Silicon Vally Bank, the 16th largest in the US, was shut down and put under the control of California Department of Financial Protection and Innovation on Friday. This failure is set to send ripples across smaller technology companies. Even though there is good reason to think that uninsured depositors will eventually be made whole or nearly whole, some may have had so much of their working funds tied up at Silicon Valley Bank that it may be hard for them to find work-arounds, particularly with so many other companies in the same pickle. While is it is likely someone will cobble together financing, at what speed and on what price?
One seldom-acknowledged issue with the American banking regime is that it is pretty much impossible for small to medium sized business to protect themselves from the risk of a bank failure. For operational reasons, they pretty much have to keep the money they will use for payroll at a single bank. Similarly, many companies have routine transactions that exceed the $250,000 deposit guarantee.
SVB had a relatively small, highly committed group of depositors. About 37,000 customers accounted for nearly $157 billion or 74% of the bank’s assets with an average account size of over $4 million….at the end of 2022, 87% of the bank’s $173 billion in deposits were uninsured.
Reader Zephyrum explained that was no accident:
When I had a VC-backed company more than a decade ago, we were required to put our $11M lump-sum funding into SVB where the VCs could keep an eye on it. They had levers into the bank. It bothered me at the time.
Business Insider explained that Silicon Valley Bank acted as a merchant bank, and as a result, many tech executives also had large deposits at the bank:
And many in Silicon Valley say SVB has no equal – doing everything from providing venture debt to personal mortgages to founders who have little banking history and would likely not be approved by other institutions.
And based on the response of at least some customers, the collapse will have knock-on effects. From Daily Mail:
A Silicon Valley Bank branch in Manhattan today called the cops on tech investors trying to pull their cash out as a run on the bank forced regulators to seize its assets.
Police were called after ‘about a dozen’ financiers, including former Lyft executive Dor Levi, showed up outside the building on Park Avenue as investors scrambled to get their money out amid the biggest collapse since the Great Recession.
The CEO of a Boston-based health and wellness company said she has been unable to log into her Silicon Valley Bank account, where she has at least $10 million in deposits.
Ashley Tyrner, the founder of FarmboxRx, told The Post on Friday that she has been frantically trying to reach her banker at SVB, the California-based lender that is teetering on the brink of collapse.
She told The Post that she’s been experiencing “the worst 18 hours of my life.”…
Tyrner, who heads a company of 63 employees, told The Post that her firm’s banking relationship with SVB stretches back two years.
“We were going to raise a round a venture financing,” she said, noting that SVB “is one of the go-to banks” for that purpose.
Tyrner claimed that despite having had only $56 million in revenues last year, the freezing of her >$10 million corporate account (the article discusses her CEO trying to process a wire transfer) will not impair the viability of her business, since she diversified her banking relationships.
A second Daily Mail story argued that the Silicon Valley Bank deposit freeze will have serious effects:
The collapse of Silicon Valley Bank today sparked fears of a contagion in the tech industry with mass layoffs predicted by experts if start-up firms fail to make payroll….
NY-based entrepreneur Brad Hargreaves warned that the failure of SVB would have a ‘massive impact on the tech ecosystem.’
‘SVB was not just a dominant player in tech but were highly integrated in some nontraditional ways. A few things we’ll see in the coming days or weeks,’ he tweeted.
‘One, SVB was incredibly integrated into the lives of many founders. Not just their startup’s bank & lender, but also provided personal mortgages and other financial services. A whole mess for FDIC (or the eventual buyer) to unwind.
‘Two, any ‘uninsured’ balances at SVB – those above $250K – are in jeopardy. FDIC plans to pay them out ‘as it sells the assets of SVB’. Lots of startups exclusively banked with SVB as *this was a covenant of their debt*!’…
‘This is going to be tough on a lot of founders and startups, a lesson to be learned,’ said Adrian Mendoza, founder and general partner of Mendoza Ventures in Boston.
He told The Boston Globe: ‘I am getting texts and e-mails from all over. We are getting bombarded.’
One of our running buddies from the financial crisis days, bank stock analyst Chris Whalen, confirmed our early take yesterday, that we could soon see a rerun of the Volcker rate hikes, where the Fed had to reverse gear sooner than Volcker wanted due to damage to the banking system:
Christopher Whaler, Chairman of Whalen Global Advisors in New York, said: ‘I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail then the Fed is faced with a very tough situation which may force them to drop interest rates.’
‘There could be a bloodbath next week as banks are in trouble, the short sellers are out there and they are going to attack every single bank, especially the smaller ones.’
‘I think Silvergate started it. That one was the first pebble to go off the mountain and now we have a boulder and more are likely to follow.’
Politicians tied to Silicon Valley are calling for a bailout. But if the bank was solvent, as many claim, and just hit by a panic, a bigger bank should absorb it once it has kicked the tires. From the Economist:
The question now is whether there will be a bail-out and, if so, how big it would need to be to make depositors whole. svb “is the lifeblood of the tech ecosystem,” notes Ro Khanna, a congressman from California’s 17th district, which includes some of the valley. “They can’t let the bank fail. Whether that means that it should be acquired by another company…or get assistance from or even a statement from the Treasury department so that the depositors feel secure—I will leave that to the experts.”
And even if the bank is wound up with no losses to depositors, the failure will still make like harder for new tech companies. Again from Business Insider:
“It’s going to be harder to bank as a startup going forward,” [Mark] Suster [manager partner at Upfront Ventures] said. “Our industry has shot itself in the foot.”
Other information about the windup courtesy Wolf Richter:
The DFPI [California Department of Financial Protection and Innovation] appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC announced that it had created the “Deposit Insurance National Bank of Santa Clara (DINB)” and that the FDIC, as receiver, “immediately transferred to the DINB all insured deposits of Silicon Valley Bank” to protect insured depositors. Depositors will have access to their insured deposits on Monday, March 13.
The FDIC, as receiver, said:
- “The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023.
- “The DINB will maintain Silicon Valley Bank’s normal business hours.
- “Banking activities will resume no later than Monday, March 13, including on-line banking and other services.
- “Silicon Valley Bank’s official checks will continue to clear.
- “The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition.
- ‘Loan customers should continue to make their payments as usual.”
Insured depositors: “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023,” the FDIC said. They will not lose a dime.
Uninsured depositors: “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the FDIC said and provided a phone number for this folks to call. It looks like they will get at least a portion of their funds.
FDIC is unlikely to lose money, that’s what it looks like from this statement as the available assets, after they’re sold by the FDIC, will be sufficient to pay for all insured deposits, other liabilities, and at least a portion of the uninsured deposits. So it looks like the FDIC will not incur a loss.
Shareholders got bailed in and face a total loss. They’re the ones who are “bailed in” automatically when the FDIC takes over. Other investors may have a partial loss.
Chaos at the end. The fact that the FDIC took over the bank during the day — rather than Friday evening, which is the normal procedure — shows just how fast-moving and chaotic this situation, including a massive run on the bank, had become.
The fact that the California regulator calls itself the California Department of Financial Protection and Innovation is an omen of sorts, since “financial protection” and innovation do not go together. As we wrote in ECONNED:
But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
Admittedly, at this point, it does not look like Silicon Valley Bank walked all that much on the wild side, but was overly concentrated, both in its industry focus and its skew toward comparatively few and large depositors. But the tech industry looks set to at least have a very bad case of intestinal distress over this failure. And it’s likely, as usual, that the smaller fry, the employees, company owners, and suppliers, will take much more of a beating than the venture capitalists.
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The failure of SVB is also having some effects on the crypto world, as of a few of hours ago.
Circle, the entity that issues the popular USDC stablecoin that lives in the Ethereum ecosystem is said to have upwards of $3B of their reserves deposited at SVB. This combined with the reserves that were held at Silvergate constituted roughly 8% of their reserves based on the figures floating around online.
As word of this has spread throughout the day, there has been a run on USDC and it has de-pegged down to around 0.90 as of this writing. The largest US-based centralized exchange, Coinbase, has told account holders that all USDC conversions will be blocked until Monday.
What’s also been interesting is that the crypto prices for the last 24 h are actually slightly up, likely the result of scared USDC holders converting to Bitcoin or Ethereum.
Some are claiming that this reaction is overblown given the level of exposure Circle has to SI and SVB, and there are surely some speculators pouring into USDC right now hoping it recaptures the peg. This seems the most likely outcome, in my opinion, but should be worth keeping an eye on in the coming days.
For my part, it is interesting to note that this effect, similar to the effects of the FTX fiasco, resulted from poor management of crypto-exposed entities in the traditional finance sense and had little to do with the mechanics of crypto itself (contrast this with the LUNA saga, which included an engineeeing/technical failure component that substantially compounded the poor management).
The effect of rising rates, combined with remote work means massive defaults on CMBS and bank loans secured by commercial real estate. It’s already started, with PIMCO recently defaulting on $1.7B on soured office bets. Even the relatively “safety” of multifamily is on the precipice of a huge drop in value. Rents have been softening for the past 6 months or so, and apartments under construction will deliver a record number of units in 2023 and 2024. Over 80% of this inventory is skewed to the luxury rental market, where rent pressures will be most severe.
If the banks were to mark to market the low interest rate loans on the books, insolvency will be the outcome. Banks were underwriting the apartments to a yield on total construction costs of 6%+/- . It will be impossible for the banks to refinance the totality of the construction at today’s mortgage rates.
Way to go Jay Powell! Mission Accomplished!
> It’s going to be harder to bank as a startup going forward
That’s a damn shame.
Interesting to see how this knocks on elsewhere around the globe.
Because..
Not all startup are in the US
Not all venture firms are in the US.
There are many other banks and lenders across the globe.
I don’t know how localised to the US this issue is?
Does this actually represent opportunity for startup communities in for example UK, Europe, China etc?
.
It sounds like SVB was a fulcrum of a particular type of start up culture.
I hope the rest of the world doesn’t replicate all parts of it.
Delaware registered foreign startups, especially from India, are being impacted as well as they kept the funds raised with US based investors in SVB. I think this makes it harder for banks to promote a USP tied to being a specialist player in the tech ecosystem. If anything this brings to the fore the importance of diversified banking relationships and its likely the big banks that will see this as an opportunity.
Anecdotally, I flew from France to San Francisco on Air France about a decade ago. The neighboring seat was occupied by a software engineer emigrating to Silicon Valley. Why? That’s where he could get financing for his startup. France would not do it.
Meanwhile, according to Michael Hudson, China has made its financial sector into a public utility. As a percentage of GDP, spending on scientific research in China (& S. Korea) now exceeds the U.S. Of course China’s growth exceeds U.S. GDP growth, and now Chinese life expectancy exceeds U.S. life expectancy. Correlation may not be causation, but it’s awfully suggestive to see the knock-on accompaniments of a predatory financial sector.
