SVB collapse could mean a $500B venture capital ‘haircut’(bloomberg.com) |
SVB collapse could mean a $500B venture capital ‘haircut’(bloomberg.com) |
Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of your deposits in a single day you're not a bank anymore. That is a money market account or some other product, which doesn't lend long. It's a bit apropos that those who started the run will pay part of the price, although there's a LOT of collateral damage, and I don't doubt those who started it will ultimately turn that to their advantage since they have the deepest pockets.
https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.htm...
BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes (not raising short rates would increase inflation expectations and push 10y rates even higher!). And there is no hard line between solvency and liquidity, because it all has to do with time scale. If I say you have to give me $1000 in the next 3 seconds or I take your car, you can't do it because you can't reach your wallet fast enough.
I blame the bank management. They left the risk management position open and spent way too much time, money and effort on marketing during that period of time rather than shoring up their shaky position.
The problem is apparently that some VCs invested in banks - and banks are about to be more heavily regulated. That's a good thing -- it will get banks implementing the backstops they should've had all along. I really don't mind if some VCs make less money than they'd hoped on their investments in risky banks.
Also, this $500B number is spread across the entire VC industry. And even then, most VCs have heavily diversified portfolios. Just for example, one investor in SVB was Insight Partners -- but their web site lists 800 different investments. They're part of that $500B number, but it will have very little effect on their overall portfolio.
We're seeing old lessons from the 80's being retaught in the banking world.
Never put all of your cash in one bank. Keep your debt and your liquidity held in separate banks because if you don't and your bank goes under, your bank debt is written off against your balance when the bank liquidates.
The hyper-connected world we've created prioritizes efficiency and optimization at the expense of operational redundancy, which leads to people getting caught doing stupid things like putting all of their money into one business bank that had no visibility into their own risk profile.
Closer to a year, I believe. On the back of lobbying for exemptions from Basel III adequacy requirements.
There was no moral hazard created because bank shareholder equity got zeroed out.
Bank management and shareholders were not protected against the 'find out' phase.
The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete.
A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.
So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.
Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.
When you sell your liquid portfolio to Goldman at a $2bn loss and then announce non-binding equity commitments, you’re going to lose 20% of your deposits. Now that banks can borrow against the face value of their Treasuries, the same duration problem shouldn’t recur. (That said, we’re stuffing an ungodly amount of crap into the FHL bank.)
Can't we sort of blame the Fed for that [yield curve inversion and long rates] too? It undertook massive quantitative easing during the pandemic, which depressed the yield of long-term bonds such as those bought by SVB. Perhaps if it hadn't done so much QE, the yield on SVB's long-term bonds would have gone from, say, 3% to 4% instead of 1.56% to 4%.
Edit to clarify: I'm not saying that the Fed deserves blame for SVB taking such a risky long-term position, I'm saying the Fed deserves some blame for long-term bonds being risky.
No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up.
SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.
The BTFP does it for one year without a haircut. Is it long enough? Depends on where long term rates go. If they fall a couple of points in the next year, it could, but if the Fed fails to beat inflation and they rise... then it wouldn't.
I've been around and around on this question. Insolvent or illiquid, illiquid or Insolvent... etc. It was solvent on paper, by what it had to record on it's books. But it was insolvent by mark-to-market (which it didn't have to use but which the sophisticated but not-that-sophisticated investors, say venture capitalists, would assume is the reality). But hey, you could say it was solvent by the Fed supporting every bank it's size. Then again, the Fed didn't come through in time, so maybe the run was the reality [1].
And you could say "this was a run 'cause picking on SVB in particular was unfair since a significant portion of all bank capital in long term bonds that put them on an "overhang" of unrealized losses. [2] But maybe, the Fed needed to cool the economy so killing a few banks was needed and SVB and signature were the most logical.
[1] Matt Levine in Bloomberg https://archive.ph/uIYtY [2] https://finance.yahoo.com/news/u-banks-sitting-1-7-211212318...
It seems like you're implying that a truly sophisticated investor would view this differently, but I don't see how. By all indications, the MTM price was economically correct--bid/ask spreads and trading volumes were normal, and the price was very close to what a simple NPV model would predict. There are cases where the market price is economically wrong (in a "liquidity crisis", "fire sale", etc.), but there's no evidence of that here.
Managers and shareholders of the SVB and other banks with similar losses have strong self-interest in arguing otherwise, and they're doing so quite successfully. It's particularly easy to confuse people about interest rate risk, since it's so abstract--you're still getting the same future cash flows, and it's hard to explain why they're less valuable without a concept of NPV or other bond math, which relatively few people understand. The economic loss is just as real as with any other risk though, regardless of what the accounting says.
