[HN Gopher] The Demise of Silicon Valley Bank
___________________________________________________________________
The Demise of Silicon Valley Bank
Author : tim_sw
Score : 182 points
Date : 2023-03-10 18:20 UTC (4 hours ago)
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(TXT) w3m dump (www.netinterest.co)
| paulpauper wrote:
| Weird or interesting how SVB survived 2000-2002 tech crash , and
| also 2007-2009, but 2022 was too much. Every crisis or cycle is
| different. Unique challenges, threats, etc. This is why it's so
| hard to predict these sort of things. It's impossible to
| anticipate all the ways things can go wrong.
| filmgirlcw wrote:
| That's because in those situation, SVB didn't put $91b of its
| deposits into mortgage bonds right before interests rates
| soared. Those bonds are now worth a lot less (and will be sold
| for even less still to other banks that want to pick them up on
| the cheap).
|
| Every crisis is different, but hedging so much money in one
| basket seems to be the real undoing here. I'd posit that the
| bank, which was much smaller in 2000 and 2007, didn't make
| those sorts of moves then.
| pookha wrote:
| Inflation is the killer here. The Fed had no choice but to
| raise interest rates.
| capableweb wrote:
| The author seems to allude to a difference between then and now
| is that it wasn't quite as easy to withdraw money back then,
| usually you'd have to at least make a phone call, or head over
| to your physical branch. Now you could just open the
| website/app and do it there, immediately.
|
| Another point seems to have been that Silicon Valley bank have
| a customer base which is tightly knitted, so if any bad news
| gets shared in the circle, it gets around quickly. Maybe they
| weren't as popular the last crashes, or as impacted as other
| sectors, so it would be easier to avoid trouble. But
| specifically this time, the trouble was related to them, so
| they got hit the hardest.
| rcme wrote:
| Maybe... but SVB's immediate issue is that they lent money
| when rates were zero and those loans decreased in value when
| interest rates went up. This type of issue can only be caused
| by a decade-long zero-interest environment where people stop
| believing rates will ever go up again. It's interesting how
| every financial crisis has its roots in the specific economic
| conditions of the time.
| capableweb wrote:
| Even so, no matter what cause, if people are unable to
| withdraw money + won't hear any rumors about a bank run,
| would SVB be in the scenario they are experiencing today?
| As it seems like the bank run is what did them in, not
| whatever magic they did with the deposited money.
| dahdum wrote:
| They were insolvent before the bank run, that's why they
| needed the firesale and emergency equity raise to stay
| afloat. If they were able (allowed) to hide that fact and
| get the money quietly elsewhere, we may never have known.
| Or perhaps they would have continued to lose money and
| fail later, with depositors taking a larger haircut.
| rcme wrote:
| Yes. Their issues started when they needed to sell their
| assets available for sale. This happened because interest
| rates made it harder to raise money, which caused their
| clients to draw down their accounts faster than they
| anticipated. The bank run at the end is more a symptom of
| SVB's issues rather than a cause. Everything about the
| bank's problems can be traced back to believing interest
| rates would be 0 forever.
| yardie wrote:
| > quite as easy to withdraw money back then, usually you'd
| have to at least make a phone call, or head over to your
| physical branch. Now you could just open the website/app and
| do it there, immediately.
|
| The main reason some of the other startup banks such as Ramp
| or BREX exist is because SVB was kind of a dinosaur when it
| came to cash management. Their online cash management apps
| were very basic and rudimentary. And they were a lot slower
| than these new online banks at responding to customer
| requests.
|
| So now you're saying that bank (a very conservative
| investment bank from what I've been told) was moving too
| fast?
| benatkin wrote:
| Is it really all that different or is it just bigger?
| _shudders_
| nothis wrote:
| Is this one of these innocent little articles popping up that
| people refer to as "the SVB moment" in the future?
|
| Or was this bank just uniquely fucked?
| nine_zeros wrote:
| What makes this thing even more interesting is that there is
| viral, wide-spread knowledge about banking - as opposed to 2000
| or 2007. A bank run is one tweet away.
|
| A lot of banks have similar asset books and asset values MUST
| go down as interest rates rise. So, banks are really screwed
| unless they offer MUCH higher interest rates on deposits ASAP.
