FDIC Takes over Silicon Valley Bank

https://www.fdic.gov/news/press-releases/2023/pr23016.html

by khuey • 3 years ago

3172 1550 3 years ago

mkmk• 3 years ago

Oldie but goodie on what actually happens when a bank is taken over. https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...

PascLeRasc• 3 years ago

That's fascinating. I'd love to watch a documentary about that.

khuey2• 3 years ago

This 60 minutes segment from the Great Recession is the closest thing I know of to that. https://www.youtube.com/watch?v=TAE8i40A5uI

bgc2• 3 years ago

60 Minutes followed an FDIC takeover in 2009, including when the agents actually walked into the bank’s headquarters: https://youtu.be/TAE8i40A5uI

mikece2• 3 years ago

I know a couple bank VPs who have been the representative of the take-over bank in absorbing failed banks. They describe it in terms that most of us would recognize as taking over a failed project and re-architecting/refractoring it so that it can succeed (or making the call to discard all work to date and start over with a workable solution).

FormerBandmate5• 3 years ago

This case is unique because of the sheer volume of non-FDIC insured deposits. Substantial risk of depositors not being made whole for a while, they’ll probably get all their money but it will still be bad

JumpCrisscross6• 3 years ago

Substantial risk of depositors not being made whole for a while

Emphasis on for a while. Stock and bond holders (man, did the latter miss the ball) will absorb losses.

nostromo3• 3 years ago

All their money? I doubt it.

SVB owned a bunch of mortgage backed securities and treasuries - both of which are down 30-50% from their peaks, which coincides with our last venture capital boom. SVB was buying at the top because they had so much capital to deploy.

Maybe instead of cashing it out, depositors could be given a treasury worth 30% less than SVB paid for it, that pays out 1% a year in interest, redeemable at face value in just 20 short years.

dmoy4• 3 years ago

It's a little unique because it's a top 20 bank failing. As far as I can tell, it's not super unique in terms of % of fdic insured deposits.

As a whole it's like <30% FDIC insured in the whole US banking industry.

they’ll probably get all their money but it will still be bad

They may not. Even for banks where most assets are FDIC insured, you'll see that not 100% of deposits are returned. Selecting a random recent one:

https://closedbanks.fdic.gov/dividends/bankfind/Dividendinde...

~95%.

hindsightbias• 3 years ago

SBF was a piker.

gnopgnip• 3 years ago

Have there been any cases in modern times, in the last 25 year or so where depositors lost money because they had more than the fdic covered ?

katmannthree2• 3 years ago

Are clawbacks a thing in this case for the people who did get [some] of their money out in time?

dmoy4• 3 years ago

pclmulqdq2• 3 years ago

Clawbacks are only poised to happen for big crypto failures (FTX) because the people who held money in those institutions aren't technically "depositors," and are considered a more generic type of creditor (which has a bankruptcy clawback).

Bank deposits are special and there will be no clawback. However, depositors who lost money will be first in line at the bankruptcy court.

mikece2• 3 years ago

From the looks of the news stories, it looks like the FDIC isn't as efficient in taking over a bank as it used to be:

https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...

ellisv3• 3 years ago

I wonder if the FDIC is just as efficient but this situation is different.

Animats4• 3 years ago

When the FDIC takes over a bank, they usually have some local cops around, to deal with crowd control and calm down upset depositors. See the 60 minutes video. There's a police car parked in front of the bank, but the cops are not doing much.

ren_engineer• 3 years ago

will companies with money in SVB even be able to make payroll? Seems like this could cause huge issues in the short term and long term

sroussey3• 3 years ago

Pipe, Clearco, Founderpath, etc, are going to have a busy month.

Likely many companies won’t be able to do mid-month payroll.

Someone will setup a market for the FDIC warrant on uninsured deposits, but that will take time.

formerly_proven• 3 years ago

Yesterday I read on here that "xyz doesn't mean SVB is going under like FTX did five minutes after doing that".

karpierz4• 3 years ago

The difference is that SVB's depositors will see most of their money back, which is the point of the FDIC taking over.

dannyw3• 3 years ago

When, though?

If your company can't access your money to access payroll for X months, you might as well as be dead.

johnbellone8• 3 years ago

I wouldn't be too sure about that. 93% of SVB deposits are uninsured.

CamelCaseName• 3 years ago

Only 2.7% of SVB's deposits will be covered by FDIC.

kgwgk33• 3 years ago

We don’t really know yet if they will be getting most of their money back.

The only guaranteed amount is 250k.

dragonwriter13• 3 years ago

The difference is that SVB's depositors will see most of their money back

Depositors will see all of their insured money back, uninsured deposits will be recovered based on available assets and/or terms of any resale by the FDIC, but could be lost in whole or substantial part. Large depositors could potentially see substantial losses.

bell-cot3• 3 years ago

"Denial isn't just a river in Egypt."

rvz2• 3 years ago

Oh dear. It guess this is how the VC pyramid scheme collapses. $151BN uninsured deposits in the bank. [0]

Now all those unprofitable startups will be falling like dominoes as now the money is tied up in the bank with withdrawals disabled.

[0] https://twitter.com/FedGuy12/status/1634038788468113408

tarr11• 3 years ago

Does this mean that SVB customers are going to lose deposits over the FDIC limit (250k?)

rekttrader• 3 years ago

For now yes, you get a note on what’s owed that remains and in time you get some of your money back post bankruptcy.

Keep your accounts lower than 250k

trimbo• 3 years ago

No because SVB has assets with value to sell. That's the "dividend" the FDIC refers to in the press release.

ncallaway7• 3 years ago

SVB's assets will be divided up and given back to creditors (including depositors). So remaining depositors likely will get something back eventually, but we don't know how much yet (10%? 50%? 85%). There will also likely be a delay in getting those funds back as the process plays out, which is probably more dangerous to many companies than the haircut (assuming the hair-cut isn't too severe).

marcosdumay• 3 years ago

That amount of confidence on the fact that the music would never stop is... I dunno, I don't get any good adjectives. I can't understand it.

It's not even the case that they did it for the returns, because the returns were negative. Is it a regulation thing that forced banks to overinvest in long-term bounds?

johnbellone8• 3 years ago

You're getting downvoted because people are upset, but this is a real problem that could have been avoided. We'll come out of it stronger, but its going to hurt.

bagels6• 3 years ago

Many people will not come out of this stronger.

NordSteve13• 3 years ago

Only 3% of deposits in the bank are FDIC insured; other depositors will need to wait for the receivership process to run to get access to (what remains) of their deposits.

edit: replace "bankruptcy" with "receivership" as the latter is usually a faster process than the former.

ncallaway7• 3 years ago

Where'd you get the 3% figure? The only thing I saw in the article was that it was not determined.

At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

Is the 3% figure from SVB or an estimate from another source?

NordSteve13• 3 years ago

https://twitter.com/GRDecter/status/1634208652595699713

NordSteve13• 3 years ago

Likely number is bigger than 3%, as they had a giant outflow over the last couple days.

jb19912• 3 years ago

Only 3% of deposits in the bank are FDIC insured

why is that?!

NordSteve13• 3 years ago

Because most of their depositors were business that kept >$250K (the insurance limit) in the bank.

synu3• 3 years ago

Because the insurance is for $250k and most depositors had much more than that.

pastor_bob• 3 years ago

Bill Ackman and Wall Street calling for a government bailout for all depositors:

https://twitter.com/BillAckman/status/1634032841687285761

NordSteve13• 3 years ago

I can't see that happening in today's political climate. Imagine the stories juxtaposing coddled tech workers against the cost of the bailout.

twoodfin3• 3 years ago

Could the Fed do this in a back door way? Buy the devalued bonds at above-market rates?

treis5• 3 years ago

This isn't true. The bank is in receivership and which is a different form of bankruptcy. The FDIC will liquidate assets or find a buyer relatively quickly. Depositors will end up getting most or all of their money back.

sp332• 3 years ago

The FDIC will pay uninsured depositors an advance dividend within the next week.

bagacrap4• 3 years ago

Only 3% of accounts were under 250k. An account of $251k isn't part of the 3% figure, but is almost totally insured.

mbStavola• 3 years ago

It's kind of amazing how much optimism there was just an hour ago regarding SVB's position.

kgwgk33• 3 years ago

« literally no one saw this coming a couple of [hours] ago. »

dylan6043• 3 years ago

are you quoting something from a couple of days ago?

johnbellone8• 3 years ago

There's a strong correlation here to people who have deposits in SVB. This was all but certain yesterday.

treis5• 3 years ago

What are you talking about? Pretty much everyone I've seen has called this a bank run and said to get your money out since SVB announced they were trying to raise money. Techcrunch called the announcement shooting yourself in the foot.

fidgewidge• 3 years ago

Read the other threads. https://news.ycombinator.com/item?id=35088919

"SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment)"

FormerBandmate5• 3 years ago

Turns out Twitter making bank failure a meme didn’t really help anything at all. It’ll be very interesting to see what happens to uninsured depositors

albatross132• 3 years ago

Probably a dumb question, but what determines if a deposit is insured or not at an FDIC insured bank?

ncallaway7• 3 years ago

Deposits > $250k per depositor per bank are uninsured.

https://www.fdic.gov/resources/deposit-insurance/faq/

bagels6• 3 years ago

Up to 250k is insured, amounts beyond that are not.

swift532• 3 years ago

Not a dumb question at all. AFAIK it is the amount, in the USA it's $250K. Other countries have similar situations, most of the EU is 100K €.

abofh2• 3 years ago

Investment products are not FDIC insured; Accounts over 250k are not FDIC insured; In this case, that's probably the bulk of 'uninsured' - large accounts, or creatively sold investment products.

ramses0• 3 years ago

* Amount less than $250k * "Deposit Account" => not a "fancy investment interest account"

Details: https://www.fdic.gov/resources/deposit-insurance/

Not Covered: https://www.fdic.gov/resources/deposit-insurance/financial-p...

zeitgeistcowboy• 3 years ago

I'm not sure if this helps answer your question, but coverage is automatic if you have your funds in an FDIC insurance bank (most all of them) and if it's in a normal savings type account and then any amount 250k or less.

davidgerard2• 3 years ago

First actual FDIC takeover since 2020, I think.

ellisv3• 3 years ago

| The last FDIC-insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.

From the release.

_delirium• 3 years ago

The FDIC also maintains a "failed bank list" that is kind of interesting to browse (goes back to 2000): https://www.fdic.gov/resources/resolutions/bank-failures/fai...

sjkoelle• 3 years ago

strong "days since last fatal accident" vibes from that sentence

kerowak• 3 years ago

For comparison, alamena had 68m in deposits compared to SVB’s 175b

https://www.fdic.gov/news/press-releases/2020/pr20119.html

megaman8• 3 years ago

yes but if you look at the decade before that, it was pretty common about 3-10 or so bank takeovers per year, from the link below.

game_the0ry2• 3 years ago

2008 bear sterns vibes.

The fed's move in interests rates was bound to break something. This is the first big name and, while banks are taken over by the FDIC often and it never makes the news, this one will be especially interesting bc it is Silicon Valley Bank. Naturally, people and the media will associate with the rest of silicon valley, bringing extra scrutiny to every brand name tech company, especially the ones that are still barely profitable.

And any accounts over $250K, poof.

Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.

yeahsure224• 3 years ago

It’s not interesting because of its name, it’s the 18th largest bank in the US. A domino that big usually doesn’t fall alone. Also, FDIC hasn’t taken over a bank since 2020. This isn’t exactly a common occurrence.

game_the0ry2• 3 years ago

It’s not interesting because of its name, it’s the 18th largest bank in the US.

Given how much media attention silicon valley gets, for better or worse, the name of the bank would have some affect.

Tech and fintwit are both blowing up on SVB, there are like 4 SVB related posts on HN front page, I even some reddit posts.

This will be big in the media, and therefore the public conscience.

mywittyname2• 3 years ago

"Since 2020" is not a great metric, since a lot happened in 2020.

Here is a chart that shows the number of bank failures over the past decade [0]. As you can see, having a year with 0 failures is actually the outlier. The average annual bank failure over the past 20 years is roughly 20 per year and the median number is 8 per year.

[0] https://www.fdic.gov/bank/historical/bank/

pbourke2• 3 years ago

It’s also the second largest U.S. bank failure. WaMu was considerably larger when adjusted for inflation - $300B in 2008 dollars (> $400B in 2023) vs SVB at $200B in 2023 dollars.

Ekaros2• 3 years ago

I think big question really is has any other banks "invested" their deposits in similar manner. So could there be others that will go down if bank run is encouraged?

subarctic2• 3 years ago

I know very little about this, but the wikipedia page says it's the second largest bank failure in the history of the US, so maybe you're underselling it a bit?

https://en.wikipedia.org/wiki/Silicon_Valley_Bank

Pasorrijer• 3 years ago

I mean, potentially.

The reality is they try to protect as much of the assets as they can and even those over 250k will probably not lose as much as they would have without the FDIC

34679• 3 years ago

Good luck to any companies with over 100 employees trying to make payroll and other obligations on $250k.

version_five• 3 years ago

Re Bear Sterns, there were lots of political reasons it was allowed to fail while others were protected. If I remember right something about them not helping with the Long Term Capital Management collapse for example. There will have been people who had the opportunity to help SVB and collectively decided it was better to let it fail. It will be interesting to understand the decisions that were made when the dust settles

Octokiddie5• 3 years ago

Bear Stearns was the first shoe to drop. Intervening would have spooked the market. Later implosions were addressed because there was no alternative.

Unless you experienced that time, it really hard to understand the pervasive denial of what was obviously happening.

You'll see the same thing happen this time around, and will have an equally hard time conveying just how strong the denial was.

banku_brougham4• 3 years ago

great callback. revenge on Jimmy Cayne for when genius failed.

Dont forget it was Lehman that failed first, Bear got special treatment amongst the Citi, AIG, et al bailouts.

fallingknife2• 3 years ago

They did intervene with Bear. The JPM acquisition came with all sorts of backstops and guarantees from the Fed. Lehman was the one where they didn't intervene, which is why there was no acquisition.

borski10• 3 years ago

And any accounts over $250K, poof.

That's not quite true; the FDIC will pay uninsured depositors an advance dividend within the next week.

om42• 3 years ago

My finance-foo is quite weak, what does advance dividend mean in this context?

eli2• 3 years ago

And they'll probably get 90%+ back eventually. The bank's money isn't gone it just isn't liquid.

mywittyname2• 3 years ago

Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.

This chart of historic bank failures paints a different picture:

https://www.fdic.gov/bank/historical/bank/

cableshaft2• 3 years ago

Almost all of those are during The Great Recession or the aftermath of it, so I think it's not that crazy of a claim to make.

Also means we may be about to start seeing a lot more of them again, assuming we're getting closer to the next big recession.

ezekg• 3 years ago

And this chart paints an even different picture:

https://twitter.com/alistairmbarr/status/1634275645235793920

Zetice• 3 years ago

lol so the fact that we didn’t have $250k of runway ends up being a good thing?

ElfinTrousers• 3 years ago

I mean, you could argue that relatively speaking you're better off, since you're probably not suddenly trying to satisfy champagne tastes on a malt liquor budget.

benjaminwootton• 3 years ago

Does this mean that depositors have lost access to their funds until the bankruptcy process, with the exception of $250k which will be available on Monday?

NordSteve13• 3 years ago

That is correct.

FireBeyond2• 3 years ago

Technically yes, but the FDIC is also working to release as much uninsured funds as possible as an "advance dividend".

Octokiddie5• 3 years ago

At the time of closing, the amount of deposits in excess of the insurance limits was undetermined.

What are the insurance limits for companies? Same as individuals? I get the sense that most of SVB's deposits were from startups and small companies. And I also get the sense that $250K is not much room for a startup trying to make payroll to employees with Silicon Valley wages.

ncallaway7• 3 years ago

Yep, $250k.

boeingUH602• 3 years ago

In my whole life, I have never seen a bank run from start to finish, but here we are. Interesting times!

rozap• 3 years ago

A bank run powered by memes.

We truly live in a world.

OldManAndTheCpp• 3 years ago

Bank runs are always caused by memes -- the change is bank runs powered by image macros, but memetic spread of the idea "this bank may fail" is always what causes a run.

katmannthree2• 3 years ago

Yikes. Does anyone have an idea of which orgs have significant exposure (like Molly White's FTX contagion graph[0])?

[0] https://www.mollywhite.net/etc/ftx-contagion

TechBro8615• 3 years ago

40% of startups just had their bank accounts cut down to $250k, so... a lot.

tedivm5• 3 years ago

I'm not sure how true this is. I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.

