There’s definitely going to be some major fallout from this. I don’t think SVB will be bought, and depositors certainly are not going to be made whole anytime soon. Why?
Well check out SVBs most recent 10-Q. Everyone knows they had $90B in MBS but most people haven’t commented on the fact that they also had $70B in loans as part of their assets. Normally loans are considered pretty safe assets, but as others have commented a good part of these loans are to the same depositors (startups) that SVB owes money to. Additionally SVB lent money to founders to buy homes, cars, etc. Hopefully you can see where this is going now… The real question is going to be how much if any of those loans SVB can recover to cover their deposits. This could mean calling in all kinds of credit instruments from startups that are ill prepared to suddenly pay them back.
Unless the loans are forgiven, in addition to making the depositors whole, SVB will still take a whole bunch of startups down with it. Those companies vendors will feel the hit too. It may take some time for the full repercussions to be felt but this is going to be a big deal.
Also, for those of you who didn’t live through 2008, there were plenty of people who assured everyone that everything was OK right until the music stopped.
I don't think SVB is the keystone, but things simply don't feel correct right now.
* Inflation is unusually high right now
* The working/middle class is increasingly discontent.
* Rising interest rates are causing major follow on effects.
* Housing prices have been blowing up. Given increasing unemployment and interest rates, it's unclear what's going to happen there.
* The pandemic created insanity. Markets have made little sense over the past 3 years. They're just now returning to normal.
* Many, large companies are doing layoff. The market as a whole is signaling they don't expect profitability through revenue increase - so they're reducing burn.
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I have a hypothesis that markets are becoming increasingly optimize - which results in quicker returns, but also more frequent and harder drops/recessions.
I think the issue is way worse than all this, and way harder to solve - we're basically on the edge of the roaring 20s. inflation is high because companies are increase profit margin, and companies are increasing margin because there isn't enough competition. Companies would never voluntarily lower profitability, and are rewarded for short term actions, incl. layoffs, which are gutting long term stability of these companies. People, businesses, governments are increasingly indebted compared to prior generations. Housing in productive cities is way below demands, while there's empty houses in Detroit and Cleveland. Even with remote work (which is being clawed back), this isn't stabilizing and there isn't enough housing (esp. affordably). It takes years before that much housing can be built, assuming we legalize it (YIMBY v NIMBY). We don't have a strong growing population without immigration so there is no future generation big enough in this economic Ponzi scheme.
The working class (with housing and all that) are screwed, while the rich get richer. Eventually there's no where left to turn for profitability though - and no more debt Wall Street can issue to keep the spending up. Then what?
Don't forget that we are entering into a new cold (lukewarm) war over the next couple of years if this keep going which will require a complete re-jig of the entire world economic infrastructure as things are going to have to brought back and produced locally or near-shored to friendly countries.
I can't see this not affecting inflation as cost of goods will increase.
There will also be many more manufacturing jobs in the west, that will be really good for people that don't have access to a good job today. I wonder what that will do to inflation with more people better employed.
I have a hunch this has been happenomg for a while. Less food to go around, for example, as a major fertilizer exporter is currently fighting a land war on their territory.
Hell, restore the exact tax code from the end of the Reagan presidency and call it the “Reagan was right bill”. It would still be a massive step towards a balanced budget
Total federal outlays in 1989 were $1,143,744M in today's dollars. That's less than is currently spent on Medicare and Medicaid, ignoring everything else in the budget.
So you'll have to make some pretty substantial alterations.
Your tool does not allow for classic federal tax rates. It caps in the high 30s claiming higher taxes "do not work" in spite of the fact tax rates were double that for decades.
Interesting, perhaps this isn't the best one. It's more the exercise of trying to tweak revenue and spending that I am recommending than this particular site. Otherwise people seem to imagine that the problem is much easier than it is.
come on. Why is BNPL taking off? no-cost emi? why should regular folk be given free access to credit to buy groceries and shit? remember, the interest is charged, it just gets added to the cost so everything gets expensive.
if only "essential" stuff like buying a home or a business got a loan, things would be much cheaper because overall there would be less interest to pay.
You are responding to a thread about federal budget balancing. This is not similar to balancing your own budget. If the federal government had no debt, the public would have no money.
it always does go on a diet. but people demand it protect banks, oil, defense contractors, jobs, hospitals, poor states, poor people, rich people, rich states, .... and so on.
you benefit from having the FBI, FDA, NLRB, FAA and even the EPA while people try to rob you, give you fake drugs, force you into endless debt and low pay, put you on dangerous crowded flights and crash railroad cars around you with cheap stinking chemicals that stay on your lakes and farms for years.
these companies would rather you shuttup and buy from the only two identical stores left who raised their prices.... and shut down the government for your own problems.
Several fair points there. The unmentioned element is Environmental / Climate.
That is, even if we could instantly magic into completion, all of the affordable housing to meet all global demand, and give it free to all who require it - as in, "hey! problems solved! enjoy your new homes, everybody!" - then the simple environmental load of doing that would put us quite significantly further on the road to ruin, in and of itself.
Climate change is here and will increase, so any human strategy involving "speed up! do more stuff! build more stuff!" is also inevitably an Own Goal in some respect. Even some things that we consider to be desperately needed for this or that societal reason.
First off, the actual scientists, like the ones at the IPCC say climate change will only slow growth, it won’t ruin us.
Your point - is basically what most well off (and since you’re on HN I assume you’re better off than 80-90% of the world) are now saying about climate change, screw the poor, they need to have expensive energy, expensive food, and according to you no affordable housing. Why? Because you think the world will be ruined, because that’s what your media is telling you, and you haven’t even looked at the scientific facts on this.
You know, maybe you should give up all your possession and live on rice and beans for the next 10 years, knowing you’ve done your bit for the climate, and then see how you feel.
Edit: removed personal attack at the end. It was unnecessary.
That's a whole lot of traits and mindsets you've unfairly assigned to me.
And that's part of the perennial problem with discussion nowadays. It's near impossible to speak without being pigeonholed and caricatured : "omg! you dared to tangentially hint that prioritising building comes with some downsides! one of them! you must, therefore, also hold this, this, this, and this unfavourable worldview! how horrid you are!!".
It's all a bit silly. And ironic, because I'm actually disabled, and on a really tiny income within the scale of my country. I already make my difference by living a low impact life, practicing what I preach. I'm in my 40's and I've never owned a car, and it's not because I can't drive. I consume so much less than my countrypeople, in general in life. While my friend is earning, and consuming, $150K worth of "whatever" per year, goods, consumables, flights here and there for this and that luxury frivolity, raising his kids rich-person style, I'm living a simple life at home making a lot out of a little. There'll be no kids for me.
Screw the poor?? I am one of the poor. Regardless, I still see the basic Occam's reality that our species as it stands (and with massive inertia) is currently saturating this planet's resources in many different ways. And the mindset that we can fix everything by getting busy will always be somewhat paradoxical. Because, as you point out, everything we need is already right there, stockpiled in the hands of a greedy minority.
I was with you until the last sentence. Why the vitriol? This is fundamentally a hard problem and I have a hard time defining an attitude towards climate change that I feel 100% good about.
The scarcity of affordable housing isn't from a lack of housing stock as much as it is from the ways that housing as an investment puts constant upward pressure on housing prices, and the ways that inequitable distributions of housing alienate people from the work of making home. We need people to feel invested in where they live, to take care of it, to care for it, but that kind of culture gets stifled by current housing ownership arrangements, where the incentive and opportunity to care for one's physical space gets sucked dry by the chain of landlords who could care less.