| Because if they don't, most people are very aware of
| treasurydirect and will simply deposit there.
| lumb63 wrote:
| It might be impossible to anticipate which way exactly things
| will go wrong, but I'd say it's pretty easy to anticipate the
| ways things can go wrong. I see this as at least ignorance,
| probably negligence, and at most, fraud, on the part of a lot
| of folks involved.
|
| This has been the most widely predicted recession in history as
| far as I am aware. The Fed has openly and deliberately said
| they will raise interest rates until something breaks.
| Investing in assets that are negatively correlated with
| interest rates under these conditions is a terrible idea.
| Professional bankers should know this.
|
| Startups are far less negligent, but still, could diversify
| their deposits with multiple banks (or use "real" banks) to
| mitigate their risk. Startups are risky enough; having sound
| money is important and I wouldn't be risking it with a regional
| bank.
|
| The Fed is negligent for treating financial markets like penny
| stocks. They had nothing else in their tool chest to fight
| inflation, though, so I can't entirely blame them.
|
| Politicians and the Fed are negligent for creating so much
| liquidity that it spurred such immense inflation. Anyone with a
| macro-101 level of economics could have foreseen this.
|
| Voters are negligent and ignorant for their unwillingness to
| elect better politicians and demand change and reform in an
| area that continually fails them. We are failed time and time
| again by the banking system because it is fundamentally unable
| to be guaranteed solvent. We bail banks out or get by a crisis
| somehow and forget about it until the next time around and then
| shout "wow, who could have seen this coming?!" as if it is the
| first time a bank has failed.
| macintux wrote:
| I don't know that we need a 3rd active discussion.
|
| - https://news.ycombinator.com/item?id=35096877
|
| - https://news.ycombinator.com/item?id=35094466
| db1234 wrote:
| Sorry for a dumb question:
|
| Apparently lots of VCs and startups use SVB as their bank. Could
| someone explain why would startups not choose relatively safer
| big banks like BoA or Chase? What are the advantages of using SVB
| as the primary financial institution?
| frankchn wrote:
| Venture-backed startups are weird in terms of cashflow compared
| to traditional businesses.
|
| They appear out of thin air with no history and millions of
| dollars. They then constantly burn money in the tens to
| hundreds of thousands of dollars a month until they disappear
| or get injected with millions more dollars. Often, traditional
| banks don't know how to deal with these entities and it sets
| off tons of alarms in their fraud and risk management
| departments.
|
| SVB and related departments know the business and financial
| models of startups a lot better and are more willing to help.
| [deleted]
| twelve40 wrote:
| i really wonder if that was a problem. My last startup banked
| with Wells Fargo for a while all the way from pre-seed to A,
| and it seemed to be fine. Anyway, my number 1 ask from any
| bank is not to fail, before anything else, and that didn't
| really work out great here. If SVB was a top-5 bank it
| probably would have been bailed out by the govt. Not great,
| but probably safer for the customers.
| [deleted]
| bloodyplonker22 wrote:
| This makes complete sense, however, why would big banks not
| want to compete against SVB by establishing a smaller
| division that handles startups? Obviously, the market is
| small compared to their usual markets, but there is still a
| lot of good money to be made.
| frankchn wrote:
| If the deposits are going on the parent bank's balance
| sheet, it would be subject to the same controls.
| eastbound wrote:
| > why would big banks not want to compete against SVB by
| establishing a smaller division that handles startups?
|
| Because such startups tend to, when they can't raise funds
| easily (=nowadays), withdraw all their cash deposits at the
| same time (=what's happening at SVB), which puts it in
| bankrupt. So, small market, but so much variance in
| deposits that it's risky.
| icelancer wrote:
| Bank of America couldn't care less about our XX
| million/year revenues. Literally wouldn't take even basic
| requests for services. We moved to Keybank who has a much
| better rep with small businesses, and service (and pricing)
| has been orders of magnitude better.
|
| I'm assuming a similar thing was going on with SVB vs.
| other large banks.
