I don't think I agree with this as a mark of "shame". Were these companies wrong to pull money out of SVB when they (correctly) thought the bank might be insolvent or headed for trouble?
Are we celebrating those who left their money in, despite the warnings, when they could have potentially lost it all if the government didn't step in and make an unprecedented promise to honor the deposits? Would that have been "heroic" in some way? I personally don't think so, that seems more like stupidity if the potential consequence is your company losing all it's money and going bankrupt for outside reasons.
SVB as an institution sponsored lobbyists to lobby against regulations meant to keep banks stable, then without those regulations they failed to self-regulate properly and failed massively. That is IMO pretty shameful. But I don't blame any clients of theirs for taking money out when they saw a potential instability. They did not create that instability; that instability created the bank run.
“Sorry team, our main VC advised us to keep our money in SVB because it’s the right thing to do. We can’t make payroll. Our VC, true to their ideals, kept their cash in SVB too. They can’t help us. Kindly cast your blame on the thousands of startup peers that withdrew and remain unscathed. Their blatant self-interest may have killed us, but we are the true moral victors.”
I'm pretty sure they mean that if the VCs hadn't advised companies to withdraw all at once, the crisis might never have happened, and March 11th might simply have been a nice day for a walk.
When the Moody's data became known it was going to happen one way or another. Well over 90% of the accounts were uninsured. Someone was going to pull money. Perfect unanimity in inaction was simply not possible. Given that scenario, it is a rational response to try and be first out the door.
The fault here is with SVB management making some very bad decisions and with VCs not looking at the publicly available data and moving away from SVB a lot sooner. Of course, hindsight is alway's 20/20. Once the Moody's trigger had happened the choices were simple.
The fault is also with VCs who mandated that portfolio companies concentrate large uninsured deposits in one bank, increasing the risk of a run. The bank to my knowledge didn’t even offer insured cash sweeps, a basic financial product for deposits above 250k.
There is a clip I saw on twitter as this was happening of Jason Calacanis bragging insufferably about his special treatment from SVB in obtaining quick and favorable terms for a private mortgage, likely thanks to the amount of business he and other investors brought the bank.
So no, I reject your claim that the same people that would design Class A shares to be inferior to Class B shares, then say “no takesy backseys!” when executing a hostile takeover of your company are not at fault here.
How can a discipline that prides itself in superior networking ability, information gathering, and prudent decision making not be at fault for pooling a stupid amount of wealth in the first bank to go broke post COVID bubble?
Yes. I agreed that the VCs are at fault for poor decisions relating to their use of SVB in the face of known issues with the bank. I also agree with your additional point that the initial concentration of uninsured funds in a single bank was also a bad idea.
Defecting is only a good strategy in a prisoner's dilemma when you don't need to cooperate in the future and can't be punished outside the scenario of the prisoner's dilemma.
If this, say, destroys public trust in Silicon Valley startups, or leads to restrictive government regulation, then it might cost more than it saved in the long run.
> no need for heroics, just don't "lie" about it by signing statements
Have you read the statement? There is no "lie" in pulling money and signing the statement. Here is the text:
"The events that unfolded over the past 48 hours have been deeply disappointing and concerning. In the event that SVB were to be purchased and appropriately capitalized, we would be strongly supportive and encourage our portfolio companies to resume their banking relationship with them."
The statement clearly communicates that they have ended their banking relationship (pulled their money). They are simply stating that if the finances of the bank are straightened out they will start banking there again. I don't see any disconnect or deceit between pulling their money and signing the statement. When the Moody's data came out and it was clear things were headed south, of course they transferred or at least tried to transfer their money out.
The failure of all of these financially savvy VCs was not pulling their money weeks or months ago. The data was all there as others have pointed out. They have all been whistling past the graveyard hoping the problem would go away. If there is any shame, it is in that failure to act earlier.
Agree completely with your point. Moving their funds from the train wreck was smart.
Shaming those that withdrew their funds reminds me of meme stock culture where participants shame sellers and make holding “no matter what” the highest virtue. The suckers that listen to that bullshit are the bag holding losers.
How is pulling money out of an insolvent bank "blindly following?" Everyone could see their deposits were decreasing for over a year and they didn't have the cash to continue to support it, there's nothing blind about following the incentives and making a good decision.
If deposits kept increasing they might've been ok, but startups had been withdrawing the cash they had raised during the pandemic, deposits were decreasing rapidly before the solvency issues were thought about. At that point there is a very real scenario where the bank runs out of money and depositors are screwed.
There's no way to "feel" this, if you can look at items on their balance sheet you can determine whether their assets at fair value covers their outstanding debt of not. IF it doesn't, it's likely the bank would break sooner or later, if there was no bank run, it would have died a slow and painful death anyway (or, more likely, somebody would try to make risky bets in attempt to recover).
There hasn't been a buyer yet, which indicates the perhaps the assets aren't that great.
Sometimes they've been able to make all the depositors while by wiping out all the investors and selling all the assets (buildings, office chairs, etc.)
What was unprecedented this time was the promise that they'd do it regardless of whether or not they could recover enough assets.
When Washington Mutual and IndyMac collapsed in 2008, some depositors indeed never got all their money back from their uninsured accounts.
One big difference was that those banks were knowingly engaging in hugely risky schemes, while SVB was ultimately burned by making overly conservative investments.
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Now you may argue it is unfair to other banks to penalize them for the failings of a few. What the SVB fiasco showed is that systemic risk is not just in the too big to fail institutions, but also ones like SVB that are important to specific sectors of the economy, like SVB for Tech or GMAC for cars. As it turns out, SVB had recently gotten TBTF and started the risk management compliance process, including the so-called "living will" to give the Feds a roadmap for an orderly wind-down of the bank, which must have been well-thumbed over the weekend. I expect one of the consequences of this is that more banks will be subject to oversight.
> while SVB was ultimately burned by making overly conservative investments.
This isn't true, interest rates risk of securities of long duration (especially when current fed interest rate is zero) is well known to be risky by anyone who has a cursory understanding of the matter.
Put another way, this is a list of VCs that prioritize their portfolio companies health and success more than their personal banking relationships or public perception.
That’s a pretty strong signal to future startups they’ve got your back when the shit hits the fan.
I’m not saying it’s good, but I’m betting a lot of founders are feeling pretty thankful. The bailout was never guaranteed.
No. There was only a 1.8 billion dollar temporary hole in the books. If they wanted to they could have plugged this in minutes and ensured their partner in banking survived. Then cashed out with 1:1.01 tbills or whatever in its stead. Follow on benefits would have been a statement of strength and cooperative SV culture.
Instead they panicked like children and told everyone else to panic too
If you read the SEC filings, there was a 12-13 billion hole in their balance sheet. The 1.8 was simply accounting rules which say they only have to recognize the giant hole when they sell and they sold some of the assets in question. Marked to market, ie assets marked to real prices instead of fantasy prices, they were toast.
People who looked at SVB financials knew it was a train wreck. They behaved like serious investment professionals and pulled their money.
yep, even though it seems "can't find their own mouth" level incompetence to try to raise cash through equity sale (which prompts everyone to think about their situation) instead of getting a loan, but they may have already exhausted that option.
... though finance is very much about connections, charisma and acting tough, and backchannels. aaand sometimes fundamentals. it's very hard to know if they could have organized/coordinated/managed to put together a rescue package.
by forcing a bank run and crying about payroll they managed to get the government to step in and basically undo SVB's bad deals, at the cost of sacrificing SVB itself. but VCs are happy now, they had the opportunity to both enjoy SVB up to now and have a financially zero-cost exit.
if the fallen SVB management gets the same treatment as the fallen WeWork management their egos will be fine at the golf courses.
As a former SVB customer, they understood the needs of startups like no other bank, and this will have adverse implications for the startup ecosystem, innovation and future economic growth not just in the US but also China and Europe. The incompetent top management who invested deposits in long-maturity T-bills with mediocre rates are not the same as the front-line personnel who had the relationships with the startups.
As for moral hazard, past bonuses for executives including the past Chief Risk Officer who left a year ago and cashed in her chips can and should be clawed back.
Lots of cash, lumpy or no revenue, no credit history, need to lease equipment like servers for those that run in a data center. Mitchell Hashimoto of HashiCorp describes it here, even if his is an extreme example:
But that's not really different from boring low-volume high-margin retail. Let's say a car dealership. Or basically consumer banking for anyone without a biweekly/monthly income. Or anyone who goes on vacation. Let's say I open a bank account, put my savings there and go on a long unpaid leave and spend a lot of it.
Banks are just picky, because they can be (and because regulation makes it hard to have a boring bank, so there's no competition). Because banks still don't understand the business they are in (because they can be dumb, because regulation, etc), as the Hashicorp story illustrates.
People want dumb banks, but banks make money buy upselling shit to people. So banks are basically evil MLM machines instead of trusted/trustable financial partners for people. (Because the people who actually need financial support will get taken advantage of in less time than it takes me to type this. And those who don't need it are constantly annoyed by the scam machine. Rightfully.)
And, ridiculously, Chase spent time and effort educating tellers in case the next startup ends up opening an account at them ... instead of making sure that they provide a good service so that founders choose them.
And that story is perfect. Everything went as expected. Nobody bothered the startup. Yes, closing the account was harder than imagined, because they were impatient, still they got it done in 2 days.
No, a strong signal would have been providing material support to portfolio companies harmed by the collapse, instead of just signing an empty statement.
These people absolutely deserve to be named and shamed. If the big, "evil" banks can cooperate for the collective good of their industry and the wider economy as they did today by injecting $30 billion of deposits into First Republic to forestall its collapse, there's no reason why these supposedly enlightened, rational VCs couldn't at a minimum collectively agree to just not completely withdraw their deposits from SVB in a stampede, or perhaps go a bit further and actually help them raise additional capital.
Instead they gutted the bank that provided them with banking services for 40 years, often when other banks would not. Some of them even did so two-facedly, publicly claiming to support SVB while pulling their and their companies' money out of it:
> Y Combinator advised its portfolios to collapse SVB, while Garry Tan petitioned the government for a bailout
Union Square:
> Signed the statement [of support of SVB] after contributing to the run.
Fred Wilson seems like a great example of PG's "Mean People Fail" delusion.
> Two members of a criminal gang, A and B, are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communication with their partner.