Why don't you all come and join us in Europe? We have what you are looking for:
- Universal high quality health care
- Free education including high quality universities
- Cheap or even free quality childcare
- A social system that has everyone's back if shit hits the fan
No need to introduce socialism as some here seem to advocate. History has shown that this fails 100 out of 100 times, and it's been tried in every thinkable constellation.
Europe IMO has a better approach vs the US - still enough incentives to work hard, but aiming to afford everyone a humane existence. The main threat I see is that the balance is shifted too much to socialism over here, stifling innovation and ultimately destroying the wealth that funds all these goodies.
Part of the problem is that "socialism" is such a vague term, at least in the US. The most prominent self-defined socialist in the US, Bernie Sanders, doesn't want a Bolshevik revolution but basically just move the US to be more like Canada and Western Europe with increased safety nets and universal health care and free/cheap university education. On the other hand, yes, there are various fringe groups who are actually into Marx and collective ownership of everything despite the disasters they led to historically.
You can't just go there. I don't see many European companies trying to recruit Americans in software. There's the language barrier for Americans but I think in software speaking English is good enough for many countries. We'd have to take a pay cut, but we know we'd be trading off less salary for actually useful lifetime benefits. I get pinged all the time for jobs in Canada, less in Australia. Whereas in my experience at American companies, we're trying to hire people from all over the world and we do it and bring them here.
> Even with remote work (which is being clawed back), this isn't stabilizing and there isn't enough housing (esp. affordably). It takes years before that much housing can be built, assuming we legalize it (YIMBY v NIMBY). We don't have a strong growing population without immigration so there is no future generation big enough in this economic Ponzi scheme.
So stop immigration, let the population contract, and the housing problem takes care of itself.
It'll take time for that many people to die off and free up housing, plus who will work the jobs? Who will buy the stuff?
We need more workers (record low unemployment in 2023), and more consumers (to generate more profits without more profit margins), and more tax payers (to cover fixed government costs).
We should basically open the borders, and enforce that those entering work fairly against Americans to keep them from driving down wages. This wouldn't be an issue if the business acted respectably.
> Time for a forceful redistribution and system change. Can’t happen soon enough.
Sadly revolutions have a really bad track record for the 99%. It may feel good in the short term but the people who end up assuming power are usually much worse.
OTOH fractional reserve banking and cronyism are really past their expiration dates. It'd be nice to stop kicking the can down the road - we have technological solutions now.
My point is that people should not have to serve or suffer for the system, but the system has to work for them. There is more than enough wealth for everyone, it’s only a distribution problem. For that, modern tech surely can help
The people created the system though - indirectly thru flawed / corrupt leaders but you get what you get. I'd like to understand now why we'd get a better set of leaders if we tear it all down now. I personally don't have any observations indicating why that would be true.
Similarly if you redistribute wealth - what's going to prevent it from becoming unequally distributed again? I'd imagine that a small subset of people would quickly game whatever system is devised and we're back at square one again.
Just for demonstration purposes: imagine we get rid of voting alltogether.
Instead, a random representative sample of 1000 people is chosen from the population, for some congress, for a year. They rule during that time. Some rules cannot be overruled, like the 1 year limit, no way to game that. Additionally, all communication of the chosen ones must be recorded and public, without exceptions.
This basically eliminates corruption or the rise of a „ruling class“, and lobbyism has a much harder task.
I would also argue that this will result in much better overall decisions - they might lack some initial knowledge but that is more than offset by missing corruption and cronyism
You can't parachute people into government without explaining to them how government works. Representatives don't just vote on legislation, they have to propose it and draft it. Someone has to understand and explain how all of that functions.
The people doing the drafting, suggesting, and explaining won't have term limits and will have the real power. They'll also be the ones targeted by lobbyists.
You'll end up with is a floor show with the real decisions being made behind the scenes by people who are mostly not directly accountable.
Not unlike what we have now. Different, possibly better in some ways, and possibly worse in others.
A randomly assigned legislature sounds like a recipe to create an unaccountable bureaucracy of staffers and advisors 'guiding' the forced citizen through what must be done / can't be done legislatively. This is where the real power would lie - and frankly we are kind of there today. Most congresscritters spend 45% of their time campaigning, 45% of their time fundraising and 10% of their time looking damn cute. Staffers, lobbyists and think-tanks do most of the legislative work.
In my country, we have some kind of "popular tribunals" (i.e. tribunals where nobody is a professional outside of the lawyers) for trade disputes (although there are professional tribunals for appeals).
My sample is anecdotal at best, but the single instance in which I ended up in a position to witness a judgement and its rationale, the result was... laughably wrong. It was quickly overruled in appeal by the judges who actually know the law.
So... I'm not optimistic. Perhaps some AI could help, I guess? But that comes with lots of risks, too.
> Similarly if you redistribute wealth - what's going to prevent it from becoming unequally distributed again?
The redistribution shouldn't be a one-time event, but rather a persistently different approach to taxation, labor rights (unions!), welfare, etc.
We can see this working in a number of countries, especially the Nordics.
Of course, there will always be attacks on such a system, but such is life. Some battles need to be refought every two generations or so, that's just how humans work.
We can see this working in a number of countries, especially the Nordics.
Norway doesn’t count because of its sovereign wealth fund.
How is it working in Sweden though? That country still has billionaires (IKEA founder, Minecraft’s notch).
I think it just doesn’t work in general. If you try to set up a new system to redistribute the wealth, the winners will be those in charge of the system.
What makes you think the entrenched interests befitting from the status quo won't co-opt that process and funnel the wealth into themselves?
I mean hell, the whole BLM shindig petered out the nanosecond that it looked like the people with BLM signs in their yard might not get tackled by the first cop that see em'.
Now imagine how something with serious dollar signs attached would go(!!).
I mean hell, the whole BLM shindig petered out the nanosecond that it looked like the people with BLM signs in their yard might get to see someone walk down the street with an open container and not get tackled by the first cop that see em'.
everytime i hear someone talk about redistribution i wonder if they're asking to have more money, or if they'd be happy if the redistribution made them poorer.
Neither. More like: if you are sick, you can go to a doc for free, he is paid for by the public. Want to become a doc? Get that education for free, including some monthly money to live during studying. Those teachers? Same thing, paid for by the public.
Or you can travel with great public transport, for free. It’s not that I want more money, taken away from the rich, but the realization that everyone including me is much better off of everyone around also is taken care of. Strong public services are key.
Ontop of that, even more radical, companies should be run by the people working in it instead of shareholders siphoning out profits. Workers would never fire each other for more profits, or evade taxes that fund their neighborhood, or offshore their own jobs. Currently that might not be legal, that’s why it would need forceful redistribution.
Even on the simplest level: if you have free access to education/healthcare/… imagine how many brilliant people can try to become entrepreneurs or researchers instead of having to suffer two service jobs to provide their family. It’s statistics, that 60%+ of the population might include the next Einsteins, but are unnoticed and their potential wasted.
According to [1] 14.5% of all EU workers are self-employed (i.e.: they have their own business, as small as it may be) whereas only 6.6% are in the USA.
I'd say "self-employed" is essentially being a contractor or owner-operator, with no or very few employees and focused on facilitating the work for themselves (and possibly their immediate family), not growth & scaling & expansion.
Entrepreneurs start companies that are meant to grow beyond themselves and aren't just a legal framework to provide their work.
Not to disparage anyone who's self-employed. I am too, but I wouldn't consider me an entrepreneur. I might become one, but that would mean changing my work setup.
There several reasons for that, but one key thing is that people do not, in general, desperatly dream of the „get rich quick“ to escape their life situation. A big share is simply well off, taken care of if there are problems, and live their live in good conditions.
I am fine with not every useless thing to exist and waste resources on that.
Lots of people in the US that start companies are well-off, too, and they don't "desperately dream" of escaping their life situation. They just have a very different risk profile, and are happy to risk failing for a better chance at success.
