[HN Gopher] SVB collapse could mean a $500B venture capital 'hai...
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SVB collapse could mean a $500B venture capital 'haircut'
Author : askl56
Score : 148 points
Date : 2023-03-26 17:10 UTC (5 hours ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| gigatexal wrote:
| Good. All those 0% interest leveraged VC funds can go burn in a
| fire. They pumped stupid money into companies and inflated
| valuations. Now that things are getting saner with real interest
| rates above 0 and getting higher sanity will reign again in the
| markets.
| leptoniscool wrote:
| Real interest rates (nominal interest rate minus inflation
| rate) is still negative.
| bagacrap wrote:
| No? Overnight rate is 5% and last month/3 month inflation is
| running under 5% saar no matter which measure you use.
| deltree7 wrote:
| It's delusional to think that this won't have effects on most
| HNers employment/salary.
|
| So be careful what you wish for
| bbbbzzz1 wrote:
| More tame inflation for people who maintain their good paying
| jobs will be in an even better position
| deltree7 wrote:
| Deflation is always worse than inflation. 1930s is always
| worse than 1980s.
| mindslight wrote:
| Like how deflation totally wrecked the PC industry
| because nobody ever buys computers, knowing that
| tomorrow's model will be more capable and less expensive?
| Or how if we knew grocery prices were going to be lower
| in a year, most people would forgo buying food and
| starve? </s>
|
| The prices of things naturally want to go down - this is
| exactly what market optimization aims to do. The Fed has
| been creating ever more new money to erase the gains of
| economic and technological progress. If this new money
| were being spent by congress on tangible projects, then
| at least we'd have something to show for it. But instead
| it has all been wastefully dumped into creating an asset
| bubble that's just a huge handout to the rich. If you
| want to know the cause of ever growing rich-poor divide,
| look no further.
| rvz wrote:
| Don't care. It was all inflated salaries from unprofitable
| companies who depended on pumping VC cheap capital every
| month. They need to now show that they are profitable.
|
| We also will now see which _startups_ can afford to hire
| developers at over $350K /yr + bonus + stock options in an
| adverse, unfavourable market _without_ VC capital. Oh wait...
| None.
| jjtheblunt wrote:
| What? Why do you think HN readers are working for companies
| impacted or dependent on some way?
|
| I conjecture a huge fraction are entirely independent of SVB
| FDIC shenanigans.
| SilasX wrote:
| "A socially destructive practice benefits you, so you
| shouldn't wish for it to stop."
|
| Wrong. You should, and I always bite that bullet.
| lmm wrote:
| Honestly, on a national scale (never mind international)
| we're the lucky ones. A slowdown that mainly hits us is
| better than a crash that hits everyone.
| [deleted]
| lr4444lr wrote:
| Pardon my ignorance, but why would VC backed companies not have
| CFOs and general VC advice against putting all or even a majority
| of their funds in a single bank? Why would they not split it
| among several mid to large sized banks?
|
| [Edited for typo]
| jimnotgym wrote:
| Indeed.
|
| I suspect vcs were telling the companies to bank with svb as
| some sort of mutual backscratching.
| eunos wrote:
| From a reddit AMA (dont have the link sorry), IIRC small
| startups dont have enough manpower to hedge their finance and
| more or less discouraged to hire finance teams (just focus on
| your product!).
| lxgr wrote:
| There are treasury products available that do it for you,
| both by distributing deposits across multiple FDIC-insured
| banks or by buying short-term treasuries.
| bagacrap wrote:
| SVB was a large bank fwiw
|
| A lot of their contracts with SVB involved exclusivity clauses
| apparently. I'm not sure what SVB gave them in return.
| fblp wrote:
| I'm sure some VC firms also encouraged their portfolio to bank
| with SVB. They were regarded as the most "startup friendly"
| bank.
| gumby wrote:
| It's a pain to do. They should have a small amount (basically
| the next month or so, plus payroll a couple of days before
| payroll), then just keep the rest in the MM/commercial paper.
| mbesto wrote:
| What you're referring to is called "treasury management". Roku
| is not a VC backed startup (it's a public traded company) and
| they held nearly $500M in cash in SVB (idiots).[0]
|
| HN'rs love to criticize financial analysts, but this is
| precisely the thing that they would _typically_ look at
| (whether they actually did on Roku is another question) when
| analyzing the overall value of a business. Meaning, they don 't
| just look at the company's financials, but also the management
| team, their performance, their controls, processes, etc. (and
| arguably their treasury management). We also love to criticize
| MBAs and finance people, but this is exactly the type of thing
| that is optimized with experienced business/finance
| professionals.
|
| You might be thinking "how on earth does X big company operate
| this way?". The same way a company like Equifax who literally
| provides all of its FICO scoring via computers, was running
| outdated Java components that led to a serious ransomware hack.
|
| [0] - https://www.cnn.com/2023/03/10/business/roku-svb-
| cash/index....
| Animats wrote:
| _"There are enough zombie companies with frothy valuations that
| need restructuring, price discovery and of course re-tooling of
| their business models to a world of tighter credit, subdued
| revenue and higher rates,"_
|
| SVB has nothing to do with that problem. It's about higher
| interest rates. The end of free money for stupid stuff. Now
| companies have to make money.