Just making sure I understand your point here, are you just against "banking"? Unhedged duration risk w/ LOLR backup is essentially "the banking business".
What's the moral hazard? The equity is wiped out, most of the debtors are wiped out.
The only moral hazard I see is we've disincentivized individual depositors from assessing the financial strength of their banks. To me, this is a good thing. I hope we can bring similar moral hazards to choosing a plane to fly on, bridge to cross, building to enter, restaurant to eat in, hospital to go to, etc.
What’s your take on the observation that historically after the yield curve inversion ends, it’s 3-6 months until a recession?
If deposit accounts were held at the Fed, and investment and loans were kept separate, there would be no possibility of bank run.
Proxy war in eastern Europe, with USA dumping big $ there, is causing price rises.
Trade treaties and WTO rules cover dumping in international trade for obvious reasons, but to my knowledge, there's no law in the major western jurisdictions covering domestic dumping.
Now they're coming down to more reasonable levels, in fits and starts.
VCs and their LPs don't want the write-offs. They're painful.
But ultimately, I think the write-offs will prove healthy.
Also we are coming on the debt ceiling limit at some point in the next few months, which might trigger a crisis of its own. If I were a VC I wouldn’t play my one-time hyper-risky card before seeing how the debt ceiling shenanigans play out.
> It’s important to take the time to celebrate that the VC’s attempt to gin up a banking crisis to pause rate increases failed and now they’re well and truly boned
[1]: https://twitter.com/SMTuffy/status/1638609733702524936?s=20
SVB has nothing to do with that problem. It's about higher interest rates. The end of free money for stupid stuff. Now companies have to make money.
So who's going down? TSLA, UBER, and RBLX already made it to the public markets; they're out of the VC sector. Those are the biggest ones. What are the remaining big money-losers still owned by VCs?
This has created a divide and widens the inequality gap on a scale not seen before in our lifetimes.
The rich get extremely rich, because they don't pay the same taxes as labour and they have so much money they own politicians and can make sure the status quo never changes.
This has caused things like "quiet quitting", because people no longer see work is worth anything anymore if you can't progress your life in any meaningful way.
All ladders to wealth and fulfilment that our parents and grandparents had have been destroyed.
[Edited for typo]
HN'rs love to criticize financial analysts, but this is precisely the thing that they would typically look at (whether they actually did on Roku is another question) when analyzing the overall value of a business. Meaning, they don't just look at the company's financials, but also the management team, their performance, their controls, processes, etc. (and arguably their treasury management). We also love to criticize MBAs and finance people, but this is exactly the type of thing that is optimized with experienced business/finance professionals.
You might be thinking "how on earth does X big company operate this way?". The same way a company like Equifax who literally provides all of its FICO scoring via computers, was running outdated Java components that led to a serious ransomware hack.
[0] - https://www.cnn.com/2023/03/10/business/roku-svb-cash/index....
I suspect vcs were telling the companies to bank with svb as some sort of mutual backscratching.
A lot of their contracts with SVB involved exclusivity clauses apparently. I'm not sure what SVB gave them in return.
So be careful what you wish for
We also will now see which startups can afford to hire developers at over $350K/yr + bonus + stock options in an adverse, unfavourable market without VC capital. Oh wait...
None.I conjecture a huge fraction are entirely independent of SVB FDIC shenanigans.
Wrong. You should, and I always bite that bullet.
If you're a business with 30 employees all making 150k/yr you have 375k in payroll costs every month. Holding even 1 months payroll in cash puts you above the FDIC limit of 250k. Normal people rarely need more than 250k in cash so the ratio of business to normal people in customer base matters.
To make things worse let's say you're VC funded and you don't have monthly revenue to put towards your payroll. Instead you have X months of payroll/runway in cash in an account being slowly drawn down. Now you might have 1 year of payroll in cash. Nearly all of that is uninsured.
Quick googling shows me that SVB was only 15% insured. Likely because of their focus in startups with large balances vs regular ppl with low balances. For context BOFA is 40% insured and JP morgan is 35%.
https://time.com/6262009/silicon-valley-bank-deposit-insuran... https://www.forbes.com/advisor/banking/bank-of-america-revie...