Mariana Mazzucato’s TED talk outlines just how important government is to innovation. For example 75% of pharmaceutical innovation comes from government research, as does about 80% of those smart phone innovations.
Unless the U.S. is willing to step up to the regulatory plate, this bank’s failure may be the start of a long-term downtrend (assuming, of course, humanity survives, long term). The bank will be effectively nationalized, but it’s unlikely to be the start of a trend. More likely: The usual suspects (B of A, Citi, Chase, etc.) will be recruited to take over. Private is always better, doncha know!
Thank you for sharing what you observe, Adam.
Yes, Dr. Michael Hudson has been a chief advocate for China in trying to maintain its’ “financial sector” in the Public Domain. A very wise move on China’s part.
Decades before The FED became a powerhouse for private investors, it’s our understanding the US Govt. kept all moneys within it’s own “public structure.”
If 75%-85% of research is paid for by the public (i.e., us taxpayers), why does 100% of the money earned on these innovations go to Big Pharma and Big Tech?
And much of that in turn is driven by war, cold or hot.
Airplanes, radio, even the very internet we use to write these comments came about in large part thanks to war time spending by governments.
Penicillin became a practical drug thanks the US army setting up labs to brute force grow the mold.
Similarly, modern consumerism came about thanks to industry having excess capacity after WW1 and needed some way to make people buy it all. In steps Bernays and PR/marketing.
And i don’t think USA will ever step up to regulate unless there is a proverbial bloodbath in congress. the critters there right now are too deeply involved with finance for that to happen. They are even exempt for insider trading!
Sarcasm, yes?
Dry, very dry. But not sarcasm at all. I’m very tired of genuflecting whenever the word “startup” is used.
Lambert, neither this comment nor your reply are worthy of NC’s normal standards.
I know VC has a reputation as the latest bezzle (Hi Uber, Hi Wework!) but let’s not throw the baby out with the bathwater. Listed equity markets have spent thirty years deequitising. At least VC has attempted new capital formation and capital allocation, even if the MBA and hedge fund web 2.0 “tourists” have ruined the place for the deeptech old hands lately. It would indeed be a shame if the SVB failure made it hard for non-scam startups to get banking – even if in my opinion the OP’s fear is unlikely.
You see, there is nothing about SVB’s failure that is the fault of startups as a customer segment. Maybe US banking is more restrictive but UK banks are always happy to give SME’s bank accounts. The issue is the SVB would provide a higher level of service, a corporate banking service, and would take credit decisions on companies and personal loans to founders that high street banks will not.
SVB was not bad at the credit committee level, the decisions being underpinned by an understanding that having big vc’s in board made a borrower less likely to default. The yardstick (my experience is if SVB UK) was £1m of lending for every £3m of equity, I.e. if you raise a £10m Series A, you could borrow £3m of venture debt (say to finance lab equipment or possibly manufacturing cycle). I don’t know what terms founders got for personal banking (I don’t think it was offered in UK) but I imagine SVB looked at share/option wealth in assessing collateral for loans and on repayment options on interest only mortgages.
Several of our portfolio bank with them. In fact, I was just pushing a company to switch to them in its last board meeting, having raised £3m. Oops! It is worth considering why we were doing this though:
– we are opening subsidiaries in the US and European territories
– there are no other banks providing international banking to groups where the parent is a start up
– SVB was the only “single sign up” option for UK-US banking.
– opening an account was far quicker than opening one with a high street bank, let alone multiple foreign high street banks. KYC is a royal pain even for single shareholder, single director companies, which can take weeks or months in the UK where banks are quite slick. When you have multiple shareholder entities, they all need to pass KYC tests (level of control, identity of ultimate beneficial owner, politically expose d person tests) and as most VC funds are partnerships, this can get gnarly; and all the directors have to pass individually, any previous innocent insolvencies of portfolio companies may be a bar, in-person interviews in the foreign jurisdiction may be required etc.
SVB offered a unique service and was rewarded with the lion’s share of deposits, especially from the portfolio companies of big brand VC’s (not describing us, we are nonentities!). Unfortunately it chose to take that cash and set it on fire by investing in unhedged debt securities right before the end of ZIRP and making inadequate arrangements for covering liquidity needs without crystallising losses and wiping out its equity.
Forget the VC and tech angle, this was not a failure of Route 101 but of Banking 101!
(There may be some juicy facts of crazy lending to VC’s and founders with reality distortion fields but I would be surprised if this was material to the failure. I am also surprised that the Valley big cheeses have not bought it out for 1c. Perhaps they know what bad credit risks they are!).
I have never had the time or the opportunity to share my jaundiced views on “start-ups” and the so-called Silicon Valley “ecosystem” generally. Sadly, this comment cannot substitute for such a post. However, I do follow the news flow with some care, and these are my thoughts.
Personally, I’m happy that the Fed — doubtless inadvertently — blew away the froth that is capital investment in Silicon Valley; it was high time. VC has a reputation for creating bezzles because it has worked very hard to earn it. To the multibillion-dollar debacles of Uber and WeWork we should also consider adding Theranos and self-driving cars, plus what Google became after adding AdSense, what Amazon became after selling books, and what social media became. We should certainly add crypto. All of had substantial social downsides (“externalities”) as well.
Silicon Valley has become rentierism fueled by stupid free money (a punchbowl the Fed seems to have accidentally spilled, but O felix culpa!) SV and VC take an existing, understood, and perhaps not “optimal” social relation, insert a digital intermediary, then charge users rent for it. Cory Doctorow’s cycle of enshittification then applies. There is no reason to continue the enshittification cycle, and if the SVB collapse brings it to a halt, I for one would be happy. I used to be able to find stuff on Google, a decade or so ago. I used to trust Amazon reviews! Maybe those days will return!
> At least VC has attempted new capital formation and capital allocation, even if the MBA and hedge fund web 2.0 “tourists” have ruined the place for the deeptech old hands lately.
I do not see how anybody could honestly defend SV’s performance in allocating society’s capital, given the visible decay of actual, material infrastructure, in everything from healthcare to education to the power grid and on and on and on. The VC “ecosystem” blew $41 billion on crypto in 18 months. Capital either should flow or be made to flow away from them, and if the SVB collapse makes that happen, I will be happy about that too.
I also think you have an overly optimistic view of SV. I don’t know who the deeptech “old hands” might be. What I do know is that the scam that is Web3.0 wasn’t driven by “tourists,” but by a16z, who are at the very heart of the VC “ecoystem,” and you can bet Web 3.0, if it ever were shown to be useful to users, would undergo the enshittification cycle too.
> You see, there is nothing about SVB’s failure that is the fault of startups as a customer segment. Maybe US banking is more restrictive but UK banks are always happy to give SME’s bank accounts. The issue is the SVB would provide a higher level of service, a corporate banking service, and would take credit decisions on companies and personal loans to founders that high street banks will not.
I’m not a banker, and I don’t even play one on TV. However, you seem to be making a premature judgement the SVB was a clean bank, but that “mistakes were made.” I’m not sure how clean they are. To take two small examples: SVB distributed bonuses to insiders just before the hammer came down. That smells. And then SVB is in the winery business, too. I’m not sure that makes sense. Or maybe it does! From CalPERS, we know that California is not immune to corruption, including financial corruption. We really need to get the full story before concluding anything about SVB’s lending practices. After all, SVB seems to have thrown around mortgages to Founders like SBF threw contributions to NGOs (which, oddly, nobody but Atrios talks about to this very day). SBF bought a lot of friends until it all went pear-shaped, and it’s not implausible to think that SVB did too.
Startups [genuflects] — whatever they are — have no assets by definition. They are in no sense a typical “SME,” as you aver. (The attitude in the press seems to be that if startups lose their “entitlement” to a constant stream of stupid money, there will be fewer of them. The SV “ecosystem” will shrink or collapse. To that, I say good.)
Here is SVB’s business model as I understand it. From “A Feasibility Study of Introducing the Silicon Valley Bank Model to Korea,” in SSRN:
You write “Forget the VC and tech angle, this was not a failure of Route 101 but of Banking 101!”. No. Route 101 and its rentierism is at the heart of SVB’s business model. More:
Let me translate “financing support tailored for the life cycle of startups”. We might as well rename “Silicon Valley Bank” “The Rentier’s Bank of Enshittification,” and bring some welcome clarity to the situation. Who needs a bank like that?
There are people in the Valley who think Holmes got a raw deal and Bankman Fried is getting railroaded. Not all but for sure a sizable portion of the business people there are not in touch with any real world.
SVB lost its way in the same way VC did, getting rich and fat in the web 2.0 boom, accelerated by the GFC and then the pandemic, and thinking those conditions would last for ever.
VC was always a trend follower but a fast follower: see a few entrepreneurs working on a similar idea in a short period and the signal is strong that there is a new trend, which may not pan out but if you don’t place a bet you definitely won’t win so one of these lucky teams becomes one of your fund’s 15-20 portfolio companies.
Andreesen and a16z climbed out of the wreckage of Netscape and “eyeballs” and the dotcom bust to be the poster child for Google Envy and building Web2.0 ad-backed consumer internet businesses. We all became the product and the iPhone turbocharged it all. MBA carpetbaggers descended (and how we had all laughed in the dotcom bust that B2B and B2C meant back to banking and back to consulting for them…)
But go back to the early days of VC, up to the dotcom bust, and it was a local cottage industry of eccentrics with heterodox resumés, not a global bezzle group-think, and yet it backed major companies in software and hardware that delivered tangible concrete benefits to users: transistors, minicomputers, microcomputers / PC’s, disc and tape storage, networking equipment (fibre optics, GSM kit, WiFi, Ethernet etc.). Old School VC also created the biotech industry from scratch.
Some of these VC’s are still alive. I got into the industry wanting their job, of socially useful capital allocation to cutting edge technology (plus a chance of winning the lottery personally). And in my career I have watched VC “pivot” to investing in ever more local grocery delivery companies and crypto scammers. It has been shameful to watch and the funds raised have just got bigger and bigger, to the point where the general partners can get rich on the fees and never mind the lottery ticket of innovation.
So I hope you don’t think I have a rosy or mythical view of VC. But I am not inventing the point that its core function of allocating capital to new business is important and historically well done (the post GFC bubble excepted; the earlier dotcom bust had built a lot of useful telco infrastructure like the railway manias did).
A start up is an early stage company, sub $10m revenue p.a. and definitely not profitable (Uber, loss-making garbage barge that it is, is not a start-up). Their assets will be some software IP or biotech patents and lab equipment. Many of these companies were obliged by their financing arrangements to bank at SVB or they were not be able to find similar services from generalist commercial banks (it is hard to open an account in one country, let alone several, for SME’s, and get attendant trade finance, credit arrangements etc.) And so it seems mean spirited to blame these start up depositors at SVB for their predicament and they would be the most numerous class of claimants in the liquidation. How many small companies have the chops to read a bank’s financial statements, given NC’s repeated postings about how they are largely works of historical fiction given the uncertainty, subjectivity and time lag in them?