|
| So who's going down? TSLA, UBER, and RBLX already made it to the
| public markets; they're out of the VC sector. Those are the
| biggest ones. What are the remaining big money-losers still owned
| by VCs?
| bobolino123 wrote:
| Scale AI and Cruise?
| EMM_386 wrote:
| "Extend and pretend" shows how ridiculous this all really is.
| kurthr wrote:
| Play bank run games, win bank run prizes.
|
| Really, I don't love the regulatory arbitrage played by SVB and
| unhedged duration risk, nor the moral hazard created by the
| bailout, nor the somewhat bizarre attitude of companies holding
| huge $100Ms of uninsured deposits earning minimal interest (why
| have more than 1 months cash flow?), but really this was a bank
| run pure and simple. When you have to plan to lose >20% of your
| deposits in a single day you're not a bank anymore. That is a
| money market account or some other product, which doesn't lend
| long. It's a bit apropos that those who started the run will pay
| part of the price, although there's a LOT of collateral damage,
| and I don't doubt those who started it will ultimately turn that
| to their advantage since they have the deepest pockets.
|
| https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.htm...
|
| BTW you can blame the Fed for low interest rates, but it's the
| yield curve inversion and long rates which caused the
| liquidity/solvency problem not the short term rate hikes (not
| raising short rates would increase inflation expectations and
| push 10y rates even higher!). And there is no hard line between
| solvency and liquidity, because it all has to do with time scale.
| If I say you have to give me $1000 in the next 3 seconds or I
| take your car, you can't do it because you can't reach your
| wallet fast enough.
| joe_the_user wrote:
| _...really this was a bank run pure and simple_
|
| I've been around and around on this question. Insolvent or
| illiquid, illiquid or Insolvent... etc. It was solvent on
| paper, by what it had to record on it's books. But it was
| insolvent by mark-to-market (which it didn't have to use but
| which the sophisticated but not-that-sophisticated investors,
| say venture capitalists, would assume is the reality). But hey,
| you could say it was solvent by the Fed supporting every bank
| it's size. Then again, the Fed didn't come through in time, so
| maybe the run was the reality [1].
|
| And you could say "this was a run 'cause picking on SVB in
| particular was unfair since a significant portion of all bank
| capital in long term bonds that put them on an "overhang" of
| unrealized losses. [2] But maybe, the Fed needed to cool the
| economy so killing a few banks was needed and SVB and signature
| were the most logical.
|
| [1] Matt Levine in Bloomberg https://archive.ph/uIYtY [2]
| https://finance.yahoo.com/news/u-banks-sitting-1-7-211212318...
| tripletao wrote:
| > which it didn't have to use but which the sophisticated but
| not-that-sophisticated investors, say venture capitalists,
| would assume is the reality
|
| It seems like you're implying that a truly sophisticated
| investor would view this differently, but I don't see how. By
| all indications, the MTM price was economically correct--
| bid/ask spreads and trading volumes were normal, and the
| price was very close to what a simple NPV model would
| predict. There are cases where the market price is
| economically wrong (in a "liquidity crisis", "fire sale",
| etc.), but there's no evidence of that here.
|
| Managers and shareholders of the SVB and other banks with
| similar losses have strong self-interest in arguing
| otherwise, and they're doing so quite successfully. It's
| particularly easy to confuse people about interest rate risk,
| since it's so abstract--you're still getting the same future
| cash flows, and it's hard to explain why they're less
| valuable without a concept of NPV or other bond math, which
| relatively few people understand. The economic loss is just
| as real as with any other risk though, regardless of what the
| accounting says.
| joe_the_user wrote:
| I suppose I shouldn't necessarily imply "truly
| sophisticated" but one group of depositors would just say
| "of course the Fed will support the depositors, there's no
| reason to worry" your argument about insolvency is correct.
| JumpCrisscross wrote:
| > _have to plan to lose >20% of your deposits in a single day
| you're not a bank anymore_
|
| When you sell your liquid portfolio to Goldman at a $2bn loss
| and then announce non-binding equity commitments, you're going
| to lose 20% of your deposits. Now that banks can borrow against
| the face value of their Treasuries, the same duration problem
| shouldn't recur. (That said, we're stuffing an ungodly amount
| of crap into the FHL bank.)
| arcticbull wrote:
| > nor the moral hazard created by the bailout
|
| There was no moral hazard created because bank shareholder
| equity got zeroed out.
|
| Bank management and shareholders were not protected against the
| 'find out' phase.
| xboxnolifes wrote:
| People keep saying this, but I don't understand why they
| don't see the issue. Yes, shareholders got zeroed out of
| their SVB shares. But since there was no risk to playing with
| depositors money besides losing the business, which can fail
| in any number of other ways as well, there is no deterrent to
| taking on the large risk.
|
| The optimal strategy to beat the competition is to edge
| toward more risk. And since you can get an edge by playing
| more risky, other banks will have to do as well to compete.