| af0daert wrote:
| I'd expect that in many cases they are forced to as part of the
| venture funding offered by SVB. F.e. Secure a $10M venture note
| (in connection with Series A) but use SVB exclusively for
| banking.
| bpodgursky wrote:
| Big banks do not understand the cashflow situation of startups.
| They flag standard fundraising as fraud, drug money, or money
| laundering (or simply won't open an account in the first
| place).
| rickreynoldssf wrote:
| I have to say, Bank of America was a great bank for my
| startup. We wouldn't have gotten a bridge loan with them or
| anything like that but for operating cash management there
| was never an issue.
| mbesto wrote:
| More importantly, they know how to offer credit to them.
| twelve40 wrote:
| do a lot of VC-backed startups rely on credit?
| icelancer wrote:
| Convertible debt instruments have become significantly
| more popular over the last few years.
| yeahsure22 wrote:
| They understand it perfectly well, it really isn't that
| complex. You are repeating SVB marketing. Bank of America
| works with thousands of start ups and I'm sure all the other
| large banks do as well.
| justin66 wrote:
| > Big banks do not understand the cashflow situation of
| startups. They flag standard fundraising as fraud, drug
| money, or money laundering (or simply won't open an account
| in the first place).
|
| It's not like they blacklist you the moment your attempt to
| open an account raises an eyebrow. Show up to BofA or Chase
| with a copy of your contract with your VC, in addition to
| their check, and it would be odd for them to refuse you an
| account.
| phendrenad2 wrote:
| I wonder if bigger banks don't want exposure to the kind of
| disaster we're seeing play out at SVB. Maybe SVB is (was)
| filling a dangerous niche.
| elzbardico wrote:
| Why in the fucking hell someone thought it would be a good idea
| for banks to use the deposit money to buy securities?
| swarnie wrote:
| I think some regulation was rolled back at some point, wasn't
| it the L-Express rider with a sub-par dry cleaning service?
| dboreham wrote:
| The someone who wanted to make a profit?
| frankchn wrote:
| Treasury bonds are securities as well.
| marcopicentini wrote:
| Does Coinbase could have the same problem since it's business is
| based on stacking (USDC) during this moment of low volumes ?
| aliasxneo wrote:
| Can someone ELI5 how the increased interest rates hurt the bank's
| strategy? I've read a few articles now and still can't parse
| through the language to understand what's happening.
| mandevil wrote:
| Matt Levine's invaluable Money Stuff (free newsletter) did a
| fabulous job of just that:
| https://www.bloomberg.com/opinion/articles/2023-03-09/crypto...
| was before the FDIC moved in,
| https://www.bloomberg.com/opinion/articles/2023-03-10/startu...
| was from today.
| kentonv wrote:
| Say you buy a bond for $100 with 10-year maturity. This means
| the bond will pay $100 in 10 years. What is it worth today?
|
| Let's say you are looking for an investment to pay 1% yield
| year over year, because that's the going market rate (which
| highly correlates to interest rates). Then this bond should be
| worth about $90.53 to you. You buy it at that price.
|
| Now suddenly rates change and everyone is expecting investments
| to pay 3% year over year. Then an equivalent bond is now worth
| only $74.41.
|
| That's OK. You don't have to sell your bond. You can hold on
| until it matures, and just live with the fact that you aren't
| getting the same yield as others.
|
| But now imagine you need to come up with a lot of money quickly
| to satisfy some requirement (like customers withdrawing a lot
| of money). Now you have no choice but to sell your bond. And
| that means you have to admit you lost the money. And now you
| may not have enough money to cover your obligations, even
| though you would have if you could have waited for the bond to
| mature.
| kentonv wrote:
| And the reason SVB had more bonds than most is because there
| was a huge influx of deposits in 2021 from investors going
| nuts funding startups, but SVB doesn't have many customers
| that are good candidates for loans. They needed to do
| something with the money. So they bought bonds instead,
| because those are "pretty safe".
|
| A lot of bonds.
| jmstfv wrote:
| Roughly speaking:
|
| They were holding some _candies_ that became less valuable
| because you can buy better _candies_ for the same price in the
| shop. They needed the money, so they had to sell those candies
| for cheaper. Some friends of theirs noticed they were selling
| those candies for cheaper and started getting suspicious and
| panicky and asking for their toys back.