The big guys raising growth rounds (“unicorns”) may account for more of the losses by dollar value but they can find ways to cope with a loss of runway that a startup is too fragile to survive. Down in the foothills of VC, things are lot more socially useful and less rentier and these companies will be the casualties of the SVB failure. Plus all of the damage will just hit the working Joe whose pension invested in the funds that invested in the companies that deposited funds with SVB.
(Digression on “unicorns” – this term used to be the punchline to an in-joke about unrealistic VC’s who were looking for excellent-and-cheap business, which simply don’t exist!).
SVB understood its depositors and borrowers very well. Unfortunately it appears not to have understood interest rates or group psychology and its banks appear to have run a reckless fundraising strategy akin to yelling “please buy shares in the theatre to improve the FIRE ESCAPES…”).
I get that NC has a dim view of Uber and Palantir etc. and their libertarian sociopath founders and investors. I do too! But could you reconsider the “a plague on all their houses” tone to the coverage given that parts of VC and SVB might be worth saving and the failure is going to cause real pain to real people, not just “techbros”?
I have to quibble with “understood their depositors”. The assumption in banking is deposits are sticky. Here they were not.
Also there is a big problem with VC, in that it has refused to support programs backed by the government intended to create jobs. Marianna Mazzucato described one long form in her book The Entrepreneurial State. The LCD panel business was built on the back of federally funded R&D. The reason was that the US wanted an LCD screen manufacturing business. VCs refused to fund it.
OK – they understood their depositors’ business needs (as start ups). You are right that they did not understand their depositors’ herd instinct posed a risk of a bank run.
But previously this risk was mitigated, I would imagine, because there would be loans that would default if the depositors broke covenants by moving the deposit. An issue here is the “excess” deposits were seemingly not tied in by a growth in the loan book (who needs debt when you can raise equity at crazy valuations and anyway your revenues won’t pass the credit committee) and SVB placed these excess monies in interest rate-sensitive debt securities.
I wonder if anybody at SVB noticed that loan origination was lagging deposit taking and whether the low level credit committee people said “we’re not seeing loan proposals we can back, the revenues are not there” but nobody drew a macroscopic conclusion that the deposits rolling in were equity bubble hot money if they could not be re-lent and had to be held in tradeable securities out of all proportion to historic trends? It would be easier to believe they would have screwed up by making bad loans rather than what they actually did, keeping the loan book under control with the left hand and setting depositors cash on fire with right hand in the MBS market!
As for VC not backing USA INC plans, that may be true but that seems a very different aspect of the story (and economics is not a morality play, I remember you writing many times in the GFC: recent VC behaviour may be greedy and short term at an industry level and Obama may have bailed out the banksters but that is not a reason to celebrate losses to depositors backed by VC and create runs on commercial deposits in other thin-capitalised banks pour encourager les autres).
Nobody is willing to fund hardware in VC. Andreesen is a polarising figure but “software is eating the world” has gone deeper than the product level. Modern financial capitalism is all about high margin intangible rent-seeking and it has found its mate in software and specifically SaaS. Why back anything else when you can create a product with minimal cost of manufacture/provision, near infinite gross margin and customer lock in to recurring revenues, which support beautiful discounted cashflow valuations?
Unlike most other VC’s, we backed a number of hardware startups. They have all been terrible investments compared to the SaaS businesses. They have been:
– capital hungry, supporting the manufacturing cycle
– low margin, having to discount against VC-backed competitors selling at a loss to hit “landgrab” adoption targets
– low revenue visibility and drivability, having to start from zero each month and deal with vagaries of distribution channel demand and the issue that sales on Facebook or Amazon etc are at the mercy of the algorithm…
– and as a result of the above, low valuation. We’re getting offers for next rounds of 2-4x revenue rather than 25x revenue for a fast growing software company.
I don’t see any way back for hardware venture capital in the West. The best that will happen is some deeptech investment in quantum computing, battery technologies etc. and an assumption that existing players will acquire these companies to roll out at scale.
Tesla is a remarkable exception of a new entrant manufacturing company and I suspect its growth has been funded with state grant and tax credit farming and retail stock market money, not VC money. Not an edifying mix but at least an example of capital formation by the market rather than deequitisation. Let us hope the capital formed is not destroyed by the crazy valuation….
SVB was not lending to startup companies, for the most part. Over half their loans outstanding were for subscription lines of credit and anecdotally they also were very active lenders to the principals of VC firms and investee companies, as in personal loans.
As for the crisis, I never made mention of VC.
I don’t know the mix of SVB’s loan book between loans to VC-backed companies (calling them start-ups credits them with an innocence not all of them enjoy), loans to founders (against their paper wealth / future earning power) and loans to funds (as advances on LP commitments). However, SVB was definitely lending to genuine start-ups. The offer in the UK was typically £1m SVB facility for every £3m raised in a round led by blue-chip funds.
I don’t think it changes my question, anyway: if they were taking deposits from companies and funds in excess of their ability to re-lend them (and therefore bind the depositors in to SVB through covenants), why didn’t alarm bells ring about how hot the new money was?
I wasn’t saying you mentioned VC specifically in the crisis. It hadn’t wet the bed at that point – in fact, any mention was typically of how the dot.com bust had been confined to losses within the VC industry and on Nasdaq and had, being equity and not leveraged, not had any systemic implications.
I’m saying that the point often made on NC at the time that economics is not a morality play is a good one. The Germanic conflation of guilt and debt which makes the consequences all the borrower’s fault etc. is unhelpful – and here the borrower is SVB rather than the pernicious start-ups and the problem is on the SVB asset side (not enough near cash, too much duration risk).
It doesn’t matter if the cat is black or white as long as it catches mice is another good technocratic maxim. Even if, prior to SVB blowing up, a guarantee of assets >$250k would have looked like moral hazard, the greater risk post-SVB is not extending the guarantee – otherwise, the hot money in the system will rush from the “weakest” banks to the “strongest” banks (quotes because bank balance sheets are polite fictions and all private money has an implicit state guarantee in a crisis) and, like passengers rushing from one side of the ship to another, the whole thing will capsize.
Somewhere in the financial system, everybody who bought treasuries and MBS in the past few years at the top of the market (a figure of $18tn was mentioned on FT Alphaville) is taking their losses on interest rate rises but do they have enough equity in their structures to absorb those?
I have had enough of your snide insinuations and straw manning.
First, you admit you have no idea how important lending to startups was to SVB’s book. Dawn Lim of Bloomberg wrote an article about SVB’s subscription line financing. That was 56% of its loan book. Other reports have stated that lending to vineyards and personal mortgage loans was more important than lending to companies, which we already know was part of only 44% of their total loans. So please do not keep touting loans to companies as important to SVB unless you can prove it.
Second, Amar Bhide in his pathbreaking work on highly successful companies, found that that less than 1% of startups were VC funded, and even of the very most successful, fast growing companies, only 25% were VC funded. And of those I would anticipate that only a minority got debt financing. A fixed obligation makes it harder for a fledgling company to survive.
Third, you are denying you own plain language. You did say we wrote about VC during the crisis:
That sort of bald-faced lie in your most recent comment alone is grounds for blacklisting.
Third, as to the criticism of the bailouts, the depositors do not deserve to be saved. Many of them were wealthy individuals, including the VCs themselves. They knew the risks. There are tons of services that will spread their deposits among banks to keep their holdings at any institution below $250,000.
Sadly they need to be saved due to contagion risk, but that was not the basis of your argument. Anat Amati correctly called it a hostage situation.
We called for a payroll support facility.
Fourth, we never never never said economics is not a morality tale. We have consistently said the reverse. Mainstream economics is an ideology to justify the unfettered operation of capitalism. From ECONNED in 2010, which codified our views:
We have similarly argued, with supporting detail, that an amoral system makes commerce impossible. The costs of contracting, oversight, and enforcement become impossibly high relative to the intended activity. We repeatedly and forcefully called for accountability of those at the top of the food chain, particularly prosecution of bank executives, and loss sharing on bad loans. Nowhere have you called for anything like that, nor acknowledge how your industry has failed at capital allocation, nor acknowledged the societal risk of letting banks have even more extensive government guarantees when SVB and other case demonstrate that they result in more firm (intended in the end to result in personal) profit seeking. No, you wrap yourself in the mantle of supposedly virtuous small companies and finger wag about class warfare. After hearing years of special pleading by Silicon Valley libertarians, I am tired of it.
I apologise if my comment came across as snide and I wasn’t trying to erect a strawman.
I’ve googled what I remember and the NC posts I remember were by Philip Pilkington. I apologise that I misattributed them to you.
https://www.nakedcapitalism.com/2011/05/18253.html
https://www.nakedcapitalism.com/2011/06/philip-pilkington-economics-as-metaphysics-and-morals.html
And apparently the source of the epigram during the GFC was Martin Wolf, who was amplified by Paul Krugman (no idea if somebody said it before Martin Wolf – his son was a VC acquaintance, by the way)
https://fabiusmaximus.com/2009/01/14/morals/
I don’t subscribe to an amoral market view of society. We need a humanist motivation, not a bloodless profit motive. But we need to understand the SVB failure in operational terms for an industry rather than as certain depositors getting their comeuppance because of a failure of a single bank serving a greedy and hubristic industry.
As for SVB, I have looked up the loan mix (reading note 9 to each annual financial statements from 2015-2022). The comment box is inadequate to reproduce the data (shades of Fermat’s last theorem) but the summary is as follows:
In 2015 (when SVB was giving my fund the hard sell and I assessed them as a counter-party), total lending was USD16.74bn, of which USD 14bn was commercial lending to VC funds or companies (the balance was 0.2bn premium wine businesses and 2.54bn real estate of various stripes including wineries) and of this USD5.47bn was lent to VC funds as advances on capital calls, i.e. 83.3% of lending was to VC funds and companies of which 33% to funds and c. 50% to VC-backed companies.
By 2022, these figures had blown out to USD74.25bn total lending of which only USD17.29bn was commercial loans to VC-backed companies or similar and USD41.27bn was lent to VC funds as capital call advances, or 23% was to VC-backed companies and 56% to VC funds. Premium wine has shrunk to 1.16bn.
So, in the light of these figures, I agree with you that SVB’s lending to “start-ups” is modest by 2022. It has barely grown since 2015, from 14bn to 17.29bn, despite a VC boom visible from space. What these figures do not tell us is whether SVB turned its back on portfolio company lending because fund lending was so lucrative or whether portfolio companies turned their back on SVB borrowing because they could sell overpriced equity to VC’s instead (who were so hungry to buy it NOW, they borrowed against future capital commitments, setting on fire not only this year’s money but all future years – ouch!). The answer is probably a bit of both: when the ducks are quacking, feed them….