|
| A traditional business, when edging toward risk, fails when
| they cannot get their customers to buy from them. Banks fails
| when they can't get their customer's money back to them.
| That's the big issue with the risk dynamic.
| yibg wrote:
| What was stopping this behaving before or if there was no
| depositor guarantee? Either way there was no downsides to
| them.
| taeric wrote:
| This is probably less true than you think. If SVB's assets
| had been anything other than treasuries, I would agree. But
| liquidating their assets would almost certainly move all of
| those to a willing buyer. It is everything else that is
| problematic and likely nobody wants to buy.
| cwilkes wrote:
| The moral hazard is that there isn't a a limit to the $250k
| FDIC insurance so people that put money into the bank don't
| have to care what the bank does.
|
| So there's no incentive to work with a bank that took the
| time and money to pass a stress test -- in fact the one that
| didn't bother to do any testing can give better terms as they
| aren't spending money to be safe.
| bagacrap wrote:
| What's an individual supposed to do, pay for an audit of a
| bank's balance sheet?
|
| The bank had poor risk management, regulators were asleep
| at the wheel, depositors are blameless. Although I will say
| that a startup with millions in the bank should probably
| have a CFO.
| kasey_junk wrote:
| Large deposit holders audit bank balance sheets as a
| matter of course. It's a standard risk management
| function for corporate treasuries.
|
| That it's apparently news to a bunch of cash heavy
| depositors at SVB is one of the more revealing parts of
| the crisis to me.
| watwut wrote:
| You can insure larger deposits. It costs a bit more and
| that is about it.
| phoehne wrote:
| If you bank with most banks (unless they're very small)
| they publish their financial statements and those
| statements are audited. They are freely available for you
| to read and contain a lot of good information. You could
| watch, for example, SVBs interest expense grow
| unsustainably, quarter after quarter. That's what the
| shorts picked up on and why some investors built up a
| short position on SVB.
|
| That being said, two people running an Etsy store won't
| do that. Nor should they have to. Maybe the insurance
| should be bumped up, but for either a very limited time,
| until you write new, official rules. And yes, the CFO
| should do an appropriate level of due diligence for a
| large business with lots of money. It makes you wonder
| what some of the CFOs did all day.
| dilyevsky wrote:
| Right lets all just play silly accounting games breaking up
| your 100M into 400 individual bank accounts instead of
| doing something productive and just raising fdic limit to
| something sensible for a small-medium business
| phoehne wrote:
| That's why managing those insured deposits is automated.
| arcticbull wrote:
| I don't think it should ever be the depositors
| responsibility to figure out whether a bank is properly
| managing their risk backing your deposits. That's both
| intentionally meant to be opaque to depositors - you get
| dollars in an account, not share in an MMF for instance -
| and also, it is incredibly difficult for even professionals
| to evaluate. This is the responsibility of regulators plain
| and simple. And I'd argue by the FDIC taking this risk on
| now, moral hazard is still not a factor.
| phoehne wrote:
| It is and it isn't the depositor's responsibility. It's
| totally expected for a large company to take a long, hard
| look at their bank. When I was an undergrad in Econ and
| in Accounting, the issue of insured account limits was
| literally in the text books. In the
| accounting/finance/economics area it's already well
| understood that a CFO (or their office) is responsible
| for vetting the bank. Moreover, it's the CFO's job to
| make sure the bank has adequate controls because (unlike
| consumers) commercial deposits are not indemnified when
| fraud occurs. If a company's payroll is stolen through
| fraud, for example, it's likely not recoverable. (Unless
| the bank failed to follow their procedures or the
| procedures set forth by the depositor, and you may still
| sit in court for years.) If your personal Visa debit card
| gets compromised, you aren't liable for the fraudulent
| purchases and the processor eats the cost. The health of
| the bank is less opaque to mid to large businesses, which
| have access to tools like Lexis/Nexis, Bloombergs,
| detailed ratings, and let's not forget personal networks.
| Most large companies also have to run big choices, like
| what banks to use, by their boards.
|
| . Pending litigation . Counter party risks (e.g. do they
| have exposure to a problem bank) . Financial statements
| (usually the first stop and contains a lot of
| information) . Credit Default Swap rates (what does it
| cost to insure the debt issued by the bank) . What rules
| does the bank operate under (domestic, foreign, state,
| federal, etc.) . General reputation in the industry (e.g.
| go to $CS to launder your cocaine money)
|
| That being said, it's probably beyond a small business to
| really evaluate their bank risk. And while 250k may have
| been adequate for the 2010's, it may no longer be
| sufficient to cover many small businesses (and by small I
| mean the back office is a handful of people). Should it
| be 500k? 1 million? I don't know. What I suspect is that
| making it unlimited, it means that a bank that's
| hemorrhaging depositors could offer unsustainably higher
| rates. Less risk-sensitive CFOs might decide that parking
| 10 million in reserves might be a good deal since it's as
| safe as an officially insured deposit. It's much more
| liquid than holding a 90-day CD or 3 month T-bill to
| maturity. Suddenly, the bank is flush with deposits, but
| is still going under. This would be kind of like the
| 1980's S&L crisis. That's why I'm all for raising the
| cap, but with clear limits and adjustments to the fees
| charged to member banks for insurance. If we need to
| expand the FDIC insurance fund by 3x to raise the cap,
| that's fine. But raising the cap, for an extended period,
| without adjusting the rules or the price for the
| insurance could lead to unintended consequences.