It’s more than a desire for money too. The SV culture simply assigns a lot of respect to founders — definitely to the successful and also somewhat to those who try and fail. The founders I know do this not to get rich but to access that prestige. In fact, most know it will be a financially difficult task. Consider eg the lore of the Airbnb founders having to max out a binder full of credit cards…
For sure, when I said I was an enterpreneur in the US, Hungary and Spain, I got three different reactions. In the US, people think you're a cool kid, in Hungary they think you're a crook and in Spain they think you are poor.
Interestingly that's a popular myth. Much of Europe - especially Scandinavia - is much friendlier to startups than the US. The proof is the much higher social mobility.
What the EU lacks is the Ivy->Startup pipeline and insider/investor networks with access to old and old-ish money. And also the relentlessly aggressive branding and self-promotion (and tolerance of scamming and grifting) that defines US hustle culture.
If you're not in or around those networks already your chances of success in the US are pretty slim.
The EU also lacks the equity compensation pop that makes people millionaires overnight after 10 years of hard work. It's largely cultural rather than regulation related, but for example Spotify IPO'd but minted few millionaires relative to if it had been a silicon valley startup like AirBNB or Dropbox or Slack.
The recent discussion on Slack's stock options showed how few SV startups make employees millionaires these days. It's as rare in SV as it is in Europe now.
I don't think that's true, it's hard finding comparative figures that aren't out of date (one below is mostly ~2004), but it indicates European countries generally have more SMEs per 1000 people than the US, and a couple of more recent articles say the UK still has more.
Anecdotally, I live in Europe and know plenty of entrepreneurs, albeit mostly either in the tech space or as incorporated side gigs.
My income is way above average. I'd be happy to be poorer if, in exchange, I was assured that my children and their children etc. will be treated decently by society no matter what happens.
Rich socialist here. I make a shitload of money. I also give a shitload to charity. I would expect that redistribution systems would take a lot of my income and wealth. Okay. It isn’t like I work ten times harder than my brother in law, despite getting paid ten times as much.
I’d like people to not go bankrupt paying for medical bills. I’d like everybody to be confident they can afford their next meal.
I dont think we have a very strong culture of leaders and an informed populace currently to definitely state that whatever comes after is better
The current system was forget in the furncace of extreme bravery and duty . A fledging nation was taking on the superpower of the time (UK). Every single founding father was taking direct personal risk to themselves and their families by declaring indeoendence.
The level of bravery needed for this is astonishing. The people doing this literally had no self-interest in doing so. What leaders can you find today with the same sense of duty that are able to negotiate this country into a better deal?
The answer is there arent any and anything new we put in place today will look like a disaster vs what we have now.
Its insane to discard a 250yr old system that has outlived 2 world wars and most competing systems, because some of its features have been gamed.
Savings and Loan Crisis had similar issues. Volcker raised interest rates extremely fast to combat inflation, which put a bunch of banks' assets during ZIRP underwater.
Regulations have controlled a lot of the serious problems back then, but there is no getting away from the fundamentals. Also, during QE, the Fed bought tons of overpriced MBS assets, and they're losing money right now for the first time in a long time. This doesn't really matter since they can't become insolvent; they just print money. But that has inflationary effects itself.
This is a much more complicated (probably worse) situation than most want to admit.
> Also, for those of you who didn’t live through 2008, there were plenty of people who assured everyone that everything was OK right until the music stopped
In the 2nd or 3rd week of the 2008 crash starting, they put on CNN this guy who predicted the entire crash years ago and wrote a book about it. And also 3-5 finance experts. All of them were laughing in the guy's face as the guy explained what was happening, why it was happening and what exactly was going to happen very soon. They were discrediting, belittling him and assuring the public how everything was totally okay. All of them were actual prominent personas in finance, with education, experience, credentials and whatnot.
Things happened exactly as the guy wrote in his book and explained on CNN. Everything came crashing down.
What's unforgettable is how all the actual experts with credentials were reassuring the public that everthing was ok SO hard to the point of laughing in the guy's face...
If the talking heads on the news were told how to react, then it is logical that they maintain the perception that everything is ok. A lot of economic factors are controlled by perception since we are debt based economy. If everyone in the US wanted their money in cash or gold/silver, banks and the entire system would collapse because it is not there. And in 2020 the Fed removed the 10% reserve requirement so I don't see that fairing well.
We are beyond the point where the music will stop. In the last 15 years we have entered the full simulation. Short of a nuclear bomb going off on American soil, there is seemingly nothing that the upper class won't wish away with make-believe. When the class divide becomes great enough, the powerful can dictate reality. Something needs to tangibly get severely messed up for the emperor to admit he's not wearing clothes. Currency is not tangible enough, and there's plenty of room for people to escape with golden parachutes.
> Unless the loans are forgiven, in addition to making the depositors whole, SVB will still take a whole bunch of startups down with it.
This is fine. Healthy even. There are risks inherent with investing whether that’s a startup or otherwise and so letting them fail leads to better, safer, and more innovative business models that don’t rely on low interest rates and excess cash.
Ultimately SVB isn’t contagion because SVB unlike many other banks was heavily reliant on investments and securities that were highly exposed to interest rate increases. Shit happens. Businesses including banks and startups fail. World keeps spinning. Any argument for bailing out investors here is an equal argument for bailing out homeowners or any other person who was affected by high interest rates for any reason.
This isn’t a case of startups failing for being poorly run.
In some cases, the issue is literally (using small numbers to make it work for individuals), you have a steady job, $200K in the bank and owe $200K in loans, partially secured by the cash and partially by your income.
Tomorrow, the bank calls, and says “we spent your future paychecks and life savings, so we really need you to continue making payments on that loan”.
> This isn’t a case of startups failing for being poorly run
Sure but it is a case of buying the wrong product (SVB) and then reaping the repercussions of that bad decision. It doesn’t really work for individuals because it’s a B2B transaction and not B2C.
A bank is just some other business. Mismanaging the risk is the industry’s problem and now they get to eat the lunch they ordered. The world is scary, some things have insurance (FDIC which is not most deposits at SVB), and some things don’t. Is what it is. Doesn’t matter if it’s “right” or wrong - that’s a naive interpretation of business.
In some cases they were forced to used this bank by VCs. But even if not, if anything, they are the victims here. It is not like they could make full audit of bank prior decision or had any reasonable chance to see problems.
That is whole reason for having regulations and goverment audits.
People are confusing shareholders with demand deposit account holders.
Shareholders can and should be wiped out with very little to show for it. That is the risk they run.
Demand deposit holders getting wiped out is unthinkable. Taking any non-negligible haircut on their demand deposits (yes, even over $250k) will destroy confidence in the banking industry. This is far worse than the moral hazard of a bailout.
What must be done is not a corporate bailout to protect shareholders, yet tons of people think this is "socializing losses and privatizing gains."
> Demand deposit holders getting wiped out is unthinkable. Taking any non-negligible haircut on their demand deposits (yes, even over $250k) will destroy confidence in the banking industry. This is far worse than the moral hazard of a bailout.
Says who? 2/3 of amercians live paycheck-to-paycheck [1]. The only thing that a banking system has to provide them is day-to-day operations plus a small cushion (much smaller than 250k).
For that people accumulating over 250k is a privilege, one thay may as well come with the risk of getting it wiped out in very rare events such as this one.
> Think about the 2/3rds of americans above. Why shouldn't they think that?
Because:
> 2/3 of amercians live paycheck-to-paycheck [1].
Their paychecks are drawn from these demand deposit accounts.
This money above $250k is not being stored in an account like Scrooge McDuck just trying to get the highest score. This money is being held in a transitive fashion to pay employees, vendors, and lines of credit. This is what people are not understanding.