The guilty parties here could communicate with each other, and could cooperate, just like the banks did today by aiding First Republic. Instead, it appears that while they did communicate and cooperate, it was only towards the end of running on SVB. And as others have pointed out, even if the framing of it as a Prisoner's Dilemma is correct, it's not a single iteration variant: if the VC community could have come to some sort of an agreement, any party that refused to cooperate, or worse, that pledged to and then betrayed the others, would suffer a substantial loss of trust from other VCs and startups going forward.
In a textbook prisoner's dilemma, the prisoners both get a hefty sentence if they failed to cooperate and both defected. They had a lot to gain from cooperating.
In the SVB situation, most of the losses are borne by the bank, investors of the bank, and the general public (in the sense that it caused financial instability across the nation). It's not a prisoner's dilemma because the downside to not cooperating is mainly borne by other people. The VCs and the startups who decided to "defect" are fine.
I'm personally unable to understand the anger here and finger pointing here, the bank was obviously in a bad shape due to their assets being underwater, why would bank clients have a moral responsibility to continue depositing in a bad and failing bank?
----
And btw, the fact that parties could communicate with each other doesn't really change the game much. And nobody in their right mind would sign an agreement to keep assets in a bank or face penalties just because of some moral obligation to protect shareholders of a bank that made risky bets. That's just nuts IMHO. Anyone is free to create a time deposit if that's what they want to do.
The VCs started the bank run. They were the primary depositor base of SVB. It wasn't a question of whether it was rational or ethical to join a bank run already in progress. Instead it was they, the rational, enlightened VCs, who started the bank run in the first place, becoming prisoners of a dilemma of their own making.
It was in their best interest to cooperate to not run on their bank, and they failed to do so, which in turn brought down SVB, risks bringing down other regional banks in a domino-like fashion, and has already resulted in government bailouts that have made people outside of the SV bubble hate them even more than they already did.
Furthermore, the supposedly "evil" big banks, as I've repeatedly noted, have shown a comparatively greater ability to cooperate for the greater good of their industry and the wider economy, which is embarrassing given how these VCs posture.
I think it's really ridiculous for anyone to assert with a straight face that bank customers have a moral responsibility to keep money in a bank that's failing and under water. It's even more ridiculous for a bunch of tech VCs to be responsible for a country's financial health and stability of the banking system.
I don't think banks are "evil" and I don't think anyone has commented to that effect here. They're just responsible for this mess.
I’m not going to be using this site to guide my opinions of VCs, I don’t generally outsource that much of my opinion-making to 3rd parties. But it does broadly reflect my opinions, you could get a very rough “general direction” picture of how I think from reading it.
“It’s rational to join a bank run, VCs would have been negligent to their companies if they advised to stay”
I know! Believe it or not I have studied a fair bit of game theory, enough to go beyond “it was a prisoners dilemma” and analyze the SVB collapse as an iterated prisoners dilemma with variable information/reputation and a small number of rounds (in this case the amount of information/reputation broadcasting very quickly drove the whole population to “defect always” and the ecosystem rapidly collapsed).
I trust myself to be capable of assigning blame for the bank run correctly (broadly speaking: I. nobody started the run, everyone joined it; II. joining the run earlier is very slightly more blameful than joining the run later; III. being part of the run “loudly” is very significantly more blameful than being part of the run “quietly”).
That is maybe 20%, while the other 80% and thus the real albatross here is the demand to be made whole afterwards.
Roughly speaking the least blameful is “you’ll get 250k immediately, a substantial fraction soon, and almost all eventually; if this still kills your business let us know and we’ll try to arrange bridging finance”, while the most blameful is “the government must promise to make us whole on Monday morning or the contagion will spread; use taxpayer money if you have to, this is that important”.
It wasn't a prisoner's dilemma. Cooperating gets you almost nothing while defecting gives you benefit. It was nearly the opposite of the prisoner's dilemma.
Couldn't another school of thought "blame" those who didn't participate loudly?
“Cooperating gets you almost nothing while defecting gives you benefit”
That is the prisoners dilemma. What you have offered here is in fact an accurate statement of the payoff matrix for the prisoners dilemma in the case where the other prisoner cooperates.
In prisoner's dilemma cooperating gives both parties the most benefit in aggregate, while defecting gives on party additional benefit at the expense of a steep disadvantage for the other party. Also note that if all parties defect they all end up in a rather undesirable state.
For the SVB bank run, the main loser is the bank, who isn't party to this game (of whether to keep deposits or not). Even if everyone defected, the early defectors don't lose anything. And arguably, it can be foreseen that even late defectors don't lose anything either due to SVB marginally in the "too big to fail" category, or at least, the startup ecosystem being "too important to fail".
You forget to consider, in your blame list, the people who created the unstable situation in the first place. If I put a pencil on a table, balanced on its tip, can we find which puff of wind to blame when it falls?
The bank's leadership, for example, by choosing to focus heavily on one industry known for rash herd behaviors, both benefited from it some (lots of VCs recommending them) and now seems to have been undone by it.
The bank's regulators might have also looked the other way, we'll find out more.
I agree. This all reads like a solid reminder that two things happen in that realm of highly VC funded systems:
- Investment/money management often happens by people who are very new to this process and make swift sometimes stupid decisions.
- Everyone else is clearly in the “protect profit” game, even if that means ignoring the clearly stupid things svb (and really the entire system) did/does. Mort backed securities, crap from the 08 markets, deregulation.. etc.
A failing bank should not crash the economy nor should a bunch of startups failing as a result crash too. Poor startup decisions are one thing. But “too big to fail” things maybe need to be smaller or nationalized?
I realize the site I’m on, and know I am still learning about this.
I have just, in all my (short 43) years, felt the “too big to fail” reason pop up more than it seems it should because, to me, it means “gov must protect my profit, or I’ll deadman switch the economy.”
I’m sorry, this was an utter mess, shouldn’t have happened and lots of people share blame. But I don’t think it was wrong for depositors to pull deposits from an insolvent (or nearly insolvent) bank. Neither is it wrong to encourage companies you’ve invested in to move money. The only thing I have a problem with is when some of the VCs, like Jason Calacanis, deliberately tried to spread panic to other banks to make SVB more important to the government so they’d backstop his deposits. That was pretty bad.
But realizing your badly run bank is badly run and pulling your funds and encouraging others to do the same is a very reasonable thing to do. Certainly not worthy of this virtual tar and feathering. They are, or would have been, the innocent victims of this banks poor risk management.
I am a founder who had assets tied up in SVB. As someone with something to lose, I'm going to be honest that I think the people on this list mostly look incredibly stupid—both at the time and in retrospect. And I think it's worth dwelling on why.
* In a catastrophic (_i.e._, non-backstopped) bank run, _most_ deposits are not getting out of the bank. Especially when the deposit sizes are very large, as they are with corporate treasuries.
* Thus, if a catastrophic bank run is already in progress you are unlikely to succeed at saving any of your portfolio treasuries.
* BUT, if a catastrophic bank run is not in progress, the downside is that you lose 100% of portfolio treasuries because you started one.
I am seeing a lot of people like Elizabeth Yin say that they are proud for telling everyone to pull the plug. I get it. They are on the side of their founders and they want to be helpful, and they believe decisive action helps.
My message to all of those investors is that "makes swift but extremely stupid decisions" is not a quality that is admirable in a capital allocator. I don't think this rises to a moral failing but pretty much everyone on this list is going on my personal docket of people who are too stupid and impulsive to trust in emergency business contexts.
I had to parse this a few times to understand. I think your thesis is that an investor has multiple ventures in their portfolio. And many of those ventures park their treasuries at the same bank. And by telling them a run is happening, your thesis is some or none of those ventures pull their money out faster than others, and the stragglers of the portfolio can't due to the bank run started by the investor and/or other companies in the investor's portfolio?
During a bank run, 0 withdrawals will complete. So if you warn portcos to withdraw _during_ the run, you save 0 treasuries. If you warn portcos to withdraw _before_ the run, you might trigger the run in which case you'd almost certainly lose 70% of portco treasuries.
I'm proposing in neither case it makes sense to encourage portcos to move their money.
I think there are a lot of details missing and presumptions from this model that could change the calculus, and it would be swift and stupid decision to bet that 0 withdrawals in a bank run are going to complete, or that the first actors are expected to lose a significant share of their money if a run is triggered.
Ok let's play that out. FF is the prime mover in this bank run, and the most important investment in this generation of their portfolio is Rippling. But not only did Rippling get stuck in this mess, all of the customers of their flagship product (payroll) also got stuck.
FF are incredibly smart. Their most important investment did not get out. They would have been better off not saying anything. QED. There is no hope arguing otherwise.
I agree the best action is to not say anything to the public until all of their money is quietly taken out (if possible). The question is if FF had done nothing, would they have been better off? That's a hell of a bet to make, to assume that no one else is part of the run and that given the deteriorating financials that it won't be coming soon (even if inadvertently in the normal course of business).
Ok, I'm not sure where this is going. You previously argued that the first movers might be able to get more money out, and nonzero transactions might be processed during the run. Both are very plainly factually incorrect, even for the very first mover, even when that first mover is perhaps the most sophisticated actor in the entire sector, and even when it directly impacts the most important portco in the first mover's portfolio.
This is not a prisoner's dilemma because there is no hope for the success case. The prisoner cooperates or not, and either way they go to jail. The only rational action is for all participants to not participate.
If you have a point to make, now is the time to do it...
>You previously argued that the first movers might be able to get more money out, and nonzero transactions might be processed during the run. Both are very plainly factually incorrect, even for the very first mover, even when that first mover is perhaps the most sophisticated actor in the entire sector, and even when it directly impacts the most important portco in the first mover's portfolio.
The (alleged) 'prime mover' you cite is FF. They (the fund itself) got ALL their money out [0]. FF also gave their portfolio companies a chance to get their money out by alerting them of problems with SVB. You cite a single company portfolio in FF that did not, yet no evidence they would have been able to get their money out had they not been alerted. There's no reason to believe the portfolio was worse off for being tipped off earlier than later, in the quite possible scenario FF wasn't even the first mover.
The claim that no one got money out in the run is plainly untrue. FF got their money out, Hustle Fund brags of pulling the trigger before it was too late. Non-zero transactions were made.
> first movers might be able to get more money out
First movers in a bank run get more money out than those at the end. This is basic principles of fractional reserve banking in a bank run. That you find this "factually incorrect" is absolutely mind bogglingly wrong. There is literally nothing to be gained to being at the end of the bank run, which is effectively where those who do nothing end.