|
| Should a VC funded company of 10 people do what GM does
| when evaluating a supplier or customer? Probably not.
| What about when it gets to 100 people? At that point I
| would expect there to be a competent CFO. What about the
| VC? (I'm just going to ignore all the tweets from the
| All-In community that showed a profound lack of
| understanding of banking, confusing a modern bank
| Gringot's.) Should the VC, as part of their advisory
| role, maybe recommend a good part time CFO or cash
| manager? Did regulators screw up SVB? Possibly, there
| were a lot of issues found when they transitioned to a
| new regulatory team year or two ago (or so I read). But
| regulators are not bank managers. And if a bank can show
| their risk controls are adequate, and those risk controls
| are being followed, it does not mean they're making good
| investments. (It's arguable that both lack of controls
| and following controls were an issue for SVB - as far as
| I've read).
| tripletao wrote:
| I'd tend to agree that expecting depositors to police
| their banks is bad policy. It would be better to make
| that policy change explicitly though, by insuring all
| deposits, rather than by slouching into it with ad hoc
| rescues like here.
|
| I agree there's no moral hazard as to the SVB
| shareholders, since they got zeroed. There is a moral
| hazard as to the shareholders of other banks, who will
| benefit from the new lending program in proportion to the
| amount of bad interest rate risk they took.
| 8ytecoder wrote:
| That's the point IMHO. We want depositors to keep money
| in the banking system. The inverse of it where depositors
| don't trust the system would result in even more bank
| runs. However well run a bank is, there'll always be a
| certain amount of assets in long term that lose value in
| the short term. We'll be seeing perpetual bank runs and a
| new shadow banking system will emerge if this continues
| unchecked.
| chimeracoder wrote:
| > So there's no incentive to work with a bank that took the
| time and money to pass a stress test
|
| This assumes that there future uninsured deposits are
| guaranteed (they may be, yes, but this is a bet, not a
| certainty).
|
| Regardless, you're making the case that consumer choice is
| not sufficient pressure to enforce safety measures. Which
| is correct, but we already knew that! That's the purpose of
| regulations.
|
| Expecting industries to self-regulate in response to market
| forces is a losing battle.
| doktorhladnjak wrote:
| There is absolutely moral hazard for depositors. If uninsured
| SVB depositors had gotten something like 90C/ on the dollar
| for deposits, every company with uninsured deposits would
| start thinking about how reliable their bank might be. More
| due diligence would happen.
|
| Of course, we also would have seen runs on many more regional
| banks. The "too big to fail" banks like JP Morgan and BofA
| would only have gotten much larger.
| ouid wrote:
| There is a hard line between insolvency and illiquidity.
| Illiquidity can be solved by borrowing at the federal funds
| rate.
| kurthr wrote:
| I kinda agree here, it's a cash flow question. But that
| doesn't resolve what the haircut (if any) should be put on
| the securities in question nor what their future value will
| be.
|
| The BTFP does it for one year without a haircut. Is it long
| enough? Depends on where long term rates go. If they fall a
| couple of points in the next year, it could, but if the Fed
| fails to beat inflation and they rise... then it wouldn't.
| cinquemb wrote:
| The other problem with BTFP is that it makes less HQLA
| collateral available in the swaps market for securities
| with similar tenors to those locked in BTFP. In one hand
| you increase liquidity for the most liquid assets on bank
| books, and on the other hand you decrease liquidity for
| least liquid assets on bank books (and private holders of
| said securities, private $ denom debt > us gov debt).
| 3327 wrote:
| [dead]
| rcme wrote:
| The Fed's owns projections have rates coming down in 2 years.
| Of course the 10Y yield curve is inverted.
| somedudetbh wrote:
| > unhedged duration risk, nor the moral hazard created by the
| bailout
|
| Just making sure I understand your point here, are you just
| against "banking"? Unhedged duration risk w/ LOLR backup is
| essentially "the banking business".
|
| What's the moral hazard? The equity is wiped out, most of the
| debtors are wiped out.
|
| The only moral hazard I see is we've disincentivized individual
| depositors from assessing the financial strength of their
| banks. To me, this is a good thing. I hope we can bring similar
| moral hazards to choosing a plane to fly on, bridge to cross,
| building to enter, restaurant to eat in, hospital to go to,
| etc.
| bagacrap wrote:
| Other banks had less duration risk and some used hedges. No
| bank is going to profit from this particular environment but
| it's possible to manage assets such that the entire business
| doesn't implode.
| landemva wrote:
| While it is possible to manage for safety, regulators did
| not enforce that.
| grozzle wrote:
| Last week's David Mcwilliams podcast [1] goes into a good
| explanation, generally matching your reaction. David is an
| economist who's regularly been around all the top conferences,
| worked for a couple of central banks, and he is good at
| explaining how you can tell when the emperor has no clothes.