Yes, I agree. Depositors are entirely different issue then shareholders. I think that startups mentioned in this thread are the depositors.
Plus it is not just that shareholders took risk, it is also that market incentives push companies into too rules breaking and too much riks. Because it makes shares go up temporarily.
Nobody should have complete confidence in a bank. When I was young, I worked for a guy who ran multiple businesses and used multiple banks. He showed me how he balanced his treasury across multiple banks and instruments to minimize risk. He had lived through the Great Depression and seen banks fail. I took his advice seriously and have always used multiple banks. I am always concerned when any one account is higher than the FDIC limit. This requires cash flow planning and long term instruments, but it is what one has to do in this world.
and this is a dumb waste of resources/time/money/energy. the government should run a safe and boring bank for people and small businesses. no loans, no credit cards, just deposits (and allow people to buy safe bonds/ETFs through other banks).
they are already going to guarantee most accounts anyway.
> In some cases they were forced to used this bank by VCs.
Hmm it definitely wouldn’t have anything to do with SVB executives wooing VCs with lavish perks and favorable terms to increase deposits though right? That’s definitely not how the industry works.
Anywho - they are still victims and they should be made whole with remaining assets after FDIC makes depositors hole (which is a tiny percentage of deposits at SVB) - no doubt about that, but beside that these businesses and VCs are sophisticated and able to take on and assess risk. They were all calling to remove assets and urging portfolio companies to do the same because they understand the game. Not a lot of regular folks at SVB were. There’s a clear difference in sophistication. Next time maybe they’ll bank across a few organizations to reduce risk. Or maybe ask questions even.
If you’re going to use taxpayer dollars to bailout these businesses in excess of remaining assets you may as well pay lifetime salaries for the employees who worked at SVB. Don’t see a big difference there. I wouldn’t support either action.
SVB was literally playing by the rules outlined in banking regulations to reduce risks. Those rules are dumb, don't really reduce risk and don't fit SVBs business customers but they must be followed.
Society forced SVB to structure it's capital this way - society should be responsible to make the customers of SVB whole (SVB equity holders should be wiped out though - the risks of the business model are clear and arguably they should be aware of them as owners).
Afterwards we as a society should take a long hard thought about the success record of centrally planned economies.
SVB went bust and it busted because it made very poor decisions and had double interest rate exposure and unlike other banks (JPM, WF, BA, etc.) its depositors jointly all took their money out and created a bank run. SVB didn’t ask VCs and founders to all withdraw their money.
There’s nothing for society to do except for the FDIC to sort it what’s left and make sure the insured get their money and then the remaining assets are split up as fairly as possible.
> Afterwards we as a society should take a long hard thought about the success record of centrally planned economies.
I disagree. Going down the centrally planned economy route would be a huge mistake for the US (it’s a universal mistake for all countries except perhaps in dire circumstances like a global war). We should avoid central planning mistakes like bailing out or subsidizing bad businesses. Etc.
Yes, they reduce risk. They do not eliminate risk. If you're gambling on a "sure thing" or "have a system" it doesn't mean you're always going to beat the house.
The house relies on suckers and rubes misunderstanding risk.
In the above situation you should be able to refinance. SVB's problem is that it gave out loans it can't quickly recall at very low interest rates and these loans are now worth less than their face value.
Here is what I don't understand: How is this even possible? If SVB buys $100B worth of (10yr?) T-Bonds and MBS, this will immediately show up as an enormous interest rate risk position on their internal risk profile. The Bank's Risk Manager, CEO and Management Committee are supposed to look at these things every day and should have very specific guidelines on market risk exposure bounds. Regardless of what those guidelines were, presumably $100B worth of 10-yr unhedged fixed income instruments will be way out of those bounds. How was this missed? This is not some sophisticated high finance, this is basics. What on earth happened?
Wow. I am guessing they discovered this mess in early 2022. The CRO bailed or was pushed out. They couldn't hire anyone qualified, once they've seen the balance sheet (or were refused to be shown the balance sheet, which would be a red flag). Tried to unwind the position throughout the 2022, but couldn't, with the rising interest rates.
This is an interesting story but I'm not sure it adds up. What does it mean that they "tried to unwind the position"? It doesn't really make sense that you could fail to unwind a position in some of the most liquid markets in the world, over the course of a year. Maybe it wouldn't be at the desired price, but if they understood the risk as you imply, they'd just do the trade.
Unwinding the position in early 2022 would mean acknowledging and executing a huge loss back then. Not unwinding the position means taking a gamble that perhaps it all will work out or perhaps you'll go insolvent. Apparently they chose the latter, and perhaps that's related with the CRO quitting if they disagreed with that choice.
You would be able to unwind these positions gradually and the markets are relatively liquid for MBS and super liquid for T-Bonds. The problem is that you would be unwinding these positions after the interest rates have moved up, i.e. at a tremendous loss. Rates go up - bond prices go down and your assets are not worth as much. They did not want to do this right away and book a few billion in losses. It would be a hard decision for anyone to make. They bet that the rates will move lower soon but, instead, the rates went higher still. Now, if SVB could wait 10 years to maturity, everything would have been fine. But SVB is a bank and customers demanded money right now. They could not meet their obligations without immediate selling at a tremendous loss.
What are you going to do with MBS that aggregated averaged a yield of 1.5% when anyone can get a risk free bond returning over 3% now? Who’s going to buy your mortgages?
As chief risk officer, going into a public company that goes bad not even 2 months after being hired -for strictly risk mismanagement, not fraud- tells you all you need to know about the competency of the person being hired.
EDIT: Sincerely curious about downvotes:
You are interviewing for a CTO job. As part of the process, you get unrestricted access to prod codebase. The stack/ libraries are something you are very familiar. You find out the software will be a critical component to make payments to people worldwide. Its a high profile project. You are the public face of the software that must go live very soon, no one can tell for sure, but its imminent.
Your (interview) prep finds a dumpster fire. There's no way this thing will even run. The entire thing is not salvageable.
My point is that anyone competent would refuse to take the job. BY doing the opposite (taking the job) , the prospect hire is demonstrating that he/she (a) lacked the expertise to detect the dumpster fire, or (b) lacked the expertise to understand it was not salvageable (c) lacked the work-rate to do their due diligence (particularly for RISK management).
Pay me 20x market rate, and I’ll try to fix your cobol dumpster fire of safety critical murder spaghetti. I will need to add some liability clauses to your standard employment contract.
That doesn’t mean I’m incompetent; just that people you should hire on those terms are hard to find.
Anyway, I don’t have idea what happened here. The long time to fill the position also could have been because they were looking for a CRO that was better suited for a mushroom farm (kept in the dark + fed bullshit).
The resume of the new CRO suggests it was the former, not the latter.
Isn't the CRO and other CxO positions considered officers of the corporation by law? I'm under the impression that there isn't any kind of liability clause that would get a corporate officer out of hot water with regulatory bodies should they decide to pursue charges.
If that's not correct, I'd love to be enlightened.
Presumably, they could make sure they got a personal copy of the books as they existed on the start day, so that any negligence charges would be directed at the prior CRO.
Not a lawyer, but various CxO’s specialize in jumping in and trying to repair failing companies. I’m sure they’ve figured out how to shield themselves from personal liability if their new employer ends up laying of 100,000 people and crashing the global economy.
Pay me enough and as long as I won’t be held criminally liable, I will take charge of fixing a hybrid ColdFusion/Java Server Pagers website running IIS on Windows NT with an Oracle back end.
I’ll probably fail spectacularly. But I will still have money in the bank.
Also, the entire domain is managed by Apple Open Directory on an Xserve. And all of the business logic is not in the Java code, it's in C code called from the database.