Yes this isn't prisoner's dilemma for a variety of reasons, but since we agree it is not (and I never claimed it was) we'll not belabor that point.
The point is this. It is anything but "swift and extremely stupid" to see deteriorating bank financials that suggest you are at risk of a bank run or failure and transfer your money to a different bank. Doubly so for the second and beyond actors, who find themselves in a run and nothing to gain by letting everyone in front of them in line. Anyone who thinks otherwise is going on my "personal docket of people who are too stupid and impulsive to trust."
final note regarding 'participation.' : Once the bank run starts you have no choice not to 'participate.' You are a participant who can either try to get the money out before it's all gone or you are a participant who chooses to exercise the superior game theory or whatever of letting everyone else suck up the remaining liquidity.
Ok, I see a lot of points here but reading them I do not get the sense that you really understood what I wrote, and they don't seem to be connected to what you wrote before. So I guess the best option forward is to just go back to what you actually said so that you can try again:
> the question is if FF had done nothing, would they have been better off?
Yes. We know that FF did not get their portcos fully out in time, including the only company they need to return the fund. Their portfolio downside might be partially mitigated—they totally lose, let's say, 40% of seed-B portcos instead of 70%—but it doesn't really matter because a non-backstopped run kills 80% of seed-B startups immediately.
The rational move for companies is to pull out but for VC firms the rational move is to encourage people to stay.
The whole house of cards you are relying on here is the bank run would not have happened had FF not made the move. The facts presented to not rise to such certainty.
If Bloomberg is to be believed, the run started after the funds started experiencing real problems with regular money movement. In which case, it is kind of an emergency?
> But the firm learned that its limited partners were encountering issues using SVB services as they tried to transfer the funds — they weren’t immediately going through as expected, the person said.
But the funny part is that this story is still unfolding. The bank's new management is soliciting new business under the same "startup-friendly" pitch (and presumably a large number of the same assets and liabilities), and again vulnerable to _the same exact run on a small-ish number of uninsured deposits_ (as opposed to diversified banks with lots of insured accounts across many industries). Except, now they also pitch it as fully insured! So how does this even end? Is it a temporary thing until the bridge bank gets acquired by somebody, or do they have now perpetual 100% protection from the FDIC? Really trying to understand. What good is a friendly bank that collapses from mismanagement and is propped up to serve the same small segment, vulnerable to the same run again?
> So how does this even end? Is it a temporary thing until the bridge bank gets acquired by somebody, or do they have now perpetual 100% protection from the FDIC? Really trying to understand.
That will depend on what the FDIC does, and I don't think even they know what the end result will be. They'd like to get it back into private hands (and to that end they want to keep it operating normally, to make it as attractive as possible to buy, at least for the time being), but that depends on finding someone willing to take it. If they can't, they might start gradually winding it down in orderly fashion (e.g. close to new accounts, start giving people a while to transition), or they might keep running it in the current limbo forever (just look at Freddy and Fannie).
It was 100% possible to genuinely hold the belief that "Silicon Valley Bank is safe" and to advise portfolio companies to remove money to reduce risk.
In-fact, that looks like it was the prudent way to behave: depositors probably haven't lost their money but it sure is a lot less liquid.
And this is exactly why bank runs are dangerous - once there is risk of one the safe thing to do is to remove your money as well. The only way to stop one is for an institution with a LOT of money to step in an guarantee it.
The best way to prevent a bank run is not to run. A stampede isn't caused by the movement of a lone animal, but by the herd. It's a classic feedback loop.
Metaphorically you should aim to be the second out the door really. It’s the first person out the door who starts the run, and starting the run is rarely rational. Once the run has begun, yeah you should aim to be out the door fast.
Unfortunately it’s very rare to have the knowledge and/or connections necessary to guarantee that you can not instigate a run, but still withdraw before the collapse.
That's not a way to prevent the bank run. That's just choosing to not be a part of it. Unless you can both coordinate with and convince others to do the same, you're not preventing anything.
It sure seems that of all the people who could coordinate and convince others not to run, this list of investors with several thousand overall portcos would be just the right people. A moment of stability at a time of crisis would sure be better than a run for the doors NOW approach that set off the stampede.
Imagine the ALL-CAPS tweets and backdoor phone calls that could have been possible if these very same investors (who now rally behind the shuttered and reopened bank) could have called for calmness instead of panic. But that's not what happened. Once the run starts, you can't stop it.
OP website is complete hogwash. Blaming VCs for deposit drawdowns fully within their right is shortsighted. Now the entire banking industry will need to reassess their treasury bond investment risk. Of course mass actions related to derisking those exposures could also spiral out of control within the ecosystem, with further weak banks with way too much risk exposed and failing, but it’s likely necessary.
Here's a defense of those critiqued here (I am uninformed, so please correct me with more nuance):
Bank runs are similar to prisoners' dilemmas. If all depositors could agree to not bank run, then they would have. Without this agreement, it does make sense to participate in the bank run (earlier is better), since if the bank run happens and you tried to be "good" by not running, you could be the one holding the bag at the end. And if the bank run doesn't happen, then no cost is incurred.
So unfortunately, a bank run is one of those situations where everyone makes really rational decisions in the absence of coordination, but the outcome is bad.
Perhaps I’m an outlier here, but doesn’t this feel a bit exaggerated? I’m not sure why the author (or, for that matter HN in general) feels so strongly about this. In the end, everyone was made whole. VCs acted in the best interest of the companies they back, and SVB made some really poor decisions which caused them to implode. What exactly is the story here?
Some misguided people thinking tech startups are supposed to care more about maintaining the stability of the banking sector over whether they can pay their employees next week.
Interestingly enough nobody is blaming politicians and/or the Fed for causing all this in the first place. I mean, I get that tech and VC money in particular benefitted hugely from the zero interest rate environment in 2011~2021, but still, I fail to see where the moral obligations come from.
This was commented elsewhere, but the auditors were correct in that situation. This was not a case of fraud, where the bank had less money than they said they did. KPMG's job was to verify that SVB's public statements were accurate, and they were.
SVB's precarious position was not a secret - saw a good post from mid-Feb that predicted exactly how this eventually played out. The only other thing KPMG could have done is give a "going concern" warning, and that would have been incredibly reckless because it would itself have caused a run on the bank.
>>>This was commented elsewhere, but the auditors were correct in that situation
Sorry, no. Auditors are supposed to effectively run going concern tests as part of their process. Its not only fraud they are looking for. If a company fails 2 weeks after the opinion because of an act of God, thats different. In this case, it was a literal duration mismatch (interest rate risk) that was predicted by blogs elsewhere.
I maybe concede that im not sure it would be reckless to issue FS with a going concern, even if the going concern is true. A more likely scenario would be...no signed opinion. Financial filing would have been delayed. Which itself would have caused the run.
If I was KPMG, I know what scenario I would like to be in, and its certainly NOT the current one, with a signed an opinion -with a wet siganture still- for a company that melted away within 2 weeks.
Well, when I was working with auditors (internal AND external) in previous roles in major financial institutions, we always performed tests if risk management tools are sufficient and reserves are proper.
In the case of SVB it would have been possible to point out the concentration risk before bringing this into the public domain.
But then, I do agree with you that the situation evolved as a sum of many parts, which included the, at the time, highly unlikely result of a bank run by the VC community. Looking back, I still shake my head how this came to be.
> Importantly, SVB was part of the network of cash sweep banks; it had an offer on its website about it. But according to Adam Levitin, there were only $469 million in reciprocal deposits, which is where cash sweep would show up. In other words, almost nobody banking at SVB used them.
Roku had nearly half a _billion_ uninsured at SVB! I get how a small startup maybe overlooks their cash management, but how do you get to the size of Roku and have that? Treasurer/CFO should be fired.
Seems like a lot of people are missing the point of this website.
90% of the criticism seems to be "depositors are never morally wrong for withdrawing money from a bank, so this website is bad".
But mostly this website's focus seems to be on the hypocrisy, e.g. the VCs who said "don't run on the bank" while telling their portfolio companies to run ASAP. That is much more obviously a moral wrong (to me at least).
I'm mostly basing this on the fact that the website explicitly said "You will be remembered for your hypocrisy." rather than "You will be remembered for running."
The question for the VCs is not, "why did you advise your portfolio companies to leave SVB?" It is, "why did you not advise your portfolio companies to hold their capital in a t-bill money market?"
This obvious step for capital protection was somehow neglected by venture capital firms who pride themselves on advising their portfolio on a host of mundane business issues. A VC would be considered mad if one of its companies didn't run financing docs through a lawyer, or handled payroll on its own. This should have been one of the most obvious and simple items on the checklist. Yet somehow it was not.
Why not?
The failure of any bank should have been a shruggable matter for every startup funded with capital. Instead it was portrayed as an existential issue for all. (This was entirely and obviously false, but let that pass.) If it were an existential threat that was a lapse of the VCs supposedly guiding these business novices.
I very much suspect that the hue and cry for a bailout was driven in part by VCs eager to cover this lapse. And to suppress attention on the relationships with SVB that lead them to recommend their companies provide SVB with cheap deposits rather than prudently protect their capital.
The answer to a bank run is not "stand by your bank". It is "be indifferent to what happens to your bank in the first place".
There was no grand conspiracy ahead-of-time to cause a run.
It would be dumb on the part of investors and VCs to not facilitate moving vast sums of their money to safer places in an orderly fashion.
OTOH, there existed an opportunity to steer cash in directions favorable to the influencers after SVB was already sinking.
So I don't see any evidence it was anything other than mismanagement by growing too big too quickly and betting on riskier financial instruments than should've been allowed.
Scenario planning on two VC reactions on Thus (3/9)
1) VC1 - SVB is perfectly safe . Don't worry and keep the money there.
2) VC2 - We are hearing rumors about SVB. You should play safe and move it to another bank. Here is a guy who can help with opening accounts etc.
And SVB shuts down on Friday (3/10).
Guess, which VC would I recommend to a new founder?
Yes. Feds saved SVB but there is a world where it might not have and my money could have been locked for days forcing me to miss payroll. In any case, I would have had a sleepless weekend.
The single largest learning point from this experience was how entirely hollow the whole Silicon Valley libertarian ethos really was.