|
| * Candies - fixed income securities, like mortgage backed-
| securities and US treasuries
|
| * Candies becoming less valuable - government raising the
| interest rates, which makes fixed income products, like
| treasuries and mortgage-backed securities less valuable,
| because you can get the same securities but with higher returns
| in the market
|
| * Friends panicking - investors and depositors
|
| * Friends asking for their toys back - withdrawing money from
| the bank, which starts the bank run
| [deleted]
| rickreynoldssf wrote:
| This is bad. This is real bad. ...and I don't think we're going
| to know the depth of the badness for a while. Think the credit
| crunch that precipitated the 2008 crash. Though this will be
| localized to tech startups and it's only the kinds of people who
| read Hacker News who are going to be affected. A massive wrench
| has been tossed into the economic machinery of Silicon Valley and
| other tech hubs.
|
| A bunch of companies now have no or little operating cash and all
| they're going to have on Monday is $250k each.
| toomuchtodo wrote:
| Sounds like an opportunity to provide bridge financing to these
| startups on the basis of their potential FDIC deposits claim?
| djbusby wrote:
| Very high risk.
| toomuchtodo wrote:
| For sure, but that's where the high reward is. Scared money
| don't make money.
| UncleOxidant wrote:
| Is there even time for some lending entity to do enough
| due diligence to figure out which of the startups are
| even worth gambling on? That could take weeks or months.
| In the meantime payrolls have to be met, leases and light
| bills paid.
| [deleted]
| dahdum wrote:
| You aren't gambling on the startup if the collateral is
| the receivership certificate / advance dividend. Those
| should be quick to verify. Any loans up to $250k would be
| even easier.
| xwdv wrote:
| Scared money also doesn't lose money.
| lovich wrote:
| Inflation is always eating away at scared money. You
| can't sit on cash forever
| xwdv wrote:
| You could invest it in non-scary assets.
| woeirua wrote:
| No one is going to make these loans until they have some
| idea what the underlying assets might be worth.
| icelancer wrote:
| Some firms will make extremely low buyout offers knowing
| that at least a few businesses will have no choice but to
| take a massive unknown haircut or go bankrupt.
| coredog64 wrote:
| That's not true. The FDIC will be disbursing money above and
| beyond the $250k to account holders. It won't be the balance of
| their account but they'll also get a piece of paper laying out
| how much more they're potentially owed. As the FDIC winds the
| bank down, it will use that money to make account-holders
| whole. The big losers are SVB shareholders and bond holders, as
| they're going to get the biggest haircut.
| pirate787 wrote:
| Shareholders and bondholders will be zeroed out, that's not a
| haircut its a decapitation!
| rickreynoldssf wrote:
| ADP isn't going to take that paper to cut paychecks. AWS
| isn't going to want that paper either. The best you can do is
| take that paper and get a loan with a stupid high interest
| rate and that's not going to happen quickly.
| avs733 wrote:
| I may be wrong but...
|
| ADP could always take it at 90%, figure out the expected
| return and everybody wins
|
| AWS could take it plus some equity for credits? I imagine
| the incremental cost of providing the compute is worth the
| risk
|
| No one forces the economy to operate on dollars - and both
| traditionally and currently a whole lot of it doesn't.
| jo6gwb wrote:
| ADP wont' take the paper but the cash advance sharks will
| and they're circling now.
| icelancer wrote:
| Any private entity's risk assessors would place a massive
| haircut on those pieces of paper, if they would even
| allow them to be purchased.
| nemo44x wrote:
| The FDIC will pay an advanced dividend next week. We have no
| idea how much that will be but it is probably conservative.
| Some companies may not be able to make payroll today or early
| next week. Some may not be able to pay their vendors for the
| things that allow their businesses to run.
|
| It may only be a couple day disruption but what if your
| employees quit? What if your vendors cut your access and your
| customers leave?
|
| What if you don't get made whole but get back 80% of your
| cash? Now your runway is 20% shorter in a climate where
| investors aren't around.
|
| This could be very bad.
| UncleOxidant wrote:
| > It may only be a couple day disruption but what if your
| employees quit?