Lots of people just aren’t in a position to be turning down jobs. If you want to judge people by the jobs they take, set up enough of a social safety net that reasonable people can’t get screwed by a short run of bad luck.
I don't think that statement applies equally well to your average employee as it does to a potential Chief Risk Officer at a fairly large bank. Totally agree with you in the general sense, but completely disagree when it comes to this CRO hire.
I think you seriously misunderstand the complexity of something like the 17th largest US bank along with its 8500 employees and global offices vs a code base. And if you're right, maybe they did know about the risk and were actively working on reducing it.
I agree with you, but probably in the opposite way you mean: I think it should be a lot easier for a CRO candidate to evaluate a bank's balance sheet than it might be for a CTO candidate to evaluate a large, sprawling code base.
Evaluating a balance sheet and identifying risks is one of the primary qualifications of a CRO job, no?
I dunno. Elon seemed to think he had things pretty figured out with Twitter's code base. :)
But seriously, I'm amused by this thread. We always belittle or downplay the complexity of systems we barely understand. Every software engineer ever exposed to any non technical management, product managers, or sales people has experienced this in spades. You go blue in the face with frustration trying to explain why "seemingly simple things" just are not as simple as people want to believe they are.
I've coded in mixed system designs for 30 years now. Experience has enabled me to see patterns I wasn't even aware to look for as a younger me. I see so much more and am available to evaluate so much more than ever before. But the most important thing that that "experience" has taught me is that this accrual of "experience" is not a convergent knowledge position. Sure, I see more than younger me's do, but I've also come to accutely embrace the notion that "the greater my sphere of knowledge, the greater my contact with the unknown." Complex systems like massive sprawling code bases are HARD. And so are highly intertwined economies.
You're are assuming she didn't understand the situation when she took the job.
I think it's much more likely she did and decided to take on the challenge to turn it around.
People in the industry knew they were in trouble. (I remember some of my banking colleagues talking about it last year). That's probably why it was so hard for them to fill the CRO job.
SVB had declined almost 66% in 2022. They were the 4th worst performer in the S&P 500. Their balance sheet concentration and mix made them an outlier in the industry and unusually exposed to rising interest rates. Its failure wasn't inevitable though. It had a strong brand and deep customer relationships with one of the primary engines of the US economy. If they could raise enough capital to fix their balance sheet, they could weather the storm.
She was a regulator that worked on stress testing banks after 2008 and could help them decide on how much capital they truly needed. It turns out it was a lot, and when they finally did announce details of the capital raise, investors got spooked and it triggered a bank run.
I think the parent is saying that the new CRO is bad not because they caused the dumpster fire - the new CRO is bad because after interviewing in January, they saw the dumpster fire and either thought it didn't matter, or that they could fix it. Not a case of "incompetent because they couldn't fix the problem", instead a case of "must be incompetent because they saw the books but took the job anyway".
Do you have to be a bad risk officer to be willing to get paid to save whatever is possible to save even if the ship is sinking? Maybe because of them five percent fewer businesses will go under because of SVB.
Your original comment makes it seem like the newly hired CRO was so incompetent that they caused the company to go bust in 2 months... (where obviously the risks were already in place and there might not be any way to advert it by the time)
> Do you take the job ?
Depends on how much they're paying me and how badly I need the money. If I expect the company to fail shortly after I joined due to the existing dumpster fire, I'd be interested in the size of the sign on bonus. And of course whether I'd have legal liabilities by association with the company. I don't think my competence matters much in this situation.
They could be brought in explicitly to fix the situation, and they could fail to do so for no fault of their own. I don't think there's enough public information to say one way or the other.
Would a potential CRO really get full access to a public company's accounts and risk register as part of the interview process? Would a CTO really get full access to a company's code base as part of the interview process?
Genuine question as this seems intuitively unlikely to me.
18th largest bank, traded. Data and analysis is available easily. Also CRO seems to have been working for NY Fed for a long time, so she definitely knew what she was getting into.
> Prior to SMBC, Olson held senior risk management roles at other leading global financial institutions. She also has rating agency experience, as well as experience in professional services advising large- and medium-sized financial institutions on evolving regulations, risk management and stress testing following the 2008 financial crisis. Olson began her career at the Federal Reserve Bank of New York, where over a period of 10 years she held a variety of senior policy, regulatory and examination roles in banking supervision.
Not at this point in my career, but probably at some point in my career.
Routine just becomes boring at some point. Once you have an established track record, it's far easier to justify (with creditability) that you decided to take on a ridiculous situation.
A lot of words in those tweets were reminiscent of 2008. To me, it sounds like SVB was possibly giving away sub prime adjustable rate loans to startups.
Generally not, but there will always be someone (next in line) who is responsible for the overall risk management. I think the problem was, once they discovered this mess, there wasn't a whole lot they could do, with rates going up. They could have booked several billion dollar loss early on, but instead, they decided to wait it out.
I think that guy's financial advice is so legendarily bad that people are using him as a predictor of what will not happen. In this case, certain banks staying solvent...
Pet Theory: Cramer being very bad is part of his appeal. If he was giving out good advice, then who would watch him? Just like Howard Stern was back in the day, you watch Cramer to see what stupid idea he's got next and the anger at his finely calibrated dumb being so widely broadcast is what keeps you coming back. Honestly, it's a great shtick, hard to pull off or replicate for so long.
I've read some conspiracy theories on Twitter that it might be a clumsy attempt at market manipulation: i.e., he'll hype up stocks that he (or his friends/superiors/whoever else) want to sell and talk down stocks that he wants to buy. Because those actual investment decisions are somewhat sound, you get that amazing "inverse performance".
But I've got no proof for either theory and your's is definitely the more entertaining one :D
Also I guess you have to give some kind of credit to a guy who not just spouts bullshit but invents entire bullshit concepts such as "room to grow"...
There was a moment where they could have mustered up a bridge loan to SVB, probably at very favorable terms, saved their companies and acquired some decent assets while they're at it.
Instead they DDOSed their own bank, tanked a large portion of their portfolio, and now are asking for a bailout.
It seems like the VCs should shore up their companies until SVB is wound down or take the losses. It's not like they don't have the capital.
No.
If you are familiar with LPAs (limited partnership agreements) some have severe restrictions on what types of investments they can make. Moreover, a lot work on committed capital, and have to therefore make capital calls to LPs that are not exactly the easiest at this time of overvalued holdings.
I can imagine how that conversation would pan out:
"Hello, Mr PIMCO Manager. Hi, we need 80% of your committed capital in less than 2 hours in order to bail out a failing bank in which we are not a shareholder or board member. Oh yes, I don't know how much we need, but its, like, a lot. Unfortunately, we don't have any collateral on this if FDIC takes over, but I'm working on it!
Oh yea, about those mark-to-market positions, can we talk about that later please? Can we count on your capital? "
> was a moment where they could have mustered up a bridge loan to SVB, probably at very favorable terms, saved their companies and acquired some decent assets while they're at it
One, they couldn’t. It’soutside their mandates; they’d have to raise new funds from LPs. Two, why? Just have your start-ups pull their capital and bank with the countless other banks providing the same services as SVB.
if a bank becomes so toxic that FDIC had to parachute in in the middle of the day (couldn't even wait til closing) and shut it down, how can this bank be saved with a bridge loan?
> SVB “didn’t have nearly as much capital as an institution that risky should have had”
Thanks to many VCs asking all of their portfolio companies to withdraw at once, SVB had $42b in withdrawal requests on Thursday. On Friday there would have had many more billions if they hadn't ceased taking them.
I wonder if any US bank could muster up $100b in 24 hours.
(On most days with lots of withdrawals, like on common pay days, banks will see lots deposits too. They aren't one-directional and out of the blue.)