And yet again, another group that claims to say "leave us be, take away restrictions and oversight we'll take care of ourselves, be more efficient an ask nothing of you", turnouts to be just another form of "leave us along so we can benefit, and then come save us when we need help".
And to be very clear, the lesson to take away from this isn't: don't save a group when it needs help - because in the end the Yellen and FDIC did the right thing. To do any differently would have been to cut off our nose to spite our face. The lesson is stop letting groups be allowed to be build these fake worlds. Every single time it works out to be "libertarian when convenient and socialist when suffering".
As we saw with the "code is law", and other cases - as much as people like the concepts it never holds up when people's assets/health are actually at stake. It is human nature they will always turn back to society for help after having refused to pay into it to get there (or directly taking advantage of it to profit).
If you want to profit off of the hard work of an existing society, you must also pay the costs of maintaining society. Anything otherwise is just a "free rider" problem waiting to explode. We're simply lucky we could contain it this time (so far).
There is a reason why every long-run solution to the prisoners dilemma is to cooperate. There is a reason why every society since antiquity has been based on society cooperation. The only long term stable solution is cooperation and eliminating free-riders who claim to be exempt from rules.
The same people who cry to be bailed out of a bank run are the same people who wring their hands about the moral hazard of student debt relief. You will find that theme repeated. Any government money spent on poor people we simply cannot afford.
The rich never stop asking the government for money. They expect it. They certainly never refuse it. Never forget that.
"Libertarians" are pretty much just Reagan-era deregulation conservatives. It is utterly self-serving.
I admire that it can get to the top of HN, though, in that there is no heavy-handed moderation coming from the top. It shows a good working knowledge of the Streisand effect.
If I was a powerful VC I would have shorted the stock and then went to the latest Silicon Valley venture capital social hour event and made a point of mentioning I had with drawn my billions.
This plot right out of Billions.
Since I'm not material investor in SVB, I can't see that this would be a red flag for the SEC?
Wait, they're trying to say that this was all the fault of the depositors? No, sorry. While I often find it hard to empathize with wealthy tech bros, I don't have much trouble at all imagining myself doing the same thing.
SVB didn't fail because people pulled money, it failed because of a lack of risk management. Complaining about those pulling money out is silly. If anything they should have pulled it out much earlier.
Sequoia is conspicuously absent in that list. Knowing how dump their recent moves/investments have been I'm very surprised. Anyone knows how did they manage to dodge this, if at all?
It's weird that SVB, or any one particular bank, would be "playing a pivotal role in serving the startup community". Loans are loans. The stories coming out about SVB "sticking with the founders through tough times" when none of the other banks would, well, they sound a bit like what you'd hear about a bank taking reckless risks with its lending practice.
This is laughable. I won't start on how it's my money and all that jazz, so just one thing: keeping your money and your clients' money in a bank that is on the verge of a bank run is not a sign of valor, it's either a sign of being stupid and irresponsible, or a sign that you know something that others don't.
If it was in a vacuum maybe they could have kept a lid on it. But I disagree that they should have stayed calm about it with what happened prior with TerraUSD, Luna, Celsius, and FTX. The length of the list shows that it would have been infeasible to collude to stay quiet.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability. Future founders will know your worth.
Future founders will know that the VCs helped them protect their cash?
Call me naïve, but if I put money in a bank I should be able to get it back whenever I want. If I didn't want it to be liquid, I'd buy something less liquid. The very concept of a bank run is ridiculous. If all a bank's customers want their cash back, they should be able to get it back without affecting the liquidity of the bank.
Transaction accounts don't earn me anything and have fees of their own. There's little incentive to stay at one bank over another. If they want equity, they should sell long-term secured loans with LVRs under 100% or lock in my cash with term deposits or any number of other less liquid asset classes. But why should I feel guilt over moving my cash from one bank to another?
Maybe it's because I'm Australian but I feel our banking industry is significantly more stable. The last time a bank had any serious issue was 1990 and it was a (single bank that itself was bailed out by the government). Australian banks make their money through mortgages (averaging less than 80% LVR or insurance-backed if higher and with fixed terms of generally no longer than 5 years), credit cards and management fees on long-term investment products -- they don't rely on investing cash deposits on long-term illiquid instruments.
The fact this doesn't seem to be the case should raise questions over the entire US banking industry. Cash should be liquid.
Edit: For reference, APRA (bank regulator in Australia) has some very strict liquidity risk management requirements and most banks own liquidity requirements are significantly higher than this: https://www.apra.gov.au/apra-explains-liquidity-banking -- an Australian bank would never be allowed to purchase a 10-30 year bond to match against cash assets.
Yes, this is naïve, but it's a typical assumption. Cash _should_ be liquid, and almost everyone operates with the assumption that it always _will_ be liquid. but fiat cash is not what people think it is. A dollar in your bank account is not real. It's more like a share in the bank corporation which may or may not be perfectly pegged to the approximate value of the non-elected Fed's manipulated US dollar.
Fiat is a theoretical ideal "decreed by the government" which is imposed onto a system with leaky constraints. The system is... super complicated. And super problematic. Macroeconomics is... fuzzy.
This is the whole reason why Bitcoin was created in the first place. Bitcoin is fiat created by the masses which has hard constraints. Its economics are a hard science. Bitcoin is as liquid as the system that trades it. Does a Bitcoin have value? Well, universal value, no. But the Bitcoin network has value because it facilitates value transfers (even if you convert to fiat on both sides - look up international remittance fees). And the network is mitigated by the token. So if the system has value, and the token is intrinsic to the network, does a Bitcoin have value?
Yeah Bitcoin is complicated, and far from perfect. But when you start to understand how complicated and problematic government fiat is... maybe folks who still think Bitcoin is worthless may want to take another look. We need stronger money networks. #theNetworkIsTheValue.
What the heck? No that's just outright wrong. SVB shares are basically worth nothing these days. Depositors are getting something back. If you're not familiar with the relative priority of bailors, secured creditors, depositors, debtors and shareholders during a bankruptcy proceeding, I suggest you read up more before making confident and borderline condescending statements about the common person's naïvety.
> Call me naïve, but if I put money in a bank I should be able to get it back whenever I want. If I didn't want it to be liquid, I'd buy something less liquid. The very concept of a bank run is ridiculous. If all a bank's customers want their cash back, they should be able to get it back without affecting the liquidity of the bank.
Then the product you really want is a safe deposit box to put your literal cash in. They bank will make its money from the rental fee you pay. It doesn't sound like you're actually looking for a bank account that pays interest.
Cash is basically illegal for many transactions related to financial services and is likely to become illegal for everything greater than $10k in Australia very soon:
Australia and India are among those who bought (no pun intended) into the fallacy that cash is for criminals, and you're only a good consumer if you use traceable electronic funds from megacorp SIBs.
There are millions, if not billions, of unbanked people whose survival depends on cash.
And the US has civil asset forfeiture, were cops call "dibs" on cash and the owner has to essentially disprove a negative they're using it for a legal purpose in order to recover it.
This happened to my friend, he was caught with a small amount of marijuana and cocaine in his house while police were there for an unrelated domestic dispute. They then searched the rest of his house and stole approx $10k cash he had in a safe, accusing him of making that money from drug sales (it was really just emergency cash he wanted separate from his bank account, he wasn’t a drug dealer). He never got it back, it was not even in the record of items police seized.
Australia doesn't have many people that are "unbanked". AUSTRAC already requires notification of any transfer over AUD10K.
India has managed to get a large proportion of their population into the "banked" column by introducing a cheap/easy mechanism for people to store and forward their money. Whether that is also related to the "fallacy that cash is for criminals" is orthogonal to the desirable situation that even the poorest can have a bank account.
Bank accounts allow people to store their funds safely (or at least as safe as the banking regulators), it allows them to receive and send their money much more easily, which allows them greater involvement in the economy.
Australia has a few, large ("too big to fail") banks and government benefits are paid direct to bank accounts. Banks are required to offer basic/fee-free accounts and only require KYC ("100 point") ID checks to open. No one uses cheques/checks.
Basically, the US banking system is 3rd world and so distributed in terms of both the size of banks (state banks are too small, federal are too big) and regulation (50 state regulators as well as all the feds).
FedNow will hopefully start to fix this by replacing the clunky ACH and move the US to a modern EU/CA/AU/NZ/UK type banking system.
It'd help if the US used the USPS to deliver a basic banking service that is zero-fee. It would also help if the US had both an EFT debit card system that wasn't tied to the Visa/MC duopoly and merchants were forced to go to Chip+PIN, not the ridiculous Chip+Signature that is as far as they've got so far.
It would be to the distinct advantage of the majority of the US's "unbanked" population if they could have a cheap/zero-cost banking solution.
All of that is orthogonal to your worries about "fallacies" about cash and the fear of civil forfeiture. In fact, on that last item, it would be much harder for the average local police force to forfeit someone's bank account than it is for them to seize physical cash, requiring a warrant as well as working through a bank's own legal and other departments.
> Cash is basically illegal for many transactions related to financial services and is likely to become illegal for everything greater than $10k in Australia very soon:
That's irrelevant. My main point is you appear to not want the traditional "bank account" product, but rather a "secure storage" project. I provided an example of the latter from my jurisdiction, but that was only an example.
It would be a lot cheaper and probably less risky for the safe deposit box to be numbers in an account like it is with fractional reserves, except the part where they lend it out privately. Even better if those reserves can be kept at the central bank overnight to earn a bit of interest.
I also can't do an ACH or wire transfer from a safe deposit box.
Please do not store valuables in a bank safe deposit box. Customers have come back and found strangers’ stuff, or nothing, and courts have upheld banks’ almost complete disclaimers of liability in rental contracts.
(This is in the US, I wouldn’t know whether other countries also have this problem.)
Since they can loan out much more than they get in deposits that’s not strictly true right? You can have 10 house loans for every house sized deposit (or something similar).
You are confused about how fractional reserve works.
The 10x multiplier is on the bank's equity. For every dollar of home loan there is a dollar or more of deposits.
The multiplier effect of fraction reserve occurs over iterated loans and depositing. The fraction term comes in because the bank can lend out a fraction, less than 1, of deposits.
This is incorrect. Fractional reserve lending means that they can keep a fraction of deposits as reserve and loan out the rest. This necessarily means they are not fully covered in times of large withdrawals.
Sorry, you are not getting what OP was confused about.
