insolvent) in order to deal with that. Yes, obviously SVB was still very poorly hedged given current interest rates, but they probably could've unwound their position in a much, much more favorable way without the run, to the point where it's possible they could've done so without ever being "insolvent".
One is balance sheet insolvency, the other is cash flow insolvency.
But it’s two forms of the same thing! Cash flow insolvency is usually a result of holding illiquid assets that can’t be turned into cash. In this case the assets were perfectly liquid though, so it wasn’t just a cash flow insolvency.
The bank was reporting the future value of the bonds, the problem was the present value was much lower.
I don't disagree with you on the topic, but I promise you that the volcano of anger and indignation that spewed forth about this is basically all from entirely legitimate users.
Bank runs are similar to prisoners' dilemmas. If all depositors could agree to not bank run, then they would have. Without this agreement, it does make sense to participate in the bank run (earlier is better), since if the bank run happens and you tried to be "good" by not running, you could be the one holding the bag at the end. And if the bank run doesn't happen, then no cost is incurred.
So unfortunately, a bank run is one of those situations where everyone makes really rational decisions in the absence of coordination, but the outcome is bad.
Is this a valid defense?
> But the firm learned that its limited partners were encountering issues using SVB services as they tried to transfer the funds — they weren’t immediately going through as expected, the person said.
https://www.bloomberg.com/news/articles/2023-03-11/thiel-s-f...
But the funny part is that this story is still unfolding. The bank's new management is soliciting new business under the same "startup-friendly" pitch (and presumably a large number of the same assets and liabilities), and again vulnerable to _the same exact run on a small-ish number of uninsured deposits_ (as opposed to diversified banks with lots of insured accounts across many industries). Except, now they also pitch it as fully insured! So how does this even end? Is it a temporary thing until the bridge bank gets acquired by somebody, or do they have now perpetual 100% protection from the FDIC? Really trying to understand. What good is a friendly bank that collapses from mismanagement and is propped up to serve the same small segment, vulnerable to the same run again?
That will depend on what the FDIC does, and I don't think even they know what the end result will be. They'd like to get it back into private hands (and to that end they want to keep it operating normally, to make it as attractive as possible to buy, at least for the time being), but that depends on finding someone willing to take it. If they can't, they might start gradually winding it down in orderly fashion (e.g. close to new accounts, start giving people a while to transition), or they might keep running it in the current limbo forever (just look at Freddy and Fannie).
If it was in a vacuum maybe they could have kept a lid on it. But I disagree that they should have stayed calm about it with what happened prior with TerraUSD, Luna, Celsius, and FTX. The length of the list shows that it would have been infeasible to collude to stay quiet.
This hall of shame feels like an ego trip.
How dare customers demand their demand deposits. how rude, right?
All the bank had to do was upsell their customers into savings accounts and then no bank run is possible.
Are we celebrating those who left their money in, despite the warnings, when they could have potentially lost it all if the government didn't step in and make an unprecedented promise to honor the deposits? Would that have been "heroic" in some way? I personally don't think so, that seems more like stupidity if the potential consequence is your company losing all it's money and going bankrupt for outside reasons.
SVB as an institution sponsored lobbyists to lobby against regulations meant to keep banks stable, then without those regulations they failed to self-regulate properly and failed massively. That is IMO pretty shameful. But I don't blame any clients of theirs for taking money out when they saw a potential instability. They did not create that instability; that instability created the bank run.
“Sorry team, our main VC advised us to keep our money in SVB because it’s the right thing to do. We can’t make payroll. Our VC, true to their ideals, kept their cash in SVB too. They can’t help us. Kindly cast your blame on the thousands of startup peers that withdrew and remain unscathed. Their blatant self-interest may have killed us, but we are the true moral victors.”
"How was your weekend?"
"Oh nice had a walk with the boys, saw a bald eagle"
We don't know that this would have been a crisis without a sudden 42 billion dollar withdrawal over 24 hours
The fault here is with SVB management making some very bad decisions and with VCs not looking at the publicly available data and moving away from SVB a lot sooner. Of course, hindsight is alway's 20/20. Once the Moody's trigger had happened the choices were simple.
There is a clip I saw on twitter as this was happening of Jason Calacanis bragging insufferably about his special treatment from SVB in obtaining quick and favorable terms for a private mortgage, likely thanks to the amount of business he and other investors brought the bank.