In 2015, held to maturity securities were 8.76bn and available-for-sale were 16.38bn, so 24bn of liquid assets (exc cash and Fed deposits), and total deposits were 39.14bn. So the loan book was roughly 40% of assets and the commercial loans to companies 50% of this book, i.e. 20% of assets, and loans to funds are 33% of this book or 12% of assets. In short, SVB held a lot of securities available for sale, twice the held to maturity book, so it could raise cash readily in a hurry and it marked these assets to market, and its loan book was about the same size as the assets available for sale and was skewed to businesses which were the largest part of the deposit base.
By 2022, the loan book was 74.25bn and the liquid assets 117bn (available for sale 26bn, held to maturity 91bn) and the deposits 173bn. The loan book is 39% of the assets so no real change but the commercial loans to trading companies have shrunk to 23% of this book or 9% of assets and loans to funds are 56% of this book or 22% of assets. Funds are much more concentrated than VC-backed businesses (10:1 or 20:1, based on typical fund portfolio size) and their banking requirements much simpler (no payroll, no standing orders, no card merchant accounts) so shifting the banking relationship is measured in hours, not days (or minutes if they have a secondary banking relationship elsewhere already).
So by 2022 SVB had really doubled down on gossipy hot money in its deposit mix, nearly quintupled in size and yet kept assets available for sale flat and dumped the hot money into hold to maturity assets with massive interest rate exposure.
Having done my homework, I agree with you that companies had ceased to be SVB’s primary lending focus but I stand by my comments that the (comparatively few) portfolio companies who were SVB depositors are innocent victims with regard to the bank failure (if not innocent of creating a surveillance capitalism and internet of shite dystopia). Nobody should have been dancing around the flames to celebrate their predicament. However, from the data I am shocked at the role that the VC funds must have had in bringing down their own bank ecosystem. Perhaps a bonfire of vanities there is well deserved….
Thank you for this answer.
Most of the enshitification I encounter in daily life is due to tech firms that aren’t startups: Apple, Microsoft, Twitter, Google, Netflix and Amazon.
To be fair, self-driving was harder than they expected. (I was more skeptical). On the other hand, Chinese companies seem to have mastered it enough to provide self-driving taxi services in major metropoli.
Although there are certainly too many shitty startups out there, there are also startups that could be fruitful, and good for society. Jim Keller’s Tenstorrent might prove interesting. I also think Atomic Semi could prove valuable. I’m glad SpaceX and Tesla exist. So it’s best not to tarnish everyone with the same brush. Obviously I have no idea whether they bank at SVB.
Chinese self-driving car driving around in Shenzhen. Presuming it’s real, it seems pretty impressive.
Besides the obvious stupidity of putting 20 billion unhedged into 10 year treasury shows quite a bit a naivety. Hell basic sense is ladder your duration at the very least to hedge some change in rates. The bank made a killing on lending money for equity that goes public to repay loans so you get ridiculous multiples on equity when it goes public. 2022 (181) was not a great IPO year as markets where down. In 2021 over a 1000. Also keep in mind that it’s possible an organized groups of VC are responsible as they attempt to create a new entity. Peter Thiel is one that wrote letters telling people to pull money. Others did as well. So I don’t trust anyone in this bank nor the customers themselves. I am sure they where pissed over the mismanagement of deposits and losses.
A document in a substack article shows they put 86 billion (94.4% of bond investments) in bonds with greater than 10 years maturity, 4.4 billion in bonds with greater than 5 to 10 years maturity and 0.805 billion in bonds under 5 or less years maturity (less than 1%). This was unhedged for interest rate risk. And yet their CEO referred to this as conservative and said it was designed to shore up the balance sheet if venture funding went into a free fall.
Would you please provide a link to that article?
Thank you!
https://adamtooze.substack.com/p/chartbook-200-something-broke-the
It occurred to me that this is on December 31, 2022 and they may have already sold a lot of shorter term bonds. But it still stands that they put way too much in long term bonds. The CEO referred to this as a conservative approach.
Although I saw elsewhere that they had a $91 billion bond portfolio after getting their big 2021 deposits. And $91 billion is what is showing on the December 21, 2022 document in the article.
Thanks for reporting.
It feels like a step is missing between the Fed increasing interest rate and the bank going belly up. I get that probably only insiders know at this point, but I will try the basic scetch, as I understand it.
When the central bank raises interest rates “to fight inflation”, the purpose is to prevent wages from increasing as much – or more – as prices (higher interest rates are in themselves a factor that increases prices). Lower wage growth is achieved through unemployment.
Unemployment is achieved through companies and public sector postponing investments (because they become more expensive), and through companies on the margin failing.
When a company with debt fails, the bank that issued the debt has to write down the value of the asset. If that happens to much, the bank can no longer pass regulatory requirements.
So, which companies would that be? Is it VC companies in general or was SVB stupid enough to borrow money to crypto companies?
I would also like to know the answer to this question, whether you are correct or if there are multiple effects of interest rate rises.
For example, do the banks’ cost of funds rise so they make less money on their lending?
Most simplistically: In a rising interest rate world, the bank’s cost of funding rises, but the value of the debt they are holding (specifically, the price at which they could sell the debt) is also marked down, as it is now less valuable (becuase it’s paying a lower interest rate than an investor could get elsewhere). If it were held to maturity this generally isn’t a problem, but if a bank needs to sell a held asset at a lower price (e.g. to have enough cash to pay customers who are withdrawing money), the value of similar holdings has to get repriced, and thus the overall value of the bank’s assets might be marked down to a point where they aren’t considered solvent under bank capital adequacy calculation rules.
Right. If a bank has to sell assets to increase its liquidity to meet its obligations to its deposit holders and these assets have fallen in value owing to higher interest rates then it recognises a loss in the books and suffers impaired capital adequacy. They were seemingly trying to remedy that through new share capital but the linked although separate liquidity crunch hit them.
I guess a possible additional dynamic is that deposit customers might already have been withdrawing money more rapidly than usual because they are earning less profit (or incurring deeper losses) than expected or not managing to obtain more capital via VCs if funds are drying up. This may have been at least partly caused by higher interest rates.
The bank might possibly have also been reliant on newly funded start ups depositing funds too, and this may have been another liquidity source that had dried up with a higher cost of money.
Banks like us to forget that they are fundamentally risky entities: they borrow short and lend long. It only works , of course, with a lot of careful risk mitigation and ongoing confidence in the system. As soon as depositors get a whiff of an issue then you get the classic bank run.
Yes, Silicon Valley Bank was having to shrink its balance sheet due to some venture companies going though cash and thus shrinking deposits. That should not have been too much of a problem as it was happening over time, save the bond losses.
But the flip side is it was know they bought a lot of MBS at the worst possible time. so you might have gotten a gradual drainage just to reduce exposure to that risk regardless. But in that scenario, the end game would have been more likely to be a sale, not a crash.
Who was managing interest rate risk at this bank? Management must have been aware of the losses in the investment portfolios (realized or un-) for some time? The bank was close to insolvent last October under any stress scenario. No additional capital required then? Or yearend? Huh.
Bad week for Federal Reserve Bank of San Francisco. Both Silicon Valley Bank and Silvergate were state-chartered members of the Federal Reserve System (if Google is accurate). FRBSF was the primary regulator for both institutions.
They may have had a monkey at the San Francisco zoo doing their interest rate risk. There is a substack article with a document that shows how they invested the excess cash from large 2021 deposits. 94.2% was in bonds with more then 10 years maturity. 4.9% was in bonds with more then 5 to 10 years maturity. 0.8% in bonds with greater than 1 to 5 years maturity. And .07% in bonds with a year or less in maturity. They somehow give that mix weighted maturities of 6.2 or less in their notes.
They chose to not hedge the interest rate risk. The head of the bank started out as a loan officer. The CFO may have started out as a janitor.
In a long low interest rate period, with massive money expansion from a financial meltdown and a global pandemic, they chose to act like long term interest rates would stay low and deposits would flow in keeping them from having to sell securities
And the CEO lobbied the Trump administration to get rid of or lower the threshold of the regulation for banks under $250 billion to undergo fed stress testing.
The dynamic you describe strikes me as a relatively sedate one. I think that there is a faster dynamic in that when interest rates rise, funding costs for existing investments (borrow short, invest/spend long) rise, creating potential for cash-flow shortfalls. And it has been pointed out repeatedly by Yves that a lot of the “investment” that is stimulated by interest rate reductions is not the funding of new productive capacity but speculative purchases of existing assets. When these start to be liquidated to cover principal or interest payments on borrowings, it can depress asset prices, making other speculators in such assets nervous and more likely to do the same.
I think the link may be found in the bank’s purchase of US Treasury bills and govt securities as part of its capital. When the Fed raises interest rates on its Treasuries, the trading value of older, lower interest rate Treasuries falls. As interest rates go up the value of the old lower interest Treasuries a bank probably purchased as part of its capital falls, meaning the bank now has lower assets than before. The bank’s capital is being reduced. Banks are required to have x amount of capital for y amount of lending, for example.
https://www.investopedia.com/terms/b/bank-capital.asp
I’m not explaining this very well.
Here’s how Mike Hiltzik of the LATimes explains it:
https://www.latimes.com/business/story/2023-03-10/column-silicon-valley-bank-collapse-silicon-valleys-problem-not-yours
Those treasuries are assets, not capital.
It is true that their value falls as interest rates rise.
The drop in liabilities (deposits) seems to have forced the sale of those lower valued treasuries, marking their assets down. but it’s hard to believe that alone was enough to put them in jeopardy.
Banks by their nature take short term deposits (that they are paying low interest rates on) and invest them in longer term assets (that pay higher interest rates)
When the fed raises rates, banks need to raise the rates they pay on deposits or face depositers taking their money out. (Would you settle for 1 percent in your checking account when you can buy 5% 3-6 mo treasuries?).
If a bank has to pay 5 percent to its depositers, but is locked into a lot of 30 yr longterm debt paying 3-4 percent its stuck. It cant sell the bonds because they are worth sustantially less than they paid. They actually can become insolvent through this dynamic. Its not just the creditworthiness of the issuers as we saw in 2007
SVB’s assets was not positioned to absorb an almost 5-point rise in Fed funds ratein 12months.
Incompetence? and/or hubris? we’ll know then the lawsuit discovery starts.
Trump is going to have a field day: DC bails out Silicon Valley, cares squat about your finances
No, you are missing that when interest rates go up, the value of all interest rate paying investments go down. This is interest rate risk, not default risk. The bonds and loans are paying 100% but worth less.
The losses will be greater on longer maturity bonds and loans than shorter maturity ones.