The OP thought 10dollar of loans existed for every 1dollar of deposits. That is what I address. Instead for every say 9 dollars of loans there exists 10dollars of deposits.
You are agreeing with me. The outstanding loans are/should never be greater in value than the outstanding deposits. Aka: they should be a sub 1.0 fraction. Of course the fraction reserve aspect is the inverse ratio, itself also below 1.0.
The more modern treatment of this situation is that if you sold the mortgage on the open market as a mortgage backed security you might still be solvent as long as the MBS is valued at least at face value.
The real problem with failing banks is that interest rates rose steeply, and thus the MBS devalued by a significant amount.
I don't know where that 10x number is from but they can loan more then they take in by taking out lower interest rate loans from central banks. Thats what "The Fed" is.
But they're going to use depositor funds first because these days those funds are available at a virtually 0% rate.
Ugh. Okay, banks don’t take the money that you deposit, turn around and loan it at a higher interest rate directly. But they do use the money you deposit to balance their books and meet the necessary cash reserves that make those loans possible, which is, in effect, lending out your money.
When people request their money back en masse, banks face a liquidity issue because of the required fraction reserves they must keep. Directly or indirectly, without your deposits banks cannot lend out money.
You need to re-read those articles. They don't say banks "don't lend depositor funds" At least the first couple on that page explain that banks don't "need" depositor money to lend and in fact they generally lend out money they borrow from a central bank since their loan outlay tends to outpace their deposits.
But outside of the central bank reserve requirements the banks are free to loan our or otherwise invest their depositors cash, which is in fact prudent since cash "loses" value from inflation. Putting that excess funds into loans or other investments can all lead to what happened to SVB if a run on the bank over runs the reserves.
This seems like one sort of thing, in which money that used to be in a depositor's pocket is now in the bank and available for lending.
...and in fact they generally lend out money they borrow from a central bank...
This seems like another sort of thing, in which money that previously did not exist has been created by the Fed changing a number in a spreadsheet so it's now available for lending.
You might point out that in our system, these different-seeming things are essentially the same. If so, you're really agreeing with GP.
You didn't quantify or qualify "harm". The ARPA document states AGS permit a bank to stay fully liquid (100% reserve requirements) to cover any potential run. These requirements avoid the failures of bygone eras. Do you have a specific point based on evidence?
"Managing liquidity risk" means the risk isn't zero.
"APRA’s mandate is to protect the community by ensuring that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. So a central part of APRA’s work is to ensure that banks limit the extent of their liquidity risk."
Notice it says "all reasonable circumstances". There's a lot of nuance there, and depositors being a small group of VCs who are squeezed on cash and suddenly pulling out all deposits while interest rates are hiking while the bank bet heavily on 10+year MBS isn't the reasonable situation covered here.
> AGS permit a bank to stay fully liquid
AFAICT this only applies if the current fair value of the AGS covers the liabilities. It doesn't in the case of rapid interest rate hikes like in the US. However, it's probably true that in case of a bank run when interest rates are being lowered, bank assets can probably cover liability even if there's a 100% run.
Do note that this is the government institution explaining why the regulatory system makes things fine and people don't need to worry. I don't doubt the system is as robust as is possible, but reading between the lines, it's quite obvious (to me at least) that a SVB-like scenario can still happen in theory under the system. It will just take even more extreme parameters for that to happen (which admittedly doesn't exist in Australia right now, AFAIK).
What you're describing is a service provided by a bank called a safe deposit box, which banks provide as a fee service. This is quite an archaic view of banking services.
The most basic commercial bank today makes car and home and small business loans using the funds deposited by its clients, and it holds those funds 'for free' (in the 1980s in the USA, one could make 5% interest by depositing one's cash in a bank savings account, with perhaps some penalties for withdrawal, IIRC). The bank charges a greater interest rate to those who take loans from the bank and pays out a lower interest rate to those who deposit funds with the bank, and that difference is where it earns its profit margin.
People tell me this little fairy tale has very little to do with the majority of the profits 'earned' in the modern banking system, however. It seems to have something to do with the merger of investment and commercial banking post repeal of Glass-Steagall laws separating those two sectors.
Curiously, nobody seems to want to talk about the strength of the dollar being backed up by petrodollar recycling since it went off the gold standard... but hey, who cares, we're fighting a war with Russia in Ukraine over access to the European gas market for just that reason, and the expenditures in Ukraine ($100 billion) seem comparable to the expenditures looming to make good the depositors in SVB and co. ($100 billion?) and these two things must be completely unrelated... I guess.
Safe deposit boxes are very hard to come by these days. Banks are moving away from them. Last year JPM started phasing them out [1]. The trade is likely to continue.
>Safe deposit boxes are very hard to come by these days.
Safe deposit boxes are also not insured.
If you put $250k of cash in a box and the bank catches on fire or gets robbed, you will most like get $0 back, while people with accounts will atleast get the FDIC insured portion of funds back.
What took down SVB was mortgage securities. In the USA mortgages are typically 30 years long, with a fixed rate the entire time. Actual average duration is only a few years in a declining rate environment and 5-6 years in flat rate environment. In a raising rate environment, which we haven’t really seen for any length of time in most people adult lifetimes, it’s probably 10-15 years. This transition is what harmed SVB and it’s hurt all the banks but most didn’t leverage up so much on them and didn’t have only large, flighty customers. Very unique situation. There are also lots of ways big banks can protect themselves from this duration risk, if they actually care.
It sounds like in Australia (and Canada and the UK) the risk has just been shifted from the professionals to the consumers, with only five year mortgages. You can’t pay off your entire house in five years, so many people are dependent on being able to refinance, and are going to be in a lot of hurt over the next few years as the mortgages come due. This does not sound like a better solution.
Fixed terms above 5 years are basically non-existent, most people tend to fix a portion (not always 100%) of their loans for 2-3 years if they fix at all.
30 year mortgages here aren't uncommon, but the rates are variable and are basically whatever their bank wants to charge (with competition from other banks preventing them from increasing ridiculously).
Loan affordability is a big thing here too with banks being mandated to ensure that borrowers can afford the mortgages they're receiving and even shading interest rates at 3 points above their current levels when assessing this.
Sub-prime mortgages are effectively non-existent here as are long-term interest rate risks for banks as their borrowing costs are always pretty closely aligned with their lending revenues.
they don't rely on investing cash deposits on long-term illiquid instruments
Where do the banks get the money for the mortgages from those from? Is a central bank giving them loans for to cover the mortgage outlay? Because if they're financing them with customer deposits (which is the way every bank I know in the US works) those mortgages are long-term illiquid instruments.
I will preface this with - arm chair analysis. I don't know a huge amount about the banking system but I do have one point to make...
It is hard to tell is the aussie banks are in any better position. The debt leverage ratio of the big four are incredibly difficult to track down. The last figures I saw are from about 2015 and even then banks like Commonwealth bank were leverage at something like 60:1 however looking at the wikipedia I would put it at something closer to 20:1.
If that is true, between 1.7% - 5% of deposits being pulled out would mean they would have to start getting the cash from elsewhere - ie. Sell assets/bonds. That is just based on $72 billion cash to $1.2 Trillion assets.
However if this is the case, they have been in this position for a very long time and they seem to be very stable. It feels like there is some big piece of this I am possibly missing.
I look forward to others pointing out the weakness of this point of view and correct my grammar in a witty fashion. ;)
Australia has the equivalent of FDIC insurance (called FCS) that covers up to AUD250K per account holder at all ADIs.
The 4 "major" banks in Australia (Commonwealth, Westpac, NAB, ANZ) all maintain ratios above the minimum requirements and above the international requirements for "unquestionably strong". They're also (implied) "too big to fail".
APRA (our banking regulator) publishes plenty of stats.
I found this presentation https://www.commbank.com.au/content/dam/commbank-assets/inve... for the Commonwealth for FY21, which shows that their loan book is funded 73% by deposits, and the remainder is 74% long term, with a 5 year average maturity and they have 13.1% of their capital retained.
So if they have they have 13% capital, as well as AUD175B in liquid assets, with $610B in deposits, then they'd start to be in real trouble if more than 25% of their account holders started pulling out cash.
Of that $610B, $310B is households, so the split between standard savings accounts and business/investment/term deposits etc is roughly 50/50.
> If they want equity, they should sell long-term secured loans with LVRs under 100% or lock in my cash with term deposits or any number of other less liquid asset classes.
Exactly. Banks get special sweet deal privileges for their “superior” ability to manage risk and they still haven’t come up with a way to protect against a few days of rumors? I don’t buy it. Either it’s extreme incompetence, world record complacency or there’s some meta play where someone makes money off it.
And yeah, I’d be super happy to lock in deposits in exchange for a higher interest rate, it’s a dead simple financial product that nobody offers. Failing at running a bank seems to me like losing in tic tac toe as a first mover. This is why people turned to crypto. Not saying it’s good yet, but doing better than the current financial system is a low bar.
I guess they do this because someone figured out they could. I'm sure once upon a time there was a bank that only took deposits and just stored your cash in a big vault. They went out of business when they realized they had to pay for the vault but couldn't use any of the money in it.
This is like showing ads on something you already pay a monthly subscription for. Remember when cable TV was supposed to be ad-free? That died when people realized they could make more money by double-dipping. And everyone was apparently fine with it.
One thing we want from banks is to store our money and provide it to us on demand. Another thing we want from banks is provide lending to the average consumer (mortgages in the large and credit cards in the small). A bank can do both of these well, in most economic situations, if it is run well. Those two services synergize most of the time so it’s useful to combine both under one entity, but in some scenarios the sign can flip and they antagonize each other instead.
Aussie banks have both fixed and variable rate mortgages.
Most mortgages are either:
* Fixed: 1-5 year terms with exit fees if changed earlier
* Variable: 25 year terms, with variable rates, "offset accounts" (an associated account where you can deposit that offsets the outstanding principal of the mortgage), reduced or zero entry/exit fees, ability to "redraw" (effectively treating the mortgage as a line of credit) etc.
Australian banks have a mandated 100% LCR and most banks hold 130%+ LCR (remember LCR is calculated based on a 30 day stress outflow).
Even if a run lasts longer than the period above they're backed mostly by mortgages that are priced significantly higher than their borrowing costs and LVRs that average lower than 80% and the way AU banks price interest rates will always cost significantly less than their borrowing costs. They're never going to have trouble raising money on prime, variable interest (average fixed terms are always less than 5 years here) debt.