I'm sure a lot of startups will be in trouble, but those that are working with decent investors probably had help protecting the assets.

flutas2• 3 years ago

Potential contagion: https://imgur.com/a/Xh6Kudp

These are companies, sorted by PPP loan size who had SVB as their servicer.

mydriasis• 3 years ago

Holy cow, O'Reilly in the top ten. That doth not bode well.

flutas2• 3 years ago

Something to note: This list is not exhaustive. There was about 3.8k companies with svb as their servicer. That also doesn't mean all of their money was in SVB.

majani• 3 years ago

Chipper Cash raised $150m from FTX and $100m from SVB. Ouch

chollida1• 3 years ago

some note i've been taking

To protect insured depositors, the FDIC created a new entity called the Deposit Insurance National Bank of Santa Clara, or DINB. DINB will maintain Silicon Valley Bank’s normal business hours, with banking activities resuming no later than Monday, including online banking and other services, the FDIC said. Customers with accounts in excess of $250,000 are being told to contact FDIC direclty
The company’s main office and all Silicon Valley Bank branches will reopen on Monday,
Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the FDIC said

Keep in mind 93% of SVB's assest were not FDIC insured.

Silicon Valley Bank Had About $209.0B in Assets
Svb Is First FDIC-Insured Institution to Fail This Year

Their recent attempt to raise money via shares and debt sales failed,

ejstronge3• 3 years ago

Keep in mind 93% of SVB's assest were not FDIC insured.
> Silicon Valley Bank Had About $209.0B in Assets

I'm not an expert, but aren't deposits in a bank liabilities? Assets are things like treasury bills and loans held by the bank.

briandear3• 3 years ago

When someone opens a bank account and makes a cash deposit, he/she surrenders the legal title to the cash, and it becomes an asset of the bank.

bell-cot3• 3 years ago

Clearer to read it in the article:

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

dragontamer3• 3 years ago

When Alice deposits $100 into a bank, the bank gains a $100 liability (owes Alice $100), and then a $100 asset (the cash). The asset is likely traded for a bond of some kind, in this case a US 10Y treasury.

The 10Y treasury was worth $100 in 2021, but today is only worth $80. The bank still owes Alice $100 (a $100 liability), but the asset's value has declined. This has caused... issues... culminating in the past week of events.

UnpossibleJim• 3 years ago

So, first off, I am not very literate when it comes to the comings and goings of banking procedures, so forgive me if this is a dumb question.

Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?

tinco2• 3 years ago

Well a defense might be to increase their liquidity by selling those treasury bills, which would drive their price even lower, making other banks also be illiquid on paper.

So yeah I imagine all the banks nervously looking at eachother. Who is going to pussy out the first and cause them all to tumble over.

e-clinton• 3 years ago

Both would be my guess. I’m expecting more smaller banks to fall.

opportune9• 3 years ago

Yes, this may trigger many banks to sell off long term underwater assets which would further reduce their prices, incentivizing further sales. It can also trigger more bank runs that put time pressure on banks to do this. Bad situation overall

SkyMarshal• 3 years ago

Svb Is First FDIC-Insured Institution to Fail This Year

Was Silvergate bank not FDIC-Insured?

bombcar11• 3 years ago

Silvergate is apparently doing a controlled liquidation of itself, this is an FDIC-forced liquidation.

idlewords4• 3 years ago

Now we just need an "incredible journey" blog post from SVB spinning this acquisition as a great win for both customers and investors.

colpabar• 3 years ago

Bonus points if they mention effective altruism, and how great it is, but how also it can be bad sometimes.

hef1989813• 3 years ago

A pitty FTX went under before, just imagine SBF announcing he is bailing out SVB!

huslage• 3 years ago

That's not really possible. SVB as an entity no longer exists once the FDIC steps in.

NordSteve13• 3 years ago

Not entirely correct. There is still a "bad bank" which is the SVB entity (and will be wound up in bankruptcy), and the "new bank" which has all of the insured deposits.

khazhoux• 3 years ago

Or a cute 404 page when you login to your account:

"Oops, looks like Santa misplaced his bag with all your money! Don't worry, his elves are busy looking for it all over the North Pole."

adrianmonk• 3 years ago

Kinda seems like it should be a 503 Money Unavailable.

moffkalast• 3 years ago

They've made an oopsie woopsie.

reducesuffering2• 3 years ago

South Park nailed this https://www.youtube.com/watch?v=-DT7bX-B1Mg

lukewrites• 3 years ago

"This was a learning experience that will provide velocity in our continued disruption of the finance space for startups. We look forward to continuing to maintain a growth mindset as we ~cash your checks~ earn your trust."

Exuma• 3 years ago

Here's why a bank collapse is a good thing.

tibbon2• 3 years ago

They’ll have chatGPT write it

jdoliner• 3 years ago

ChatGPT is happy to oblige:

Silicon Valley Bank, founded in 1983, has had a long and incredible journey leading up to its acquisition by the FDIC in 2023. As a bank that specializes in working with the technology and innovation industries, it has been at the forefront of many of the industry's most significant developments.

The bank started its journey as a small community bank in Santa Clara, California. At that time, it was known as the Santa Clara Valley Bank. The founders, Bill Biggerstaff, Ken Wilcox, and Bob Medearis, saw an opportunity to create a financial institution that focused on serving the unique needs of the technology and innovation industries.

In the early years, the bank faced many challenges as it worked to establish itself as a leader in the industry. One of the biggest obstacles was convincing investors and regulators that the bank's specialized approach to banking was viable. The founders knew that they needed to build a strong foundation and establish a reputation for being a reliable and trustworthy financial institution.

Over the years, the bank grew and expanded its reach, opening offices across the United States and in key global markets. It also broadened its focus beyond just technology and innovation to include life sciences, healthcare, energy, and more. This diversification helped to insulate the bank from the ups and downs of any one industry and made it more resilient in the face of economic uncertainty.

Throughout its journey, Silicon Valley Bank has remained committed to its core values of innovation, excellence, and customer focus. It has always been willing to take calculated risks and to push the boundaries of what is possible. This approach has paid off in many ways, as the bank has been recognized as one of the most innovative and respected financial institutions in the world.

In 2023, Silicon Valley Bank achieved a major milestone when it was acquired by the FDIC. This acquisition was a testament to the bank's success and the strength of its business model. It also signaled a new era of growth and opportunity for the bank, as it now has the backing of one of the most respected regulatory bodies in the world.

Looking ahead, Silicon Valley Bank is poised to continue its incredible journey and to make an even greater impact on the world. As the technology and innovation industries continue to evolve and grow, the bank is well-positioned to help fuel that growth and to support the entrepreneurs and visionaries who are driving it forward. With its deep expertise, strong relationships, and unwavering commitment to excellence, Silicon Valley Bank is poised to remain a leader in the financial services industry for many years to come.

boeingUH602• 3 years ago

Bill Biggerstaff.

He lived truly to his name! Founded a bank that processed bills with a big number of staff.

Imnimo• 3 years ago

Don't forget the cutesy nickname for its employees and users.

"Dear Sveebles and Sveeblettes..."

testfoobar3• 3 years ago

What a debacle.

Some gallows humor from twitter: "Imagine raising $100m for your AI enabled dog washing app - and your bank sets it on fire before you can".

Original: https://twitter.com/88888sAccount/status/1634028258500169731...

banku_brougham4• 3 years ago

Its so funny until you realize your seed-round investment in a friends company used SVB.

Gonna be quite a show, this.

idlewords4• 3 years ago

That makes it even funnier, though. At least to the rest of us.

sophacles• 3 years ago

Isn't the investor justification for taking a huge chunk of profits "we take risk"? I fail to see how this is unfunny just because the risk you took played out in the bad way.

FormerBandmate5• 3 years ago

Tons of VCs had their assets there too. It could lead to serious ramifications, anyone with substantially more than $250k in that bank is out a lot and only time will tell how much they’ll be able to recoup. It’s not an FTX situation, the assets are somewhat there, but the losses in securities look extreme and unwinding them at a fair price may take months, if not years

berkle44556• 3 years ago

They’ll most likely be made whole or close to whole. It’ll just take time, so as long as that startup doesn’t have a huge burn already, should be fine. Anyway you bought % in their company which you still own, the cash was gone when you wired it.

tiffanyh3• 3 years ago

Imagine having a life changing amount of personal wealth deposited at a Crypto exchange, and before you can spend it - the exchange sets it on fire.

idlewords4• 3 years ago

It's still life-changing after!

themitigating6• 3 years ago

That sounds terrible and I feel bad for them.

stephenhuey2• 3 years ago

Disrupt disrupt disrupt! Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better!

If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)

capableweb6• 3 years ago

Thing is, it's probably true for 1% of the cases, that things are slow for no good reason. Trick is how to identify that 1% of times when you can truly make something better. But 99% of the times, it's all shit and ends up like this, or similarly.

onlyrealcuzzo2• 3 years ago

But SVB wasn't even doing anything sketchy or disruptive, right?

cal5k3• 3 years ago

In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately account for duration risk.

renewiltord3• 3 years ago

HN really is like a ChatGPT version of itself. SVB is a 40 year old bank, bro. They are the old stodgy bank. The Meows and Mercurys are all still around.

Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).

Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.

victor106• 3 years ago

Yeah, the cool kids also say/used to say only if they used blockchain this wouldn’t have happened…lol

sailingparrot• 3 years ago

Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better!

SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.

spaceman_2020• 3 years ago

In all fairness, those stodgy old banks have been bailed out multiple times in the past.

andrepd2• 3 years ago

If only banks were risk-averse x) Unfortunately they are risk-happy when they know bankruptcy means a taxpayer rescue.

Octokiddie5• 3 years ago

Maybe it's time to resurrect Fucked Company.

https://en.wikipedia.org/wiki/Fucked_Company

dheera2• 3 years ago

Maybe it's time to get rid of fractional reserve banking and change it to full reserve banking.

We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.

kibwen• 3 years ago

Full-reserve banking doesn't eliminate risk, it pushes it elsewhere. The nice thing about fractional reserve (yes, there are nice things about it!) is that it allows people to have a savings without completely paralyzing the money supply. Money that is "saved" can still be used for productive purposes. Yes, this introduces risk (of the sort that the FDIC is intended to ameliorate), but the alternative is to either discourage savings entirely in favor of active investments (which are themselves mostly subject to the same sort of risks as savings accounts of today), or otherwise encourage savings but let the economy be strangled by a lack of funds (which becomes a vicious cycle).

Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.

themitigating6• 3 years ago

Why does it seem the perception of the tech industry is that products are just useless devices (like what you mentioned) or scams, that its employees are lazy and entitled, and basically it's all just a giant bubble of alof elites.

The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?

Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices

andrewmcwatters• 3 years ago

Unrelated to their finances, but they have an exceptional engineering team over there that I had the privilege of speaking with.

I’m sorry to see this happen.

woeirua4• 3 years ago

LMAO. Can't even believe how many people were confidently asserting that nothing was wrong yesterday. If you had more than $250k in SVB yesterday you probably just took a huge haircut.

Hundreds of startups will become illiquid as a result of SVB's collapse, and there will be major layoffs here in the next 90 days as founders realize that they lost their funds and cannot raise in the current VC environment.

briandear3• 3 years ago

I bet a lot of VCs had significant money in that bank as well. Even if companies could raise money, there wouldn't be as money available.

JumpCrisscross6• 3 years ago

a lot of VCs had significant money in that bank

Everyone I know pulled yesterday.

gumby9• 3 years ago

VC firms don't generally have tons of cash sitting around compared to their fund size. When you raise a fund, an LP does't just hand you $20 mil, then simply promise to send you up to $20 mil when you ask for it.

johnbellone8• 3 years ago

The same people that were saying that yesterday were removing their deposits. They just wanted to be there first.

hef1989813• 3 years ago

There are three ways to succeed in this business: Be first, be smarter or cheat. And I don't cheat.

Margin Call is such a timeless, great movie!

mangosteenjuice• 3 years ago

A good lesson for everyone who forgot the last cycle.

Slowly, then all at once.

plonk• 3 years ago

SVB isn't Lehman Brothers.

themitigating6• 3 years ago

Do you think it's strange people are excited for the economy to fail?

vineyardmike3• 3 years ago

If you had more than $250k in SVB yesterday you probably just took a huge haircut.

You may not lose money. The money isn’t gone yet. The restructuring may save the money. There’s a playbook for this sort of thing.

prasadjoglekar• 3 years ago

You most definitely will. SVB already fire-sold 21Bn in MBS and took a 1.8Bn loss on that. Someone is eating that loss....

Separately, this is going to cause a lot of finance vultures to look at other banks who also have MBS portfolios on their books. The show's only beginning.

hef1989813• 3 years ago

Well, and until everything is sorted all your deposits above 250k are illiquid now. So, I guess one way to not go under is to find a bank that gives you a generous credit line against whatever deposits there are at SVB. At huge risk margin, and quite a discount on the deposits. If there are such banks willing to do so, that is.

woeirua4• 3 years ago

No one knows for sure. We don't know what the value of their HTM MBS actually is on the open market.

What we do know for sure though, is that this process will take months, maybe years, to play out and many startups will run out of money long before this is resolved.

matheusmoreira• 3 years ago

If people have to be reassured to begin with, it's already over. Money only exists because people keep believing it does. As soon as they stop believing it's gone.

banku_brougham4• 3 years ago

That gummint fiat money looking better all the time.

omgomgomgomg3• 3 years ago

But why would the startups become illiquid?

Do they get the investments from the banks or do they park the investment money in this bank?

And why this bank, when there are many more risk averse institutions out there?

NordSteve13• 3 years ago

For business banking, you want a bank that understands your business. SVB was in the first rank of banks that understood startups.

Many startups aren't particularly sophisticated financially and just kept their capital in cash in the bank.

CyanLite2• 3 years ago

They become illiquid because they don't have access to their money that was in SVB. They can't make payroll, can't pay vendors and landlords. The employees will leave first. Vendors next.

jojosbuddy4• 3 years ago

Bridge loans, DES, convertible notes, etc..., I'm sure their were loan "products" for startups similar to helocs (likely what put them in the hole). The appetite for crypto/fintech startups was huge during the pandemic and likely pressured them to get creative on products and overleveraged. It's all unwinding now.

Unfortunately, harder now for startups, mind that all those startup dreams from laid off FANG staff just got their rug pulled.

morpheuskafka4• 3 years ago

Hundreds of startups will become illiquid as a result of SVB's collapse,

I know SVB was like a "high tech bank" that partnered with things like Stripe Atlas, but is there any reason that startups were using it for their regular operating funds? Other than the name, was there something that actually made this bank particularly suitable for them?

borski10• 3 years ago

They 'understand' startups. That is, they were willing to work with founders of new ventures, didn't require insane proof of provenance of funds (because suddenly millions of dollars would appear overnight), and would support founders with mortgages, for example, that were running companies that weren't yet necessarily profitable but were well-funded nevertheless.

LightFog• 3 years ago

They were proactive in incubators and allowed new companies to open accounts and make large deposits right away, when many mainstream banks wouldn’t or were too slow. I’m guessing plenty of startups stuck with them through inertia at least.

cragfar• 3 years ago

I can't say specifically for tech startups, but a lot of times lenders will require you to use their banking services as a funding requirement.

0x4572• 3 years ago

Try to walk to BofA as an entity that didn't exist yesterday and see how that goes.

chasd003• 3 years ago

High interest rate and naive customers who think they’re the smartest guys in the room.

andrewcamel• 3 years ago

Yep... I bet this is about to pull forward a lot of startup death. Gun now to VC heads to save things. Forcing decisions they were hoping they wouldn't have to make for at least another 6-12 months.

resters• 3 years ago

The knowledge that this would happen is why it happened in the first place. SVB execs won't take a pay cut.

itg• 3 years ago

So any startup which had more than $250k in SVB only has $250k left now I'm assuming? Hopefully this doesn't have a bad domino effect.

NordSteve13• 3 years ago

The "bad bank" (SVB) will be liquidated and the proceeds distributed to the creditors. How much that will be for depositors won't be clear until that process occurs.

discodave• 3 years ago

Probably just a haircut. How much nobody knows yet, but according to the FDIC release, 3 months ago they actually had $209B of assets, so it's not a FTX-like 'oops we accidentally your money' scenario.

HDThoreaun19• 3 years ago

250k on march 13th. The rest of the account will be released as the FDIC sells the banks assets, which will probably take months.

tedivm5• 3 years ago

I'm copy/pasting a commend I made elsewhere, but I'm not sure this is the case.

I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.

Basically if you have a ton of money having it sit in a bank account is one of the worst things you could do with it, so most people who bring in a lot mostly just keep operational expenses in their bank account while leaving the rest of the money in other financial instruments.

delfinom5• 3 years ago

$250k is guaranteed by FDIC insurance.

The rest is limbo until the bank is liquidated and the remaining money is distributed.

hi• 3 years ago

Heads up founders who banked with SVB - Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-799-0959

senttoschool2• 3 years ago

What happens to the deposits above $250k in this case?

Ouch for startups that didn't pull.

hijinks2• 3 years ago

they turn into creditors of the bank to try to get the money back from asset sales. That could take years though it isn't quick

senttoschool2• 3 years ago

Isn't that a death sentence for a startup? Even if you get your money back years later, you're company is already dead because it can't make payroll. At that point, the money will just go back to the VCs?

azinman2• 3 years ago

Silicon Valley Bank is the first FDIC-insured institution to fail this year.

Wow FDIC is fully calling it a failed bank. Just yesterday they were releasing statements saying they’re in a good position. Uncle Sam just fully opened Pandora’s box and made the judgement public!

kasey_junk2• 3 years ago

The FDIC calls them failed banks by definition. If they step in, you failed. They have a failed bank list and Sivb is going on it.