Nobody owes them their money. That's not the bank's money and if the customers decide that the bank is no longer safe and is engaging in shifty shit the only reasonable thing to do is to take your own money and move it somewhere safe. The bank's whole job is to make sure it doesn't get to that point, and they failed at that. The CEO knew they were going to crash, probably for quite a while now.
A bank run like this would collapse any bank in the world. I get what you’re saying. But it is literally the fault of the people panicked and withdrew their deposits. And doubly the fault of the people who advised them to do so.
Faulting the people who withdraw their money is like faulting the fresher who crashes production. Yeah they could have avoided it, but really, this is the discussion point we want to focus on?
No this is literally the fault of a mismanaged Bank causing its depositors to lose confidence.
Imagine using this excuse in any other situation: "It's not the food poisoning at my restaurant that's causing me to go out of business it's those darned customers who stopped eating here!"
They can be risky for other behavior, necessitating capital. If they held less "risky" securities, they wouldn't need incoming cash. Cash makes the risk go away, but so does holding other better assets.
I'm not sure you have the right scale in mind. The shortfall associated with this bank may be into the tens of billions. That's a monstrous sum even for SoftBank.
its fate was sealed way before that and if Thiel instead advised everyone to stay with the bank it would have only prolonged the agony, with more people losing their money
You’re not bailing them out, you’re bailing out their depositors who had no say in the investments. The principals of SVB just lost it all to the FDIC, they weren’t bailed out in the least.
That's exactly what's happening but many depositors need to be "made whole" faster than the liquidation would allow because they need to make payroll in literally a few days time.
93% of the account holdings were uninsured. Many startups burn more than the FDIC’s $250K limit in two weeks. That’s equivalent to having 50 employees making $125K each, and zero other expenses. I’m guessing anyone with more than 20-30 employees is staring down missed payrolls.
The FDIC insurance comes into play after all other options have been exhausted. Given the FDIC can draw on the treasury and SVB has assets significantly in excess of deposits there’s literally no chance anyone will lose anything other than the management of SVB.
They aren’t insolvent and have assets to more than cover depositors. The FDIC take over is about stabilizing the bank, not destroying it. Why would you let a bank fail if it’s unnecessary ? They have enormous amounts of business relationships along a huge number of dimensions that are fully functional and fine and meaningfully contribute to the lives of millions. Why tear that up? Spite?
You don’t have to value it marked to market. You can value it as net present value of the hold to maturity value. That’s not a liquid price, but it’s the value if used as collateral against a credit line from the feds.
That’s just false. Being unable to secure liquidity to pay depositors doesn’t make you worthy $0. The bank failed to honor its charter and is rechartered under a FDIC controlled bank. But SVB is not gone, nor is it worth $0.
The article is talking about a bailout of depositors, not investors.
Not letting the bank fail is a form of bankruptcy in a way. The owners lose most or all of the value of their ownership, but the bank is sold to new owners so it can continue to run.
What is worse is we allow the mistakes to go unpunished - because then we will have more episodes like this down the line. If there are no consequences then the bad practise will continue. Anything that breaks away from the survival of the fittest is abdication of long term success in favour of short term stability. I don think that is a good trade for the system as a whole.
Everyone's evaluation of the risk will dramatically rise if the depositors are not bailed, increasing the probability that this happens at the next bank, and so on.
The article is talking about bailing out SVB, which in turn can then make the depositors whole.
This is like arguing that if I screw up my investments and put myself in a bad position that the government should bail me out for the sake of everyone I owe money to.
> This is like arguing that if I screw up my investments and put myself in a bad position that the government should bail me out for the sake of everyone I owe money to.
Nope. Not even close.
> The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage.
https://www.fdic.gov/about/what-we-do/index.html
It’s bailing out the depositors, not the bank itself. But I get your sentiment.
Worth noting though that based on what I’ve read, the bank has plenty of assets to repay depositors… the issue is just that these assets aren’t super liquid. So if there was some form of bailout, it would be more of a bridge loan type deal than a true bailout assuming I understand the situation.
They’re confusing cause and the current situation. The cause was not a joke in the balance sheet, it was a liquidity crisis, SVB created a hole by taking a haircut on the illiquid assets to try and keep the house of cards up.
Few of the explainers are covering both parts of this.
The long-duration bonds in question were plenty liquid. The problem is that SVB couldn't sell them without realizing losses -- and because they were listed as "held to maturity" on SVB's balance sheet, SVB had been hiding those losses to give a false appearance of solvency.
The bond isn't really paying out as predicted though. If they knew interest rates would go up so much they never would have bought those bonds to begin with. It's not the same as something that would pay out above (or at least ~ at) baseline if they could survive long enough.
Imagine if they put 100% of their deposits in these bonds, they would not be able to raise the interest rates they pay out above like 1.5% for the next 10 years, because they're stuck with their own long term investment. When other banks start offering a better interest rate on savings, of course people will want to withdraw.
So even if they are solvent by definition this is not the same thing as a liquidity crisis that results from an inability to sell a large amount of something in a short time, potentially something that is difficult to sell. It's not the amount or the weirdness of the asset here, it's the price they are locked into, the same way that anyone trying to sell any amount of this right now would be taking a loss if they bought in 2021. And it's not like the price is some irrational situation like GameStop, it's a natural consequence of the interest rates.
I don't see how this wasn't a predictably risky trade regardless of the VC panic factor. They put 40% of their deposits into a long term bet that interest rates wouldn't go up.
The bonds themselves were liquid. The bank didn't want to liquidate them, but that doesn't mean that they weren't liquid.
This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue.
No. SVB had liabilities significantly in excess of the value of their assets. They were, by definition, balance sheet insolvent.
The "hold to maturity" accounting practice made it legal for them to pretend that the value of their long term bonds hadn't changed, but that's just an accounting figleaf; the actual value of those bonds had factually dropped.
> the issue is just that these assets aren’t super liquid.
Yep. To me it seems like one of the monster banks will gladly pick this up. They can handle the short term liquidity then cash out massively on the long term investments.
Yes but the depositors of SVB are almost all corporations (mostly tech startups), that can ethically be left to die, whereas individuals have rent to pay and families to feed. I can see where this sentiment comes from if their income taxes are being used to bail out corporations.
At the same time the flip side of this is that many of those startups aren't profitable and in the absence of a FDIC bailout, those startups' employees (who are typically not paid that well to begin with) may not get their next paycheck and thus it still is directly impacting individuals and families.
SVB the company is basically killed. It's true, if you're an investor/owner in the bank, your equity is probably worth ~$0. The bank is owned by the FDIC and is being managed as a new bank.
Even if company SVB is worth ~$0 in equity if the parts are sold on the market, they're still a business... so they have some intrinsic value to the future income. That means there is value in buying the company, at the right price. The hole in there books would have to be bigger than the value of their future cash flow for there to be no reason to buy it. Beyond that, there's some value for a bank to buy it because the FDIC approached them. Because there is tremendous value for everyone in the stability of the system.
Did they? Making a 17% return over 13 years on the riskiest “investments” imaginable (think: injections that the market said “fuck no!” to) is an atrocious return, and a net loss after accounting for inflation.
It’s a bit unclear because some of those loans were paid back years ago, but even if it works out to be over 6 or 7 years, it’s still pretty bad.
Gov should have juiced its returns by requiring 100% equity wipeouts in exchange for gov’s ultra-high-risk loans/investments.
They actually sent out an email about 2 hours ago:
Hello,
Silicon Valley Bank was taken over by the FDIC [0] today, Friday March 10th. We’re monitoring the situation closely and it saddens us to see the closure of a bank that partnered with many of you.
If you’re impacted by the SVB closure and need to open a new bank account, we are here to guide you through it.