APRA standards all but eliminate a sub-prime problem here. Loan affordability has been a very hot topic here over the last decade.
That's what banks choose to do. People depositing their money with a bank don't have a responsibility to ensure it remains solvent though.
If you think there is a significant risk your bank is going to go under, you get your money out. If you think that risk is due to panic about a bank run kicked off by an unfounded rumor, you get your money out. You take care of your affairs, and the bank can take care of its operations and public relations.
Negative gearing (a way to merge unlimited losses from investment property into your personal tax return) and the core, multi-generational opinion that investment property is the best way to build wealth in Australia and no property tax (equivalent is rates which are significantly lower on average than the US and stamp duty which is only payable on the sale of a property) has causes massive investment in non-PPOR properties as well as massive property inflation costs in general.
Oddly enough, a very similar percentage of homes are owner occupied between the two countries despite the apparently dramatic differences in mortgage availability.
Edit: this is based off a two minute Google I could be wrong.
Ok, I'm starting a new bank and everyone will be able to withdraw all at once, bank runs will be a thing of the past, your interest rate will be 0.00000000000000000000000000000000000000000000000125%
A positive interest rate? That's a no brainer steal.
Basically you're saying you'd pay the customer for the privilege of not being able to use their money...
A bank that keeps 100% funds as reserve to accommodate any withdrawal pattern not only cannot give any interest, it would need to _charge you_ a maintenance fee to cover the costs of holding your money as well as charge you a per-transaction fee to cover the cost of moving it.
And it wouldn't be some symbolic amount like $30/mo. After all, the maintenance fees across all the accounts would need to cover all operating expenses (wages, facilities, utilities, consumables etc.) otherwise the bank would literally lose money to run the transactional account program.
Sounds fine by me. I get better returns investing in index funds anyway, my bank account is literally just somewhere to park my liquid money and direct my paycheck to because stuffing it under my mattress would be too unsafe.
Banks should differentiate between accounts where you're safely parking your money, and accounts that are actually low risk investments. And they ideally would offer both of those things. I see no downsides here.
Banks do differentiate. If you have an account that is <$250K, you're covered by the FDIC, which essentially makes it zero risk, irrespective of the account's associated interest payments.
If you are a privately owned bank with a small group of similar minded shareholders who are not looking for a lot of ROI and also the bank should not issue any bonds and raise debt then it may work.
Given that you can only accept maybe 20x[1] of the equity investment. Is it possible to raise $15B in equity financing with this model ? Otherwise this bank cannot service the volume deposits of SVB and it would be a just small novelty bank.
Banks have significant costs and expectations of growth, shareholders to satisfy, which is why they take risks. Risks that are regulated - which perhaps not strong enough (Basel III) are still pretty strict
---
[1] Ignoring risk weights etc, you would need at least 5% of the deposits in equity to be "Well Capitalized". The number goes higher depending on risk factors.
Mine does. Usually the highest interest rate checking accounts have requirements such as direct deposits and/or linked credit/debit card transactions. But, even the big banks in the US pay more than zero (very slightly more like 0.01-0.05%).
Unfortunately, that’s not how the system currently works. Literally any bank (in our currently capitalist system) would collapse from undue pressure from depositors. This is because banks are under pressure to make a profit, and the only way to do that is through lending out deposits. If you want to fix the system, petition the government to nationalize the banks.
Isn't this one of the stable Nash equilibriums in game theory.
You keep X of your X money if you withdraw, with a chance that someone else will lose their money OR you keep your faith in the system with a chance that you lose 100% of X.
Siren call for a VC Union? I'm only half-serious :)
Under the circumstances, I'd have pulled out money while I could. Money in hand is better than a hope in hell.
But seriously, I wonder if it makes sense to have some common ground to greatly reduce odds of SVB-likes happening?
Dealing with this kind of emergency is all about communication. The final collapse happened frightfully quickly. There is no time to organise when the car pile-up has begun. You got to have groundwork in advance, and comms open too.
Maybe its too black of a black swan that you can't ever prevent. Maybe the competitive dynamics of the startup world do not lend support for a commons. Yet, maaaybe if you can see that your number one business partner's books have become crazy, someone should be able to say something, at the very least?
You can't blame the depositors or the VCs in this case for SVB's failure. Only SVB was responsible for taking on naked long-term risk and being unable to meet current obligations.
At the time the VCs advised their portfolio cos to pull funds out of SVB, it was a perfectly rational reason because only 2.7% of SVB's deposits were FDIC insured. That means, there was no guarantee of the Fed, treasury and FDIC would take the action to make good all depositors.
The entire site appears like something from an affected party (shareholder/investor/exec/boardmember of SVB) who lost their shirt in this fiasco and has an axe to grind. Just saying. Not sure why the are not naming and shaming the former SVB execs and boardmembers who missed to identify these risks early on and mitigate them.
The failure of SVB is just capitalism, isn't it? They risked their capital on a business that took bad decisions, so it is only fair that the specific company (SVB) ceases to exist and something else comes up to take its place.
All of this honor-amongst-thieves bellyaching is bullshit. I'm sorry. These are venture capitalists, emphasis on capitalist. The only thing they have ever or will ever care about is the amount of money a given action makes or loses them. That's it, full stop. SVB lent to these people knowing that full well, and knowing the risks of relying on VCs for their long bets. They are to blame for their choices.
I have sympathy for nobody in this debacle, except maybe the federal government for having to clean up the mess.
Wow, sad. The only thing a bank run can be on is on "DEMAND" deposits. If you have a savings account or negotiate a similar thing then no bank run possible. A bank checking (called Demand Deposits) are to be fulfilled on DEMAND.
How dare customers demand their demand deposits. how rude, right?
All the bank had to do was upsell their customers into savings accounts and then no bank run is possible.
The amount of victim-blaming astroturfing I've seen on hn this week has been quite surprising. Depositors are never, ever to blame for bank runs.
Edit: From the about page:
> Who I am is not important. Holding accountable the hypocrites responsible for Silicon Valley Bank’s collapse is. I can be reached at svbhallofshame@protonmail.com. All correspondence will be kept anonymous.
It's just missing a PAC called something like "Citizens for Depositor Accountability."
I don't think that's true? SVB was insolvent because they had to sell bonds at a massive loss in order to cover illiquidity that was a problem due to the bank run.
What is your source for this? From everything I have read, the first point at which they were clearly insolvent was what I mentioned previously, when they sold a huge swath of bonds at a massive loss at or around March 8th 2023, which was less than two weeks ago.
My read is that they were either holding the MBSs as tradeable assets (in which case they had taken a massive real loss that wiped out their equity) or until maturity decades away (in which case they didn't have enough current assets to remain solvent as a bank).
The depositor withdrawals forced them to admit that they had taken a massive loss because of insufficient hedging against interest rate hikes, but they didn't really seem to have a path to unwinding their underwater positions in any realistic timeframe. HTM was an accounting misdirection to try to hide the hole in their ship while they bailed water, but it was a massive hole and they had a tiny bucket.
But the withdrawals didn't force them to admit they had taken a massive loss, the withdrawals forced them to take the massive loss at all. It's not a loss until you sell, right? They sold to cover withdrawals.
Apparently they had $48B in withdrawals in a one-day period. Trying to imagine any bank that wouldn't need to take losses (to the point of being potentially insolvent) in order to deal with that. Yes, obviously SVB was still very poorly hedged given current interest rates, but they probably could've unwound their position in a much, much more favorable way without the run, to the point where it's possible they could've done so without ever being "insolvent".
There are two different definitions of the same word.
One is balance sheet insolvency, the other is cash flow insolvency.
But it’s two forms of the same thing! Cash flow insolvency is usually a result of holding illiquid assets that can’t be turned into cash. In this case the assets were perfectly liquid though, so it wasn’t just a cash flow insolvency.
The bank was reporting the future value of the bonds, the problem was the present value was much lower.
I don't disagree with you on the topic, but I promise you that the volcano of anger and indignation that spewed forth about this is basically all from entirely legitimate users.
Shame is toxic, but the issue is critical for startup's and worth discussing.
Depositors making individual decisions? Ok.
Funds advising their companies? Ok, but it really hides the agency: deciders are in the funds (what CEO would refuse that advice?), but the companies are the responsible actors.
Now, would it matter if most of those funds were responding to their investors, say, Saudi's or Russians or the Chinese Communist Party, or to a consortium of friends who had shorted the bank? Most would say it does matter, but AFAICT it's perfectly legal, and no outsider would ever know the difference.
Market self-regulation, insurance, and investment diversification all depend on agents acting independently in their own interests, say, of making money.
Once agents are coordinating, or colluding, or have other dominant strategic interests, market self-regulation fails. And everyone else, who reasonably relied on the market behaving stochastically or in response to economic forces, loses.
One might hope that if this were all good, the response to a wall of shame would be a wall of honor, with transparency around decisions. But confidentiality is a key feature for any investment firms, so the best we'll get are retrospective letters of intent.
Aside from bad actors, the irony is that high federal rates means more risk-taking from banks, not less. SVB assets were good and safe, albeit not worth much (as the auction is showing).
I would have no problem with new rules saying that firms with assets big enough relative to the bank needed to schedule major withdrawals in advance. There's really no other reason than a bank run to move $100M emergently. (There'll be a secondary market for large urgent transfers, but it won't cost much, securitized with a pending transfer.)
So: yes the system is susceptible to bad actors, and there's no good way to respond without throwing out the baby with the bathwater. Really society's only defense is that the wealthy are getting wealthy enough legally that there's no real need to go all-out.
Aside from the moral hazard of covering bank risks, there's another moral hazard in creating opportunity and incentive for an already-confidential and largely unregulated industry to collude. It might push good investors into combines with bad actors, amplifying ill effects.
What's shameful really is that these systemic gaps are relatively obvious to thousands of the involved engineer/MBA/JD's, but everyone greedily grabs their local maxima, instead of insisting the system work right. That's where I'd welcome leadership, some way to reduce coordination costs.
> The board was asleep at the switch. They are now unemployable.
That's not really how this works. The CAO of the bank was CFO of Lehman. People in these positions just get credit for the fact that they had a front row seat for this sort of financial implosion, so they can (theoretically) help whoever else's board they join avoid that sort of thing.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability.