But I do see your point, short term treasuries probably would make sense for startups right now. With a 4.2% rate on the 1 month treasuries it would make sense to setup a ladder with bonds coming due as you needed them. But in the very recent low interest rate past this probably wasn't worth the hassle for many startups.
https://medium.com/prime-movers-lab/venture-backed-startups-...
imagine if you will, some kind of place you could deposit your money, and they WOULDNT get to gamble with it, outside of with consent.
imagine the depositor being able to say "i wish to allow the depositors to be used for whatever the bank pleases", or "i wish to not participate in this"
Don't get me wrong I agree with you, I just think they would get steamrolled by those who use depositors' money to gamble.
The current crop of startups have largely been pioneers, but usually, the settlers take away the bulk of the spoils.
In India, Uber got everyone used to the idea of app based cabs. Now newer players are eating away Uber’s lunch with newer models and without having to spend any money on educating customers or drivers.
It depends how unprofitable. Well-established products like Twitter and Reddit are big, have an established user base, and while not particularly profitable, I also don't see them getting disrupted by a rising competitor.
What possible value is there for entrepreneurs of a secular reduction in valuations?
Currently those of us in tech are suffering due to the absurdities of the SaaS obsession.
Edit: I mean developing technology, what has to be called “deep tech” these days.
If the valuations were just speculative, then it could represent a return to a world where cause and effect and value are more rational, which is theoretically far better for a smart investor/entrepreneur to participate in than something between a game of craps and a ponzi scheme.
I don't mean to assert that any of that is reality, but that's a possible avenue for value to be found in a reduction of valuations.
> But ultimately, I think the write-offs will prove healthy.
Yeah this was happening with or without the SVB collapse. In fact, I really don't see much of a correlation to any of this (between lower valuations and the SVB collapse). But I couldn't read the article as it's behind a paywall and the archive.is version got cut off.
Valuations from late 2020 to early 2022 were so radically insane for later stage startups that we will likely see a mass extinction event in another 12-18 months when they all either run out of money, or shrink by 90%+. Series A and B companies getting 100-200x on revenue is simply unimaginable for me even in the best of times. VCs that invested at these valuations are likely also going to die off as they'll be unlikely to raise future funds. Only time will tell.
Agree here. If you ever want to ruin a fancy dinner party say this: "We should tax capital gains at the highest rates, and tax labour the lowest."
Or what is the alternative, if they didn't get their tax breaks they would do what? Stop wanting money? I don't think so
What does this mean? Assuming you are referring to earned income tax, I do not understand how income tax is a way to make companies pay tax.
There will be a recession.. but when? I think sooner than later, but next year NBER could declare it to have started today or maybe it starts in another 12 months. There are "large and variable lags to monetary policy", which usually means >12mo. Almost a bigger issue than the actual risk free treasury yields is the rate volatility that's forcing lending rates up, because bankers don't know what's going to happen, and that makes loans and hedging expensive. The speed of the rate rise, along with the size and duration of inversion is very large and relative to previous rates it's a huge move (doubling from the 1-2% previously). That's going to break something some time. It could be when the debt ceiling fight gets real or earlier, if the economy actually turns over. You'll know when the Fed starts cutting rates.
My point was about the business though, not the stock price. The business is solidly profitable.
As the interviewee indicates, if the uninsured depositors had not been bailed out, the VC firms would have had to decide to put more of their "dry powder" (on a temporary basis) into these startups until their deposit claims were adjudicated. the VCs would not have done that, even if they knew they'd get all of it back when the dissolution was complete. That means that the 10 million investment in a 1 billion dollar unicorn currently on their books would suddenly be worthless.
Instead, they're going to continue to carry it at $10 million because there's no price discovery on these highly illiquid assets. Essentially, the last price discovery was when they made the investment which caused the value to be set.
(Yes, the fund portfolio holdings were pledged as additional collateral here but that’s secondary. The only thing that could make the CCLOC outstandings get marked down is if the well-heeled institutions and individuals who’ve committed to VC funds stop making their capital calls.)
Even SVB is not crazy enough to lever up against VC portfolio marks.
Them not being very profitable is almost like a moat in itself - not only is it hard to displace them, it's probably not profitable to do so either.
https://www.clevelandfed.org/indicators-and-data/median-cpi
That being said, I don't think the effect of the funds rate will be felt linearly like most academic models assume, and don't think funds rate has to be above CPI to be restrictive.
On the one hand, the news reports seemed to vaguely imply that some pretty wealthy people were standing in line for quite a while and I assume that was time they could use to make money other ways.
On the other hand, maybe everyone withdrawing money knew things were safe but also "knew the drill", knew the Fed needed their complaints to bolster it's actions.