Unless they match maturities and resign themselves to very low profit, banks structurally “borrow short” (particularly via deposits) and lend long.
Given that consumer banking products–CDs, saving accounts, etc.–only stretch out a couple of years at most, isnt it impossible to fully match durations?
Thank you, and others, for making this clear.
So banks has a unique problem in times of increasing rents, and the more rapidly increasing the worse.
I presume that then banks also has a boon in times of decreasing rents. In theory that would even out, in practice probably much less so.
I thought Matt Levine yesterday at Bloomberg had a pretty good description of how SVB painted itself into a corner through bad decisions and getting into too many long maturity bonds/instruments before rates started rising.
https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run#xj4y7vzkg
Or the subtitle of his article: “One problem for Silicon Valley Bank is that its customers had too much cash, and now they don’t.”
While its easy to dismiss SVB for making poor desicsions, what were they supposed to do? The fed had 3 yr treasuries paying under a quarter of a percent.
This is as much the feds fault as it is SVB for raising rates so fast so quick. Frankly though, calling it a “fault” is a misnomer. Its the desired outcome they’ve been trying to achieve: increased unemployment/economic contraction
“what were they supposed to do?”
I don’t know, have reserves set aside for a rainy day? Not obligate every single dollar to bonds? If this is a known risk that this industry faces, and the Fed telegraphs its moves months ahead of time, then prudence would dictate banks being ready for adverse business conditions which can arise when rates rise.
They could have hedged their interest rate risks. They could have just held a large amount of money in cash. The CEO was an over- promoted loan officer:
“Becker said the “conservative” investments were part of a plan to shore up the bank’s balance sheet in case venture funding of start-ups went into freefall. “In 2021 we sat back and said valuations and the amount of money being raised is clearly at epic levels . . . so we looked at that and were more cautious.” “
Imagine thinking non interest rate hedged intermediate and long term bonds was a conservative approach when interest rates were over double what they were 20 years ago. He must have felt the interest rates after the Great Recession were going to continue forever, even with massive monetary expansion from that and the effects of a global pandemic.
Greg “Me and my CFO see no significant interest rate increases for over a decade, so why hedge?” Becker
What about their loan portfolio? I imagine many of the their lines of credit to startups may go bad as VC funding gets cut back. Since no investors were willing to bail out SVB. It hints that the VCs think there is going to be a big round of startups getting shutdown. A bit of positive feedback as startups lose their banking and stop paying back their bank and going out of business. I would think the interest exposure could have been fixed with new capital but new capital was not willing to take on the exposure to the SVB loan portfolio.
Yes, this! The fact that the valley billionaires are not fighting over the corpses suggests that the VC’s plan a lot of “jingle mail” (HT Yves and NC for teaching me that phrase), I.e. strategic defaults (strategic at the fund level in not reinvesting, if not the portfolio company’s preference!). I suspect the shonkiest loans are to founders whose share wealth is evaporating in down rounds and insolvencies and whose real estate is looking wobbly (SVB had a branch in Napa just to lend to tech founders who had cashed out and bought a winery!). I believe SVB also had a specialist fund lending team, lending in advance of the capital calls agreed in the fund documents. In the boom years I bet the funds were shovelling money out faster than they could or would draw it down (I would not be surprised if the interest rate on the advance was lower than the 6-8% hurdle rate on LP capital). So we may see LP’s default on their capital calls, either because they are also brassic (possible with individuals or other imploding financials) or because they can see the fund will never recover from buying dross at the top of the market and they therefore cut their losses by defaulting on the rest of their commitment – more jingle mail! (but they could still be sued on the calla so only viable for deadbeats and psychopaths, not LPs who wish to eat lunch again). This would put repayment of these fund loans in doubt.
But this is all second act stuff, not what brought the house down: unhedged capital values of the debt security portfolio geting hammered by the Fed rate rises and no credit lines in place to avoid firesale crystallisation of losses against the equity, precipitating an old fashioned bank run among super-networked customers.
They didn’t fail due to loan defaults. They failed because
a) their customers were mostly startup companies
b) startup funding was massive in 2021 and tiny in 2022 – large net deposits turned into net withdrawals
c) they put the tens of billions in deposits they received in 2021 into mostly long/intermediate term bonds and did no interest rate hedging
d) when interest rates started rising they didn’t acknowledge their mistake and quickly sell the long term bonds – they borrowed money to handle their net withdrawals
e) when they finally sold their long term bonds to handle withdrawals they had a significant loss
f) when venture capitalists heard about them selling $22 billion worth of bonds at a loss and also issuing new shares to get cash, they advised their startups to withdraw their money
g) startup depositers did a bank run
I was watching this more or less throughout the day on Friday on CNBC. Every top of the hour was a new revelation, and a new guest they were digging into a different set of details or a different angle. At the 4pm Eastern hour they interviewed someone from the Y Combinator entity ( I fail at who that was, but he did sound authoritative on the matter of start ups and basic funding mechanisms ). Yeah these companies now exposed to SVB failure are going to experience a few existential moments in the coming weeks. FWIW, yeah that is too bad but the start up and VC industry has been funding some real prominent, highly dubious duds in the past decade or so.
Reading here and a few columns elsewhere, I am yet to see any details about exposure to crypto or exposure to bitcoin of any kind. For what that’s worth. I am not sure if that is worth making an appended comment about that aspect. I haven’t read Whalen in a long while but he is another authoritative voice on these matters.
As many have noted, the SIVB case calls attention to the large hit to banks’ capital stemming from unrealized losses on Treasuries due to Fed hikes, which would be highly visible were banks required to mark all such holdings to market (which they are not) in calculating their capital.
More specifically, the big question about the SIVB failure is why the venture capital “ecosystem” did not step up to save a key feature. The amount of capital SIVB sought to raise to cover its losses on the sale of some $18B of Treasuries, roughly 2B, is spare change considering the community of venture capitalists and tech billionaires who have benefited from SIVB’s being there over the last 40 years.
In the beginning, the bank sported a supporting cast of the 100 most important players in “the Valley,” who invested in the bank, and these relationships were at the heart of its model. A bank cannot successfully make loans to unprofitable if not pre-revenue companies unless it is confident that the backers of said startup will make it whole. Likewise, with lines of credit to pre-fund capital calls on private equity or venture capital fund investors. Outsized profitability accrued to SIVB from the warrants it received when lending to startups.
Check out the list of major holders of SIVB stock and you will see various ETF’s and mutual funds. Check out the Board of Directors and you will not see the big names of the VC world, nor anyone with deep experience in bank asset/liability management.
Isn’t the obvious answer that a lot of failing or struggling companies are about to get taken over by established tech firms? This is a way of consolidating the market under the big dogs. There will never be “the next Facebook,” we are squarely in the Federer-Djokovic-Nadal “Boomer” where the “next gen” will just never happen. Djoker has nano implants now
No, no, no.
The failure of Silicon Valley Bank has absolutely nothing to do with Silicon Valley companies failing. It is due to having badly wrong-footed their investment (bonds, not loans) for interest rate risk and getting badly whacked when the Fed tightened interest rates.
Yes, some companies may fail due to having deposits frozen, but that may not be due to the health of their business but in banking largely/only at Silicon Valley Bank and having to have large deposits on hand (for payroll, for routine transactions). An otherwise healthy business could go under this way.
I am wondering about this too. If some of these companies were keeping their VC seed capital in Silicon Valley Bank and not diversifying it, across other institutions, then we could see a lot of failures. Remember most if not all of these companies are not profitable and the early-stage ones may have literally zero positive cash flow, living off the VC land until they can “get profitable.”
I worked for one of these places not long ago and on conference calls the CEO was always bragging about how much “runway” we had. We had very little in the way of paying customers at the time.
Imagine what happens to such companies when the runway goes from 1000 meters to 10.
Later-stage startups with at least some positive cash flow should be able to get by, if they can buy time with creative financing or some good luck.
To add, since due to competing responsibilities, I have not had a chance to dig into the #s, Matt Levine confirms the problem was bond investments.
https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run
Now we can and probably will see some of those loans go bad as a second-order effect of the deposit freeze, absent a bailout (and yours truly is betting against that). But that was not what triggered the panic.
>>An otherwise healthy business could go under this way.
It reminds me of the saying, “cash flow is the oxygen of a business.”
“More specifically, the big question about the SIVB failure is why the venture capital “ecosystem” did not step up to save a key feature. The amount of capital SIVB sought to raise to cover its losses on the sale of some $18B of Treasuries, roughly 2B, is spare change considering the community of venture capitalists and tech billionaires who have benefited from SIVB’s being there over the last 40 years.”
One speculation: that wouldn’t scare or prod The Fed into interest rate cuts.
The lifeblood of those billions has been a dove-ish Fed more than the particular bank.
This could turn out to be a great opportunity for Democrats to connect with and rally their base if they act quickly. For example, Biden could fly to Ukraine and organize fund raises (I hear lots of folks in Ukraine are hanging out in cemeteries these days…a good place to start?). When folks here Biden explain the suffering caused by the SVB failure, the suffering of Silicon Valley Hedge Funds and Venture Capitalists who create our jobs, this will not only a good lesson for the people of Ukraine to learn how things work in the West that Ukraine is now a member of, but an opportunity to help and do good. Biden can also have a private meeting with Zelensky and explain to him this is how things work in the US so he should take notes for when he runs for office as Governor in a blue state when Ukraine runs out of men to fight Russia.
Next Biden then fly to East Palestine Ohio for another fund raiser…and since Norfolk Southern has already had 3 or 4 more train wreck he can add several more stops if he wants.
Then Biden can flow home to the White House, secure in the knowledge that Dems have solidified their donations from the MIC, Silicon Valley, and Wall Street.
Let’s hope Dems don’t let this opportunity get away.
> . . . the suffering of Silicon Valley Hedge Funds and Venture Capitalists who create our jobs . . .
As a wag on Twitter put it.
Susie doesn’t have to make a profit selling lemonade. She collects information on all the kids in her neighborhood that visit her stand, then sells the info to data brokers.
LOL!
I like it and don’t forget Mitt !
TARP2 here we come. Wonder what they will call it this time. Can’t have VC’s and SV Tech’s facing losses.
But that Social Security insolvency problem must be dealt with now. Work ’til your 70 suckers.
I hope not. I don’t think we’re there yet, but Bill Ackman was pounding the table for bailout on twitter.
I think the FDIC can manage this. Fingers crossed. Keep an eye on the futures Sunday evening, though.
Then there is this thought-
‘Defund Ukraine
@DoctorFishbones
Good luck with that “A bunch of millionaire Silicon Valley Tech bros lost a lot of money and now we need to pull together as Americans and bail them out” message. No, seriously, put it on a shirt and walk around in public, it’s great’
https://twitter.com/DoctorFishbones/status/1634601424532193280
Yeah I am not too sure about another TARP, or son of TARP, is going to happen. One, I think the tone of the country and US citizens would be decidedly more vocal on another go at Federal bailouts. And second, the VC industry will have to spend a few precious minutes on inner reflection on how best to proceed next.