|
| 1 https://podcastaddict.com/episode/154571052
| jgilias wrote:
| You sound like you have a good grasp of this!
|
| What's your take on the observation that historically after the
| yield curve inversion ends, it's 3-6 months until a recession?
| qwytw wrote:
| It's a correlation. Also a big part of the inversion is the
| fact the market expects the Fed to start cutting rates in 3-6
| months. Of course historically this tends to happen at the
| beginning of recessions...
| kurthr wrote:
| I agree. I'm an amateur, but I'll give my personal answer:
|
| There will be a recession.. but when? I think sooner than
| later, but next year NBER could declare it to have started
| today or maybe it starts in another 12 months. There are
| "large and variable lags to monetary policy", which usually
| means >12mo. Almost a bigger issue than the actual risk
| free treasury yields is the rate volatility that's forcing
| lending rates up, because bankers don't know what's going
| to happen, and that makes loans and hedging expensive. The
| speed of the rate rise, along with the size and duration of
| inversion is very large and relative to previous rates it's
| a huge move (doubling from the 1-2% previously). That's
| going to break something some time. It could be when the
| debt ceiling fight gets real or earlier, if the economy
| actually turns over. You'll know when the Fed starts
| cutting rates.
| mitthrowaway2 wrote:
| > BTW you can blame the Fed for low interest rates, but it's
| the yield curve inversion and long rates which caused the
| liquidity/solvency problem not the short term rate hikes
|
| Can't we sort of blame the Fed for that _[yield curve inversion
| and long rates]_ too? It undertook massive quantitative easing
| during the pandemic, which depressed the yield of long-term
| bonds such as those bought by SVB. Perhaps if it hadn 't done
| so much QE, the yield on SVB's long-term bonds would have gone
| from, say, 3% to 4% instead of 1.56% to 4%.
|
| Edit to clarify: I'm not saying that the Fed deserves blame for
| SVB _taking_ such a risky long-term position, I 'm saying the
| Fed deserves some blame for long-term bonds _being risky_.
| LapsangGuzzler wrote:
| > Can't we sort of blame the Fed for that too?
|
| No. SVB chose to pursue a risky investment strategy with no
| risk manager at the helm for months, the banking equivalent
| of stupidly storing all of your nitrous fertilizer in one
| place and then being surprised when the whole thing blows up.
|
| SVB made numerous, critical mistakes in their management. If
| anything, one could argue the Fed enabled this stupidity by
| keeping rates low for so long. But ultimately, the failure
| falls on the bank.
| mitthrowaway2 wrote:
| Oh, I'm not looking to absolve SVB of their responsibility
| for their position. I think you misread my comment. I mean
| blaming the Fed for the yield curve inversion and the steep
| change in long-term rates, and thus value of long-term
| debt, as opposed to only low overnight interest rates. The
| Fed does not deserve blame for SVB's choice to _load up on_
| that long-term debt without hedging those risks. I 'm
| answering the parent's context, which is discussing how the
| gun got loaded; we all agree it was SVB to blame for
| pointing it at their own head.
| reverend_gonzo wrote:
| I'd say it's more like the Fed opened up a "Free ammo and
| cocaine store". Most banks came by, got their free coke
| and went on their way. SVB came alone and said "well
| let's have a fucking party: get rocked up and play some
| Russian roulette." And every other bank that might've
| been eyeing that ammo realized "holy shit this is for
| reals."
| jjeaff wrote:
| I haven't seen a lot of evidence yet that SVB was
| necessarily pursuing a risky strategy. Certainly,
| proceeding at all without a risk manager is risky in and of
| itself. However, the "risky" investments that I have heard
| described thus far are mostly treasury securities. They
| simply had too many for a time horizon too far out. There
| is no bank right now that could withstand a withdrawal rate
| of nearly 50% of total assets in a single day.
| nafey wrote:
| > However, the "risky" investments that I have heard
| described thus far are mostly treasury securities
|
| You assume that all risk is default risk. The risk that
| SVB took wasn't that the US govt will default on its
| bonds. It was that the treasuries will lose their value
| in case of interest rate changes.
|
| SVB bought billions of dollars of US treasuries which
| lost their value in the last year due to rate hikes. This
| showed up as unrealized losses on their balance sheet
| which spooked their depositors and precipitated the
| collapse.
| wbl wrote:
| Please explain to me what you think rates would have needed
| to do given that there was a massive decrease in economic
| activity due to a pandemic followed by inflation.
| phoehne wrote:
| I think the real damage was done between 2008 and 2018,
| when we spent 10+ years under zero interest rates in the US
| and negative rates in parts of Europe. I think that
| conditioned people to forget about things like duration
| risk and interest rate risk. Had we been under a "normal"
| rate regime during that period, I don't think people would
| have thought 10 year t-bonds paying 1.5% were in any sense
| of the word a "good deal." I think peoples' expectations
| were so messed up that Austria (?) issued a 97 year zero
| coupon, zero interest rate bond. Like it was a good thing.