Havoc• 3 years ago

That's pretty normal for confidence based stuff like this. There isn't really a point in regulators/insurers releasing a "well we're about half confident" message. So it flips from full confidence to zero confidence. Bit jarring but the sharp transition is not unexpected.

purpleblue4• 3 years ago

This is how quickly a bank run can happen. They announced they were seeking funding, people started withdrawing all their money, and the investors all pulled out, leaving SVB high and dry. Now it's dead.

NovaDudely• 3 years ago

It is fun (in a morbid kind of way) just seeing how quickly the confidence on these things turn.

"Company is 200 years old and we will go for another 200 years more!"

2 Days later

"Whoops, all the moneys gone. Bye!"

whalesalad2• 3 years ago

Well that escalated quickly. Glad I am banking w/ Mercury and hope they are not impacted by this.

wonderingyogi2• 3 years ago

Mercury isn't a bank, it uses Evolve Bank & Trust and Choice Financial Group.

whalesalad2• 3 years ago

True, I am just glad it isn't SVB.

davidw5• 3 years ago

What's the best brief summary of what has happened so far?

NordSteve13• 3 years ago

During the last couple years, SVB got a ton of deposits, and they didn't have matching loan demand. So they invested the money in bonds. Unfortunately they make a bet that interest rates would stay low, and bought longer duration (~10 year) bonds.

Interest rates have gone up, so the bonds they bought have lost value. They tried this week to fix that by selling part of the portfolio and raising capital, but did it in a ham-handed way and triggered a bank run.

rafaelero4• 3 years ago

That's some terrible risk management. I can't believe they thought Fed' action during the covid crisis wouldn't cause inflation and prompt them to increase interest rates.

beefield• 3 years ago

I'm a bit confused. (Haven't followed in detail) Did they not mark to market the bonds they bought and ended up insolvent in reality but not in their books? Shouldn't the regulators have pulled the trigger earlier, then? Or is this just a liquidity issue and the bank is solvent, but the assets need to be sold?

EVa5I7bHFq9mnYK• 3 years ago

So they did exactly the same thing that FTX did - gambled with clients' money and lost.

davidw5• 3 years ago

Interesting, thanks. What with the bad bet being some fairly boring bonds... that should mean their investment didn't, say, lose 90% of its value or something. Just that the 10% (or whatever it was) it dropped was enough to put them over the edge. But if they sell off those bonds that's still a fair amount of money that can be recovered... right?

dragonwriter13• 3 years ago

Its worth pointing out that bonds are just debt instruments and that their recoverable value responds to changes in the economic environment in pretty much the same way as direct loans with similar term would.

colinmorelli• 3 years ago

I think an important backdrop here is the initial catalyst for this (to my understanding) was a decline in VC funding and elevated cash burn in their clients, leading to a net outflow of deposits, which is ultimately what necessitated selling securities in the first place.

When the economy is generally healthy and your clients are diversified, deposits remain fairly stable. If this had happened, SVB likely would not have needed to sell the low-yield mortgage backed securities to cover liquidity. SVB is very exposed to the venture community and very impacted by the changing climate.

loeg4• 3 years ago

They made some bad-in-hindsight bets on low-interest, medium-duration debt, rates went up 4%+, and also startups have less cash in this environment, so they were obligated to realize losses on the debt to pay withdrawals. The end result being they were undercapitalized or at least not well-capitalized. They attempted to raise funds by selling equity but this incited a run on the bank.

berkle44556• 3 years ago

That’s a whole lot of startups not making payroll or their SaaS payments

mynameishere• 3 years ago

Anyone know what the fire drill is on this? I imagine SV CFOs on the phone with Goldman Sachs trying to get a 5 million dollar credit line by COB today. Or shutting down operations.

Eumenes4• 3 years ago

Why did startups use SVB over larger commercial banks? Every place I've worked has used them for some reason. I don't get it.

xt00• 3 years ago

common wisdom held that it made it easier for investors to get you money -- especially from the usual sand hill road folks..

Eumenes4• 3 years ago

I could understand like, getting the funds deposited to SVB, then managing your corporate funds in a larger more regulated bank

nemothekid3• 3 years ago

Before the rise of mercury/column/stripe they were also way more amicable to get access to certain banking products. I remember at one point a company I worked for wanted to start doing ACH payments out of their account. Wells Fargo had some incredibly hoops we had to go through whereas SVB was just like "we would give you access, but you need to make us your primary bank".

wonderingyogi2• 3 years ago

I wonder how many startups its going to affect.

bagels6• 3 years ago

All of them that need to fundraise.

tlb4• 3 years ago

The regulations that allow a bank to hold long-term fixed-rate bonds backing variable-rate liabilities (since deposit rates float) seems broken.

It's straightforward to reckon their exposure to interest rates: they had $90B in 10-year fixed rate bonds, so they lose $9 billion per % of interest increase. They must have known that a 4% increase in interest rates would put them underwater, but they did it (and were allowed to do it) anyway. It'll be interesting to learn about the process behind that decision.

mynameisjonny_• 3 years ago

There's nothing wrong with your first sentence really. Banks can (and should) hedge these risks using swaps and other products. Someone really messed up here.

bombcar11• 3 years ago

All banks run on exchanging short term liabilities for long-term assets. No bank is big enough that it can survive a large enough run.

The whole point of capitalization stress-tests is to determine that banks can withstand a certain amount of withdrawals.

It of course is going to be much much more likely on a bank that only has 3% FDIC - I have no desire to "run" on my bank because I am below the $250k limit, and even if the accounts were frozen for a week it wouldn't be that worrisome.

But if I were a startup with $100m at SVP, I would have been freaking out earlier this week.

engineeringwoke2• 3 years ago

A swap has two sides. Someone still holds the bag, so what you're saying here doesn't make sense. What SVB was doing is typical; regular banks don't hedge anything. You can see everything in a Bloomberg terminal

bagacrap4• 3 years ago

they don't lose anything if they're not forced to liquidate those bonds but can hold them to maturity. It seems like the real problem here is a lack of diversity in liabilities (all tech/biotech startups).

tlb4• 3 years ago

That's not true. When interest rates go up, they have to pay the higher rates on customer deposits, but they're not getting any more from their bonds. Perhaps they can spread the losses over 10 years, but the losses are the same.

eclipsetheworld• 3 years ago

I'm wondering the same thing. The current rise in interest rates must have been a scenario that the bank considered. How can we still have a system that allows situations like this to happen? Other than negligence or malpractice, I cannot fathom a reasonable explanation as to how this happened / was allowed to happen (again).

kragen3• 3 years ago

this is the system working as designed

zero risk is not a thing

Randalthorro4• 3 years ago

What’s crazy to me is the fed hasn’t been raising rates out of the blue. What the fuck was this bank doing the last two years during every raise? They should have been rebalancing.

opportune9• 3 years ago

I think what probably happened is that, for whatever reason (hubris, incompetence, some bull thesis) they didn’t sell their HTM assets during interest rate increases until it got to a point that taking a loss on them would have forced them to recalculate their reserves such that they were lower than deposits (ie insolvent). Technically they were allowed to do this because they get to count the maturity price as reserves rather than the market price. Selling at a loss at any point would have fixed the problem but force them to lower their reserve calculations and realize a loss.

Once their HTM assets’ market price fell enough that rebalancing would force them to admit to insolvency by recomputing their reserves, they literally could not do anything with them except hold and pray that they make it, which may have just made things worse. Who knows how long they’d really been underwater

runeks3• 3 years ago

They should have been rebalancing.

How would that have helped?

hintymad2• 3 years ago

Will startups have problems paying salaries now?

fullshark• 3 years ago

Good question and to me it seems the answer can only be yes.

severingties• 3 years ago

If the company's payroll is under the $250K FDIC insured amount, they can make payroll on Monday. If the company's payroll is like $1 million a month, maybe not.

jossclimb3• 3 years ago

I can't see many startups having that sort of salary bill, unless they are a small seed with just a few founders working on a small wage as a sacrifice for their own investment. A lot of these startups would have hired during the frothy 2021 early 2022 phase when $250k might just cover a single employee.

preinheimer2• 3 years ago

I know SVB was an early partner for Stripe Atlas[1], I hope they've got other options now, and not too many companies get really hurt here.

[1] https://www.svb.com/news/company-news/silicon-valley-bank-pa...

bagels6• 3 years ago

They had three choices. Mercury and one other.

reducesuffering2• 3 years ago

Does this mean $SIVB stock holders who had $265 shares two days ago now have worthless shares? JFC no wonder bank stocks are priced so low compared to earnings... You're just hoping the dividends pay out enough before the inevitable implosion.

abofh2• 3 years ago

Well, they were 38$ this morning, but yeah, probably going to approach zero

boringg2• 3 years ago

They will be getting something but probably close to pennies on the dollar. Depends on how it gets repackaged and sold.

muzz5• 3 years ago

The depositors, creditors, employees etc. all have to be paid first. I would be surprised if they can even do that, much less have anything left over for stockholders

ejb9992• 3 years ago

pretty much.

rootusrootus• 3 years ago

In the FDIC priority list, stockholders are dead last, depositors first. If the depositors take any kind of haircut, I'd guess stockholders will end up with exactly zero.

preinheimer2• 3 years ago

Adam Conover did an interesting episode on the mechanics of a bank failing in the US, and how the FDIC practices for this moment.

It's in The G Word, their episode on Money. https://www.netflix.com/ca/title/81037116

omgomgomgomg3• 3 years ago

Hold on, what happens if someone raised money from them for an incorporation?

They have to pay backbas usual, right?

Macha3• 3 years ago

Yes, if you owe money to a bankrupt organisation, the creditors of that organisation now have your liability as their asset and will still expect payment.

boringg2• 3 years ago

"Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-799-0959."

At least its toll free...

tpmx2• 3 years ago

A Swedish white collar pension fund (Alecta) was the 4th largest owner of SVB. It's been big news over here today. I think I have some pension savings there.

Their investment in SVB represented 0.6-0.7% of their total fund. I assume that the FDIC takeover means it's a total loss.

Was this a manufactured bank run?

https://www.bloomberg.com/news/articles/2023-03-10/why-svb-w...

DLarsen• 3 years ago

I think I'm going to start asking potential employers where they do their banking.

capableweb6• 3 years ago

I don't think it should be like this, but most surely your profile will be flagged as "suspicious" if you ask such questions.

kube-system• 3 years ago

There are some founders who are aware that their early employees are invested in the financial security of the company, and not only aren't scared of these questions, but openly discuss company finances.

ShamelessC• 3 years ago

I'm fairly certain that would be A-okay with the person you responded to.

zamnos8• 3 years ago

Asking them to name the bank is a bit of a weird one, only because the answer can't be SVB anymore, and I'm not sure what OP would do with that information. (So it's FRB, then what? Unless you have inside info that they're about to fail, and you're interviewing this week, I don't see how their banking partner's material) But if a startup you're interviewing at won't answer what their runway is, or the rest of the reverse interview business questions, then that's a red flag and you should run far, far away from them.

* Are you profitable?

* If not, how long is your runway?

* Where does the funding come from and who influences the high level plan/direction?

* How do you make money?

* What's preventing you from making more money?

* What is the company's growth plan for the next 1 year? 5 years?

* What are the big challenges you see coming up?

* What have you identified as your competitive advantage?

https://github.com/viraptor/reverse-interview

banku_brougham4• 3 years ago

Aw shucks I wonder if any of my clients kept their working capital at SVB.

hw• 3 years ago

Are there any public companies that bank with SVB? Startups that went public in recent times?

nostromo3• 3 years ago

For comparison, Bear Stearns had $350b in assets in 2006 (and much less when they crashed in 2008).

SVB had $210b in assets yesterday.

roflyear6• 3 years ago

So let's say you work at a startup that has all their cash at SVB. Are you basically without a job now?

capableweb6• 3 years ago

Depends on how big the startup is, how high the burn rate is and how on top of things the founder is and if they managed to pull the money before everything broke down. If the startup is small, you should be fine, $250K should be accessible relatively quickly, beyond that will be a process that can take long time and there is no guarantees.

But a small scrappy startup with not super high burn rate might be hugely impacted. Large startups with high burn rate are pretty much screwed though and are gonna have to downsize pretty aggressively and quickly.

johng• 3 years ago

https://open.spotify.com/track/6j1D7df1BqtulVza3iIL6c?si=EuQ...

dangerboysteve• 3 years ago

SVB is one of the banks Stripe uses for its Atlas program.

ulrashida• 3 years ago

The biggest joke has to be all the "analysts" who chimed in with neutral or buy ratings as recently as yesterday.

I wonder what, if any, consequences fall their way other than the obvious professional embarrassment of a missed call.

gumby9• 3 years ago

I suspect all depositors will be made whole. The bank had a liquidity crisis; it had reserves in excess of its liabilities.

Every bank borrows short term (you can walk up and withdraw your money at any time) but lends long (e.g. mortgages, though SVB writes few of those). The recent management grabbed some very long federal bonds; as rates have risen the resale value of those long term assets (paying a lower interest rate) fell. They can't unwind that position and cover all possible demands.

FDIC will transfer the accounts to another bank, guaranteeing the 250K at least (I believe SVBs own liquid assets could cover that) and may use its own asset base to cover the balance, siezing SVB's other assets and stuffing them into FDIC's piggy bank. It's not like those government bonds won't pay out...eventually.

bombcar11• 3 years ago

The thing that's strange is FDIC took control and setup a receiving bank for liquidation.

That's not normal; FDIC works quite hard to find a bank willing to take over - usually they can work out what the "cost" is to take over, and FDIC pays the receiving bank that amount to "eat" the dying one.

If they don't announce they have a bank to assume SVP by Monday, it's quite abnormal.

NordSteve13• 3 years ago

Most FDIC bank takeovers are slow moving crashes, allowing for a longer negotiation where buyers can evaluate the loan portfolio they are buying. This is a reaction to a classic run, so no time for that.

czbond2• 3 years ago

Chase has wanted this bank for years. Either they are taking advantage (takeover) or <conspiracy theory unfounded> helped accelerate it.

mikeyouse2• 3 years ago

So what I think is happening here is that if you take over a bank the traditional way, you need to mark-to-market all of the bank's assets -- so all of the losses from the long-dated MBS that would be perfectly fine if held to maturity would have to be recognized immediately, just crushing the balance sheet of anyone who bought it. Probably trying to line someone up who can either absorb that loss, figure out a way to recapitalize without recognizing the loss, or get access to some other lending facility.

mixdup4• 3 years ago

Exactly. The fact they didn't have a bank lined up points very heavily to the fact that they are not going to be made completely whole. In the past, the FDIC has found a buyer and as part of that process guarantees some amount of the losses. IE: Savior Bank buys Failed Bank for pennies on the dollar, or even for a negative amount. They get all deposits, insured or not, and all assets--meaning loans. Then, the FDIC guarantees they'll make Savior Bank whole some percentage of losses on assets that go bad. Sometimes 80% or more

This arrangement usually results in all depositors being made whole, and the FDIC fund not taking any, or many, actually losses, because most of the loans will still pay back, at least partially

They also do this before seizing the bank, so that it's all very orderly and calms any panics

SVB was looking for a buyer on the open market and that failed--no surprise

That the FDIC also could not find a buyer that they could subsidize and announce the same day as the seizure is very damning. I would be shocked if someone comes in later and tries to buy it

Also, the fact the seizure happened in the middle of the business day, and not at the close of business yesterday points to a somewhat disorderly and rapidly deteriorating condition. I think maybe the run picked up a lot faster than they expected

ecopoesis• 3 years ago

When was the last US bank failure where depositors lost money?

everybodyknows3• 3 years ago

What is "SVP"?

kgwgk33• 3 years ago

The size of this failed bank is quite abnormal. The business of this failed bank is quite abnormal. The surprising thing may be that the find anyone willing to take it out of their hands - let alone by Monday.

tinco2• 3 years ago

But by the time the depositors get their money all of their employees will have left, and some other company will have an N year lead on cornering the AI dog washing market.

fairity4• 3 years ago

I suspect all depositors will be made whole.

Agreed. The FDIC report shows $209b in assets and $175b in deposits.

Even if they took the full $15b estimated loss to liquidate their HTM bond portfolio, they'd have $20b to spare before not being able to cover deposits.

Am I misunderstanding?

anonuser1234562• 3 years ago

The assets may not be valued anywhere near market prices given the recent run up in interest rates. They don’t have to reprice the asset if they intend to hold it to maturity in the face of fluctuating rates.

engineeringwoke2• 3 years ago

There's a $40 billion hole in their balance sheet...

gumby9• 3 years ago

As fairity pointed out in a comment to this thread, "The FDIC report shows $209b in assets and $175b in deposits."

Unfortunately much of their balance sheet is illiquid (consider loans they've made to venture-backed businesses, and of course a poor choice they made in government debt maturity).