The people in the VC community who triggered the bank run did the right thing by their startups. They don't have a responsibility to SVB. If they saw a run on the bank starting, it was in their best interests and the best interests of the startups in which they invested for those startups to get their money out as quickly as possible.
Isn't this misinformation? The Chief Admin Officer of SVB Securities was an exec at Lehman, but SVB Securities is independent of SVB. If you Google [svb lehman], you get pages and pages debunking this.
The fact that SVB securities is independent is irrelevant to the point, which is that people who play roles in financial catastrophes do not become unemployable as a result.
> The people in the VC community who triggered the bank run did the right thing by their startups.
I don't really have a horse in this race, but: while the above argument makes sense, what about all their future startups? Everyone says nice things about how it was good to have this bank that understood startups and treated them well, and now that is all gone. And no one who had deposits lost their money anyway.
It seems to me that everyone is worse off. It was a lose/lose move.
You're right, but it is entirely prisoner's dilemma.
The rational decision, when you know you cannot control how others will act, is to minimize the pain. If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
And it is not a personal decision, continuity of business is a pretty big deal. Nobody in the company would forgive you for missing their payroll, because you thought it was the ethical thing to do.
>You're right, but it is entirely prisoner's dilemma.
But part of what makes that whole bit of game theory interesting is that it has a lot more complexity then just the simple version. Yes in a plain prisoner's dilemma betray can make sense, but in an iterated prisoner's dilemma that's no longer true. That's been part of the debate around the whole debacle, for much of SV's history it was very much iterated, it wasn't just about any one company for VCs or even founders, there was some interest in the overall ecosystem. Some very successful people only found success after multiple failures, but success could pay for it all in the end. VCs too, maintaining the ecosystem mattered. In that sense, killing the goose laying the golden eggs, even if there is some short term payoff, is still clearly a poor idea.
There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game. If it only took a single megahit to cash out forever, then incentives might be more towards selfishness vs thinking about the next company and the next after that.
>If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
Sure, but how do you think they were feeling Monday? Or now? Zero threat to deposits after all for anyone including those who sat tight, but they lost a valuable service and icon, invited other problems and scrutiny, etc. While I'm sure lots will confidently say they did the right thing and that purely looking out for #1 was "responsible" I suspect there are at least a few who have some real regrets, even if SVB absolutely made very stupid choices as well.
> There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game.
Are you conflating theories here? Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
I’m not in the field but I’ve never heard a theory that a generous strategy works in a game between an arbitrary number of (mostly) anonymous players.
And to call this event part of an iterated game at all seems… unusual.
I don’t understand how the iterated prisoner’s dilemma makes a difference.
If you are a founder who withdrew all your company’s money, then your reputation is neutral or perhaps positive. You saved your company. You did “whatever it takes”. These are good qualities in a founder.
If you are a founder who left your company’s money in SVB, nobody is going to give you a medal for that. Instead it exposes you to questions such as “Why did you have so much cash in one place?”. If depositors hadn’t gotten bailed out then you also face the collapse of your startup, your coworkers losing their jobs, etc. So this is definitely a much more negative outcome iterated or not.
I wouldn't look so much at the founders as the folks higher up the food chain.
I'm not sure they deserve quite so much vitriol as that website directs at them, but it really does seem to be a lose/lose situation for all the people who claimed to be fans of that bank. No one seems to be better off.
And while it's not hard to explain this outcome as 'the rational thing', it's also easy to imagine a different outcome where some more courageous leaders got together and held things together.
Replying to this as it's the top one right now, but also to siblings after:
>I don’t understand how the iterated prisoner’s dilemma makes a difference.
SVB isn't fungible, this isn't the case of "a bank is a bank", it was heavily used for a reason and that was it had developed specialized services, expertise, and culture around supporting startups. Losing it may mean that SV as a whole is permanently, or at least temporarily but significantly, impoverished. New startups may become harder to start and operate. This doesn't mean the end for existing businesses, certainly not already grown successful ones with stable income and sufficient size for in-house expertise, so in a singular game it's not a big deal. But to the extent VCs or founders care about the next game and the one after, the startups to come that don't yet exist even on napkins, they may now be worse off than if through cooperation SVB had been saved and reformed.
You're missing the entire point of iteration, that it's not just about this one game. Startups fail for all sorts of reasons, what has made SV successful long term wasn't the success or failure of any single startup but that there was an overall environment where it was straight forward to have new ones try again and again.
tobyjsullivan sibling wrote:
>Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
Historically though SV has indeed been relatively consistent players, from VCs to founders to employees to, well, services like SVB! Silicon Valley Bank was founded in 1983, not yesterday. What is that to Silicon Valley itself if not consistent?
The iterated game here is all the startups after the current batch. Where do VCs and founders go to and deal with in Fall 2023? In March 2024? Will it be exactly and perfectly as good as SVB, or better? If so then sure, no problem. If not, they've sacrificed advantage in future iterations for the short term.
RyanGWU82 wrote:
>The Prisoners' Dilemma analogy was covered in Ben Thompson's Stratechery article this week
Thank you! There it is, glad I can read it now. Much better than anything I wrote. And to add on for the future here is the HN discussion on it:
It is, but also it's even worse. The usual prisoner's dilemma is explained with 2 parties. In this case, it was thousands of parties with a choice of: a) do what's best for your business, b) bet that almost all the other parties with also choose b.
2-person prisoner's dilemma is a fun game theory exercise. "All the customers" prisoner's dilemma is a social "have you met other business people" exercise.
FYI: prisoners dilemma is an interesting game theory experiment where you do better if everyone cooperates. You do better than your "opponent" if you don't. The wikipedia explains it well.
Wouldn't this not be prisoner's dilemma then? If I pull my money out, I'm in the same spot as before with my money parked at a different bank. If I don't pull my money out, I'm either in the same spot as before or even worse off.
In this case, starting from the perspective I have a choice (and thus the bank is still liquid), I can only do at best the same as I would have done if I pulled out.
The famous example illustrating PD created by Albert W. Tucker does have no communication - so that parties don't coordinate and cooperate with each other - but in this case with thousands of parties, there was no way to coordinate them all, or communicate with them all in time, or trust them all, so it still counts. It's possible to set up prisoner's dilemmas with communication, say in cases where it's a one off and the parties have every reason not to trust each other's word.
On Friday I was feeling that Circle/USDC was wrong that those who initiated transfers on Thursday should have them completed even if others with uninsured (above $250K) lost theirs.
> We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally.
In other words it shouldn't be entirely dependent on whether they were in the bank run. Earlier transfers, yeah.
In a bank run situation people were rushing to the bank and tying up the phone lines. Panicking shouldn't be encouraged to such a degree as to make millions of dollars depend on it.
The amount recoverable ended up not depending on whether an SVB customer attempted a late withdrawal. And that's good. I would have expected it even if depositors had to settle for a portion of their funds.
What does Friday matter? Friday was when the cynics would rejoice in righteous indignation. Monday was when responsible people were redeemed; when society through its government recognized that the real moral dilemma here was whether or not to vindicate the cynics.
There is a solution to the Prisoner's Dilemma, and it's called civilization, known in the modern era as institutional government. Like their communist cousins, die-hard libertarians should be forced to live in truly libertarian countries (i.e. those with extremely weak governmental institutions where wealth is safeguarded primarily through a web of private arrangements) and only then be allowed to opine on what's rational. For some reason libertarians can't often be found in those countries; not by choice, at least; and certainly they don't park their wealth there.
This is incorrect. such coordination was possible and did happen, only in the opposite direction.
A relatively small group of VC firms effectively did coordinate the depositors very effectively to organize except it was to take money out
Saying coordination wasn’t possible is therefore incorrect. And had it not occurred, getting people to keep their money in would have been a moot point, the whole thing a non issue.
Propagating a run simply takes propagating the info that a run is happening. No other communication is necessary. That signal is enough.
Coordinating stopping a run would take a huge amount of much more sophisticated and time consuming back and forth communication and negotiation, reassurance and confidence building. You’d have to convince people that together right now in this situation you can stop the run. How would you do that? That coordinated consensus building would have to happen and propagate through the community, all of the community, at least as fast as the news of a run in order to stop the run. If it’s slower it’s too late, the people that heard there’s a run before they heard there was a movement to stop it already pulled out their money.
I'm not quite ready to embrace that line of thinking, but the thought did cross my mind. Regardless, if someone was trying to maneuver things that way it may have backfired, making it more difficult for alternatives:
First, the speed of action & (so far) efficacy of containing and stabilizing things while keeping all depositor money safe is both an endorsement of traditional regulated finance as well as a sharp counterpoint to recent crypto collapses that were neither contained nor safeguarded customer money.
Second, some of the most crypto friendly finance partners are now gone.
Sure, Bitcoin is up, but from the point of view of growing an alternative I think crypto as a whole has taken yet another hit. Whatever struggle the sector would have had regaining momentum after the past year now just got at least a little harder.
Coordinating action in one direction can be trivial while coordinating in the opposite is nearly impossible. It takes years of engineering and construction to build a dam but only a few critical mistakes to break it down. The same amount of water is involved in either case, but it's a lot harder to hold it back than it is to let it loose.
And yet they were coordinated enough to tip off their mates to pull out.
In previous generations the industrial titans had a sense of nobless oblige, or at least pretended to; they knew their lucrative position came with responsibilities, and in times of crisis they would step up to do their share. Whereas when a crisis hits Silicon Valley, apparently you look after number 1 and when you reach out to the government it's not to ask how you can help but to ask them to bail you out.
You are on a boat that hit an iceberg. There are enough lifeboats for half the people. If everyone bails water together, you will just barely be able to keep the boat afloat.
What do you think is easier to coordinate - a dash to the lifeboats, or getting everyone to bail water?
The founders represented by the VCs were looking at a company they spent years building and all its money potentially disappearing overnight. They had to act quickly under a lot of uncertainty and took the decision that minimized risk. I guarantee if SVB hadn't been bailed out people here would be questioning the VCs who didn't pull out instead.
I don't blame them. It was irrational if they were omniscient beings with knowledge of what would happen.. they aren't.
But within 24 hours we had VCs from Founder’s Fund and the All In podcast personas who intentionally and knowingly fueled a panic on social media.
That panic was designed to benefit them and it worked, to the detriment of everyone reading this who has a deposit at a US bank, and who will now be assessed a fee to cover the cost.