|
| I guess they don't have to worry so much about that what
| with all the tech layoffs over the last 6 months and with a
| lot of other statups in the SVB boat, who's going to be
| hiring?
| jcadam wrote:
| Top people are always in demand - that's who you'll lose.
| The average performers you might keep if you get things
| sorted quickly enough...
| dragonwriter wrote:
| > It may only be a couple day disruption but what if your
| employees quit?
|
| Even if they don't, in California there is a statutory
| penalty payable to the employee of $100 _to each affected
| employee_ for a first, non-willful late payment of wages
| (second or subsequent violations, or any willful or
| intentional violations, have a much greater penalty - $200
| _plus_ 25% of the wages not paid); that's not a lot (if you
| didn't happen to have a prior payroll hiccup bumping this
| into the "second or subsequent" category), but its still a
| hit.
| UncleOxidant wrote:
| > they'll also get a piece of paper laying out how much more
| they're potentially owed. As the FDIC winds the bank down
|
| That will take months at least. In the meantime they'll have
| this non-liquid piece of paper. I suppose they could try to
| pay employees with IOUs, but I don't think that many
| employees would be able to afford to stick around for very
| long.
| dragonwriter wrote:
| > It won't be the balance of their account but they'll also
| get a piece of paper laying out how much more they're
| potentially owed.
|
| Yes, they'll get an "advance dividend" based on whatever
| surplus cash is available beyond what is necessary to cover
| the insured balances, plus a "receivership certificate"
| accounting for the rest, and, to quote the FDIC press release
| [0], "As the FDIC sells the assets of Silicon Valley Bank,
| future dividend payments _may_ be made to uninsured
| depositors." [emphasis added].
|
| [0] https://www.fdic.gov/news/press-
| releases/2023/pr23016.html
| mtoner23 wrote:
| Nope, this is why we have the FDIC, most americans wont even
| notice
| rco8786 wrote:
| FDIC is only good for $250k per account...
| mtoner23 wrote:
| The fdic is much more than just 250k per account
| postalrat wrote:
| Did you even read the comment you replied to?
| mtoner23 wrote:
| the FDIC does more than hand out 250k checks. They will
| find a buyer for this bank who can successfully manage its
| assets. and most likely will payout uninsured account
| holders at least 90 cents on the dollar. Probably even all
| 100 cents. Remember the bailouts the goverments made to
| banks on 08, we didnt lose a cent on those. the govt made
| money. We are gonna be ok
| rickreynoldssf wrote:
| This isn't going to happen before Monday. Or before the
| AWS bill is due. $250k isn't going to cover most
| company's operating cash needs.
| mtoner23 wrote:
| fair point. we'll see how it goes though, i dont expect
| it to be a banking collapse thougu
| in_cahoots wrote:
| If the Twitter saga has shown anything, it's that
| companies can afford not to pay on their contracts, at
| least in the short term. Amazon will give them a grace
| period because a customer paying a few weeks late is
| better than the customer going belly-up.
| rickreynoldssf wrote:
| If your company's next payroll is more than $250k you're
| going to notice. Not even getting into accounts payable for
| various other suppliers etc.
| swarnie wrote:
| I do thin Xe's right in saying "Most Americans wont notice"
|
| How many of you are directly paid by the Valley tech
| sector?
| disgruntledphd2 wrote:
| It's the indirect effects that'll get you though.
| Consider my company has nothing at SVB, but 50% of their
| customers do. Still gonna be pretty bad when half your
| clients can't pay you.
| greatwave1 wrote:
| Yeah, but you're pulling that 50% number from thin air.
| How many companies do you think actually have 50% of
| their customers banked by SVB?
|
| SVB had ~$200b in total assets, less than 1% of the total
| assets in banks across the U.S. alone.
|
| There are definitely going to be indirect effects, but HN
| and other voices in early-stage tech are predisposed to
| overestimate the impact on the broader economy.