| mitthrowaway2 wrote:
| IMO? Overnight term rates should have been zero from 2020
| to about July of 2021, then allowed to rise by 0.25 per
| month to perhaps about 3.5%. Long-term rates should have
| been left to float with the market, pricing in the expected
| risk of inflation. Not that my opinion matters, since I
| wasn't in charge.
| wbl wrote:
| That still leads to losses on long term treasuries.
| That's what it means to raise rates.
| mitthrowaway2 wrote:
| Yes, of course it does. But there are losses, and then
| there are _losses_. 10-year yields going from 1.56% in
| 2021 to 4% in 2023 is equivalent to a price drop of 17%
| (given maturity in 2031). If 10-year yields had only
| been, say, 3% in 2021 before rising to 4%, the bond price
| drop would have been closer to 7%.
| akira2501 wrote:
| > you can blame the Fed for low interest rates, but it's the
| yield curve inversion and long rates which caused the
| liquidity/solvency problem not the short term rate hikes
|
| I blame the bank management. They left the risk management
| position open and spent way too much time, money and effort on
| marketing during that period of time rather than shoring up
| their shaky position.
| MilnerRoute wrote:
| And even then, this article is about the venture capital
| industry and private equity firms - which for the most part
| is entirely different than banks.
|
| The problem is apparently that some VCs invested _in_ banks -
| and banks are about to be more heavily regulated. That 's a
| good thing -- it will get banks implementing the backstops
| they should've had all along. I really don't mind if some VCs
| make less money than they'd hoped on their investments in
| risky banks.
|
| Also, this $500B number is spread across the entire VC
| industry. And even then, most VCs have heavily diversified
| portfolios. Just for example, one investor in SVB was Insight
| Partners -- but their web site lists 800 different
| investments. They're part of that $500B number, but it will
| have very little effect on their overall portfolio.
| danielmarkbruce wrote:
| It's also questionable that they could account for their
| bonds the way they did. A company isn't allowed to just
| decide to put something in the "held to maturity" bucket -
| they need to both intend to do it and actually be capable of
| doing it. Given the depositors in question, I don't think
| they ever met the bar.
| landemva wrote:
| > not raising short rates would increase inflation
|
| Proxy war in eastern Europe, with USA dumping big $ there, is
| causing price rises.
| mindslight wrote:
| "Proxy war" ? Asserting that Russia only invaded Ukraine at
| the behest of another country (China?) is a pretty strong
| claim.
| watwut wrote:
| Russian troll.
| bagacrap wrote:
| How does that domestic impact service sector wages
| landemva wrote:
| Large debt issuance to fund federal government deficit
| spending causes dollar to devalue. This affects price of
| labor paid in dollars.
| nostromo wrote:
| Inflation was surging well before the Ukraine invasion.
| landemva wrote:
| The virus lockdowns ended and manufacturing supply chains
| have been clearing. Please tell us why price increases are
| continuing, instead of dramatically dropping.
| nostromo wrote:
| Because we printed trillions of dollars and haven't come
| close to removing all that excess stimulus yet - nor have
| any supply side constraints that existed prior to Covid
| been removed.
| landemva wrote:
| I thought the corona payments ended. Computer chips and
| PCs are largely back in stock.
|
| Fertilizer and fuel prices went higher in past year. This
| drove up food production prices. Molecule flow in
| pipeline to Germany was sabotaged, preventing sale of
| molecules from east to west which drove up natural gas
| prices at export ports in USA. Not a virus issue but a
| war issue.
| lxgr wrote:
| > Computer chips and PCs are largely back in stock.
|
| Not sure if car manufacturers, the Raspberry Pi
| foundation, and many others would agree with that
| assessment. Energy prices in Europe have started coming
| down again as well.
|
| And Corona payments may have ended, but the money is
| still sloshing around in the system.
| LapsangGuzzler wrote:
| SVB also chose not to prioritize hiring a risk manager for
| months leading up to their collapse, which is just pure
| stupidity. Anyone worth their salt would've pointed out that
| they were at risk due to their investment strategy and
| homogeneous customer base.
|
| We're seeing old lessons from the 80's being retaught in the
| banking world.
|
| Never put all of your cash in one bank. Keep your debt and your
| liquidity held in separate banks because if you don't and your
| bank goes under, your bank debt is written off against your
| balance when the bank liquidates.
|
| The hyper-connected world we've created prioritizes efficiency
| and optimization at the expense of operational redundancy,
| which leads to people getting caught doing stupid things like
| putting all of their money into one business bank that had no
| visibility into their own risk profile.
| northstart001 wrote:
| It simply wasnt booked, some might say "they" needed an excuse to
| justify markdowns. So many assets are not marked to market which
| gives outsiders the false impression.
| blindriver wrote:
| I'm waiting for hedge funds to start blowing up from all of these
| multi-sigma moves in what should be relatively stable
| investments. I'm also waiting for Softbank to implode but somehow
| they're still around.
| lvl102 wrote:
| Can't be the only one who thinks this is possibly a ploy by VC
| bros to make Fed blink on interest rate hikes. Only they could
| have triggered such a bank run and only SVB.