This scenario does bring to mind a certain visual, from the ever reliable Trading Places. The money quote happens about the 3 minute mark, when the Duke brothers get margin called by the exchange at the close of trading.
https://youtu.be/I0swBR40_R8
The Fed will need to intervene one way or another if those deposits are going to be made whole. Almost 90% of them are not insured and the bank was insolvent before a $42B run. Whether they buy the crap assets above market or push a pile of money over to JPM to buy the bank disguised as another alphabet soup program is just a process technicality.
What won’t happen is those deposit holders eating the losses. There are no moral hazards for the wealthy elite. I’m sure WaPo and NYT can gen up plenty of Esty shop owners can’t feed their babies hysteria.
The only ones that will be left holding the bag are shareholders, aka 401K’s and pension funds.
Something that I haven’t seen mentioned much elsewhere, but Yves points it out at the end: “[SVB] was overly concentrated, both in its industry focus and its skew toward comparatively few and large depositors.”
Good risk managers at banks and brokerages spend a lot of time thinking about concentration factors of positions they hold (by country, geographic region, industry, product, etc.), but also about the composition of their source of funds — their client base. A bank that wants to be very long-term viable has to have a broad range of source of depositors funds, and SVB doesn’t appear to have management with a history of managing risk through significant down markets or industry contractions.
Silicon Valley Bank had no official chief risk officer for 8 months while the VC market was spiraling
https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/
Rut roh, sounds like the lawyers are going to have a field day. I can already see the ads running on twitter:
“Did you do business with Silicon Valley Bank? Was your company forced into bankruptcy by missing payroll? Call the law firm of Higgins, Barney, and Smith – you may be able to recover millions!”
In Silicon Valley the dominant law firm is Dewey, Cheatam, and Howe. ;)
It’s enough to cause wonder about what risk they were actually managing for.
Was the situation a concentration or a capture of large depositors and particular industry?
Read in Twitter that people on Etsy are having issues getting deposits because of this.
Also, Roku had a huge exposure.
Worth noting as well that:
Joseph Gentile is the Chief Administrative Officer at SVB Securities.
Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division.
The bank might have loan participation agreements with other banks. I wonder if there’s any short-term contagion there?
Wells Fargo was reporting glitches with some customers’ deposits yesterday.
Wells Fargo Customers Report Missed Paychecks Due To Apparent Glitch
https://www.forbes.com/sites/nicholasreimann/2023/03/10/wells-fargo-customers-report-missed-paychecks-due-to-apparent-glitch/?sh=3401a1551ae2
Silicon Valley Bank bought Boston Private Bank a few years ago. There are reports that there were people literally in line at the branch in Wellesley (a very wealthy Boston suburb) when the news broke about the bank failure. My understanding is that those customers are more of the traditional wealthy (executives, lawyers, doctors) rather than the VC and startup crowd of Silicon Valley Bank.
Whoa…Celtic’s tickets now at a discount!
Thanks for covering this. Some of the usual suspects (ZH) are making it sound like this is the apocalypse for Silicon Valley startups, and next week many that had their cash and VC money in SVB will not be able to make payroll.
I’m a bit skeptical on that one … as Yves put it, shouldn’t they be able to “cobble together” financing some way, a bridge loan or something?
I think the longer-term fallout will be for any new startups that were seeking funding. This may slam the door shut. An ex-colleague of mine at a former startup now works for Mercury, a similar bank that funds startups, and said that everyone is freaking out but they think it may help them since SVB was their biggest competitor.
Will we see a slow-motion wipeout of startups that used SLV for their payroll and storing their VC? Some runways just got a lot shorter, I suspect?
sorry for all the typos, I meant “SVB” not SLV or SLB
Read on bird site yesterday that SVB had purchased a very large amount of MBS that will pay out over 10 years (or mature in 10 years) and that this is not case of insolvency but illiquidity. Poor risk management on part of bank. Can anyone comment on how interest rates may have triggered this event?
They had to mark the bonds to market when interest rates rose. Higher interest rates = lower bond prices. And it could be insolvency (losses greater than equity) but only some short sellers had argued that.
Really the only bright spot in business in these not so united states since the turn of the century has been high tech, but that was then and this was a few days ago, when their money went :poof:
The knock-on effects for people living high on the hog will be quite something.
Sorry, I don’t know how we got to the point where pizza delivery apps were “high tech.”
Of course, there are some exceptions. Like the sophisticated technology that turns my face into a cat. /s
Hey I’ve got a great idea for a startup inspired by that.
An app that delivers pizza to the FDIC workers for bank failure fridays. It can use AI to predict what banks are gonna fail soon, and link the branch locations with nearby pizza parlors.
“She told The Post that she’s been experiencing “the worst 18 hours of my life.”” Nice life you’ve had so far Ashley.
There’s a german word that covers this.
And on naked capitalism, schadenfreude has an English equivalent: “that’s a damn shame.”
Bless your heart
Trump and/or DeSanctis are going to eat up the Dems with SVB
the commentariat will enjoy this tweet:
https://mobile.twitter.com/altcap/status/1634394974031867904
Silicon Valley stands together with Founders. Continuing to innovate. Continuing to build. This will make us stronger. Nearly universal agreement with this statement well beyond those listed. Fed needs to act now to make sure depositors are 100% protected.
I love that DeSanctis is now short for DeSanctimonious and that everyone knows it. Maybe it’s just me, but Trump has a knack for creating a hook in people’s brains that they become fond of and want stimulated.
If Trump comes through the Republican primaries with the most delegates and DeSanctis has the second most, will DeSanctis beg Trump’s forgiveness and promise to be a good little doggie if Trump will let DeSanctis run as VP on the ticket? And would Trump graciously favor DeSanctis with his forgiveness?
I think so. DeSanctis is a shrewd little operator and a thorougly cynical politician. He will fake all the contrition he has to in order to get on the ticket with Trump. He is young and he would be one sick old obese heartbeat away from the Presidency. I think DeSanctis could swallow his pride and decide that ” Paris is worth a mass” . And since Trump lives to be flattered and worshipped, he might go for it.
So I wouldn’t be surprised by Trump/DeSanctis in 2024.
If the Democrats don’t cancel their primaries in order to deprive Williamson of primaries to run in, I will support Williamson. She is the most opposite to everything the Democratic Party now stands for. Would millions of Bitter Berners welcome the opportunity to cram Williamson right straight down the Democratic Party’s g– d—– throat? I certainly would.
I would shiver with delight to see Williamson crammed right straight down Clyburn’s throat. Right straight down Obama’s throat. Right straight down Clinton’s throat. Let’s cram Williamson right straight down every Democratic throat.
Does this turn into a hostage situation if the techies aren’t made whole on their losses?
‘Nice smartphone there, it’d be a shame if something happened to it and it didn’t work anymore.’
It already is a ‘hostage situation.’ The SVB has the Tech World by the short and curlies.
The banking regulator’s response to this will show us just who are the “top dogs” in the American Political ‘Donations’ Sphere.
Please be safe up there. We don’t want to be reading something in Field and Stream or National Geographic about “The Outcasts of Mineral Springs.”
I like the way you think, but I doubt it. Apple, Amazon, Microsoft, Google, Facebook, and all the tech giants that have massive enterprise value and market penetration will be lighting up cigars and laughing over this. They didn’t get themselves entangled with SVB. The fallout will be in small tech, think fewer than 50 HC startups that were working on the next generation of disruptive tech, and are now likely roadkill.
This will make big tech even bigger. Kind of like a rival street gang getting taken out by the Feds.
The only downside I see for big tech is that for some giants, these small firms were also their customers. Most software development is “cloud native” so a typical startup has to buy licenses/subscriptions for Amazon, Google Cloud, Azure, and Salesforce, not to mention all the other SaaS players like Workday, PagerDuty and the security mob (Crowdstrike, SentinelOne.)
If all of these smaller tech startups have an extinction-level event, that could put a dent in their earnings.
You know me, the least tech proficient person ever, thinking of the ulterior motive angle.
“The fallout will be in small tech, think fewer than 50 HC startups that were working on the next generation of disruptive tech, and are now likely roadkill.”
This should cinch another season or two for “Shark Tank” easily !!!!
Mosler argues for a zero rate policy, easily implemented by issuing only three month Treasuries.
Isn’t SVB a validation? It’s nice (as in you can sleep at night, albeit the sleep of ignorance) to have ‘safe’ long-term assets but they’re vastly unstable in a rapidly rising interest rate environment.
So the fundamental question is, do long-term Treasuries help the economy or hurt it?
Mosler would also argue that since Treasuries are nothing more than unused tax credits, ie, not debt but savings (part of the money supply) there is no reason whatsoever to pay interest on them, ie, pay someone to store unused tax credits.
So would our financial system shudder and collapse if long-term bonds were removed from secondary markets? And if there’s nowhere long-term (other than wealth producing companies) for ‘wealthtly’ entities to store long-term ‘wealth’, then what’s the point of having it?
That makes sense to me. Well said!
*Real* interest rates are pretty close to 0. At least during this newer era of QE. Sometimes they actually fall a decent amount into negative territory (when calculated using TIPS)
I’m a long time lurker and I actually happen to think it’s a damn shame and you can fault me for not walking my walk. I work at a PE owned company and I happen to be s******* bricks right now not large bricks but bricks. Why? Because at one point Silicon Valley Bank was one of a number of depository institutions through whom we would accept payments from our customers. Now they’re not large bricks because as I said it’s one of a number of depository institutions. PE buyers that buy other companies and incorporate them into their portfolio tend to retain the depository institutions of the companies that they bought.
Ironically the depository institution that I was particularly worried about is a huge money center Bank based in the Far East but despite the headlines coming out of mainland China regarding the real estate collapse, nothing happened.
How does this impact my company’s cash position? How many open invoices do we have where customers had paid but we had not posted or applied payments? As a percentage of both cash and receivables how much is concentrated in any one depository institution? And which bank do we use to manage our payroll? I know I’m not the only one that has a corporate gig on this site. Do you know the answer to these questions?
Now you might think not my elephant, not my circus and you might even be enjoying the show, but I’m looking at this as a litmus test for how this Fed and/or FDIC respond in a crisis.
Interesting set of problems. I was in charge of back office operations for an investment adviser running some fixed income funds during the naughties. Bear Stearns blew up and “counterparty risk” became the phrase du jour. The system survived because bailouts. You should be hoping for the same. I guess during the meantime you’ll want to focus on preserving smaller systems within your structure with an eye on efficient reassemble to the whole once the crisis passes. Quarantine your risk exposure if possible.