| bostik wrote:
| The article gave two numbers I didn't know about, and
| both came as a surprise:
|
| > _As at the end of 2022, it had 37,466 deposit
| customers, each holding in excess of $250,000 per
| account_ -- and -- _The bank does have another 106,420
| customers whose accounts are fully insured but they only
| control $4.8 billion of deposits_
|
| So SVB had only about ~150k banking customers. And of
| those, less than 40k are actually affected by this
| debacle. But those were concentrated enough to make SVB
| the 20th largest bank in the US.
|
| Puts things in perspective.
| icelancer wrote:
| Yeah. We're not an SVB client nor are we in Silicon
| Valley, but we're already auditing our accounts payable
| and client lists. It's likely we aren't screwed, but our
| contract accountant who told us to start doing this kind
| of bookkeeping said some of his other clients have
| massive counterparty exposure to this bank failure.
| jcadam wrote:
| Hadn't considered this. I work for a consultancy...
| jakozaur wrote:
| My take:
|
| 1. Some mighty people/companies will bail out all depositors as
| this would cause a chain effect damaging the whole USA
| innovation.
|
| 2. Still, the consequences will be grim as many startups will
| lose access to venture debt and need to do layoff quickly.
| UncleOxidant wrote:
| > 1. Some mighty people/companies will bail out all depositors
|
| Yeah, I'm sure Elon Musk can just write a check to cover
| this... oh, wait.
|
| Seriously, who do you think would have the capital to swoop in
| here and cover something north of $170B in shortfall?
| Especially right now given that money is pretty tight
| everywhere.
| jakozaur wrote:
| The shortfall is much smaller.
|
| The challenge is $80Bln mortgage-backed securities, which
| they likely have to sell at a 20-30% markdown and cover that.
| woeirua wrote:
| This is the real question. How much are those MBS worth on
| the open market? Their value decreases every day as the fed
| keeps raising rates. I don't think anyone can really say
| what kind of hole SVB might be in right now.
| fairity wrote:
| Once its becomes more clear how much SVB assets can be sold
| for and along what time frame, there will be plenty of firms
| willing to either: 1) purchase receivership certificates at a
| discount to expected value 2) issue bridge loans to cover the
| expected value of receivership certificates.
|
| It's not a bail out in the sense of free money. It's a bail
| out in the sense of a short term loan, just like after the
| GFC.
| celestialcheese wrote:
| Where are you getting 170b in shortfall?
| UncleOxidant wrote:
| In one of the other threads discussing this SVB was said to
| have ~$200B in assets, 93% of which were not covered by
| FDIC. That actually comes out to $186B.
| TaylorGood wrote:
| A friends AI startup already laid off 30 to control the bleed
| as their working capital was at SVB.
| lovich wrote:
| They laid off 30 people in less than 24 hours of this
| announcement? That sounds like those people were already
| getting laid off and this was a convenient cover
| dang wrote:
| Related ongoing thread:
|
| _FDIC Takes over Silicon Valley Bank_ -
| https://news.ycombinator.com/item?id=35096877 - March 2023 (708
| comments)
| jejeyyy77 wrote:
| should I bother going to work on Monday?
| kube-system wrote:
| Probably. Even SVB branch employees are going to work on
| Monday.
| twelve40 wrote:
| well they are getting paid by the FDIC now so of course they
| are going to work
| rickreynoldssf wrote:
| Do you work for a company that has most of its operating cash
| in SVB? If so you probably won't see your next paycheck or it
| will be late. Even if you work for a unicorn there's still a
| risk because they're not likely to hold more cash than is
| needed for a few weeks (which is now held up beyond $250k.) The
| rest of the funds are in bonds or other investments that will
| take some time to unwind to get cash to meet payroll.
|
| So you decide...
| bombcar wrote:
| Even if you work for a company entirely banked with SVB (and
| many companies have a few bank accounts for various reasons)
| they'll probably be able to make payroll even if they have to
| take an annoying loan.
| renewiltord wrote:
| Annoyingly, Rippling had a lot of their stuff in SVB so
| some companies see the debit from their SVB account but no
| actual corresponding credit into their employees accounts.
| mkagenius wrote:
| If the companies had their account with SVB then rippling
| is not the issue. Issue arises when their bank is
| something else but since rippling uses SVB, they see
| debit in their accounts but SVB doesn't release pay roll.