The prices of things naturally want to go down - this is exactly what market optimization aims to do. The Fed has been creating ever more new money to erase the gains of economic and technological progress. If this new money were being spent by congress on tangible projects, then at least we'd have something to show for it. But instead it has all been wastefully dumped into creating an asset bubble that's just a huge handout to the rich. If you want to know the cause of ever growing rich-poor divide, look no further.
Fertilizer and fuel prices went higher in past year. This drove up food production prices. Molecule flow in pipeline to Germany was sabotaged, preventing sale of molecules from east to west which drove up natural gas prices at export ports in USA. Not a virus issue but a war issue.
Asking ChatGPT "What is the case law around single-firm predatory pricing?" provides a number of examples, including the tests used by various Western court systems. (Though do note that ChatGPT is not a lawyer, and this is not legal advice!)
You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes.
SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed up as unrealized losses on their balance sheet which spooked their depositors and precipitated the collapse.
Meanwhile, the bank run happened because people noticed the horrible risk management, not randomly. And those people talked.
Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something.
Compare that to experts doing it and spending a lot more time on it, then slapping anyone who is not up to standard. It's a way more efficient system.
Asking depositors to do the due deligence is a strawman.
Except that there are many commenters in this exact thread making that argument.
As for splitting up your deposit into $250k chunks, I agree, companies should do this as much as possible. But it would be hard for some companies. An extreme case is Circle, who says they had $3.3 billion in SVB. To get all of this covered, would require 13,200 different banks. It looks like there are only 4,236 FDIC-insured banks in the US. Add in another 4,853 NCUA-insured credit unions, and we're still left with $873 million uninsured, despite using nearly 10,000 accounts.
Spread 250ks all comes out of the same fdic pool anyway, so why bother?
Asking them to insure their own funds is a reasonable thing to do though
It certainly should be if they aren't paying for their accounts to be insured. The government does not exist to prevent private companies from going out of business.
> sure they're compliant is exactly the kind of thing government is _for_.
And if regulations magically remove all risk, then insurance should be very cheap so no reason not to get it.
Even if they are when you open the account, how often should you check to make sure they still are?
If insurance is necessary then the banks should pay for it, then if they want to have lower insurance premiums it's up to them to lower their risk profile. Yes, they will pass these costs on to the customer, but banks with lower risk profiles will then be cheaper making them more popular, and increasing stability of the entire system.
My point was that the existing tools and infra was enough for svb customers to secure themselves. At a high level, they didn't bother getting an insurance and now they beg for bailout.
Sure, I don't want depositors to have to do tons of due diligence to manage a small business payroll. But I am also fine saying that a company with over 2 billion in USD should be able to afford to find safe places to stash it.
Not sure if car manufacturers, the Raspberry Pi foundation, and many others would agree with that assessment. Energy prices in Europe have started coming down again as well.
And Corona payments may have ended, but the money is still sloshing around in the system.
https://www.electropages.com/blog/2023/02/semiconductor-over...
I had read that rpi started selling bulk to companies which is leaving little supply for consumers. Maybe upstarts like Orange Pi will step in to fill the void for consumers.
http://www.orangepi.org/html/hardWare/computerAndMicrocontro...
>> payments may have ended, but the money is still sloshing around in the system.
How would existing money cause additional inflation? It would flat-line, not increase.
Until either inflation itself or other forces (such as interest rates) counterbalance that effect, we'll be seeing increased spending velocity – the other component of inflation besides the amount.
I think the government should reserve the right to haircut large depositors in cases where there is serious negligence or malfeasance, so it makes sense to have the limit. But it's also a good idea not to do that in cases of mere incompetence, like here.
The alternative is to do like Canada and basically keep around a handful of big banks and make it illegal for them to acquire each other (to avoid further concentration). We don't have to rescue them basically ever... but if we did it would be abysmally expensive. And customer service is garbage.
Until the law changes, you have to look out for yourself and not beg for bailout. Also, this is not complex since software takes care of it behind the scenes. Our company did it from day 1.
Also more than half of deposits by volume are FDIC insured so the system can handle the whole volume if the customers choose to do so
I agree there's no moral hazard as to the SVB shareholders, since they got zeroed. There is a moral hazard as to the shareholders of other banks, who will benefit from the new lending program in proportion to the amount of bad interest rate risk they took.
If you are large enough player to be visible in the "systemic risks" picture you should be helping to stabilize the system, not just throwing your weight around like a drunk elephant to see where money falls out.