Probably not that helpful a comment but it’s all I got.
Much appreciated. Unless payroll or some other operating cash was tied up with SVB my guess is we’re fine. But I want people to understand is that the idea of a business diversifying exposure via multiple bank accounts means logistical headaches. If I went to my team and said we are no longer relying on one depository institution for our North American subsidiary they probably stab my eyes out with a rusty fork given the sheer number of vendor forms we’d have to complete for thousands of customers. Or maybe after this weekend they might not.
So either we migrate to a post office style banking system for businesses or or teach people how to pull up a 10q, calculate the total unrealized losses for available for sale and held the maturity securities and then compare that number to a bank’s equity (ignoring loan losses)
As we said, the people who would get hurt with no rescue would as always be those further down the food chain: the employees first of all, and then the entrepreneurs. The VC types will have egg on their faces but it’s their investors that would take any big hits.
Indymac also had a lot of big depositors when it failed, I assume real estate investors/speculators. They didn’t get a rescue. But they were not as connected as this bunch.
The most obvious advantage the US has over the rest of the world is its tech sector which feeds into both the civilian and military sides of the economy. For instance, the technology developed by chip startups often ends up as part of the technology portfolio of large corporations. Apple bought PA Semi, AMD bought part of Cyrix, VIA bought Centaur and the rest of Cyrix, just to name a few examples. Apple buys a lot more expertise from outside itself than one would guess from their advertisements. This knowledge ends up in iconic products that change the world. So one would think that saving the startup sector would be rather important to the US government… for its future development.
There have already been a lot of layoffs in tech. Many of the people from India and China are on H1B visas (renewed multiple times) because it’s so hard for them to get a Green Card. They have to find a new job within 60 days (IIRC) or leave after losing their job. If they leave, they will take their expertise home, and could start companies there with the savings they accrued here. China in particular, is no slouch, manufacturing as much as the EU and the US combined, so these new companies might very well out-compete the US in the future.
And I see a picture where the US threatens China over Taiwan because TSMC is there, making the most advanced chips using European (& Japanese) technology because the US wants to maintain control over 2-5nm tech, and not let China develop its own fabs… yet we’ll be letting Chinese engineers go home with their know-how because of a bank failure, and because of immigration laws? Best not forget that TSMC was set up by a Taiwanese engineer who worked here but went home.
Letting the tech sector fail would not make sense to me, whether or not the Silicon Valley types are well connected, particularly since 2/3 of tech employees are not US citizens, and particularly if we supposedly care so much about tech that we sanction others and threaten them with war to preserve our lead.
Sorry to sound snotty, but it appears that you’ve got an advanced degree in advocacy for moral hazard.
The tech sector is not going to fail over this.
Silicon Valley bank has at least one competitor that managed not to blow up, in Mercury. Funding will get tighter for a while, then in a few days/weeks/months when the Fed caves, and starts lowering rates, it will be “game on” again.
How does letting people, who put their own money into a bank that had an A rating according to Moody’s 3 days ago, lose it, constitute a solution to moral hazard? It’s not as if they could have known better.
Nice straw man argument.
First of all, you wrote “letting the tech sector fail” which implies that the entire sector needs a bailout.
We don’t even have evidence of a single startup not making payroll let alone failing yet. By tomorrow we could have an orderly resolution of this, following the FDIC process of arranging for a buyer of the failed banks remaining assets. It is quite possible that even depositors above the 250k max will get enough of a recovery to make it through this.
Second, presuming that there will be small tech failures, that’s too bad but that should teach the rest of us a good lesson in risk management. Keeping all your Seed money in one bank is not a brilliant move. Lots of options existed – Mercury, Goldman, etc. why punish those startups that avoided Silicon Valley bank or got their money out in time by having the regulatory agencies pick winners?
Do you have stock in Evolve Bank and Trust, the owners of Mercury, or what? You keep going on about them, as if they were best thing since sliced bread.
Also you did not answer the question. Sure, you can virtue signal about risk management, but $250,000 is not that much for a small company. Even if they only have 50 employees paid at $120k a year, they’ll need more than $250,000 in their bank account every pay period. So you expect them to juggle dozens of bank accounts at dozens of institutions to pay their employees, buy stuff, sell stuff, etc? All the while when dealing with their actual risk: developing and selling a new technology? Having even more employees to manage all that extra burden seems ridiculous to me. If you put your money in a bank, it should stay safe there. Otherwise, you could just as well hide it under your mattress. Startups are not supposed to be banks too.
Apparently the Fed, the Treasury and the FDIC agree with me since they announced they’ll make the depositors at SVB whole. Good thing too, since it seems to me that the risk of contagion was growing very quickly.
“The most obvious advantage the US has over the rest of the world is its tech sector which feeds into both the civilian and military sides of the economy.”
Wonder how many of the tech start ups that banked at SVB were military contractors? I’m reading more about “fintech” types of start ups involved.
That’s interesting. Thank you.
I wonder, is this a lesson or warning for those banks aiming to shift focus to serving only affluent clients (which I think is probably most banks)?
The Fed is currently focused on slowing inflation and tech people aren’t popular. If the FDIC determines that the systemic risk of not making depositors whole is minimal why not throw the tech people to the wolves? This should be deflationary and help shrink the wealth gap.
From Ed Dowd:
The buried lede on #SBV is that they got caught sideways on losses in relatively safe mortgage backed securities. They made a 10 year bet that went south on interest rate increases. It was interest rate risk not credit risk.
Now how many other banks made this mistake?
https://twitter.com/DowdEdward/status/1634349802665443328
adding: From the Fed’s 4th quarter publication on bank financials. Compare the unrealized gains/losses on bank books in 2008-9 with the unrealized gains/losses in 2022. Scary chart.
https://twitter.com/youngcapitalist/status/1634350315154595842
When 30 year bonds are paying 2.5 percent they are no longer safe. This may not be econ 101, but its taught pretty early in business school. The question is whether the other banks were able to contain themselves, or whether they did what they knew was risky in search of excess return. Given the Greenspan put, they probably did load up on risky positions like SVB
This post and the comments above still have me scratching my head.
As noted above, $2B used to be pocket-lint to the VC crowd. Why didn’t they just quietly bail-in SVB? Instead I read that the VC’s were leading the run on the bank.
Why didn’t SVB simply follow the TBTF model and lie about their balance sheet instead of marking their treasuries and MBS to market? Was there already a run being led by the VC’s?
In my years working in Silicon Valley I saw a change in the culture brought on by Obama’s massive run-up in H1-B visas. This quasi on-shoring appeared to foster a shift from the Sand Hill Road collective hallucination to a culture less invested in that belief system.
I’m curious who was leading the run and what effect the recent international unpleasantness had on their thinking. Were they trying to repatriate their assets to their home countries in BRICS? Please tell me if I’m off-base.
https://finance.yahoo.com/news/thiel-founders-fund-withdrew-millions-005223787.html/
https://www.bloomberg.com/news/articles/2023-03-09/founders-fund-advises-companies-to-withdraw-money-from-svb/
If you’re taking the view this was a bank run with a leader, that could be one suspect.
Whoa, “fast moving” story! BOTH of those links have disappeared? Can anybody else see them? (Bloomberg is a 404 and Yahoo is a blank page.)
I had read on Friday or very late Thursday it was a bank run, but can no longer find those references either. I’ll keep looking and see what I can post.
Ahh, found it!
Thiel’s Founders Fund Withdrew Millions From Silicon Valley Bank
https://news.yahoo.com/thiel-founders-fund-withdrew-millions-005223894.html
As much as I consider Thiel to be a super-villain straight out of a Bond movie, the reporting makes it look like Founders Fund was late to the dance. SVB had to start their Treasuries and MBS fire-sale in order to cover withdrawals earlier than this. It sounds to me like the run was already well under way.
This morning Mayra Rodriguez Valladares of Forbes pasted a section from Page 81 of SVB’s 12/31/22 SEC Form 10K showing a nearly 5-to-1 imbalance in “non-U.S. time deposits” exceeding the FDIC limit, most having a maturity of 3 months or less. The SVB’s 10K also discloses a huge run-up in time deposits during 2022.
Am I correct that this suggests that the run might have been driven by foreign depositors? Again, did the international crisis make these foreign depositors tetchy? Or is it conceivable that this run could have been engineered from outside the U.S.?
The bank inexplicably put a huge amount of deposit money from 2021 into long and intermediate term bonds – and didn’t hedge for interest rate risk. They apparently felt they could hold and should hold them all – at very low interest rates – until maturity. When venture capital funding dried up in 2022 they had net withdrawals instead of net deposits. Instead of immediately reversing their mistake they first borrowed money to meet withdrawals. Then when they finally did sell $22 billion of their too-long-term bonds they had a significant loss. Silicon Valley venture capitalists heard about this and also saw them attempting an equity raise. They advised their clients to remove their money from the bank. This bank run collapsed the bank.
Apologies if others have posted this possible answer to your query. I wondered exactly the same and after a few hours pondering realized that if you’re a member of Silicon Valley’s billionaires boys club in good standing (sorry Elon) when would get value for your money: pre-crisis or in the middle of a crisis? Think the climactic scene of “Trading Places” when our heroes are positioned on the trading floor for orange juice futures ready to pounce once they conclude the price has hit rock bottom.
I thus came to the cynical conclusion that in all likelihood the brins, ellisons, and zuckerbergs are sitting back preparing their private offices to start making offers that cash-deprived startups won’t be able to turn down no matter how greedy and unfair. Silicon Valley was created by greed and unfairness. I was there and saw the bodies. Hell, I was one of the bodies.
P
The Silicon Valley venture capitalists found out that Silicon Valley Bank had sold a lot of bonds for a loss and was trying to raise cash via new shares. They recommended to their startups that they take their money out. USA startups were leading the bank run.
https://noahpinion.substack.com/p/why-was-there-a-run-on-silicon-valley
https://adamtooze.substack.com/p/chartbook-200-something-broke-the
The fishy thing is that the Feds (I’m assuming) sparked this collapse by refusing to loan SVB cash on bond collateral and informing other banks. I imagine that the proposed sale-with-re-capitalisation was SVB’s response to that refusal, and that the Fed’s did not like it for some reason and so scared off the new investors.
My working assumption then is that FDIC knows about something else bad in SVB other than this fairly routine and solvable financing ‘gap’. My first speculation would be that SVB somehow lost big on crypto, but of course the problem could equally be a failure to recognise run-of-the-mill impaired loans.
The systemic risk would be debt-defaults with inflation,as too many companies face increased input costs while lacking pricing power. Of this SVB would be a warning sign rather than a cause…
So this is all pretty interesting blow back on the Fed’s quest to kill inflation (or crush labor, I cannot tell which is the ultimate goal.) To be honest I think that the Fed had to raise interest rates, the distortions introduced into the economy by having free money for the American oligarchs is ripping our country apart.