|
| (Unless rippling forces you for opening SVB account, i
| don't know, i do not use rippling)
| chx wrote:
| I found https://www.livemint.com/news/world/explainer-silicon-
| valley... much easier to understand. It would seem the crux of
| the matter is:
|
| > the bank purchased a large amount (over $80 billion) in
| mortgage-backed securities (MBS) with these deposits for their
| hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were
| 10+ years in duration, with a weighted average yield of 1.56%.
|
| > with the rise in Fed rates, the value of SVB's MBS plummeted.
| This is because investors can now purchase long-duration "risk-
| free" bonds from the Fed at a 2.5x higher yield. Precisely, with
| the rising US Fed interest rates, the value of existing bonds
| with lower payouts fell in value.
|
| The second paragraph explains what the original article
| summarized as "The trouble is that when rates started to go up,
| mortgage assets got hit hard".
| apnew wrote:
| 2.a They sold some of the assets bought at step #1 at a loss
| (dont know why). 2.b Flubbed the PR game while trying to raise
| to cover the loss 2.c Bank run!
| actionablefiber wrote:
| > They sold some of the assets bought at step #1 at a loss
| (dont know why)
|
| I imagine they ran out of their more liquid instruments.
| apnew wrote:
| Ah! That would make sense why they would sell 10T at loss
| instead of riding out
| lapcat wrote:
| > I found https://www.livemint.com/news/world/explainer-
| silicon-valley... much easier to understand.
|
| It appears that text from this story may have been stolen from
| https://twitter.com/jamiequint/status/1633956163565002752
| https://news.ycombinator.com/item?id=35099982
| lamontcg wrote:
| What isn't being discussed is that SVB was probably seeing an
| initial drawdown in deposits because VC funding has locked up
| and startups are just burning through cash and can't raise
| money. SVB was likely a bet across the entire startup economy
| that funding wouldn't dry up.
|
| This probably foreshadows waves of startups failing as they run
| out of runway.
| nemothekid wrote:
| 1. Bank buys lots of mortgages (well, assets backed by
| mortgages) at 0 interest rates. Let's say those mortgages are
| $100 each.
|
| 2. Fed raises interest rates. Now new mortgages are shiny (they
| return more money) and those old mortgages are shitty, so now
| they are worth $75 ea. Normally not a problem as they can wait
| for those mortgages to mature and get $105.
|
| 3. Tech sector experiences a crunch. All the sudden more and
| more companies are taking money out of their bank account.
|
| 4. In order to process withdrawals, SVB is now forced to sell
| the mortgages it bought for $100 for $75. If this continues SVB
| won't be able to find enough money to pay depositors.
| topicseed wrote:
| thank you, this was helpful
| toast0 wrote:
| > 2. Fed raises interest rates. Now new mortgages are shiny
| (they return more money) and those old mortgages are shitty,
| so now they are worth $75 ea. Normally not a problem as they
| can wait for those mortgages to mature and get $105.
|
| It's not that new mortgages are shiny and old mortgages
| aren't; it's that $100 in 5 years (or whatever) is now worth
| less. It's easier with zero coupon bonds, because there's
| only the maturity, so a $100 zero coupon bond that matures on
| date X is worth $Y, regardless of when it was issued; and
| $100 mortgage that completes on date X needs to have each
| payment adjusted for current value. Clearly, a smaller series
| of payments is worth less than a larger series of payments,
| even though the principal amount is the same.
| lamontcg wrote:
| Yeah really its based on long-term t-bills and the risk
| premium.
|
| Because safe interest rates went up, people can get a
| better deal on long term debt unless they get a discount on
| the bonds from SVB so that in the end the SVB bonds work
| out to a the current interest rates, if held to maturity.
|
| This is how bond prices move opposite to the external
| interest rate environment.
|
| There is also a risk premium since t-bills are considered
| perfectly safe, while these mortgage backed securities are
| likely now carrying a risk premium so buyers want an even
| higher effective interest rate out of them.
|
| It isn't really new-vs-old, it is just the interest rate
| environment. If there was zero new issuance of debt people
| would still be trading the old debt at the same interest
| rates and the value of the bonds held by SVB still would
| have been underwater. Of course if there wasn't enough debt
| to satisfy the appetite for buying debt then the prices
| would rise and get bid up, but we'd see this as a lowering
| of interest rates in these markets (which isn't happening).