. Pending litigation . Counter party risks (e.g. do they have exposure to a problem bank) . Financial statements (usually the first stop and contains a lot of information) . Credit Default Swap rates (what does it cost to insure the debt issued by the bank) . What rules does the bank operate under (domestic, foreign, state, federal, etc.) . General reputation in the industry (e.g. go to $CS to launder your cocaine money)
That being said, it's probably beyond a small business to really evaluate their bank risk. And while 250k may have been adequate for the 2010's, it may no longer be sufficient to cover many small businesses (and by small I mean the back office is a handful of people). Should it be 500k? 1 million? I don't know. What I suspect is that making it unlimited, it means that a bank that's hemorrhaging depositors could offer unsustainably higher rates. Less risk-sensitive CFOs might decide that parking 10 million in reserves might be a good deal since it's as safe as an officially insured deposit. It's much more liquid than holding a 90-day CD or 3 month T-bill to maturity. Suddenly, the bank is flush with deposits, but is still going under. This would be kind of like the 1980's S&L crisis. That's why I'm all for raising the cap, but with clear limits and adjustments to the fees charged to member banks for insurance. If we need to expand the FDIC insurance fund by 3x to raise the cap, that's fine. But raising the cap, for an extended period, without adjusting the rules or the price for the insurance could lead to unintended consequences.
Should a VC funded company of 10 people do what GM does when evaluating a supplier or customer? Probably not. What about when it gets to 100 people? At that point I would expect there to be a competent CFO. What about the VC? (I'm just going to ignore all the tweets from the All-In community that showed a profound lack of understanding of banking, confusing a modern bank Gringot's.) Should the VC, as part of their advisory role, maybe recommend a good part time CFO or cash manager? Did regulators screw up SVB? Possibly, there were a lot of issues found when they transitioned to a new regulatory team year or two ago (or so I read). But regulators are not bank managers. And if a bank can show their risk controls are adequate, and those risk controls are being followed, it does not mean they're making good investments. (It's arguable that both lack of controls and following controls were an issue for SVB - as far as I've read).
The bank had poor risk management, regulators were asleep at the wheel, depositors are blameless. Although I will say that a startup with millions in the bank should probably have a CFO.
That it’s apparently news to a bunch of cash heavy depositors at SVB is one of the more revealing parts of the crisis to me.
That being said, two people running an Etsy store won't do that. Nor should they have to. Maybe the insurance should be bumped up, but for either a very limited time, until you write new, official rules. And yes, the CFO should do an appropriate level of due diligence for a large business with lots of money. It makes you wonder what some of the CFOs did all day.
This assumes that there future uninsured deposits are guaranteed (they may be, yes, but this is a bet, not a certainty).
Regardless, you're making the case that consumer choice is not sufficient pressure to enforce safety measures. Which is correct, but we already knew that! That's the purpose of regulations.
Expecting industries to self-regulate in response to market forces is a losing battle.
You always keep your foot on the brakes in case someone is drunk driving on the road. At the same time, you'll try to fix those issues via legislation (DUI) and technology
Liquidity is about bid/ask spreads, disorderly markets in which the price becomes temporarily irrational. The SVB's problem was simply the time value of money, that the liquid and economically rational price of their long-term bond-like assets is lower than they wished it would be.
This paper estimates that 190/4800 ~ 4% of banks would have deposits at risk if half of uninsured deposits were withdrawn. That means 96% of banks wouldn't. The SVB's situation wasn't completely unique, but it's far from the norm.
In traditional banking, rising interest rates are a good thing because it means that banks in turn get to underwrite loans at higher interest rates, which positively affects their bottom line. SVB's problems were twofold: A) they had a one-dimensional investment strategy that was adversely affected by rising rates, and B) outstanding loans made up a very small portion of their business relative to their size, which made it so that they weren't able to capture meaningful value from rising interest rates. The latter is actually pretty rare for a bank, which shows how uninterested they were in actually functioning like one.
I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg problem.
All the findings that came out since then points to minimal duration hedging on SVB's part, so all in all it sounds like a bank that was poorly managed, perhaps adapted too well to a ZIRP world, and was ripe for a run to happen.
They're not right. No bank could sell assets quickly enough to withstand such a run, but that's why the Fed serves as lender of last resort. Even under previous policy, the Fed would lend against the mark-to-market value of the collateral. So in theory any MTM-solvent bank could survive any run, so there was no incentive to start the run in the first place.
The SVB was MTM insolvent due to that excessive duration risk, so it couldn't do that. It's not the only MTM-insolvent bank (see the link in my other comment), but that in combination with its unusually high fraction of uninsured and thus flighty deposits was apparently enough to start the run.