March 12, 20232 yr From the other thread: The original post trying to blame this on the Fed and Biden is utter partisan stupidity. The issue was caused by the increase in interest rates, but the downfall of SVB was due to the mismanagement, lack of risk controls, and focus on a singular client base. Will try and lay this out in layman's terms. Silicon Valley Bank (SVB) was basically what it sounds like -- the bank of choice for venture capital backed startups in Silicon Valley. Having a banking relationship with SVB was seen almost as a kind of stamp of approval -- if SVB took you as a customer, then VCs were more willing to meet with you and invest. What this means is that their depositor base has very little diversity -- it was all a bunch of venture backed companies focused on high growth with no concern for profits. No one cared about profits because, in a world of zero interest rates, these companies could just keep raising more and more venture financing at higher and higher valuations -- the ultimate example of this was WeWork. So SVB has banking relationships with all these VC backed startups that are just hemorrhaging cash in operating losses and covering the shortfall by continually raising more money at higher and higher valuations. So what does SVB do? They start making loans to these companies based off their inflated values. So now all these companies are flush with tons of cash from both the venture capital raises and the SVB debt, and they take those billions and deposit them into their bank accounts at SVB. SVB's deposits more than doubled to $102 billion at the end of 2020 from $49 billion in 2018. So what did SVB do with all that cash? They bought a bunch of US Treasury bonds and agency mortgage backed securities (Fannie and Freddie). Super safe investments that, at the time, were trading at yields of ~1%. Fast forward to 12 months ago, and the Fed starts raising rates to combat inflation. Inflation that was caused by a number of factors -- COVID spending under Trump and Biden, supply chain disruptions, the war in Ukraine, etc. The Fed hikes rates from 0 to 4.5% in the span on 1 year, and US Treasury rates skyrocket. Well, this has a 2 massive impacts on SVB: - First, SVB's customers can no longer raise money from venture capitalists. Turns out, all these guys were bull market babies propped up by low interest rates, and the VC market basically closed last summer. Just look at the valuations of any high growth, money losing company -- they have all collapsed. So since these guys could no longer raise money from investors, they had to start funding operating losses with their large cash balances. So that meant SVB started seeing deposits fall as guys needed to access their cash. - Second, in a remarkably stupid move, SVB didn't hedge its interest rate risk at all. So all those US Treasuries and agency MBS they bought were now worth less than what they paid -- on just the available for sale, they took a ~15% haircut. So at the exact time they needed to fund withdrawals, they were selling at a loss. So on Thursday morning, they announce they have sold ALL their available for sale securities and taken a $1.8 billion loss. They also announce a plan to raise $2.25bn to try and fill the hole. But...their hold to maturity investment book is much larger and has all the same types of securities. People freak out and start pulling money quickly -- $42 billion was withdrawn on Thursday, and they couldn't meet it. And that is how a bank fails.
March 12, 20232 yr 15 minutes ago, Dave Moss said: Probably goes without saying but I assume the vast majority of these deposits were well over the FDIC threshold?
March 12, 20232 yr Just now, we_gotta_believe said: Probably goes without saying but I assume the vast majority of these deposits were well over the FDIC threshold? Roughly 87%. Which is a massive outlier. FDIC is auctioning the assets with bids due this afternoon.
March 12, 20232 yr Uh…yeah. We’ve all known that since 2008. It is why all my personal assets are at JPM, and fund assets are Goldman.
March 13, 20232 yr How paranoid would one appear if they moved some money earning a higher interest rate at Wells Fargo to an account earning a lesser rate at a local bank to keep both under the FDIC limit? Asking for a friend.
March 13, 20232 yr 3 hours ago, The_Omega said: How paranoid would one appear if they moved some money earning a higher interest rate at Wells Fargo to an account earning a lesser rate at a local bank to keep both under the FDIC limit? Asking for a friend. They would be foolish not to unless they were one of the special people. We're debating on whether or not to leave funds in the bank. Feeling really sketchy out there again.
March 13, 20232 yr I get the whole not wanting that much failure to occur, but damn if this all couldn’t have been prevented by rates having been raised years ago. In terms of finance, my knowledge is very much pedestrian, so I accept and expect correction. That said, I feel as if since 2008 money has been too easy to come by. VCs pumping money into businesses that aren’t financially sound (imo any company should be self sufficiently in the black w/I three years), but then also companies taking the easy to get cash and buying back stock. The former creates businesses that will fail, and the latter creates businesses that won’t innovate.
March 13, 20232 yr 1 hour ago, Bill said: In terms of finance, my knowledge is very much pedestrian, so I accept and expect correction. That said, I feel as if since 2008 money has been too easy to come by. VCs pumping money into businesses that aren’t financially sound (imo any company should be self sufficiently in the black w/I three years), but then also companies taking the easy to get cash and buying back stock. The conditions in the world are different now but this fundamental aspect is exactly the same as it was in the 1st dot com crash back in 2000/2001.
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