| mypalmike wrote:
| > SVB is now forced to sell the mortgages it bought for $100
| for $75.
|
| Not quite. The article addresses this in detail. They bought
| mostly hold-to-maturity (HTM) bonds which could not be sold.
|
| (Technically such bonds could be sold, but selling would
| trigger a portfolio revaluation of all their HTM bonds, which
| would have made them immediately insolvent.)
| zby wrote:
| Here is a quote I found in the article: "The decision
| dictates whether the securities are designated as "held-to-
| maturity" (HTM) assets " - HTM was an internal designation
| - an accounting convention. It does not have anything to do
| with the bond terms.
| randlet wrote:
| Great summary, thanks (assuming it's accurate!).
| hylaride wrote:
| https://twitter.com/fabiusmercurius/status/16342279961723658...
| (The whole thread dives in more).
|
| Essentially, when interest rates go up, current bonds
| temporarily fall in value as people can buy higher yielding
| ones. For a variety of reasons, SVB needed to sell the bonds at
| a loss now to cover deposit withdrawals, etc.
| svbthrowaway wrote:
| If one were, in theory, to have the working capital for one's
| employer tied up in this bank, how bad is it?
|
| Going to miss payroll bad?
| fairity wrote:
| The facts are:
|
| - All funds in SVB are frozen
|
| - FDIC has implied that insured funds (up to $250K per
| account) will be released within 7 days.
|
| - It's entirely unclear how long it will take to recoup
| uninsured funds (above $250K per account).
|
| - It's also unclear how much of uninsured funds will be
| recouped (although most people believe the figure will be
| above 80%)
|
| If given the above fact pattern, your company can't make
| payroll, then it will have to raise emergency cash to do so.
| Whether or not that's feasible isn't an answer anyone here
| can provide.
| jdhn wrote:
| >It's also unclear how much of uninsured funds will be
| recouped (although most people believe the figure will be
| above 80%)
|
| Where is this 80% number coming from?
| fairity wrote:
| The FDIC's statement shared that: As of December 31,
| 2022, Silicon Valley Bank had approximately $209.0
| billion in total assets and about $175.4 billion in total
| deposits
|
| The question is what haircut the FDIC will take on the
| $209b when they forcefully liquidate all securities. If
| the above data is still accurate, the FDIC can make
| depositors whole as long as they don't take more than a
| 16% haircut when liquidating.
|
| SVB recently liquidated their AFS bond portfolio at ~90c
| on the dollar. And, this traunch of securities is very
| sensitive to interest rate changes.
|
| Their HTM bond portfolio consists mostly of securities
| that could be sold today for ~80c on the dollar.
|
| Given the above, it seems likely depositors will be made
| close to whole. Then again, who knows what's hidden from
| public eye.
|
| https://www.fdic.gov/news/press-
| releases/2023/pr23016.html
| mkagenius wrote:
| At the very least the 20b from yesterday will be there
| right? So atleast 10%
| kevinpet wrote:
| this is incorrect: "FDIC has implied that insured funds (up
| to $250K per account) will be released within 7 days."
| Specifically, the FDIC has explicitly stated (rather than
| implied) that insured funds will be released on Monday
| (rather than within 7 days).
| https://www.fdic.gov/news/press-releases/2023/pr23016.html
|
| The same statement also says "The FDIC will pay uninsured
| depositors an advance dividend within the next week." which
| I assume means some percentage of the uninsured funds based
| on a worst case scenario of the recovery.
|
| Another issue is that this isn't just about the company not
| having funds, but also funds that may have been transiting
| through SVB today. At least one payroll provider was
| affected.
| HideousKojima wrote:
| FDIC only covers $250,000 per depositor per bank per account
| type, so it depends on how many employees are making how much
| money. $250k is enough to pay about 20 employees who make
| ~$150k a year for another month, to give you a rough idea. So
| it depends on how many employees your employer has and how
| much they get paid on average. Also it depends on how much
| incoming revenue your employer has.
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