Thus a liquidity crisis; technically also insolvency, but not gross mismanagement and excessive leverage by any means. Unwinding it will be quite routine (see my reply to kmod).

tchalla• 3 years ago

93% of deposits are uninsured according to a recent regulatory filing. So, I doubt it will be “all depositors” that would be made whole.

https://twitter.com/business/status/1634211584657571843?s=20

tialaramex4• 3 years ago

FDIC means you get paid immediately regardless, but the bank will almost invariably turn out to be good for the rest, just not quickly.

bityard• 3 years ago

Agreed. Lots of people here in the comments are making assumptions about a system they don't understand. Depositors with > $250k aren't necessarily going to "take a haircut," for the reason you mentioned, plus a few others. Additionally:

1. Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired. It's totally possible (and regularly done) to spread out cash among several financial institutions to protect against this very issue.

2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.

3. If spreading out your 6- or 7-figure assets to multiple institutions is too much of a burden, literally every business bank has special accounts or add-on features that either raise the FDIC default limit of 250k, or supplement it with external insurance. Again, if any startup's financial handlers didn't recommend this: fire them because they entirely failed to do their job.

jabart• 3 years ago

I don't think the signers count towards the limit like a personal joint account does and would keep a business account at $250k.

https://www.usbank.com/bank-accounts/fdic-deposit-insurance-...

kgwgk33• 3 years ago

2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.

Is it typical for business accounts to be owned by someone other than the business?

panarky7• 3 years ago

SVB is not a typical regional bank taking deposits from middle-class workers, where most accounts are under the 250k insurance limit.

Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured.

But for SVB, less than 3% of deposits are in accounts with less than $250k.

The cold, hard fact is that if the bank doesn't have sufficient assets to pay back depositors, no regulatory sleight of hand changes that fact.

There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't co-opt the power of the state to force ordinary people to subsidize them when their bets go bad.

It would be hideously immoral to bail out fabulously wealthy VCs with funds from taxpayers and small depositors.

roflyear6• 3 years ago

3. If spreading out your 6- or 7-figure assets to multiple institutions is too much of a burden, literally every business bank has special accounts or add-on features that either raise the FDIC default limit of 250k, or supplement it with external insurance. Again, if any startup's financial handlers didn't recommend this: fire them because they entirely failed to do their job.

Contractual obligations often prevent this, btw. Many SVB customers had loans with SVB, which prevented them from using other banks.

VagueMag• 3 years ago

For Pete's sake, 1 month Treasury bills are yielding more than almost every bank account. Just set up a TreasuryDirect account and be done with it.

roguecoder5• 3 years ago

It seems like SVB was exploiting the lack of sophistication among early startups, and now it is going to bite all those startups in the ass.

Wealthfront offers me as an individual better tools for managing risk that it sounds like people who banked with SVB were getting.

duped• 3 years ago

How does that work with payroll? 500k is not enough for a moderately sized startup to make payroll.

cormacrelf• 3 years ago

To be clear, if you have 10 million cash, and you need >250k to make payroll a couple of times while your banks assets are sold off and you get the rest of your cash back (or 95%, or whatever), there is no need to spread that 10 mil over 40 different banks. That would be very inconvenient. Just to set it up so you have enough insurance to help you survive a short while. You can put 9.75M in one account and 250k in another bank.

jjav• 3 years ago

Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired.

Looks like not just startups, e.g. Roku had ~500M in SVB

https://edition.cnn.com/2023/03/10/business/roku-svb-cash/in...

dahdum11• 3 years ago

DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?

https://dfpi.ca.gov/2023/03/10/california-financial-regulato...

dragonwriter13• 3 years ago

DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?

If the asset/deposits balance hasn't changed much since December (which I'm not sure is the case), depositors are likely to eventually be made whole for the deposit amounts, but liquidity issues and facilitating sale of assets to make that happen may result in substantial delays. For depository accounts businesses relied on for regular operations, that...may still create substantial additional costs that will not be compensated.

So, in a more holistic sense, it seems likely that depositors will not be made truly whole for the impacts, even if they eventually recover deposits.

gumby9• 3 years ago

See my reply to kmod for further explanation on my statement.

kmod4• 3 years ago

These statements seem pretty contradictory:

- "it had reserves in excess of its liabilities" - "They can't unwind that position and cover all possible demands"

I'm guessing that you're thinking of some sort of valuation of their assets that says something like "well they're really worth more than they're currently valued at", which is a common claim on this story but it's a pretty bold one?

ummonk5• 3 years ago

They're just saying that many of the assets are insufficiently liquid to be instantly sold off to cover all the withdrawals during a bank run.

gumby9• 3 years ago

That's a good question. The key is where I wrote that it was a liquidity crisis.

An analogy: you (hypothetically) keep your money in some 6-month CDs, with about a month's worth of expenses in your savings account in case something unexpected comes up. Then you lose your job and by the end of the month you haven't found a new job. You could liquidate your CDs, but the early-liquidation penalty might mean you still won't have enough to pay your bills. If only you could wait for maturity.

So yes, at mark-to-market firesale prices that means SVB can't pay out in full today to every account holder and so FDIC has to step in. But FDIC (who has a very large balance sheet) also seizes those assets. They give the accounts to another bank. Then FDIC can unwind those seized assets in whatever timely fashion it wants.

There's a second factor: in a secular banking crisis they may pay out only the guarantee (currently $250K; for a while (during the GFC IIRC) it was temporarily $500K. But we are not in a secular banking crisis; not only has the Fed completely restructured bank reserve requirements in response to the GFC but SVB is a single, small bank, not even a regional one, with a run-of-the-mill crisis. This is the kind of failure that you put all the new hires on because they can learn without any up-to-the-minute crisis stress. This is what they learned during onboarding :-). In such a situation it's better to pay out move than the $250K, probably several million, to prevent any "contagion" (since SVB has "Silicon Valley" in its name).

I have no special knowledge of FDIC's internal thinking: they could make them whole now, or make up to $250K whole now and pay out some later, or yes, they could force a few people to take a haircut. Those (small number of) panicing VCs would be better off calling their senators than their portfolio companies.

PS: BTW hypothetical you has more options than those above: you could take out credit card debt, perhaps tap a HELOC you might already have in place, etc. SVB had similar options: they did have a $15B fire sale and got an investment from General Atlantic. It wasn't enough.

purpleblue4• 3 years ago

No, I think you're wrong.

The reason why depositors are going to lose money I think is because the fire-sale valuation of the assets << valuation on the books. I think depositors will lose a fairly big chunk of their money, maybe 10-30% if not more.

Their money was not sitting around in cash. It was in bonds which lost a lot of value in the last several months. They also have more exotic investments in the startups they work with, which depending on how it works, could get a really bad valuation as well.

gumby9• 3 years ago

See my reply to kmod in regards to this. It's the FDIC's current balance sheet we're talking about, not SVB's. In a liquidity crisis you don't have access to your capital. So FDIC spends theirs, and takes control of SVB's balance sheet. Also SVB is a small bank.

martythemaniak• 3 years ago

Yeah, it seems companies should be mostly fine. Like you had 10 million in cash yesterday, but now you get 10m in 10y TBills, which you have to sell for $9m to get your cash back. It sucks but it shouldn't change the trajectory of your startup.

opportune9• 3 years ago

The conundrum with underwater bonds/mbs is that you can make depositors whole, or give depositors money back now, but not necessarily both.

If I had $1m in my account and it was invested 100% in MBS around in 2021, it could take 10 years to actually get the whole $1m back, and only be worth like $800k now. I have effectively lost that 20% because you could just give me $800k now and I could put it in a MBS myself to get the same results.

nr378• 3 years ago

SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respectively on a mark-to-market basis, which means a total unrecognised hole its in balance sheet of $17bn. SVB's total equity was only $16bn[1][2]

That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices).

The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done.

[1] https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley...

RC_ITR• 3 years ago

People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.

EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98.

No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it.

If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up.

This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).

whimsicalism2• 3 years ago

sounds like you are describing a liquidity crisis to me

csomar2• 3 years ago

The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth.

I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.

tikkun• 3 years ago

SVB's total equity was only $16bn

Which table in the 10-K would I look at to see this?

bjornsing2• 3 years ago

It's not like those government bonds won't pay out...eventually.

Does that really matter though? Anyone can buy and hold to maturity. The market price indicates that that's not good business.

FollowingTheDao3• 3 years ago

It's not like those government bonds won't pay out...eventually.

You go ahead and think that...

https://www.svbsecurities.com/team/joseph-gentile/

Joseph Gentile is the Chief Administrative Officer at SVB Securities.

Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division.

zenmacro• 3 years ago

Wow, the government acted incredibly swiftly and decisively to crush the possibility of a general bank panic. The current US banking system is very different from the 2008 system.

delfinom5• 3 years ago

Because SVB was an actual bank with deposits that is FDIC insured. This is their job and they always acted timely in any situation, even before 2008.

Bear Stearns in 2008 was an investment bank, they were not hawking FDIC insured accounts.

bigbillheck• 3 years ago

There were a whole lot more banks that failed in 2008 beyond Bear Stearns.

chasd003• 3 years ago

well they got a finger in the dam leak at least. The question is, is it the only leak or are other cracks going to appear with more leaks?

rrmm• 3 years ago

From what I recall of the last set of bank failures this is pretty much the FDIC's SOP. They swoop in on Friday with little notice, close the bank, work through the weekend and open up for business on Monday. It apparently made for some interesting work environments.

yieldcrv2• 3 years ago

!remindme 2 months

MrMan5• 3 years ago

your last sentence is demonstrably false!

calgarymicro2• 3 years ago

What? No it's not. Love it or hate it (and I lean towards the former), Dodd-Frank has greatly changed American banking.

perihelions• 3 years ago

HN has "ample capacity" to serve its readers "with one exception: If everybody tries to refresh this comment thread at the same time, that will be a challenge."

(I think it helps to log out? If you're in read-only mode)

nnx• 3 years ago

But I thought only crypto was risky? And that over-regulated bank sector was totally safe?

Imho, this is a great argument for the return of Free banking (including crypto) as we see time and again that regulations do not work. Fail early and fast, let the market innovate and pick its winners and losers.

ehhthing• 3 years ago

Except in this case, when SVB fails their customers will get the vast majority of their money back as the FDIC liquidates all of SVB's assets. When FTX fell, nobody got squat.

jitl• 3 years ago

When a bank fails, it gets put into receivership and you get (some of) your money back. There's enormous protection working in your favor provided by the FDIC. When a crypto token enters free-fall, there's no one to stop the market, and no one to help you get your money back. It's gone.

cp9• 3 years ago

... my guy what are you talking about. the regulations _saved_ the depositors. if the FDIC wasn't around the little guy would be getting screwed right now, as it is, the big guys are the ones taking the brunt of the damage. if this had been crypto it would *all* be gone and the little guy would be the one holding the bag

UncleOxidant• 3 years ago

regulations do not work

That's quite a lot of extrapolation from one bank failure.

unity1001• 3 years ago

And that over-regulated bank sector was totally safe?

SVB got an exemption from those regulations.

saos• 3 years ago

How bad is this for wide economy? I’m scared.

temp2022account• 3 years ago

Unless you had your money there the only change in your life will be the headlines you glaze over.

NordSteve13• 3 years ago

It should not take too long to find out roughly what the uninsured depositors will receive. The investment portfolio is straightforward to liquidate. The loan portfolio will take a bit longer to sell, but it's a well-worn process. If you haven't read about Resolution Trust Corporation, it's worth a couple minutes -- this is how the assets of failed savings and loan companies were liquidated 40 years ago.

https://en.wikipedia.org/wiki/Resolution_Trust_Corporation

Ancalagon2• 3 years ago

Yikes what a sucker punch to tech in a downed market. This sucks

xnx• 3 years ago

A lot of talk about the $250K FDIC insurance limit in this thread. It took me a long time to learn that you can have up to $1.25 million insured at an institution if you designate multiple beneficiaries: https://www.fdic.gov/resources/deposit-insurance/brochures/d...

zamnos8• 3 years ago

If that's of interest to you, you might also want to look up "FDIC sweep" or "insured cash sweep". Basically your bank makes accounts at other banks, and each sub-account only has up to $250k in it, so you're totally covered.

https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...

m00dy• 3 years ago

Sorry to say but the depression is on our way.

jossclimb3• 3 years ago

For tech workers who were part of the overtired 2021 cohort, sure, however most other industries remain isolated to this.

kmlx2• 3 years ago

Silicon Valley Bank UK confirms it’s a standalone independent UK regulated bank.

London, 10 March, 2023: Silicon Valley Bank UK, the financial partner of the innovation economy, today moved to confirm to its UK clients, partners and external stakeholders its financial position as a standalone independent banking institution that is regulated and governed by the PRA in the UK.

Silicon Valley Bank UK has been an independent subsidiary since August 2022 with a separate balance sheet to the SVB Financial Group and an independent UK Board of directors. Silicon Valley Bank UK fully abides by the UK regulatory requirements as covered by the Financial Services Compensation Scheme and by the Financial Ombudsman Service. SVB UK, Ltd. is ring-fenced from the parent and its other subsidiaries.

Notes to editors

Funds from client deposits placed with SVB UK, Ltd. are managed in the UK for the benefit of our UK clients. None of our operations in the EU outside our UK Subsidiary are licensed to or take deposits.

https://www.svb.com/press/release?Channel=45991&Account=SVB_...

prennert• 3 years ago

For posterity: https://web.archive.org/web/20230310175421/https://www.svb.c...

rvnx7• 3 years ago

The announcement is somewhat funny in a way that "independent Silicon Valley Bank"'s announcement actually happens on the website of the US website they are not supposed to have links with.

Randalthorro4• 3 years ago

Their regulatory framework and finances are independent not the company itself

0x00000000• 3 years ago

Don’t worry guys, FTX.us is completely separate and independent from FTX.com

ignoramous4• 3 years ago

We bought two domain names to prove it!

eclipticplane• 3 years ago

This press release didn't age well.

https://www.bloomberg.com/news/articles/2023-03-10/svb-s-uk-...

mirthflat83• 3 years ago

Lmao, just like FTX

morpheuskafka4• 3 years ago

If the assets are separate, it is still a very relevant point for depositors because the outcome of the UK receivership will be based on those separate assets. The amount that depositors in the UK bank recover may be completely different, higher or lower, than the depositors in the main bank.

deepsun2• 3 years ago

What are insured maximums in the UK's equivalent of FDIC?

alarmingfox• 3 years ago

I believe the Financial Services Compensation Scheme (FSCS) in the UK insures deposits upto £85,000.

purpleblue4• 3 years ago

The fact that no other bank stepped in to buy the assets makes it seem like this is going to be dire for depositors. There's something wrong in the books, or the liabilities are higher than the assets, both of which means that depositors are going to lose some money.

I have a friend that uses SVB for his startup and now all his funds are frozen. The big question is how long will the money be locked up for? Could it be 6+ months?

hintymad2• 3 years ago

Just heard that the payroll company Ripping is down, as they use SVB as their partner. What a rippling effect...

imhoguy• 3 years ago

https://twitter.com/Rippling/status/1634201986894577665

fudged71• 3 years ago

Which other popular companies have SVB as their main partner for providing products/services?

mosfets• 3 years ago

What does the "takeover" mean? Will people's deposit still stay intact?

avelis• 3 years ago

If a company has a loan out to SVB does that get sold off to basically another lender?

Edmond• 3 years ago

Please reboot Silly-con Valley...I mean the show. With everything that has happened with crypto and the current mayhem I think two solid additional seasons can be made.

dylan6043• 3 years ago

It would have to be with new players, as they pretty solidly tied a bow around that cast.

Zealotux• 3 years ago

I loved that show, such fun to watch! They definitely could make a lot with the crypto-nonsense indeed.

calgarymicro2• 3 years ago

Silicon Valley actually already had an ill-fated crypto scheme arc - remember PiedPiperCoin?

adrr3• 3 years ago

It didn't have NFTs or failed exchanges.

tpmx2• 3 years ago

Bring back the whole cast including TJ Miller (sober or not, he brings it) ... but not Middleditch.

https://www.usatoday.com/story/entertainment/celebrities/202...

primitivesuave• 3 years ago

Thomas Middleditch shouldn't earn a living ever again because he made a woman at a nightclub feel uncomfortable?

esalman• 3 years ago

We need a reboot featuring crypto+AI.

cloudking• 3 years ago

I can see Pied Piper AI replacing Richard as CEO

heavyset_go• 3 years ago

Why make another documentary when you can just watch the news?

melvinmelih• 3 years ago

It’s not as funny when the real world is crazier than the parody show. See also what happened to Veep.

ozten• 3 years ago

I was wondering how us tax payers would end up paying into the crypto ponzi scheme.

NordSteve13• 3 years ago

For those who want to geek out, here's a great memo that describes the liquidation process in great detail: https://corpgov.law.harvard.edu/wp-content/uploads/2008/10/0...

Someone holding a receivership certificate likely can sell it or borrow against it.

dahdum11• 3 years ago

it has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency.

Does this settle the question of insolvency then? I didn't see that term in the other announcement.

tiffanyh3• 3 years ago

Stripe?