So if crushing inflation a la Volker wont work, how about an effort to go right at the easiest target?
Corporate Profits Drive 60% of Inflation Increases
https://mattstoller.substack.com/p/corporate-profits-drive-60-of-inflation
Corporate greed is at least 60% of inflation. Can we just do a Nixon and freeze prices, or heaven forbid, investigate some corporations and force price rollbacks?
Let’s be blunt. The days of economists assuming labor, especially skilled labor is something there is an enormous supply of are OVER. And thinking you’re going to “tame” labor by wrecking their lives? Good luck with that. It’s much more likely you’re going to get more unanticipated SVB blowouts which wreck the whole economy top to bottom.
+ 100
Although I don’t think the Fed could say this quiet part out loud.
They need to burst the Asset value bubble but can’t be seen to be taking aim at any of their particular constituents.
Better for Central bankers to watch which vulnerable sectors implode significantly as rates rise without endangering the whole system before gearing up for a bailout I think.
I think the first test of this approach was with the recent implosion of Brit insurers when currency markets went awry. That was contained and now largely forgotten.
Or perhaps it’s just hopeful thinking on my part.
The only ‘inflation’ that’s significant systemically is artificially inflated Asset prices across the board.
You’re so correct. Available cheap labor has vanished, gone with the wind.
I can’t even find people to move me at $15/hr.
In 1980 CEOs made 20 times workers’ wages. That would put CEO pay at $624,000 if workers made $15 per hour. I miss the days of cheap CEO labor.
The discussion above is very very informative and interesting.
But I haven’t seen anyone discuss the implications if it’s true that the Fed will be forced to reverse its course of interest rate rises, and if so, what that will mean. I believe inflation is still raging.
3.5% inflation becomes the new 2%.
Bottom 66% will not see real wages return to trend for many years. in my opinion.
next FOMC prob will be 25 pts. 50 or a cut = panic.
JPM (or Uncle Warren and Wells or BofA) as to acquire SVB in a fire sale this weekend for $1/share
Chris Whalen blames the Fed for “emasculating” bank surveillance capability in NY Fed (post 2008) Were thus “insufficiently tuned in” to federal markets (7:15 in embedded video) Suggests (and expects) a come to Jesus moment from the Fed on Monday morning (8:20 )
More commentary at
https://www.theinstitutionalriskanalyst.com/post/who-killed-silicon-valley-bank-the-ira-bank-book-q1-2023
or youtube direct
https://www.youtube.com/watch?v=vU1g7ZUQkWI
The 2008 crisis was focused on asset quality. And subsequent regulation was laser focused on preventing a redo of 2008. Meanwhile, the 1980’s was a decade of carnage from asset/liability mismatch. The S&L crisis was triggered by asset/liability mismatch. It is the fundamental issue in banking history. And the vanilla solution is a combination of deposit insurance and a lender of last resort. See Walter Bagehot’s book, ‘Lombard Street’. https://fraser.stlouisfed.org/files/docs/meltzer/baglom62.pdf. Deposit insurance was ineffective because SVB deposits were uninsured for the most part. As to why they couldn’t have utilized established mechanisms like the FHLB to bump liquidity is too technical for me.
It seems to me that it became almost axiomatic that a portfolio of US Government agency backed securities increased the safety of bank balance sheets. And the basic blocking and tackling of managing asset/liabiliy mismatch was ignored.
Increasing interest rates from zero to 5% in a year adds a lot of stress to the financial system. If it were done more slowly, it becomes more manageable. But the Fed is trying to slow inflation, and you don’t ‘break’ inflation without slowing down the real economy. And Silicon Valley is the poster child for financial excess.
As far as this being done ‘in plain sight’…I did look at SVB’s 12/31/2022 10K. And the $2.5 billion loss on the ”held for sale” investment portfolio was also booked. A $2.5 billion loss was also booked in AOCI, or Other Comprehensive Income. But no one commented on this number. There are about 60 million shares and SVB lost about $40/share without a single mention. Offset by maybe $25 share in profits. https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm And it wasn’t buried in a footnote, but rather on the balance sheet… ‘Available-for-sale securities, at fair value (cost of $28,602… $26,069. A difference of $2.5 billion.
So they weren’t either disclosing a new figure nor announcing an undisclosed loss, but rather trying to point out that it had already been booked. The message confusing because it was discussed in conjunction with a capital raise. Which was needed because their held to maturity portfolio was both bigger and had a duration of 6 years.
Let me just add that a more vanilla bank would have a lot of low cost retail deposits, as well as a portfolio containing some floating rate loans. So it is impossible to generalize. And people do pay attention to net interest income, which does address income from assets vs cost of funds.
FWIW, the next line on the balance sheet is the HTM portfolio… “Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6 and $7 (fair value of $76,169 booked at $91,321. Which would wipe out most of the bank’s capital.
Tell us if what we read is right or wrong:…… some are saying, that SVB provided firms with venture capital. Meaning, those investments were NOT FDIC-Insured? Meaning, The FED can’t ensure that money remains safe.
Right or wrong?
Sorry, wrong. Svb held VC money and money VCs had given to startups but itself did not do commercial banking except for a boutique ‘private banking’ service that it provided to VC partners and senior managers of startups that parked their funds at SVB.
Back in 1988 I started a SV company and, misled by Tom Peters’ hype for SVB went to see if we could get a business loan. Hah. Absent houses to pledge as collateral all they would offer is to loan against our accounts receivable (aka factoring). Since we were brand new and had no AR you can see the problem. Went away with nada but I think I stole a pen. ;-)
SVB provided deposit taking to VC backed companies – the companies were raising this money by issuing their equity to VC’s. Those deposits are its liabilities.
SVB provided some venture debt to those companies (those loans are its assets). It also lent to founders for mortgages etc.
Its deposits greatly exceeded its loan origination because VC’s stuffed their portfolio companies with cash in the boom. SVB parked the excess deposit cash (its liability) in treasuries and mortgage backed securities (its assets) at the top of the market and lost a boatload of money when the Fed raised rates.
SVB’s problems are not a result of:
– portfolio companies burning cash (but this did require them to deliver cash, pressuring them to liquidate the securities and take the fair value loss)
– portfolio company downrounds (SVB does not make VC investments in equity)
SVB did take options as part of its venture debt lending over the portfolio company shares but in the event of a downround these lapse unexercised so no gain but no loss, the only impact is future profit would be lower than in the boom years).
The bank primarily held money provided to startups by venture capitalists. The reason most of it (like 97%) is not FDIC insured is because the FDIC only insures $250,000 per depositer and the startups were each putting in a lot more than that.
Somehow it bothers me when Reader Zephyrum explained that when they had a VC-backed company more than a decade ago, that they were required to put the $11M lump-sum funding into SVB where the VCs could keep an eye on it. So instead of prudently having his banking with different banks, that they were forced to put all their eggs in one basket, like it or not.
Meanwhile, the ripples are getting larger. Circle’s USDC, the second largest stablecoin with $43 billion market capitalization, held an undisclosed part of its $9.8 billion cash reserves at failed Silicon Valley Bank.
https://www.coindesk.com/markets/2023/03/10/scrutiny-falls-on-43b-usdc-stablecoins-cash-reserves-at-failed-silicon-valley-bank/
It’s not over yet.
Everybody can stop worrying – ‘Peter Thiel’s Founders Fund got its cash out of Silicon Valley Bank before it was shut down, report says’
https://www.businessinsider.com/peter-thiel-founders-fund-pulled-cash-svb-before-collapse-report-2023-3
Feels like that story is missing the middle part as to what actually tipped em off. A bank transfer not going through immediately doesn’t sound like Defcon 1 material. Although perhaps it is at that level, I wouldn’t know.
Wire vs. ACH. Wire is direct from one bank to the other, ACH passes through intermediaries with a resultant lag.
Thus, a true Wire not hitting almost instantaneously would be DEFCON 1 for sure.
Apparently the FDIC predicted a problem of this kind on Monday:
The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year end 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.
https://news.yahoo.com/us-discusses-fund-backstop-deposits-003036814.html/
Bloomberg — The Federal Deposit Insurance Corp. and the Federal Reserve are weighing creating a fund that would allow regulators to backstop more deposits at banks that run into trouble following Silicon Valley Bank’s collapse.
Fine with me, as long as it is financed by member fees (i.e. reduced profits) rather than by tax dollars.n (“Dream the impossible dream.”)
Somehow I missed the link for the gofundme for all of the victims of the SVB failure. I’m sure that will be included in tomorrow’s posts.
The Tech Bros will have to take a 20-25% haircut for being fiscally foolish and leaving all of their eggs in one basket. Boo hoo says I. These sociopaths have crushed mid/lower class job markets with gig work, allowed the state to surveil and censor our speech, and helped destroyed the social fabric of this country with their innovative “disruptions”.
Based on what I’m seeing on the very platforms they created, it seems that I’m in the large majority. Unfortunately I have no faith in our systems that “democracy” will prevail in any of this. If the Treasury/Fed gives one dime to these people while continuing to ignore the plight of East Palestine our government deserves to be turned into a pile of ashes.
So came across tweets of poor Lindsey Michaelides founder and CEO of Strongsuit. “Ohio mother of 4. Drives a used Honda Odessey. Husband works in manufacturing”.
Now all at risk of collapse of SVB.
Then I came across The Rest Of The Story for Lindsey and Strongsuit. If that’s representative of the SBV portfolio then this thing was way overdue to collapse.
This whole ‘sensible car’ thing like Sam Bankman Fraud’s “and he drives a …Toyota Corolla!”, must have been taught in the highest-priced business schools to fool the muppets.
Regarding payroll and bank risk: why can’t companies just have a dedicated account for payroll that they sweep the money into every two weeks from their diversified banks?
The same for receivables: have one bank account for receivables but sweep nightly into other accounts.
Obviously this is not feasible for some reason, I’m just wondering what that reason is.
In the final analysis, this is what happens when a nation forfeits its own future by handing over ALL $$$ into the arms of a privatized system. You end up with Financial Aristocrats who control & make profit for themselves, leaving common citizens impoverished.
We saw this with the Roman Aristocrats, and in Great Britain with its Aristocrats.
And just as the Roman and British Empires died, so will the US’ Financial Empire die, too.
“Greed” is NOT “Good.”
I heard Peter Thiel took out his money first, and this was more or less a SV slack ingroup panic.
What if this was done on purpose, in order to force the fed to ease ?
That is, fundamentally, what the SV crowd needs to happen. This was not a tech bankruptcy after all.
If the 16th largest bank wasn’t subject to the stress tests per the loosening Trump did….. Let’s get those stress tests happening on the top 50 banks posthaste. Ugh