Choosing a banking partner
- We’ve worked with startup-friendly banking partners like Mercury (mercury.com/partner/atlas) and Novo (novo.co/a/stripe-atlas) to get Stripe Atlas companies priority access to signing up.
- You can also choose to use any bank such as JP Morgan Chase, Bank of America, Wells Fargo, or PNC, and often your personal bank offers business services.
You can think of the short term federal funds yield as a proxy for savings rate. You deposit, Wealthfront collected 4.75% overnight, and paid you 4%. They make a tidy 0.75% as the middleman.
It is probably currently lower. It takes ~ 12 months for inflationary events to roll off the “annual inflation” stats. This is why stories like “After years of no inflation, US encounters 10% annual inflation for the third quarter in a row!” are total nonsense. Another way to write the headline is “There has not been significant deflation since the spike in inflation last year”.
If you are willing to substitute brands, then the number will probably be a lot lower. For instance, Hershey’s brand cocoa used to be inexpensive, but not costs about the same as the most expensive brands at our store. If you switch to the expensive brand (and update the 2020 list), you’ll be looking at 10-20% inflation instead of 50-100%. I’ve noticed this for a lot of products we purchase (some of which simply became unavailable after a few months of price hikes). This mostly means we’re either switching from midrange brands to the most or least expensive, depending on the item.
Of course, this doesn’t actually lower our grocery bill vs. 2020, but we’re also not paying 70% more.
From the Article> Thankfully, loan books make up a much larger share of assets at most other institutions.
I got a laugh on this one. Sure... other banks are safe from loss of client deposits and a bad bet that interest rates won't rise. I'm not so sure that with rising interest rates and a shaky economy these institutions with large loan books won't see too many loan defaults. We are seeing a lot of commercial property defaults already in the big markets. Can't pay your mortgage if you can rent out your skyscapper.
Perhaps I wasn't clear. With the rising inflation and interest rates and deteriorating economy people lose their jobs and can't pay their mortgage. My point, and why I thought the line was funny in that article, is that the way SVB failed isn't the only way that banks can fail. Moreover, Tech is currently in a massive round of layoffs and if this spreads to the general economy (which I think it will) then holding large loan balances could become a problem for the banks.
Who cares about the financial system? What does it mean for the startup sector and companies that trusted SVB with their money?
And what if SVB is just the tip of the iceberg?
Maybe the governments should start better regulating and supervising the banksters and offer no bailouts using public money. Let the wrong doers be the only ones suffering from their mistakes.
The answer of course is nothing. But it's worth it to read the article to get to this gem of a final sentence.
"Larry Summers, a former treasury secretary, has said that so long as the state steps in, there is no reason to worry that svb will harm other parts of the financial system. Lots of people will be hoping that it does, and that he is right. fS"
Nevermind that no one outside of the "tech" company crowd cares what Larry Summers thinks, the sentence is cringingly ambiguous. What does "it" refer to: (a) the state stepping in or (b) SVB harming other parts of the financial system. Did ChatGPT produce this article.
Not only is there no need to worry about SVB harming other parts of the financial system, there is no need to read "articles" like this one. The amount of useful information is negligible.
An unexpected side effect of continued employment gains is that the employees expect to be paid... A series of bank failures puts payroll in doubt, and could quickly lock up the system with extreme inflation and a liquidity crisis.
More money will be created to bail out the banks which will cause more inflation and more inflation will mean higher rates to fight it, which could freeze credit more and draw down savings and so on, all of which leads to more job losses and liquidity problems. It's numerous things in a feedback loop and if the bank runs and failures continue to spread then it's going to put serious strain on a system that never fully recovered from 2008.
The reverse repo rates are kind of fascinating when you look at what happened around 2007 and where it is today.
Maybe SVB is an outlier and can be contained but another hidden issue is how much Fintech has worked its way into normal finance. There are many online only banks and companies like Chime and Cash app which could broaden a crash.
I really believe we are about to experience a financial crisis worse than anyone alive has experienced. It will be unique as well in that so many of these factors have never happened before or all simultaneously.
This also doesn't consider global reserve currency changes and ways for the world to conduct trade without the U.S. financial system being involved. All of this provided liquidity in the past, the safe haven effect and so on.
Or maybe a few banks will get bailed out and it will be no worse than the savings and loan crisis. The next few months should get interesting.
Oh and if that's not enough, there is the potential for Ukraine to do poorly in the summer and a potential conflict with China on the horizon. The U.S. could be in a two front war with near peer competitors at a debt to GDP ratio higher than at its highest point during WW2.
Quantitative easing kicked the bucket down the road but it seems to have been a band aid only making the disease worse in the long run.
Lessons were learned following the 2008 financial crisis to sure up major banking risk exposure. Dodd Frank act was reversed a little but there are regulations and stress test simulations to improve banking system resilience if there is a cash or credit shortage. Who knows how valid some of the assumptions changes in these marginally higher interest rate times but we cannot be in pre-2008 credit swap nonsense.
SVB represents $200B assets and the customers are in large part revenue negative or growing startups. That doesn’t make it Ok but it cannot be representative of the greater economy. I’m sure fintech in personal banking, credit, and mortgages is far more popular than it was in the 2000’s but it by and large does not represent a majority or even large minority of retail banking.
My hope is there isn’t some sneaky financial engineering marvel in large corporate debt that this fringe instability snowballs and we find out we’re back in a state where the market is propped up by sketchy extrapolations of value estimates.
But I don’t think a bank run by a bunch of VCs or startups is a picture of the greater economic engine.
This bank was 40 years old. It’s leadership weren’t really just a bunch of startups.
I suspect your comment will age poorly. The solution to 2008 was to bail out failing institutions instead of letting them fail and be replaced with competent ones. If anything, since then, the institutions that created the 2008 crisis have consolidated market share, and gotten more and more regulations rolled back.
> and gotten more and more regulations rolled back
False, besides scaling back Dodd Frank please name 2 regulations removed from consumer investment banking or credit or mortgages.
Investment banking isn't what it was in the recent wild west days. Goldman Sachs fell from grace and stuff isn't fast and loose. Its not even cool anymore, investments are risk profile managed algorithmic ETFs. Its a well regulated industry, albeit better regulated in 2010 than now, but better than 2005. I'm sure there all kinds of shady things in IPOs and SPACs and private equity debt but that does not represent the greater consumer exposure public market.
Also, letting all large banks fold in 2008 would have been bonkers. There would not be a viable replacement in time to stop an all out dark ages. Those banks paid back loans plus interest in full. It was a systemic failure and Ben Bernanke stopped a depression and the system was improved instead of failing. Was is fair that wallstreet gets money from the Fed to stay afloat while people lost their homes? Not whatsoever, completely unfair. More could have been done to help out common people like we had in covid relief. But it was still the correct thing to do to keep the lights on. And the recovery period with QE was the longest stretch of growth thanks to the sugar rush of 0-interest debt that will play out to not be the best idea.
Anyway, I wasn't taking a shot at SVB leadership inferring they are naive startups. I'm saying that much of the SP500 are revenue generating profitable companies that do use debt but don't need recurring 20M funding rounds to make payroll. Startups are by and large not a good representation of the greater economy because they are supposed to represent new ideas. The banks customers are totally a risk and cash intensive with no physical capital. That is not representative of the economy.
That's all I'm trying to get at. The parent comment to mine is pretty doom & gloom and making ill founded parallels to 2008 and saying this will be even worse. I don't see how that follows. It does not make sense. We're entering a recession but that doesn't mean complete implosion.
There are a billion things I don't understand about the greater economy and globalization but I want to call out poorly formulated assertions because the narrative above is based in facts. Especially on this site where people give credence to web3 nonsense and trying to pose solutions financial problems that don't exist.