Is Stripe adversely impacted by this given they recommended to merchants to use SVB and probably accounted for a large portion of deposits into SVB (from payment transactions)

brunoTbear• 3 years ago

Stripe's money is not there

tiffanyh3• 3 years ago

Question being: if a meaningful portion of Stripes customers were to bank with SVB, and if SVB were to seize operating - would this effect Stripe?

It’d be a Jedi move for Stripe to straight up acquire SVB. Imagine how strong of an offering they could create then.

xeeeeeeeeeeenu• 3 years ago

In the previous thread, someone posted a video showing the process of the FDIC seizing the Heritage Community Bank in Chicago:

https://www.youtube.com/watch?v=KIh6NEBL8BU

It's pretty interesting.

bmon• 3 years ago

Thank you for that link, it was really fascinating. The Australian government guarantees deposits in the same way, but I never realised this was also true in the US. I had assumed during the mortgage crisis that people lost their deposited money when their banks failed.

college_physics• 3 years ago

For some context, it seems that this is the first bank failure since some time (Oct 2020) [0]

[0] https://www.fdic.gov/resources/resolutions/bank-failures/fai...

armatav• 3 years ago

Those mortgage backed securities will get you every time

nodesocket• 3 years ago

I worry about all the valley based companies that held their payroll and operating expenses with SVB. It's going to take awhile (potentially years) to deal with FDIC an clawing back what's left of funds. I.E. what about huge infrastructure related companies like Gusto, Brex, Xero? This is very concerning.

zackmorris• 3 years ago

Looks like the FDIC coverage limit was raised to $250,000 in 2008 and made permanent in 2010, before that it was $100,000 since 1980.

https://americandeposits.com/history-and-timeline-of-changes...

Plugging that into any online inflation calculator, $1 in 2010 is $1.33 in 2023. So FDIC insurance should really cover $333,000, and people could lose $83,000 or more due to coverage not being raised.

This is one of 1000 examples of how deregulation and defunding government programs often backfires on the people calling for it. It's almost like the people who casually deal in hundreds of thousands of dollars don't know the value of the dollar, because they got that money by skimming it from their employees.

dylan6043• 3 years ago

how deregulation and defunding government programs often backfires on the people calling for it

You make this sound like the avg citizen called for this, because this is who gets screwed in these situations. The heads of banks and the banking industry called for it, and not one of them will even notice the blip in their lives.

cjbgkagh3• 3 years ago

'Bracket creep' almost never works in your favor and that is by design. The government knows perfectly well how to peg things to inflation.

bgc2• 3 years ago

An interesting tidbit from the Bloomberg live thread[0]:

The FDIC prefers to close a bank over the weekend, shutting it down on Friday and reopening Monday, Steven Kelly, senior research associate at the Yale Program on Financial Stability, told me.
“The midday takeover suggests the bank couldn’t responsibly operate until the end of the day,” Kelly said.

[0]https://www.bloomberg.com/news/live-blog/2023-03-10/the-fall...

christkv• 3 years ago

How many of companies will loose access to liquidity and face bankruptcy next?

cissou• 3 years ago

That's wild. I wonder if it's good news for neobanks like Mercury and Brex who will see an influx of new customers, or on the contrary, startups will seek old, boring, safe banks instead of niche boutiques with lots of exposure to industry risk.

dopeboy• 3 years ago

In my circle of founders, it appears JPMC is winning out. We are currently on Brex via lending club and monitoring the situation closely.

AndreLock• 3 years ago

I think it's the latter. If anything, this will negatively impact Mercury and Brex in the long run as companies will favor safety above all else.

anonuser1234562• 3 years ago

This made Nouriel Roubini’s morning.

neom• 3 years ago

If you're struggling, email is in the bio, happy to chat. I've heard a few folk are really in trouble right now and we don't need anyone doing anything permanent, this too shall pass. Happy to talk! There is a way forward! :) :)

If you need to talk to someone immediately: 800-273-8255

650REDHAIR• 3 years ago

You’re a good egg.

serf• 3 years ago

If you need to talk to someone immediately: 800-273-8255

it's an 800 number, perhaps you should be clear to where you're directing people: the American National Suicide Prevention Lifeline.

I get that you're trying to be light-footed around the topic, but I feel as if I must point out that not all people that need to talk to someone even have the concept of self-harm on their mind.

If you actually just need to talk to someone , try a Warmline. [0]

[0] https://warmline.org/warmdir.html#directory

marban• 3 years ago

Unbank the banked.

dcow• 3 years ago

It seems like anybody can find any way to light standing cash on fire. Not just crypto poster children. So...

danielmarkbruce11• 3 years ago

Most un-insured depositors are going to get most of their money back. They'll get a good chunk (guestimate 20-50%) of it back within a week. The claims on SVB which will be held by depositors will likely be able to be sold to investors who specialize in this stuff for something reasonably close to par. Those who just hold onto the claim will be paid out most of what is owed (maybe literally 100%, more likely 90%+), but it will take longer.

It will be annoying and stressful, but basically ok.

knodi123• 3 years ago

Silicon Valley Bank is the first FDIC-insured institution to fail this year. The last FDIC-insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.

How humiliating. At least this isn't an epidemic.

kuczmama2• 3 years ago

What I don't understand is why do banks work this way?

Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers.

If I had to bet, most people who have money in a bank today think this is how banks work.

But in reality, when a bank receives money, a bank will take some percentage of their customers deposits (90% or so), and then invest that money trying to make a return on it. This works as long as all customers don't try to withdraw their money at once.

But when enough customers... say 10% of the customers try to withdraw money from the bank at once, since 90% of the money was in other investments, the money isn't really there, and you get a bank run.

Silicon Valley Bank is not new, the whole reason we have FDIC insurance is to protect against bank runs. As long as this is the system we follow, we will continue to get bank runs.

I feel like the entire banking system is broken because "The money isn't actually there". There needs to be a better way then relying to the government to bail out banks who make bad investments. Either a bank should be backed 1 to 1, or there should be some other way to keep hold of your money.

noncoml• 3 years ago

If you have a large sum of money that you don’t expect to need them soon, do you put the in the bank or do you invest them?

Probably invest then. Why would the bank put its money in the bank if you are not?

420official• 3 years ago

The bank can happily choose to invest *its* money, it shouldn't be investing *my* money.

bombcar11• 3 years ago

There are banks that do offer the 1:1 ratio you want; they charge you a quite hefty fee to do this.

But from time immemorial banks work by taking money from you (short term) and selling it to someone else (long term). Originally the banks were "protected" by being able to claw back the long term at anytime; but that caused even worse problems.

FDIC provides a way for "common people" to be protected from this; the other option would involve something like the USPS offering cash-only banking for people.

ncallaway7• 3 years ago

Then the bank could make money by providing services to their customers.

Which services? And those services would need to be something that I can only provide by being your depositor (otherwise I'll get beaten by someone who provides those services without the added burden of holding and securing your physical money.

You've basically designed a system that increases the costs of being a bank, and eliminates the main source of profit, and hand-waived over how to close that gap.

I suspect it's simply unprofitable to run a bank in the model you've provided. I suspect the only way to make that system work is by saying "banking is a public good, it's OK if it runs at a loss" and making it a gov't provided service. I don't really see a path to private banks existing in the model you outlined.

kuczmama2• 3 years ago

That's a very good point. I think services could include things like financial management, checking, sending/receiving fees, etc.

You're right, in this model it wouldn't be nearly as profitable to be a bank as it is now. Potentially, it could be a "public good" provided by the government, or it could be like a lot of the brokerages who provide investment services and charge a commission on top.

Also, you're right it would be very hard for banks to be anywhere near as profitable as they are now if assets are backed 1:1.

But in some sense, banking is already viewed as a public good since the FDIC is backing all of the bank deposits. So at the moment we kind of have a weird hybrid situation where banks are kind of pseudo-private, but also backed by the government.

PragmaticPulp• 3 years ago

Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers.

Now imagine you've finally settled on a cost structure that can pay all of your insurance, operating costs, payroll, and everything else. You charge monthly fees and you might also charge per-interaction fees to do anything or talk to anyone.

Then a competitor comes along that operates in a fractional reserve manner. They not only offer zero fees, they actually pay customers interest to keep their money in the bank. There is a risk of failure, but it's rare and all evidence points to customers not suffering massive losses when it does happen due to various regulations. Inconvenient, yes, but it's unlikely that you're going to lose all of your money.

The majority of your customers would leave for the competitor bank.

AvAurora• 3 years ago

Not if you make inducing bank runs by means of marketing legal.

adrr3• 3 years ago

Also where would the capital come from to give out loans?

stuxnet79• 3 years ago

I see the point you are trying to make here but your argument isn't very convincing. You are completely ignoring the impact regulatory oversight would have. If fractional reserve banking was banned outright due to the risks it poses, then the situation you just described would never emerge.

As time goes on it's becoming more obvious that the current status quo is unstable. Our financial institutions regularly engage in ponzi like activities and we've become accustomed to near catastrophic collapse at the end of every business cycle.

If we are going to stick to fractional reserve banking then we need to come up with better reasons why otherwise I feel like the entire system needs to be reevaluated.

suresk• 3 years ago

1:1 banking essentially guarantees long-term loss of principal for depositors, albeit slowly. The main "service" a bank would provide in that scenario is holding onto your money for you and instead of paying interest on it, charging you a few percent per year to hold onto it for you.

Also, in your model, where does money for loans come from? How are borrowing costs impacted by a major source of funds for loans going away?

zerbinxx• 3 years ago

Ironically, returns on bank savings accounts have been so low for so long that my present APR of like 1% is functionally the same as if they just held onto the money for me. That would probably do a great deal to explain why no one uses savings accounts anymore

themitigating6• 3 years ago

Then how would a bank provide loans for cars and houses? They might also have to charge a very high fee to hold your money and not provide interest

adgjlsfhk1• 3 years ago

The problem with this take is fractional reserve is really good for the economy because it expands the money supply. The problem with a bank that holds 100% of the money is that it has to charge it's customers to use it, so they won't get customers.

UniverseHacker• 3 years ago

The ability to 'borrow' someone else's money to do something valuable with it opens huge opportunities. This model is what fueled the massive economic growth of the last few hundred years, made the industrial revolution possible, and made home ownership possible for non-aristocracy.

kayamon3• 3 years ago

The people whose money you're 'borrowing' may have had other ideas about what they'd have liked to see it invested into.

nine_zeros• 3 years ago

What I don't understand is why do banks work this way?

This is such a great question. It has depth and nuance. If I understand it correctly, it comes from a place of wanting stability. Why wouldn't anyone design a banking system that is fully backed and stable? Who the hell wants these violent booms and busts? This looks like something that can be kept stable right from the get go.

I hear you. The main reason I can think of is that "banking is crookery".

The old goldsmiths were crooks who understood fractional reserve. Imagine if we were to ban the current system and asked banks to hold every deposit 1:1, they could - for a small fee. But that will mushroom a black market of lending for interest. All the banking crooks will have no choice but to go to the black market. This will cause the black market to grow faster than stable banking, which will lead to more unregulated chaos.

The only alternative I can think of is equity-based islamic finance style banks. While these banks have interest in varying forms, they don't have as much asset risk because the interest rate is largely meaningless because lending/borrowing is not the main way to earn money.

mempko3• 3 years ago

Banks don't lend out deposits. They don't take deposits and lend out 90% or so. Fractional reserve banking is a model of how banking works but it's a wrong model. In reality banks make loans (which create deposits). They try to attract deposits from other banks because they need enough bank reserves to cover liquidity issues (like customers transferring money to other banks). When a bank transfers deposits to another bank, they must transfer reserves too. There is really a 2 tiered money system in the US. There are bank reserves (which you and I can't have) and deposits (which you and I do have).

How banks actually work was described well by the Bank of England. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

kgwgk33• 3 years ago

Fractional reserve banking is a model of how banking works but it's a wrong model. [...] They try to attract deposits from other banks because they need enough bank reserves

Not completely wrong, after all.

chernevik3• 3 years ago

The whole point of a bank is maturity conversion, the transformation of short-term deposits into long-term loans.

It generally works because while any one depositor's funds are short term, the pool of such deposits is generally stable. A good chunk of today's deposits will fund tomorrow's withdrawals. Banks also have elaborate instruments like commercial paper and the Fed discount window to cover short-term liquidity gaps. A bank with assets it can't sell quickly enough can generally borrow briefly from some other bank to cover the term gap. But there is a limit on how much such borrowing a bank can do, and SVB has hit it.

It seems that SVB made a classic mistake of putting a lot of "hot" money into long-term assets, thus taking on interest rate risk. They probably should have put the surge of deposits into shorter-term instruments, but that would have forced them to reduce interest on deposits or their own profits.

stoicking• 3 years ago

I think what you described is a vault. A bank is where I go when I need money for a car or a house. A vault is where I put my money to be 100% safe.

thetrb• 3 years ago

People expect interest when they park a large amount of money in a bank. Where should that interest come from when the money just sits there? The bank will have to invest is somewhere (ideally somewhere very safe like in Government bonds) where they can then collect interest.

So it looks like in this case SVB chose MBS with a pretty low interest rate and long maturity, which they now have to sell due to the bank run you mentioned.

rafaelero4• 3 years ago

What I don't understand is why do banks work this way?

People don't want to lose their money to inflation, so banks are implicitly required to make up for that. Also, it's just too tempting for them not to use the money that is collecting dust.

Hopefully people will emerge from this with a better understanding of Bitcoin's advantage to normal fiat system, which is something that is severely lacking in discussions I see here in HN.

hot_gril• 3 years ago

Except the bank interest still doesn't beat inflation, let alone the rate of M2 increase. Chase offers 0.1% on savings accounts right now, which would be pointless to me.

It's more difficult just to hold onto wealth than most people see. It'd be nice if everyone holding the currency weren't implicitly taxed through dilution, forcing them to passively invest, creating bubbles... and still being taxed on the so-called gains. These passive investments are more about stashing wealth in something with a limited supply (stocks etc) than about the actual business they're investing in, making them not all that different from the concept of a broadly-adopted cryptocurrency. Difference is they have to keep fleeing from one "save haven" to another as the money moves and the bubbles pop.

nemo44x4• 3 years ago

Then the bank could make money by providing services to their customers.

The point of a bank is to loan money. That's it. This is how they make money. They need deposits so they can loan money. They pay the depositor a part of the interest on the loans they write. They don't exist to sell services because that's a really bad business. They provide services to attract deposits so they can write more loans. That's what banks are.

...and then invest that money trying to make a return on it.

No, they don't do that. They loan the money. If they can't loan it then they put it into a variety of safe places that can earn some interest, among other things. But they don't gamble depositors money. Investment banks may, but that's an entirely different thing.

yibg• 3 years ago

If all banks worked like this, how would people get mortgages? Can’t loan out the money with interest.

killerstorm• 3 years ago

What I don't understand is why do banks work this way?

Because people want economy to be self-regulating. What is the correct amount of money in circulation? What are interest rates? Let the market decide. Banks is how market decides, basically.

globular-toast• 3 years ago

Because you're a greedy human and you will find a way to take a larger slice of the pie. It happens every single time. You'd think this would be obvious by now.

How you think the banking system works is how "educated" people think it works and even that isn't correct, by the way. There is no reserve. The funds aren't real. It's all just made up numbers. There have been several Hollywood films made about it (e.g. The Big Short and Margin Call). It's almost so stupid you think there must be something else to it, but it's just people playing with numbers.

nsxwolf• 3 years ago

I had never even heard of the Silicon Valley Bank. It sounds fake. Is this really a contagion risk?

somenameforme• 3 years ago

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate):

"- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.

- As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.

- 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.

- The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield.

- This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.

- However, yesterday afternoon, SVB announced that they had sold $21bn of their Available For Sale (AFS) securities at a $1.8bn loss, and were raising another $2.25bn in equity and debt. This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio."

[1] https://twitter.com/jamiequint/status/1633956163565002752

BlandDuck• 3 years ago

"This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually."

But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate.

It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured.

EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.

danpalmer• 3 years ago

It's never a liquidity issue as long as no one tests the liquidity!

lkbm2• 3 years ago

He meant solvency issue. Someone else called this out downthread and he confirmed. Definitely felt like it should've been corrected more prominently, though.

blantonl• 3 years ago

“Eventually”

The markets can stay irrational longer than you can remain solvent.

pishpash8• 3 years ago

All liquidity issues are solvency issues when marked to market.

davidw5• 3 years ago

10+ year duration, with a weighted average yield of 1.56%.
the value of SVB’s MBS plummeted.

How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?

Someone1234• 3 years ago

That has to be an inflation adjusted yield, right? Why would anyone do anything remotely risky for such terrible returns? You can almost find government bonds with similar average yields.

mikeyouse2• 3 years ago

They're very safe assets, they just have a long duration which makes them really risky if you could need them to cover deposits.

To make things more straightforward, let's just compress it to a 1-year time frame vs a 30-day bond. So a $100 MBS at 1.5% would pay you $101.50 if you held it for 1 year. If you have $100 in deposits and a $100 MBS bond, you're "solvent". But what happens if after 30 days, your depositor asks for his $100 back? You either need to sell your MBS or find other money to pay them.