| bagacrap wrote:
| So far it's worked out brilliantly for tech megacaps
| Dr_Birdbrain wrote:
| Interesting idea. If so, it was a risky gambit, and also they
| only get to do it once, because the next bank is bigger than
| SVB. Do they really care enough about lowering interest rates
| to play such a risky gambit, which can only be played once?
|
| Also we are coming on the debt ceiling limit at some point in
| the next few months, which might trigger a crisis of its own.
| If I were a VC I wouldn't play my one-time hyper-risky card
| before seeing how the debt ceiling shenanigans play out.
| lvl102 wrote:
| Debt ceiling is a political game and VCs definitely have
| politicians under control.
| happytiger wrote:
| I mean considering that many expected venture backed startups to
| bring us through this upcoming recession and be the silver
| lining, SV's problems seem more than a little problematic.
|
| https://medium.com/prime-movers-lab/venture-backed-startups-...
| [deleted]
| varispeed wrote:
| The whole idea of venture capital comes from the broken taxation
| model. The people who actually produce things, you know doing the
| work and have knowledge how to do something are burdened with
| heavy taxation, because years ago, when companies had high
| headcount, it was a way to make companies pay taxes. Now that
| everything gets offshored, including work, that model doesn't
| work anymore, but politicians for known reasons (corruption)
| don't want to change that, so to plug the tax gap, they increase
| taxes on labour and continue the squeeze, while not touching the
| big companies and the rich. This has created a situation, where
| educated and hardworking people can't amass enough capital to
| start their own business and their only way to get their idea
| running is to beg venture capitalists for money in exchange for a
| slice of their business or banks for a loan.
|
| This has created a divide and widens the inequality gap on a
| scale not seen before in our lifetimes.
|
| The rich get extremely rich, because they don't pay the same
| taxes as labour and they have so much money they own politicians
| and can make sure the status quo never changes.
|
| This has caused things like "quiet quitting", because people no
| longer see work is worth anything anymore if you can't progress
| your life in any meaningful way.
|
| All ladders to wealth and fulfilment that our parents and
| grandparents had have been destroyed.
| ransom1538 wrote:
| "so to plug the tax gap, they increase taxes on labour"
|
| Agree here. If you ever want to ruin a fancy dinner party say
| this: "We should tax capital gains at the highest rates, and
| tax labour the lowest."
| lotsofpulp wrote:
| > because years ago, when companies had high headcount, it was
| a way to make companies pay taxes.
|
| What does this mean? Assuming you are referring to earned
| income tax, I do not understand how income tax is a way to make
| companies pay tax.
| beiller wrote:
| I can take a stab. I imagine, if everything else stayed the
| same (rent, food etc) and the government raised income tax,
| companies would be forced to pay more wages to cover the gap.
| IE most of the increase would come out of the employer's
| pocket, because there is a minimum they ultimately must pay
| in wages in order for workers to afford rent food etc, and if
| the minimum is not met, why bother working?
| erenyeager wrote:
| I don't know, I like your reasoning but isn't it more
| complicated than that? Bootstrapping imo is the best way to go
| if you don't wanna give up stake but the reality is that going
| to VCs makes much of the process much easier (funding). Without
| the VC system, would we have to go back to a traditional loan
| process? I find that backwards and I would assume founders will
| like getting money from VCs better than banks at the start
| (after all, most loans may not even be approved if you're
| starting out).
| jimnotgym wrote:
| This is a good comment. In the UK capital gains are taxed at
| around half the rate of employees. There are other incentives
| to 'investors' too. VCs and Hedge Funds are parasites on those
| that know how to produce wealth. They should pay more.
|
| Or what is the alternative, if they didn't get their tax breaks
| they would do what? Stop wanting money? I don't think so
| guestbest wrote:
| As an independent developer (misv) working on my projects part
| time out of necessity, I look forward to a tech market where well
| funded businesses give away their software for free until they
| establish a monopoly mostly disappear. I don't think this will do
| it, but it helps make me think they won't have spigots of easy
| money flowing in to their accounts.
| mrtksn wrote:
| Completely agree, I'm sick and tired of capital flooding the
| markets until everything else dries out so their products
| prevail due to the sheer reality that you can't compete against
| "free". At first it may seem like encouraging innovation but it
| ends up with stagnation once the battle over land grab is over.
| gumballindie wrote:
| This comment is underrated. Basically what these businesses do
| is they sell their products at a dumping cost. If that practice
| is illegal for physical products then so should it be for
| software.
| labcomputer wrote:
| Well, sure, but that's essentially impossible to define for a
| product with zero marginal cost. You'd be making it illegal
| for a small company with x sales/year to sell for the same
| price as a large company with 2x sales/year.
| whack wrote:
| At a very minimum, you can make it illegal to price a
| product below its marginal cost. This would have prevented
| e-commerce/rideshare/delivery companies from using VC-
| funded discounts to gain market-share and destroy less-
| funded competitors.
| mmmmmbop wrote:
| I agree with the sentiment, but it's not correct that price
| dumping is illegal for physical products.