The way I understand it, young people heading startups are often financially and businesswise naive, and SVB would hand-hold them through a lot of things they had to do regarding banking. You could walk in with your documents and they would set everything up for you with enthusiasm. This is difficult to find in classical banking.
It is. But if life has taught me anything it is that there’s enough irrational actors that the sane ones have to act exactly the same to get their own.
The bank run seems to have occurred after the insolvency.
The bank was appears to have been insolvent (from the currently available information), though they avoided their books showing the fact by having bonds marked as “HTM”.
When a bank is insolvent, it’s best to shut it down as soon as possible, to avoid the bank engaging in risky behavior to ‘make back’ the missing money.
Bonds that are HTM would have been profitable. They just weren't sellable for a profit on the open market (at the time they needed to sell them), because their yield was too low. So, as far as I have read, it wasn't until there was a run that they needed to dramatically increase liquidity. With so much of their holding being HTM, they were stuck. The issue was a mismatch in the timeframes (which was the fatal problem, and should not have happened).
But without that pressure, there probably would have been enough time for this to have been a much more orderly transition. The panic didn't help anyone, it just made SVB's existing problems more difficult to manage.
To put it another way -- SVB went bankrupt the old fashioned way... slowly and then all at once. The bank run was the inflection point.
Illiquid and insolvent play off each other to the point that one implies the other at this state.
The only way to make back the $100 they spent on a 1.25% 10 year $100 treasury was to wait 8 more years.
Those 8 years they'd either have to become slowly become insolvent by offering their depositors 3-4% savings accounts like every other bank, or become illiquid because what depositor would keep their money in an account earning 0.5% so that SVB can keep the lights on. They had to sell and book the loss eventually.
The FDIC take over only happened after the massive amount of withdrawals/bank run the day before. Which is the nuance in the above statements... they had assets, but after selling what they could to meet immediate withdrawal obligations, the assets they had left (HTM) weren't worth as much if sold immediately than their booked value. If the assets could have been held until maturity (HTM), they would have been worth their book value.
So, only after the run did they become insolvent. The change from illiquid to insolvent happened quickly, but without those withdrawals, the illiquidity could have likely been managed to avoid an outright insolvency (probably through a sale).
They were liquid. They could sell the $80 bill or so of bonds they had quickly and at fair value. Their problem was selling forced them to face the reality that they'd lost $12 or $13 bill on a wrong way interest rate bet.
Under that interpretation nearly everything is liquid.
If you’re going to take a loss by selling an asset prematurely, it is illiquid. Otherwise you’d have to say things like the houses people own are liquid because the person could sell it in a day if they were willing to do so for 80 cents on the dollar.
That is not the financial world’s definition of “liquid”
Things one can sell at fair value in a few mins are liquid, and things one has to sell slowly or take 80 cents on the dollar to get rid of it fast (like a house in your example) are illiquid. It's a function of buyers and process, not my accounting treatment or tax treatment or whatever other treatment might make me not like the idea of selling right now.
What's next? The FX markets aren't liquid because I don't feel like realizing a gain from a tax perspective?
>> That is not the financial world’s definition of “liquid”
Taking 80 cents on the dollar == illiquid is exactly the point I was making. Selling quickly is a necessary but not sufficient condition to meet the definition of liquid. That 80 bil in bonds isn't liquid if they had it on the books as hold-to-maturity and took a haircut to sell it early.
>Yeah, it is, to us in the financial world.
I get the feeling we're talking around each other, your response indicates that we (probably) agree, and I'll assume it was my own communication failure, so I won't otherwise remark on this snarky & somewhat inaccurate (in its implications) comment.
I said nothing about profit. I can sell my house today, yet houses are one of the prototypical examples of something that is illiquid. The ability to sell something fast is not the definition of liquid. Liquidity is specifically the ease (or difficulty) with which you can sell something without taking a haircut.
No, it really isn’t. It may lead to insolvency, but that is by no means a foregone conclusion and can play out in different ways.
At a simple scale, If I own a $200k home outright and have $50k in credit card debt that I cant pay then I file for bankruptcy, negotiate with creditors to sell my home and pay the debts, and come out with $150k in assets with no liabilities. I was always solvent.
This happens daily in the business world’s bankruptcy courts. (Of course some of them are also insolvent)
The math & definitions of solvency & liquidity don't change with scale. They are separate things even if the mechanics of how they influence each other put them in such close proximity to each other that some people confuse the two.
My small scale example illustrated the concept, my large-scale citation of bankruptcy courts show a bit of how it plays out in real life & validates the analogy.
> Without a run on the bank none of this would have happened.
A bank run is an almost inevitable consequence of a loss of confidence in a bank.
The loss of confidence was caused by their $1.8B loss on securities sales and plan to go to the market for $2B in funding.
The next day shares plummeted, and people began to remove their money (including those advised by VCs)[1]
Given the fact that only $250K of funds is FDIC guaranteed, in the face of a balance sheet crisis at the bank the withdrawal of funds was entirely rational. Arguably not doing it would have been irresponsible.
Even if there hadn't been a bank run it's pretty easy to see cases where the bank would have "temporarily restricted the amount of money an entity can withdraw in a day" or something. That potential restriction on liquidity is something any responsible business owner would want to avoid.
Rumor is uncontrollable and often unattributable – and each organization acted in the best interests of its employees and shareholders, as is their duty.
You are in charge of a startup and are responsible for its finances and the jobs of the people who work there. You can see that a bank run is starting. If you don’t pull out your money, what are the chances this will prevent the bank run happening?
Nobody is blaming any startup who took that decision, the rational decision is to take out the money.
However it was not the rational decision for a fund to do so. You have a) substantially larger voice and also ability to coordinate for better outcomes, for a fund it is no longer a gamer theory 101 standard prisoner's dilemma.
The larger funds could have
- Banded together and made a joint statement ( like they were able to organize and do after the run) reassuring every startup of their confidence in the bank
- Participated in the equity infusion into the bank
- Organized and bought debt in the bank to give it liquidity
- Simply moved their own money as new deposits into the bank.
Just doing a joint statement - which wouldn't have costed them a single penny would have gone long way to reassure the markets and also gained the key guys a lot of clout and established their influence J P Morgan style.
They ostensibly noticed the bank was insolvent and shared that important information with their startups. The bank should never have been anywhere near insolvent.
Once the run started then VCs who had not previously had a negative stance on SVB may have done right by their startups, but yeah not the ones who actually started it in the first place.
This seems like distinguishing between the snowflake that falls on a sheet of snow and starts an avalanche, and the snow that collects along the way. Both were necessary conditions for the avalanche, but is either more to blame? It's an imperfect analogy but my point is this: the problem is all the loose snow sitting on a slope in the first place.
Unless those first people were actively trying to create an insolvency crisis, it seems to me they were either being prudent or prescient. There's a reason it's called the "tragedy" of the commons, and not the "tyranny" of the commons.
I have no idea if this is correct or not, but by some accounts, there were noticeable issues with regular transfers which caused the initial concern about the bank. It's not like someone started this out of boredom.
They lost $12 billion on an interest rate bet. The fact they didn't need to mark it to market under an accounting rule didn't mean people ignored it. It was a giant, known problem. It's why they were out trying to raise capital.
I'm talking about the "rumors" that caused the bank run. From what I've read (quoted above), these weren't really rumors but problems with day-to-day transfers that prevented the fund(s) from completing their deals, in which case one has to be insane not to let their friends know that the bank is not transferring money like they are supposed to. In hindsight we know they had problems like you said, but the "spread rumors" part seems to have been triggered by legitimate problems with regular transfers.
It wasn't hindsight though. They filed their 10-k well before the run and it showed a disaster of a situation. Their balance sheet was progressively getting worse, it was already bad the 10-q before. People knew it was problematic months ago, this didn't come out of nowhere.
>Joseph Gentile, the subject of the viral tweets, is currently the Chief Administrative Officer at SVB Securities, which is an investment firm. SVB Securities is a subsidiary of Silicon Valley Bank’s former parent company that is financially independent from the collapsed bank. He had previously been the CFO of a division within the greater Lehman Brothers’ bank and left about a year and a half before the bank filed for bankruptcy.
It's unknown whether it was in their best interest, because we can't observe the alternate reality where 42 billion dollars wasn't withdrawn in one day.
The raindrop never feels responsible for the flood, but it is.
These people acted rationally. As soon as there was even a hint of "this bank could fail" it's a no brainer to press a couple buttons on your app and transfer your money even if there is only a 0.1% chance of failure.
It's just game theory.
The problem is when everyone acts to protect themselves from the 0.1% chance event it actually becomes a 100% likely event.
That's why FDIC Insurance was invented in order to prevent bank runs and is why we have had so few in the hundreds years since it was invented.
The obvious solution is to waive the FDIC insurance caps and probably increase the cost of the insurance to make up for the increased risk of failure.
> These people acted rationally.
> It's just game theory.
The conclusion from game theory (specifically Prisoner's Dilemma) is not that only one action is rational. Both cooperation and defection are rational; that's what "dilemma" means. The difference lies in the scope or horizon to which reason is applied. Every time I see someone invoke "rationality" or game theory to justify what is really selfishness, it makes me want to throw up.
Failure was a foregone conclusion non matter what time horizon you wanted to apply.
The bank had wiped its equity before depositors drew on it. It was a matter of time it failed. Its loan portfolio is impaired. Its startups are burning DDA cash without vc funding. The majority of its capital is locked up on long duration bonds.
The bank was bleeding from a thousand cuts. It was put out of misery by a good old run to the head. Eventually some startup was going to try drawing on their checking and it was going to fail.
A bank run is just a symptom of the disease (mismanaged bank risk).
Banks don't have to issue demand deposit accounts if they want to invest your money while you "loan it to them".
How rude for the contractual obligation of a bank be asked to uphold their end of the deal. thats rude and racist. customers at that bank were real jerks.
Are we celebrating those who left their money in, despite the warnings, when they could have potentially lost it all if the government didn't step in and make an unprecedented promise to honor the deposits? Would that have been "heroic" in some way? I personally don't think so, that seems more like stupidity if the potential consequence is your company losing all it's money and going bankrupt for outside reasons.
SVB as an institution sponsored lobbyists to lobby against regulations meant to keep banks stable, then without those regulations they failed to self-regulate properly and failed massively. That is IMO pretty shameful. But I don't blame any clients of theirs for taking money out when they saw a potential instability. They did not create that instability; that instability created the bank run.