If you try to sell the MBS to pay that $100 deposit liability and interest rates are about the same as they were when you bought it, you'd likely get around $100 and things are okay. If however, rates have spiked since then (like they have here), investors can either buy your bond that pays 1.5% or they can buy a new issuance 1-year bond paying 4% or 5%, or perhaps a 30-day bond paying 1.5%. So you need to give them a discount in order to sell your bond -- in this case it might be upwards of 30% or 40%.

So if you sell your MBS, you'll only get $60 or $70 for it -- leaving you a huge shortfall that you need to makeup from your other reserves. If you could convince your depositor to leave his money in the bank until that bond matures, you'd be completely fine -- but the timing mismatch and interest rate spike just kills the bank.

mitthrowaway2• 3 years ago

A bond with a 10-year yield of 1.56% has a price of $0.85 on the dollar. A bond with a 10-year yield of 4% has a price of $0.676 on the dollar. So if yields increase from 1.56% to 4%, the bond price falls by 21%.

kgwgk33• 3 years ago

The risky part is (or more precisely has happened to be) the 10+ year duration, more than the ~1% yield over treasuries (which may be too low to compensate for the additional risk but is not what has brought the bank down).

dahfizz5• 3 years ago

You can't use your intuition about stock prices for bonds/fixed income. In FI, its all a numbers game. As rates go up, prices go down.

JumpinJack_Cash• 3 years ago

> 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.

But why didn't they just hold money at the Fed given that they are a bank and they can?

It's literally splitting hairs between what the Fed Fund Rate is and what they got on their MBS.

Explainer post says end of 2021 they made that trade, in March the Fed raised the Fed Fund Rate to 0.20%, and by April it was 0.77%.

Had they waited just 5 months they'd have got a better Risk adjusted return by just keeping the money at the Fed

jwozn• 3 years ago

Yeah, but banks don't profit by holding money for months.

gerad• 3 years ago

If they could have forecasted the future at that point, they could have made even more money than that!

zenlikethat8• 3 years ago

Because people can’t see the future and you’re talking do we forgo $1b a year or not in that spread. It wasn’t the MBS that got them into trouble, they were supposed to hold those to maturity. It was something else they did that led to that forced liquidation

duxup4• 3 years ago

I have some family who (with some other partners) founded a small community bank that has grown over the years.

They expanded in some areas by buying other small community banks, specifically in areas where there was a big increase in income in the local area (from mineral rights, etc).

The smaller banks that they bought were in a situation where suddenly they had large amounts of cash incoming, and customers who were paying off / not taking out loans like they used to.

They didn’t have the reach (mostly confined to a small rural region) to use that cash to give out loans elsewhere so they looked to merge or be bought by someone who did.

Until I heard about those banks I hadn’t considered “too much money” was a problem.

kccqzy2• 3 years ago

Actually if you think about the balance sheet for banks "too much money" is a problem for them because deposits are liabilities not assets. The money belongs to customers not the bank. The bank must pay back the customers on demand.

That said, I think historically many banks can easily avoid the "too much money" problem by setting the interest they pay on deposits to be low, and maybe even negative.

joosters• 3 years ago

At first glance, bank balance sheets are unintuitive and feel 'the wrong way round'. When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities.

(Yes, this is a gross over-simplification)

navane• 3 years ago

with interest being zero as it was the past couple of years, can the bank not just sit on that money and literally do nothing? What operational expenses do they have?

goodoldneon• 3 years ago

Why is "too much money" a thing? If a bank only wants $100 million in deposits, but customers deposit $150 million, why can't the bank set the extra $50 million to the side and pretend like it doesn't exist until customers want to withdraw it?

rmk• 3 years ago

Yes, it's nonintuitive at first glance. A (good) loan is an asset, and a deposit is a liability as far as banks are concerned.

DeathArrow• 3 years ago

Until I heard about those banks I hadn’t considered “too much money” was a problem.

You can always buy crypto if you think you have too much money. Or find a nice Ponzi scheme and invest in that.

lr4444lr• 3 years ago

Can you ELI5 this for me? Why is it terrible for the banks to simply sit on deposits if there aren't sound lending opportunities? I understand that the owners might prefer to sell rather than wait, but a small bank doesn't seem any inherently different than any other small business who's owner simply enjoys the work of running something. What is the inherent downside to idle deposits?

tomrod• 3 years ago

“too much money”

Its not so much this as deposits are bank liabilities.

andromeduck• 3 years ago

Why even chase 1.5%.

pirate7873• 3 years ago

On $80B that's $120 million a year

postalrat• 3 years ago

If you could make 1.5% off other people's money how much would you "invest"?

berkeleyjunk2• 3 years ago

They got too much in deposits very quickly and could not originate loans at the same speed. If they kept the money uninvested their operating costs would have eaten up their principal (even if they had to pay 0% in interest to their customers)

HDThoreaun19• 3 years ago

1% of 100 billion dollars is a billion dollars. They would rather have 1.5 billion than .5 billion.

itissid• 3 years ago

Noob Questions: How do banks typically diversify their investments so that this kind of thing does not happen? Also don't they have to have some kind of liquidity cushion? Can't they just cover their short term costs by borrowing(I thought there is an overnight facility for lending between banks to borrow at low rates)

LanceH• 3 years ago

With only a look at the summary numbers above, it looks like they tied up 40% or so to 10+ years. I don't know what the right percentage should be, if that much is going to be tied up in hold-to-maturity, you would expect it on a rolling basis which reflects the long term liquidity of your deposits.

On its face, such a purchase would only be done assuming rates and markets will remain the same. I wish I could say that accusing a bank of making such a naive purchase means that interpretation is wrong, but these banks keep doing things like this since it's always worked out before. I'm sure it's much more complicated, but sometimes that's because it should have been a lot less complicated.

rsync• 3 years ago

"97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%."

I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ?

I understand the inverse relationship between bond price and yield ...

... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%.

Are there other factors at play with MBS in early 2023 - such as increased delinquencies - that are putting downward pressure on their price ?

boosting6889• 3 years ago

There’s a misconception that bonds are safe investments. They are not. You’re just trading one kind of risk for another. You can do the math, compare 4% and 1.5% compounding for 10 years and that’s why no one wants the bonds yielding 1.5%. Dumping 90%+ of your liquid funds into a single thing other than cash is completely insane especially when it’s not yours.

nilsbunger• 3 years ago

It's pretty straightforward -- if you have asset yielding 1.5% forever, you can make it an asset yielding 3% by cutting its price in half.

In this case it's a little more complicated since you also get the principal back in pieces, but you can calculate the price today to create the equivalent of a 3% yield instead of 1.5%, and you'll get a significant price reduction.

hervature• 3 years ago

I will first try to explain with simplified numbers and then do the equivalent calculation somewhere else.

Let's assume you buy a $100 bond with 0% rate for 10 years. For simplicity, let's assume it's a riskless bond. Now, let's suppose those same bonds now pay 5% a month later. Well, the smart thing to do would be to sell your 1-month old bond and buy the new one. Of course, everyone is doing the same thing so the price has to drop until the bonds are equivalent. You would get $100/1.05^10 = $61.39. Of course, the old bond still pays 0% but now, on paper, the price of the bond should grow 5% every year as we get closer to maturation.

Going to the real world, it would be something like 4.5% (current Fed rate - expected to be higher) minus 1.5% (the MBS rate they have) is 3% difference and so $100/1.03^10 = $74.41. Now, you said 10+ and so doing the same thing with 15 years is $64.19. This is also not including the fact that MBS is strictly worse than treasuries in terms of riskiness and so it's easy to imagine 50% off.

ikiris• 3 years ago

Go watch Margin Call.

fspeech• 3 years ago

Interest rate rise will cause the same loss for bonds of the same duration. However MBS don’t have fixed durations. As interest rates go up, borrowers are expected to hold onto their mortgage longer. So the expected duration goes up for an MBS as well and loss is expected to be higher than bonds with similar duration to begin with. However there is a mitigating factor for MBS in a rising rate environment, that is they are amortizing instruments. So the duration doesn’t go up as dramatically as callable bonds/CDs.

jshaqaw• 3 years ago

MBS have a double whammy when rates rise. Not only are the mortgages yielding less relative to current rates but prepays decline so the duration extends. A lower relative rate for a longer time means a lower market price.

walrus013• 3 years ago

As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS)

Do we now have people making decisions on stuff like this who are too young or clueless to remember what happened with the 2004-2007 mortgage backed security bubble that popped in the 2008-2009 financial crisis? Seriously? Did nobody learn the lessons on this? Countrywide and other originators of MBS and CDOs?

SilasX4• 3 years ago

The error wasn’t that the mortgages defaulted too much (like in the ‘08 crisis) but that interest rates went up, which is a distinct problem, and, from the comments in these discussions, not something that the capital requirements adequately capture.

alexlesuper• 3 years ago

The problem is with MBS but not for the same reason.

mason55• 3 years ago

Did nobody learn the lessons on this?

I'm not sure you learned the lessons. Other than MBS being coincidentally involved, this has literally nothing to do with 2008.

dahfizz5• 3 years ago

Do you think MBS are always and forever a bad investment because of a bubble 15 years ago?

The MBS wasn't even the problem here. If they had 10Y corporate bonds or Treasury notes paying the same rate, they would have had the same problem.

twblalock• 3 years ago

Any investments whose value was sensitive to the Fed's rates would have had the exact same problem.

In 2008 MBSes were bad because the underlying value of the investment turned out to be bad. That's not happening this time. All that's happening is the same thing that happens to any bonds -- when rates increase, older lower-rate bonds lose value because why would anyone pay full price for them when they can get a new one with a higher rate?

patmorgan232• 3 years ago

The underlying problem in the 08 collapse was poor/non-existent underwriting of the mortgages and those loans being rated AAA when packaged in an MBS. When the economy slowed just a bit people started defaulting because originators were writing NINJ (No Income, No Job) loans, something that is illegal today.

This situation today has nothing to do with the failure of the MBS'S to payout like 08.

voisin2• 3 years ago

- 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.

This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?

makestuff4• 3 years ago

My pessimistic view is that bonuses were paid out on invested cash not on cash just sitting there. So they had to buy something to get a fat bonus.

rvnx7• 3 years ago

As a bank, parking the money into long maturity bonds, especially when it's not your money, and your customer can take the money back anytime, and the current rates are 0% (so can go upward only...).

Sounds like an insane investment decision.

ummonk5• 3 years ago

They were probably chasing higher yields in a low yield environment.

DiscourseFan2• 3 years ago

I don't get it. I'm no expert in finance but even I knew the fed wasn't going to stop raising interest rates because I had the common sense to know the fed would fail to trigger a recession by doing so.

riazrizvi2• 3 years ago

When I set my ‘Hindsight Goggles’ to 100, I too saw that the Fed would keep raising interest after the initial rounds, because unemployment would stay low despite massive layoffs, somehow, and that prices would keep rising. And I am an expert in finance.

323• 3 years ago

I had the vague impression that after the 2007 crisis, banks holding retail deposit accounts were not allowed to invest in stuff like MBS, only investment banks (without retail accounts) were.

dragonwriter13• 3 years ago

I had the vague impression that after the 2007 crisis, banks holding retail deposit accounts were not allowed to invest in stuff like MBS, only investment banks (without retail accounts) were.

You are confusing the Great Recession with the Great Depression.

The 2007 crisis and subsequent Great Recession was contributed to by the 1999 repeal of that rule, adopted in response to the Great Depression; there were several efforts to restore it after the Great Recession, but none succeeded.

ohgodplsno• 3 years ago

Investing in the exact same kind of unsafe assets that brought the 2007 crisis, as well as assets that cause house prices to stay unaffordably high.

Yep, all of SV is truly made of bumbling idiots. That whole solution is truly hilarious and watching all these clowns lose their money is going to be fun.

berkeleyjunk2• 3 years ago

Actually not. The kind of asset they invested in does not really matter. If they invested in super safe government bonds at <1% at the same time, they would have had the exact same issue. It is the rapidly rising interest rates that did them in. If they were smarter they could have done a rolling ladder of short maturities but probably someone there was lazy.

dahdum11• 3 years ago

The execs have been pulling $3-10M/yr compensation and will walk away wealthy, legally in the clear, and probably into similar roles and comp elsewhere (or simply retired). They aren't bumbling idiots, though if they were, they'd be hella crafty ones.

I don't think the depositors, investors, or VC's that pushed for SVB were idiots. SVB was a good bank, with a good reputation, and good services that got mismanaged into oblivion.

dang3• 3 years ago

(We detached this subthread from https://news.ycombinator.com/item?id=35097120, which contains "that tweet".)

mcenedella• 3 years ago

Great moderating dang! Appreciate your tireless work to make hackernews great.

tempsy2• 3 years ago

honestly disgusted by the blatant PR moves by YC and Founders Fund yesterday in leaking their “advice” to their founders to get out of SVB

Very blatant weaponization of FUD to drum up deposits for their investments in Brex, Ramp, and Mercury.

zdbrandon• 3 years ago

As someone who was considering using one of those "banks" in the coming months, this whole ordeal makes me want to stick with Chase, Wells Fargo, etc. Stripe integrations be damned.

hef1989813• 3 years ago

Or just some, as it turned out, valid business advice. That being said, I would never let my investors choose my banks (as in more than one bank) holding my company's cash. And I definetly wouldn't use some not-to-big-to-fail, not international bank to hold my multi-millions in VC money, which is the only yhing keeping my company a float.

misssocrates• 3 years ago

Would it be better to keep good advice private?

weego• 3 years ago

When the fuck are retail banks going to be ring-fenced away from being able to trade in MBS. They're consistently cancerous to our banking systems.

zomglings2• 3 years ago

I do not think this is a problem of mortgage-backed securities.

The problem is that SVB tied up their liquidity for 10 years at a yield far lower than they would get with more secure investments after the FED's rate hikes.

The specific assets they invested into are immaterial.

tertius• 3 years ago

This isn't an MBS problem. It's just a poorly performing asset problem.

walrus013• 3 years ago

This is a symptom of the problem of middle class single family home residential real estate being treated as an unreasonably-price-increasing bubble inflated investment and not a place for people to live in.

The irrational exuberance in price increases in this segment of the market over the past 4-5 years is not sustainable.

It is not logical, sane or normal for houses that were valued at $150k five years ago to now be valued at $400k in some suburbs and metro areas.

dahfizz5• 3 years ago

This has nothing to do with MBS in particular, it is a fundamental aspect of the fixed income market.

xwolfi• 3 years ago

Come on, where else would they put your money ? When are retail going to understand handling and parking and securing and regulating money has a cost and interest rate have to be chased somewhere.

Narrow banking never works because at the first regulatory lapse (my employer got fined 200M because we used whatsapp, not even for committing crimes), BAM no money left for deposit liabilities.

And dont forget here that as long as people eventually pay their mortgage in the expected default risk, the money will eventually come back, at an opportunity cost.

lapcat4• 3 years ago

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate):

[1] https://twitter.com/jamiequint/status/1633956163565002752

That tweet is unattributed verbatim from https://www.livemint.com/news/world/explainer-silicon-valley...

[EDIT:] See the thread, it seems that the story may have stolen from the tweet! Pretty shocking for one of India's biggest business publications (and with 2 million Twitter followers).

rvnx7• 3 years ago

He is correct, but he is blaming the FED raising interest rates. The responsible is not the FED, but the negligent management of SVB that purchased such products because of greediness.

When interest rates raise, previously issued bonds lose in value because there are more attractive ones available.

It's like if they missed the Chapter 1 lesson about investing into bonds.

jamiequint4• 3 years ago

My tweet was posted before that article.

lapcat4• 3 years ago

Some people are downvoting my reply to jamiequint https://news.ycombinator.com/item?id=35100305 but if that comment becomes dead then you won't be able to see his reply to me or the surprising conclusion of the story.

jamiequint4• 3 years ago

I hope it's accurate. What I should have said though is "This is not a *solvency* issue as long as SVB maintains their deposits", it's obviously a liquidity issue.

kypro• 3 years ago

- The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield.

Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.

Over the last few years the Fed has basically done a pump and dump on the bond market, and SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.

I've seen a lot of people speak critically of SVB and I get it, but I think people should take a minute to ask why the hell bonds were yielding such a low amount in 2021. I just wonder how much longer we're going to blame, banks, crypto investors, bond investors, equity investors, home buyers, etc for what's happening to the value of their assets. When central bankers make government bonds trade like meme stocks this is what happens. Perhaps if we didn't do that, SVB and many others wouldn't be in this position.

highwaylights2• 3 years ago

Nah, the bank is responsible for their decisions.

They bought $80b of fixed-rate bonds at historically and artificially low interest rates in a time of massive QE. Even based on the information available at the time, this is not a surprising outcome at all.

NovemberWhiskey15• 3 years ago

Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.

One of the principle, statutory purposes of the Federal Reserve is to conduct monetary policy to achieve maximum employment and stable prices. That means it's the job of the Fed to manipulate interest rates.

darkerside4• 3 years ago

Is there a reason they couldn't have just purchased shorter term bonds and securities instead?

roguecoder5• 3 years ago

... housing prices have continued to rise at wildly unsustainable rates, leading to record homelessness. Which is the exact opposite of what happened with the crypto market, where the Ponzi scheme collapsed.