|
| Trade treaties and WTO rules cover dumping in _international
| trade_ for obvious reasons, but to my knowledge, there 's no
| law in the major western jurisdictions covering domestic
| dumping.
| toast0 wrote:
| Domestic dumping may be prohibited as predatory pricing
| under anti-trust, depending on the circumstances, including
| the pricer needing to have market power.
| mmmmmbop wrote:
| Right, but there is zero differentiation there between
| physical and virtual products. GP implied that there is
| some sort of protection against price dumping of physical
| products that doesn't exist for virtual products.
| [deleted]
| KirillPanov wrote:
| The differentiation is in your choice of terminology.
| "Virtual" products have zero marginal cost, and the
| statute mentions marginal cost. The statute doesn't have
| to mention "virtual" products because it mentions
| marginal cost.
| btown wrote:
| https://www.ftc.gov/advice-guidance/competition-
| guidance/gui... notes that there are dumping restrictions,
| but that courts rarely find firms in violation.
|
| Asking ChatGPT "What is the case law around single-firm
| predatory pricing?" provides a number of examples,
| including the tests used by various Western court systems.
| (Though do note that ChatGPT is not a lawyer, and this is
| not legal advice!)
| mmmmmbop wrote:
| Correct, anti-trust law can introduce a lot of rules
| prohibiting actions that would be fine if it weren't for
| the monopolistic position of the actor. But as mentioned
| in the other comment, there's no differentiation there
| between physical and virtual products.
| WJW wrote:
| Perhaps, but seeing the public outcry when docker tried to kill
| its free-for-open-source plan makes me think we'll see
| companies giving away software for quite a while.
| drowsspa wrote:
| I'd even say this model was a net negative for development in
| general. So much complexity and time wasted spread throughout
| the industry because of these companies with infinite money
| fuzzfactor wrote:
| Remember the way Mr. Drysdale fainted when Granny threatened to
| withdraw all of her money from his bank?
| cs702 wrote:
| Startup valuations had gotten too rich.
|
| Now they're coming down to more reasonable levels, in fits and
| starts.
|
| VCs and their LPs don't want the write-offs. They're painful.
|
| But ultimately, I think the write-offs will prove healthy.
| dehrmann wrote:
| The takeaway from SVB is that there are a lot of losses in
| asset values either because of the pandemic (SF office space)
| or rising interest rates (home prices, startup valuations) that
| have yet to be realized.
| ryanSrich wrote:
| > VCs and their LPs don't want the write-offs. They're painful.
|
| > But ultimately, I think the write-offs will prove healthy.
|
| Yeah this was happening with or without the SVB collapse. In
| fact, I really don't see much of a correlation to any of this
| (between lower valuations and the SVB collapse). But I couldn't
| read the article as it's behind a paywall and the archive.is
| version got cut off.
|
| Valuations from late 2020 to early 2022 were so radically
| insane for later stage startups that we will likely see a mass
| extinction event in another 12-18 months when they all either
| run out of money, or shrink by 90%+. Series A and B companies
| getting 100-200x on revenue is simply unimaginable for me even
| in the best of times. VCs that invested at these valuations are
| likely also going to die off as they'll be unlikely to raise
| future funds. Only time will tell.
| spaceman_2020 wrote:
| I also think that tech is moving very fast, and startups with
| 10+ years of unprofitable existence without any potential exit
| are going to get disrupted by newer players.
|
| The current crop of startups have largely been pioneers, but
| usually, the settlers take away the bulk of the spoils.
|
| In India, Uber got everyone used to the idea of app based cabs.
| Now newer players are eating away Uber's lunch with newer
| models and without having to spend any money on educating
| customers or drivers.
| dehrmann wrote:
| > startups with 10+ years of unprofitable existence without
| any potential exit are going to get disrupted by newer
| players.
|
| It depends how unprofitable. Well-established products like
| Twitter and Reddit are big, have an established user base,
| and while not particularly profitable, I also don't see them
| getting disrupted by a rising competitor.
| snordgren wrote:
| They are social media sites, the textbook example of the
| network effect.
|
| Them not being very profitable is almost like a moat in
| itself - not only is it hard to displace them, it's
| probably not profitable to do so either.
| gumby wrote:
| > Startup valuations had gotten too rich.
|
| What possible value is there for entrepreneurs of a secular
| reduction in valuations?
|
| Currently those of us in tech are suffering due to the
| absurdities of the SaaS obsession.
|
| Edit: I mean developing technology, what has to be called "deep
| tech" these days.
| EMM_386 wrote:
| https://archive.is/uCB49
| dehrmann wrote:
| Is the only common thread between SVB and the haircut that it's
| inspiring LPs to look more closely at their investments?
| fairity wrote:
| I'm confused too. Seems like link bait. The article fails to
| connect the dots between SVB and venture valuations, which were
| already well into a downswing before SVB's collapse.
| DeepYogurt wrote:
| I wonder how this will play out for today's mid stage startups.
| Do they acknowledge their prior rounds as being inflated? Do they
| try to say the course and double again? Their burn rates will
| likely not be easy to cut down in the short run.
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