Its a not good situation and concerning. But I think there needs to be compartmentalization to understand what else is at stake.
>SVB represents $200B assets and the customers are in large part revenue negative or growing startups. That doesn’t make it Ok but it cannot be representative of the greater economy.
There are ~1900 publicly traded companies with a market cap over $1B. (NAMER)
There are over 1000 privately owned companies with valuations over $1B. (NAMER?)
Writing off startups as not contributing to the economy (jobs, spending with vendors, etc.) is a harder to argue in 2023 than it would have been in the past.
This very well could be the beginning of a stall in the greater economic engine. Except this time it isn't necessarily fueled by failure of the underlying assets. Instead the underlying assets may fail because of the banks. Which could cascade into additional failures across the system.
I’m not trying to disparage or minimize startups. Merely pointing out that this bank’s business model does not represent the greater economy. I’m not putting down the banks customers saying that they are cash intensive risky businesses. That is the nature of a startup.
Also, 1B valuation in an asset bubble doesn’t really mean much with rosy assumptions on price to earnings ratios that is unproven. Unless that 1B company translates to public through an IPO that 1B valuation can be 10000B it really doesn’t yield any concrete value. Pre-market due diligence is a dark art and venture capital is operating on perverse incentives to value things. If you take out a large loan on your holdings in a 1B private asset light intellectual property light cash burning business then that person issuing the loan is irresponsible. Same thing with housing inflation, pointing to comps and estimated growth since that sale leads to inflated valuations. Except there aren’t many comps in a startup space and banks and credit unions are smarter at not giving out more money than they can collect back through a sale in the range of 300k-1M.
Sounds like there was too much deposits and the demand for returns made the bank choose a time risky purchase if interest rates rise. Then they did over a year. Then cash hungry customers made a run after rumors.
What does that mean for JPM and Wells Fargo and Blue Cross and Humana and GMC and Maersk? Not much because (I really hope) they’re not hedging their accounting in shares of a high risk VC regional bank.
Businesses need to adapt to higher interest rates and that alone is going to take the wind out of the sales of some speculative business models. The bank was underperforming on returns from their accounts so they chose an irresponsible bet.
In the US we need to collectively get of the cheap debt sugar rush and check the assumptions in what is viable growth and valuation. But that doesn’t mean the sky is falling because an AI healthcare startup cannot raise their next funding round.
The major banks should be good because they’re stress testing. The cheap money and every new company getting the cash to scale as has been the case for 10-15 years is likely behind us.
Valuation is not remotely related to GDP until there is an IPO.
Startup valuation on pre-profit businesses is dominated by the greater credit and bonds performance. Hopefully the impact radius of the inflated valuation coming back down to realistic levels is contained to private capital and not the whole country’s 401Ks.
A good asset to purchase during a banking meltdown would be something that would hold its value or increase in value. This could include things like gold, silver, or other precious metals.
^^^ this is a terrible idea. if you're going to buy gold don't do it thru immutable public ledger contracts. If you cannot front the cost of one purchase unit then don't buy any. Fractioning the $USD/g cost of a commodity metal is not innovative.
> I really believe we are about to experience a financial crisis worse than anyone alive has experienced...
Or maybe a few banks will get bailed out and it will be no worse than the savings and loan crisis.
I think right now it looks more like the latter (S&L crisis of the late 80s/ early 90s) than it does the Great Recession '08. Wasn't a huge impact in the economy at large from the S&L debacle. It will have an impact on tech so that this might look kind of like the tech wreck of the early aughts - again, while that impacted those of us who were in tech at the time it had little effect outside of tech. If it were to start spreading outside of tech to other sectors then I'll reconsider.
The market can remain irrational longer than one can remain solvent and furthermore, this logic is either predatory; goading someone into doing something unwise; or altogether irrelevant (namely in that if one belieces the financial system is going to fall apart, why on Earth would you try to use the very system on whose destruction you're wagering to... Win?)
It's like talking to someone as a person with a gambling problem and dismissing them telling you the roulette ain't gonna help, and you replying Well, then bet on the roulette and make money.
My wife's employer banks with SVB. I'm still trying to understand the implications for her and her colleagues. It's hard to imagine they won't be affected.
Wait until spooked investors start looking at other banks and realizing how much they've sunk into agricultural mortgage backed assets, when half of American ag is facing the largest megadrought since the Byzantine Empire was a thing and the other half doesn't know what it's facing because tornadoes and floods knocked it ass over teakettle. Not to mention all the billions invested into property development in the Colorado River Basin. Ooops! Tee hee.
"Christopher Whaler, Chairman of Whalen Global Advisors in New York, said: ‘I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail then the Fed is faced with a very tough situation which may force them to drop interest rates.’"
Bear Sterns fell first, at $350 Billion in assets.
The issue in 2008 was that the banks were doing a domino effect on each other. We don't see any such signs of that with Silicon Valley bank, and SIVB is smaller than Bear Sterns (and other banks) from 2007 crisis.
There was a domino effect, but a number of banks had the same root problem -- MBS held on their books at higher than their true value. Bear Stearns just happened to have a whole lot of the worst MBS, so it went down first.
In this case, a number of banks are holding a lot of long-term debt as "hold til maturity", so they're not recognizing on their books that it has lost value due to rising interest rates.
Well Bear Sterns never went bust, it was bailed out.
The issue in 2008 is rather that institutional investors (mostly money market funds) ceased to lend to banks, or only overnight. I am not saying that the banking system is as fragile as in 2008, it is clearly not. But it only takes a panic to cause another post-Lehman contagion across the financial system.
The really troublesome securities of the Global Financial Crisis were complex derivatives of private-label, almost universally sub-prime, asset-backed-securities:
The standardized, so-called "agency" MBS on the SVB books really isn't anything like that CDO plague. In 2008, people were losing faith in the ability to even assign valuations to CDOs; SVB's problem with their MBS portfolio is that the current market valuation is obviously not what they needed it to be just now.
The Times says stock prices of other banks fell as concern spread that they could also be facing similar problems. First Republic Bank in California fell 16.5 percent, Signature Bank in New York more than 12 percent and Zions Bancorporation 11.4 percent.
Well they are not being bailed out, they are being liquidated. A bail-in is the power given to regulators to write down debt holders to auto-recapitalise the bank so it can re-open healthy the following Monday. A sort of instanteneous, extra-judicial chapter 11.
They fucked with the wrong people, that is why. I just hope this is not a chain reaction. 2008 all over again, but this time it is going to be extra juicy. Alot of shady stuff is going to be unveiled in the next few months.
Plenty of banks will refuse to do business with, or impose onerous conditions on, companies with such characteristics as:
- founders from outside the U.S. or from certain countries
- operations/investments in certain countries
- operations in certain industries/market segments (including ones that are completely legal but are considered high-risk)
- founders/directors with previous bankruptcies/insolvencies or any criminal history
- activities anywhere near any legal grey areas or risks including things like cannabis or hallucinogenic substance sales/research even if legal in the company’s region of operations
Those come to mind now but I’m sure there are others.
It’s not just about accepting deposits but offering lines of credit, credit cards even with low balances, international transfers, insurance and other services crucial to the smooth functioning of a company.
Banks are inherently risk averse, and mainstream banks just don’t have the expertise or resources to look at startups and evaluate their risk profile, so will just refuse service based on anything slightly outside very narrow safety criteria.
Silicon Valley Bank is a bank too and still has to be quite conservative, but has been far more willing to do the work to accommodate the more risky/unconventional aspects inherent to startups.
A low-quality take is that if a company is in any way suspect it doesn’t deserve to be in business, but that position just wipes out swathes of innovation, research and wealth creation, and leads to a scenario where only people who are already rich (and American) can start startups.