When the assets haven't even moved in the same direction, I don't know how you are going to blame federal policy to counteracted the recessionary impact of covid for moving them. Whereas the fed has caused significant damage & also been ineffective at fighting the current supply-side inflation caused by Russia's war of aggression.

Aeolun2• 3 years ago

When central bankers make government bonds trade like meme stocks this is what happens

That’s what happens when people buy meme stock. I think the failure of the goverment and the bank are unrelated here.

rib3ye• 3 years ago

SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.

Is this true?

rqtwteye3• 3 years ago

"to generate the yield they wanted to see on this capital."

Sticking to unrealistic goals seems to to be the downfall of a lot of financial institutions (and probably a lot of other companies). Same happened with Deutsche Bank in the 2000s. The CEO declared that they wanted to achieve higher ROI and to achieve this they had to start doing ever riskier stuff until it blew up in their faces (and the taxpayer generously bailed them out so they could keep their big bonuses).

ahmedbaracat3• 3 years ago

Exactly that. I am wondering why the “pressure” to generate more yield or any yield at all. It is counterintuitive to me to view the startups deposits as investments and not as saved money to be used later, hence no need for a risky or any yield (even if part of the savings will be washed by inflation year over year)

Eumenes4• 3 years ago

The team making these poor choices at SVB should be criminally charged ... The tax payer shouldn't have to bail out banks.

berkle44556• 3 years ago

Another bank will acquire the company and make depositors whole. Government won't actually do the bailout, just facilitate/force it.

paulddraper6• 3 years ago

should be criminally charged

For what crime?

If someone unintentionally but ineptly writes code that crashes Amazon on Black Friday, did they commit a crime?

zenlikethat8• 3 years ago

They bought assets and loaned to customers … pretty standard stuff

bluetwo• 3 years ago

There are some big parts to this story we don't know.

Yes, they sold the treasuries and took a bath. But if that was their best option, it speaks very poorly to the other "assets" they held on their balance sheet.

We may find out in the coming days that they had a big position in Silvergate, which went bankrupt yesterday, and they had to mark their position to zero, creating the need for liquidity.

PhaedrusV• 3 years ago

I heard elsewhere they were extending loans to startups with pre-IPO shares as collateral, so yeah, that was their best option apparently.

HDThoreaun19• 3 years ago

Something like 60% of their assets were these bonds in December. They very well may have seen the other 40% withdrawn already by startups that can't raise anymore leaving them with this pile of 10 year 1.5% bonds.

resource0x• 3 years ago

Ackman panics, appeals for a bailout

https://www.msn.com/en-us/money/other/billionaire-investor-b...

abhiminator• 3 years ago

Bailout? Sounds like an '08 déjà vu again.

It's crazy to realize how brazen Wall Street bankers and Hedge Fund managers are when it comes to asking for taxpayer dollars during distress, while decrying any attempt to add to that taxpayer dollar pool from their billions in earnings when the times are good.

notShabu2• 3 years ago

One of the differences between a central bank and regular bank is that the regular banks should do the riskier stuff and offer the higher interest rates.

This in theory creates a diverse non-correlated system of capital deployment with the best projects winning over the bad ones.

However when the central bank offers interest rates that a private bank cannot match even when it's deploying into safe and endorsed assets like MBS then some weird stuff happens...

The Fed can promise risk-free returns at whatever rate they want but once it exceeds the private banks', then the banks no longer serve any purpose. If there were a way for individuals to hold accounts directly w/ the Fed, they'd all do that. Money will be sucked away from banks that deploy capital in the private sector and squeeze into ones that just passthrough to the Fed's like money market funds.

With high enough interest rates, the Fed can end up sucking up liquidity even from good and safe projects and cause widespread asset collapse b/c the entities that are supposed to be doing price discovery can't compete anymore.

AviationAtom• 3 years ago

Relevant Bits About Money article on FDIC and bank failure:

https://www.bitsaboutmoney.com/archive/deposit-insurance/

I should add: apart from 2008, bank failure has historically been quite rare

bjornsing2• 3 years ago

- This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.

You mean it's not a solvency issue? It sounds like a textbook liquidity issue.

the88doctor• 3 years ago

Even if SVB maintains their deposits, that IS a liquidity issue, it just isn't a solvency issue.

dools3• 3 years ago

What’s interesting is that this bank failure as well as the failure of a neo bank Xinja in Australia despite taking in deposits both illustrate that it is not the case that banks make money by “lending out deposits” but rather by issuing loans and then attracting enough deposits to make their lending operations profitable.

mooreds• 3 years ago

Affecting stripe payouts too: https://support.stripe.com/questions/important-information-a...

MattyMc• 3 years ago

Stripe stopped payouts to SVB bank accounts. Seems reasonable.

ahmedbaracat3• 3 years ago

This logic is counterintuitive to me “As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital.”. Startups are not depositing the money in SVB to invest it, they are storing it for future use. Why the pressure to generate yield and grow the loan book “fast enough”?

https://twitter.com/AhmadBaracat/status/1634293096639787008?...

adam_arthur5• 3 years ago

There was no explicit need or requirement for SVB to buy MBS at 1% yield, yes. Poor management handling too much money.

They also could have hedged the interest rate risk. Likely there will be policy change as a result of this. Banks over some AUM requiring stricter regulations

The Fed is complicit in encouraging moral hazard through distortion of the bond market. Pretty much every crisis in the modern era is precipitated by fed policy from years earlier

bryfb2• 3 years ago

"The yield they wanted to see on this capital" I imagine is some combination of money needed to run operations of the bank, interest paid on the deposits and profit.

They could have just stored the money in the proverbial vault. But if they do that, then they have to charge the depositors a fee to be a customer. And competition has pushed in the other direction.

And probably more importantly that whole "profit" goal.

brightstep• 3 years ago

Because the bank, like all capitalist entities, exists to make a profit. Why else?

zenlikethat8• 3 years ago

Because if you lose 7% of capital on $180 billion in real terms that’s an awkward conversation with your boss?

drawkbox• 3 years ago

"- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.

Would be interesting to see where that money came from. That has all the markings of a pump before a dump, the dump being 2023. They didn't even have to dump, they just had to stop the pump to auto dump once the interest rates went up.

SVB opened themselves up to an attack vector and one thing the banking industry likes to do now and again is consolidate and shakeout. That amount of inflow in good times can make you do funny things. The better way to go about it is be scrappy always, and expect the attacks.

There were way too many companies in this bank, it had too much concentration of startup/VC/PE money. Regulations will probably have to be made around this now more robust.

HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.

The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]

Superefficient businesses create the potential for social disorder.
A superefficient dominant model elevates the risk of catastrophic failure.
*If a system is highly efficient, odds are that efficient players will game it.*

[1] https://hbr.org/2019/01/the-high-price-of-efficiency

bdangubic2• 3 years ago

all other details aside - if you purchase $80bn of “mortage-backed” anything you deserve everything that will eventually come your way

zenlikethat8• 3 years ago

In general people pay their mortgages. Just because a financial crisis has happened around it once doesn’t mean the asset class is inherently bad. It’s more regulated than ever, the problem was rising interest rates and not being able to keep their head above water with the position.

MichaelMoser123• 3 years ago

fifteen years ago we had simpler explanations of why things are going to pieces. Nowadays everything is more complicated - but the results are the same...

(i think HN needs a black bar, we are all screwed)

lightbendover• 3 years ago

Pretty much the only outcome when reprehensible greed meets company structures indistinguishable from scams and charlatans masquerading as leadership.

anshumankmr2• 3 years ago

Why would someone buy an MBS after 2008?

ripper1138• 3 years ago

All banks still buy and sell MBS.

notfromhere• 3 years ago

MBS is not the problem here. It’s not 2008.

They bought bonds when interest was low, now interest is high and they’re worth less.

SVB wouldn’t have lost cash on those bonds if they didn’t experience a bank run.

robertwt7• 3 years ago

Please correct me if i'm wrong since i'm not a finance guy,

apart from the loss of $1.8bn and the delta of the interest - growth from their assets.

Isn't everyone still going to get their money back - the percentage of the loss that SVB has which should be less than 5-9%? Sure FDIC has to liquidate all the money from the assets and it takes time. But at least the impact is not going to be as hard as losing all the money like FTX or Maedoff in 2008 right.

jcmontx• 3 years ago

Not if they’re forced to sell at a low. I don’t know how big are the losses though.

gst• 3 years ago

But at least the impact is not going to be as hard as losing all the money like FTX or Maedoff in 2008 right.

The recovery rate for the Madoff Ponzi is 88.35%: https://www.justice.gov/opa/pr/justice-department-announces-...

zenlikethat8• 3 years ago

I mean. If you’re a startup that just had $10 million locked out and can’t make payroll. It doesn’t matter that you’ll “get your money back”. You’re toast.

leoh• 3 years ago

Good grief. Simplifying this to “they took on tons of deposits and felt the need to make risky unchartered investments to retain their existing level of returns” is just so stupidly greedy. JFC, I think here of a ship with a heavy keel; only for the captain to order cargo many multiples the weight of the keel to sit above deck.

Why can’t so many folks who are doing well enough just act with basic common sense and integrity these days?

emkemp• 3 years ago

Nitpick: The Fed isn't selling bonds. Maybe they meant the Treasury?

zenlikethat8• 3 years ago

Yea that bugged me too ha ha. The Fed doesn’t issue any bonds.

stephen_g4• 3 years ago

It’s probably not material to the overall picture, but just for accuracy, the wording of this is inaccurate - “As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital”

Capital has a special meaning to banks, and deposits are absolutely not capital from their point of view of the bank (they are from the point of view of the depositor). To the bank, deposits are on the liabilities side of the balance sheet.

A bank’s capital is only equity put in by shareholders and retained profits from previous years. This is important, because how much a bank can lend is only determined by the amount of capital they have, not the amount of deposits (since deposits are on the wrong side of the balance sheet for lending from).

wankle• 3 years ago

If that's even mostly true, it sounds like the SVB was set up to fail. It almost sounds like like Biden is trying to crash the US economy.

sacnoradhq2• 3 years ago

Lincoln Savings and Loan, LTCM, Bear Stearns, and now: SVB.

chewz• 3 years ago

- This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.

This is exactly a definition of liquidity issue... Owning enough assets but not being able to cover short term liabilities.

In opposition to not owning enough assets to cover liabilities.

gigatexal• 3 years ago

Hedging maturity and interest rate risk is literally the only thing a bank needs to do. (Okay not literally but come on you have more or less one job: assure assets are secure and generate some yield safely).

tibbon2• 3 years ago

Time to test if the regulation after Bear Sterns was sufficient. Surely it was enough to prevent issues as promised

standapart• 3 years ago

Probably safe to say: Stripe isn't going to be able to raise a couple bil to pay tax liabilities in this environment.

rvz2• 3 years ago

I'm having a feeling that Stripe is totally fucked and tangled in this situation.

From Atlas, employee stock option taxes and it's IPO fundraising might be all on the line.

fairity4• 3 years ago

The bigger story here will probably be the follow-on effects, assuming it takes a long time for uninsured deposits to be recouped.

I wonder how many businesses will be forced into a fire sale due to inability to raise cash to cover short-term liabilities. I'm sure some private equity firms' mouths are watering right now.

plandis• 3 years ago

My wife is a fan of these emotional baby toys called Slumberkins and she noticed that they appear to have this problem: https://www.instagram.com/p/CpopLR2OxRU

diimdeep• 3 years ago

It's 17 largest bank in US that is $0.25 trillion assets that is basically collapsed. It is a big sign of possible hyper inflation and much larger banking system problems for the entire world, that is still relying on USD.

nemo44x4• 3 years ago

This will be a day long remembered in the tech world. The next few weeks will be will be the bad kind of interesting. I hope they have enough assets to cover everyone.

entwife• 3 years ago

Are there any other banks that might be affected by interest-rate risk?

eddsh19943• 3 years ago

Mortgage-backed securities strike again

https://twitter.com/jamiequint/status/1633956163565002752

chernevik3• 3 years ago

I don't understand why anyone would park any sum larger than, say, $5mm in a bank deposit for more than a minute.

It isn't hard to dump those funds into a money market fund backed by short-term commercial paper or even short-term Treasury bills. Or to just buy the Treasury bills outright. Such holdings are quite liquid and can be absolutely secure.

Use the bank account for clearing, keep a couple million in it and sell assets as needed to top-up the account or to prepare for known cash outflows.

I'm sure there are cost and complexity trade-offs. But "don't lose the cash" would seem to be priority #1 and worth some trouble.

I suppose the idea was that SVB managed all that for you. But one look at its financials shows the asset/liability term mismatch, and interest rate risk, so the risk of loss of cash was nonzero. So they were NOT managing maturity risk for these large depositors, and, well, now look where they are.

cglace• 3 years ago

If you take an SVB loan you have to keep your money in SVB.

fundad• 3 years ago

SVB is a closely held organization in these funding terms. All the more reason VCs should be on the hook for the losses because managing risk is their business, their venture if you will.

timdaub2• 3 years ago

Would love to understand if this is actually good financial advice here. My bank plays broker for all the assets I own and tbills are part of that.

FDIC wrote:

As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.

So to me that sounds like those „risk-free“ assets will get liquidated too.

I‘d love to hear an actual professional confirm/deny this. Because if it‘s true, then the real risk-free assets are gold, in your teeth, real-estate and BTC.

kgwgk33• 3 years ago

The bank's assets will be liquidated. If you have a securities account at a bank those are your assets, not the bank's.

notShabu2• 3 years ago

From reading the comments it's interesting how the failure seems to have occurred.

Not crypto hype, not bad loans, but long term bonds... It's sounds very conservative and responsible.

cjbgkagh3• 3 years ago

Does the US and SVB have bail-in laws? There is a huge difference between a preferred creditor and being at the back of the line. As SVB has a rather low percentage of FDIC insured coverage at ~5.69% compared to a more normal 40-60% they can't rely on FDIC to get the more typical 90c on the dollar. But then again SVB might have been healthier than other banks so maybe the dilution won't be so bad. Historically depositors were first in line but bail-in laws (depending on how they're written) has the depositors balances converted to equity which is last in line. Such laws are totally crazy but didn't have an impact because few people knew about them so depositors were taking big risks and not knowing about it there by not demanding the interest rates needed to cover such risk. In effect it decreased the risk to the prefered debtors, preference shares, bonds, etc lowering the interest cost to the bank. Basically by transferring risk to those who don't know better the bank makes free money. The idea is sold as a win-win for taxpayers and bank health but only works as long as depositors stay ignorant. If SVB is bailed-in with conversion to equity then knowledge about that risk will spread quickly and the follow on effects could be very substantial. I think that can't be allowed to happen, which is probably why even with such laws depositors tend to be a bit blase. But if that does happen then holy shit look out.

cjbgkagh3• 3 years ago

Replying since I can't edit: FDIC is issuing a Receivership Certificate which I am assuming has first cut priority so it does not appear to be a bail-in. Debtors and equity will get hosed, as it should be, hopefully they can avoid a bail-out as well.

Edit: I just noticed that it says that in the link of the thread. I'm tired and I didn't read it carefully, my mistake.

Animats4• 3 years ago

The FDIC hasn't taken over the SVB web site yet.[1]

"Through our relationships with more than 50% (approximate) of all venture backed companies in the US, and with funds and corporations across the globe, SVB Capital’s family of investment solutions give you unmatched access to this unique asset class."

Their online operations have to be drastically changed. Did their ATM cards stop working yet?

The FDIC usually takes over banks at the close of business on a Friday, using the weekend to audit and reorganize. That this happened at the end of Thursday hints that the situation was bad, so bad that another day of withdrawals would have been too much.

[1] https://www.svb.com/

RaSoJo• 3 years ago

So SVB's problem was that they had too much of money?

throwawayapples• 3 years ago

SVB's eventual consistency was a bit too eventual.

ChicagoBoy11• 3 years ago

Ha - got a nice chuckle out of that one. Good levity for a time that is needed, and nice and extremely topical CS joke to boot!

Animats4• 3 years ago

Rippling, the payroll company, reports that payouts "in flight" may fail.[1] They used Silicon Valley Bank. They're switching to J.P. Morgan Chase.

[1] https://twitter.com/parkerconrad/status/1634237386564730882

vagab0nd• 3 years ago

Why can't this bank borrow from the Fed overnight lending market to fulfill the withdraws?

havkom5• 3 years ago

I have no idea but maybe they are not solvent anymore (negative equity, even if small)? (I guess Fed will not loan to insolvent banks, but I do not know if that is the case?)

If so, would be interested to know if anyone knowledgeable in accounting rules could speculate a bit here what has happened - has any event forced a revaluation of assets on the books due to accounting rules for example?

havkom5• 3 years ago

I asked ChatGPT now about the federal reserve loans alternative:

Why would FDIC take over an unliquid bank instead of the bank just loaning money by the Federal Reserve?

The Federal Deposit Insurance Corporation (FDIC) is a US government agency responsible for protecting depositors and maintaining stability in the banking system. When an unliquid bank fails, the FDIC may step in to take over the bank and manage its operations.