So no, I reject your claim that the same people that would design Class A shares to be inferior to Class B shares, then say “no takesy backseys!” when executing a hostile takeover of your company are not at fault here.
How can a discipline that prides itself in superior networking ability, information gathering, and prudent decision making not be at fault for pooling a stupid amount of wealth in the first bank to go broke post COVID bubble?
If this, say, destroys public trust in Silicon Valley startups, or leads to restrictive government regulation, then it might cost more than it saved in the long run.
Was this unprecedented? I thought the US government has always covered depositors in full beyond the $250k.
What was unprecedented this time was the promise that they'd do it regardless of whether or not they could recover enough assets.
When Washington Mutual and IndyMac collapsed in 2008, some depositors indeed never got all their money back from their uninsured accounts.
One big difference was that those banks were knowingly engaging in hugely risky schemes, while SVB was ultimately burned by making overly conservative investments.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Now you may argue it is unfair to other banks to penalize them for the failings of a few. What the SVB fiasco showed is that systemic risk is not just in the too big to fail institutions, but also ones like SVB that are important to specific sectors of the economy, like SVB for Tech or GMAC for cars. As it turns out, SVB had recently gotten TBTF and started the risk management compliance process, including the so-called "living will" to give the Feds a roadmap for an orderly wind-down of the bank, which must have been well-thumbed over the weekend. I expect one of the consequences of this is that more banks will be subject to oversight.
This isn't true, interest rates risk of securities of long duration (especially when current fed interest rate is zero) is well known to be risky by anyone who has a cursory understanding of the matter.
Have you read the statement? There is no "lie" in pulling money and signing the statement. Here is the text:
"The events that unfolded over the past 48 hours have been deeply disappointing and concerning. In the event that SVB were to be purchased and appropriately capitalized, we would be strongly supportive and encourage our portfolio companies to resume their banking relationship with them."
The statement clearly communicates that they have ended their banking relationship (pulled their money). They are simply stating that if the finances of the bank are straightened out they will start banking there again. I don't see any disconnect or deceit between pulling their money and signing the statement. When the Moody's data came out and it was clear things were headed south, of course they transferred or at least tried to transfer their money out.
The failure of all of these financially savvy VCs was not pulling their money weeks or months ago. The data was all there as others have pointed out. They have all been whistling past the graveyard hoping the problem would go away. If there is any shame, it is in that failure to act earlier.
Granted, I can't talk about the board or their investing decisions because I don't feel educated enough to speak on that part.
There hasn't been a buyer yet, which indicates the perhaps the assets aren't that great.
Shaming those that withdrew their funds reminds me of meme stock culture where participants shame sellers and make holding “no matter what” the highest virtue. The suckers that listen to that bullshit are the bag holding losers.
How rude for the contractual obligation of a bank be asked to uphold their end of the deal. thats rude and racist. customers at that bank were real jerks.
https://prospect.org/economy/2023-03-13-silicon-valley-bank-...
> Importantly, SVB was part of the network of cash sweep banks; it had an offer on its website about it. But according to Adam Levitin, there were only $469 million in reciprocal deposits, which is where cash sweep would show up. In other words, almost nobody banking at SVB used them.
If I was a powerful VC I would have shorted the stock and then went to the latest Silicon Valley venture capital social hour event and made a point of mentioning I had with drawn my billions.
This plot right out of Billions.
Since I'm not material investor in SVB, I can't see that this would be a red flag for the SEC?
with a clean bill of health nonetheless.
SVB's precarious position was not a secret - saw a good post from mid-Feb that predicted exactly how this eventually played out. The only other thing KPMG could have done is give a "going concern" warning, and that would have been incredibly reckless because it would itself have caused a run on the bank.
Sorry, no. Auditors are supposed to effectively run going concern tests as part of their process. Its not only fraud they are looking for. If a company fails 2 weeks after the opinion because of an act of God, thats different. In this case, it was a literal duration mismatch (interest rate risk) that was predicted by blogs elsewhere.
I maybe concede that im not sure it would be reckless to issue FS with a going concern, even if the going concern is true. A more likely scenario would be...no signed opinion. Financial filing would have been delayed. Which itself would have caused the run.
If I was KPMG, I know what scenario I would like to be in, and its certainly NOT the current one, with a signed an opinion -with a wet siganture still- for a company that melted away within 2 weeks.