One reason the FDIC may take over an unliquid bank instead of the bank just loaning money from the Federal Reserve is that the bank may be insolvent, meaning it does not have enough assets to cover its liabilities. In this case, simply borrowing from the Federal Reserve would not solve the underlying financial problems of the bank.

Taking over the bank allows the FDIC to manage its operations and assets, and potentially sell off its assets to recover some of the losses for depositors and creditors. This process is known as "resolution" and is intended to minimize the impact of a bank failure on the broader financial system.

Additionally, if the FDIC determines that the bank is not viable in the long term, it may choose to liquidate the bank, selling off its assets and using the proceeds to pay off depositors and creditors.

Overall, the decision to take over an unliquid bank instead of simply loaning money from the Federal Reserve depends on the specific circumstances of the bank and the broader financial system.

rhacker• 3 years ago

I read SVB and for some reason my mind kept thinking SBF.. is there some connection outside my mind?

hn_throwaway_995• 3 years ago

Question regarding SIVB shares. So now that the bank is in receivership, are all of those shares worthless (I'm assuming they are)?

Looking at a graph of SIVB share price, this definitely seems like yet another blow to efficient market hypothesis. Many of SIVB's woes have been known for months. While it's obviously difficult to predict a bank run, to see a stock go from a share price of ~270 to 0 in 2 days, with many billions in equity value wiped out, is astounding.

manquer3• 3 years ago

Shareholders are last in the line of creditors, shares will be worthless only if bank is insolvent not illiquid as it currently is.

While it may emerge that bank is indeed insolvent after the accounting that is not yet the case , so the value is only unknown not necessarily zero.

Also the market value includes the estimated risk which is very higher when there is lack of clear information and uncertainty.

After the dust settles , risk is becomes better understood with more information then shares can be better priced

Alternatively the assets are fully liquidated with which all depositors and bond holders are made whole anywhere between $45B and zero would be left

jasmer• 3 years ago

The whole f*ing point of banks is to hold your money.

WTF is Silicon Valley if they can't make a bank that is just supposed to sit there and not do much - not collapse.

I loathe to say this but maybe the CrytoBros need to come back?

Bank collapses should happen as often as regular buildings collapse for no apparent reason.

It's a bad look if there is less trust in regular banking.

dpweb• 3 years ago

May be nice for an acquirer. Roll those long term bonds into very short term treasuries - take that big loss now - and earn 4% going forward.

Rates will eventually top out - they just had made a very bad bet at 1.5%/10 yr.

zamnos8• 3 years ago

Eventually, sure, but we don't really know where. And neither does the Fed, though I'm sure they have ideas on how far they want to go. They don't control the jobs report though.

Rates are 5% now, so a spread of 3.5%. If rates go above 8.5% (which they were, from 1973 to 1992) then the acquirer is in basically same hole as SVB, no?

IndoorPatio• 3 years ago

https://arstechnica.com/tech-policy/2023/03/silicon-valley-b...

jojosbuddy4• 3 years ago

Question now, with other regional banks getting some contagion from this... For all those that pulled yesterday, where are they parking their withdraws? National banks (e.g. BoA), other asset classes, mattress?

champagnepapi• 3 years ago

this is terrible. Many people will lose their jobs... due to liquidity issues at their companies :(

voytec• 3 years ago

Fresh email from Alpaca (YC W19) on the matter:

https://news.ycombinator.com/item?id=35099518

elzbardico• 3 years ago

So SVB suddenly had too much money and too few people to loan this money to, so they had to buy a dangerous asset that could have exactly this problem with a raise on interest rates, where every sane person in 2021 would know that all that stimulus money would lead to inflation down the road and consequently a tax hike from the FED.

"The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness"

  MARX, Karl
  Capital Vol. III Part V - Division of Profit into Interest and Profit of 
  Enterprise. Interest-Bearing Capital
  Chapter 25. Credit and Fictitious Capital*

hnburnsy2• 3 years ago

Wow, this guy called it in January...https://twitter.com/RagingVentures/status/161582608803847373...

MrMan5• 3 years ago

wow very solid. you could have found SVB in screen just by the LTD ration and HTM percentages and zoomed in from there.

dang3• 3 years ago

Related ongoing thread:

The Demise of Silicon Valley Bank - https://news.ycombinator.com/item?id=35098607 - March 2023 (64 comments)

The previous major threads appear to be these (did I miss any?):

SVB in talks to sell itself after attempts to raise capital fail - https://news.ycombinator.com/item?id=35094466 - March 2023 (270 comments)

Ask HN: How is the SVB situation affecting your startup? - https://news.ycombinator.com/item?id=35094447 - March 2023 (130 comments)

Banks lose billions in value after tech lender SVB stumbles - https://news.ycombinator.com/item?id=35087666 - March 2023 (9 comments)

Bank run on Silicon Valley Bank? - https://news.ycombinator.com/item?id=35086836 - March 2023 (791 comments)

fintechjock• 3 years ago

You’re doing some really great work through all of this

dang3• 3 years ago

That's nice of you! but that list is hopelessly out of date now.

ignoramous4• 3 years ago

Sell off in US bank stocks after SVB solvency scare https://news.ycombinator.com/item?id=35091505 - March 2023 (22 comments)

mupuff1234• 3 years ago

Any recommendations for analysts/blogs/etc to understand how this might unravel?

seizethecheese• 3 years ago

So, I would expect a secondary market for deposit certificates to spring up. Has it? If so, what’s the value of $1 in deposit certificates at SVB?

If it hasn’t, this would be a helpful way to provide liquidity to startups with SVB deposits.

firstfewshells• 3 years ago

I wonder if this has any effect on the deposit sweeping programs run by firms like robinhood, betterment and wealthfront. They promise 4%+ yields with freedom to take out your cash any time. A quick look at their partner program banks suggests they more or less transfer the deposits to the same set of banks.

havkom5• 3 years ago

If someone has both a loan from and an account with Silicon Valley Bank, can they skip paying the difference of the amount they are compensated and their account balance towards the loan?

kmod4• 3 years ago

IANAL but I think yes and no? I think you're still obligated to pay your loan payments, but there's also a concept of "netting" where in certain circumstances you are entitled to what you describe.

Definitely don't take my word for it, just throwing this out there as maybe a starting point for more research.

eftychis3• 3 years ago

Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here are some definitions:

https://www.investopedia.com/terms/s/solvencyratio.asp#toc-s...

Defn. (informal) A company is illiquid if they can not service short term liabilities/debt as it comes due. This includes the ability to quickly sell assets to raise cash.

According to what we hear Silicon Valley Bank is/was illiquid: They were struggling to _liquidate_ at well below the maturity value of the MBS to serve their liabilities -- withdrawals. They were not able to service the withdrawal rate (there were withdrawals/wires frozen for hours yesterday).

In essence, driving themselves towards the insolvent side (hopefully not, because if they are insolvent now (discounting the equity value) we are going to have contagion.

opportune9• 3 years ago

The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them.

These things trade on the open market and adjust to interest rate changes. What really happened is that they bought a bunch of securities backed by depositors that lost value at mark-to-market. This is poor risk management, not some unfortunate unavoidable issue caused by a bank run. They are insolvent at market prices - illiquidity would be more like they have a bunch of contracts or snowflake assets (like buildings, or a security that doesn’t trade on the open market).

As a depositor, saying “in 10 years you will get the full value of your deposit back” is bullshit: you could give me the actual reduced value now, and I could invest it in the same kind of instrument, and in 10 years I’d also have the full value back - but I could do other things with it too, which may be preferable considering it’s my deposit that I may need to spend now rather than in 10 years.

The fear is that many other banks are in the same position, that they are technically underwater and vulnerable to runs because the true value of their deposit-backed assets have decreased due to interest rate increases, but that SVB was affected first because their customer base of VC-backed businesses just happened to have their withdrawal:deposit ratio increase the most.

eftychis3• 3 years ago

The regulation to my knowledge does require marking to maturity. Yes as I have commented elsewhere in this post, all banks do this.

SVB had the unique situation of being the canary in the mine, as they had to get a lot of MBS during low interest rates of 2021/2020. Your question is the jackpot one, yes: how many other banks are following closely by.

If the Fed continues or increases the rate hike I would be surprised if we don't hear more -- assuming no other action.

The silver lining might be that SVB might give the heads up for the Fed, FDIC and government to act.

twelve405• 3 years ago

So it seems like they mismanaged their assets and their liabilities, taking on a lot of expensive deposits while investing at low yield.

What I don't get is all this pro-SVB, anti-VC sentiment, how "some VC's yelled fire in a crowded theater" and caused the poor bank to collapse. Isn't it just common sense though, to protect your money? The bank fucked up by doing risky reckless things, it got exacerbated because the customer base is not as diverse as a big bank - it's all startups that are subject to the same patterns, and SVB is not as big for the govt to bail out, so the bank customers did the only logical thing which is to withdraw your money before it disappears, yet they get lectured for doing that.

https://twitter.com/msuster/status/1634203251758469120

https://www.linkedin.com/pulse/few-thoughts-svb-jeremy-solom...

opportune9• 3 years ago

This, these bonds/mbs are liquid instruments, they just lost value at market prices. When I make a deposit in a bank I am not purchasing a CD - I expect full liquidity. If the bank invested my deposit in something that lost money but should be worth my deposit amount in X years that is purely the bank’s fault, not my fault.

alfalfasprout5• 3 years ago

Here's the more mindblowing thing... not only are those MBS and treasuries completely liquid... they're correlated to interest rates! The fed has been forecasting interest rate hikes every single quarter. Every. Single. Quarter. They had plenty of time to roll over these investments at a slight loss. Heck, even reducing their exposure 50% would have been enough to not end up in this mess.

Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down.

This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.

worik2• 3 years ago

This, these bonds/mbs are liquid instruments

It is all relative, not all relevant

Anything is liquid if you will lower the price enough

gregruss2• 3 years ago

If you don't understand the sentiment, I recommend that you read about what happens in a "run on the bank". Too many large withdrawals at the same time results in a liquidity crisis. No bank in the country has enough reserves to pay all of its customer accounts at the same time; it's part of our system of fractional reserve banking. A massive spike in withdrawals forces a bank to sell long term securities in a disadvantageous environment, often for a huge loss. That undermines customer confidence and exacerbates the issue, causing more people to withdraw. A single person could bring the most successful bank to its knees in that environment, as long as enough customers believe them; it's a self-fulfilling prophecy.

https://en.wikipedia.org/wiki/Bank_run

twelve405• 3 years ago

So my personal takeaway: pick a bank that is too big to fail, because if it happened to a bigger, non-niche bank they probably would have used the taxpayers' money to bail it out.

PS. the sentiment still makes no sense, SVB customers did not sign up for the bank to gamble with their money and they have a full moral right to do whatever it takes to get their working capital back the second they start to sense any trouble. These withdrawals are not just stupid meme stock lulz, this money belongs to the customers.

Randalthorro4• 3 years ago

The same thing happened to all these stupid crypto exchanges and banks and yield scams.

The point is that they are supposed to have capitalization requirements and regulations that show they actually have more assets than liabilities.

But in reality they don’t so fractional reserve doesn’t work here. In fractional reserve the bank still has assets worth more than liabilities. That’s the whole point of the regulation.

This bank doesn’t meet that basic requirement.

This is due to the rate hikes, yes, but just like all the recent events if the bank had properly adjusted its portfolio after the hikes, making losses and having a shitty stock price for a while, it would have been able to weather this storm. The storm came because the bank never adjusted until too late. It waited until it was negative from asset devaluation due to interest rate hikes

lolinder5• 3 years ago

I think we all understand why VCs telling people to get their money out caused or accelerated the collapse. But what was any individual VC supposed to do, tell their startups to just go down with the ship?

It's the same dynamic as the toilet paper shortages at the beginning of covid: most people weren't panic buying because they thought that there wouldn't be enough toilet paper to go around if everyone kept cool, they were panic buying because they knew not enough other people were keeping cool.

If it looks like the only reward you'll get for keeping your cool is a few weeks with a dirty bottom, it's hard to avoid joining in the run.

kmod4• 3 years ago

It sounds like you're saying "if you don't sell you can't lose money"

danielmarkbruce11• 3 years ago

Of course the VCs who told their portfolio companies to pull the money were doing the right thing, by the people they are obliged to do the right thing by. They want to protect their companies and their investors. They'd be mad not to, and they are legally obliged in many cases.

I think you'll find a lot of the people complaining are people who got hit and are bitter about it.

e.g. some CFO's seem to be complaining about VCs - the CFOs likely didn't do their job, one part of it is "treasury/cash management". Some VCs are complaining about other VCs - probably they weren't paying attention and their portfolio companies got hammered.

Remember - SVB dusted ~$15 bill on their long term bond bet, it was almost their entire equity base. Pulling your money out was the only sensible action.

FiberBundle3• 3 years ago

No, it actually was incredibly stupid and short-sighted by VCs. Here's Matt Levine on that point [1]:

Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.

But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time. In fact, Bloomberg reported yesterday:

Unease is spreading across the financial world as concerns about the stability of Silicon Valley Bank prompt prominent venture capitalists including Peter Thiel’s Founders Fund to advise startups to withdraw their money. …

Founders Fund asked its portfolio companies to move their money out of SVB, according to a person familiar with the matter who asked not to be identified discussing private information. Coatue Management, Union Square Ventures and Founder Collective also advised startups to pull cash, people with knowledge of the matter said. Canaan, another major VC firm, told firms it invested in to remove funds on an as-needed basis, according to another person.

SVB Financial Group Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.

Becker held the roughly 10-minute call with investors at about 11:30 a.m. San Francisco time. He asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years, the person said.

Nah, man, you don’t get to be a successful venture capitalist by taking a long view or investing in relationships or being contrarian. I’m sorry, I’m sorry, this is unfair. Of course they were right — Silicon Valley Bank did collapse, and if you got your money out early that was good for you — but that is largely self-fulfilling; if all the VCs hadn’t decided all at once to pull their money, SVB probably would not have collapsed.[6]

[1] https://www.bloomberg.com/opinion/articles/2023-03-10/startu...

roguecoder5• 3 years ago

"Common sense" that just fucked over the industry & a whole lot of workers in it.

In more mature industries, people would have been confident that the government wouldn't let their bank go under, because the government usually doesn't, and as a result the government usually doesn't have to. Instead, startup culture is so low-trust that we shot ourselves in the foot.

ETHisso2017• 3 years ago

Where can we find a list of startups that have large quantities of deposits at SVB?

blastonico• 3 years ago

Better call Gavin Belson.

weatherlight• 3 years ago

So.... how many companies won't be able to make payroll in 5 days?

garbagecoder• 3 years ago

Crypto is the 2008ish version of 2000.

antoniuschan99• 3 years ago

SVB is a commercial bank for tech/biotech, venture & private equity firms.

FDIC insurance of 250k is a months salary for <25 engineers. Less than 3% of depositors hold less than 250k.

FDIC takeover does not necessarily mean that SVB will cease operations permanently. I haven't yet read of depositors not being able to withdraw vs when FTX was collapsing. With FDIC taking over, seems they're going to liquidate more assets to pay off creditors and depositors. Or sell the bank to another financial institution. SVB is Top 20.

Washington Mutual was also a top consumer bank that FDIC seized and was sold to JP Morgan. JP Morgan ended up assuming responsibility of the depositors.

WalterBright2• 3 years ago

The WSJ lays much blame on the way regulators regulate banks:

https://www.wsj.com/articles/washington-is-the-systemic-risk...

Apocryphon• 3 years ago

And NYT calls out the weakening of Dodd-Frank:

https://www.nytimes.com/2023/03/10/business/silicon-valley-b...

beebmam• 3 years ago

Maybe the federal reserve should slow down its rate increases before we cause a crisis.

nemo44x4• 3 years ago

Agreed. It has become cargo cult like at this point. The Fed needs to pay attention to more than inflation and consider the time aspect of money and interest rates. Creating unpredictable chaos to optimize around a single (important) metric is not going to create a desirable effect.

nickrubin• 3 years ago

Garry Tan: "30% of YC companies exposed through SVB can’t make payroll in the next 30 days. If you or your company are affected, I recommend that you reach out to your local congressman to get this on their radar TODAY."

https://twitter.com/garrytan/status/1634286688922132481

ecf2• 3 years ago

So is this going to be a “privatized profits, socialized losses” type scenario? Are taxpayers going to be bailing out this bank and the companies that use them?

justin66• 3 years ago

If the bank's failure doesn't represent a systemic risk to the economy, such that the executive branch would be justified in propping them up, we're talking about a popularity contest. Who does the American public like less, nerds or bankers? might not play in congress quite the way the OP is hoping.

It might not come to that, since the specifics of the bank's financials will determine whether everyone eventually gets their money back.

cybersol• 3 years ago

HN thread on this is here: https://news.ycombinator.com/item?id=35100743

mherdeg• 3 years ago

Does YC hire a lobbyist?

computing• 3 years ago

Libertarian, "small govt" VCs squealing for govt intervention... It would be funny if not for tens of thousands of people who might not receive their paycheck next week.

muzz5• 3 years ago

There are many ways to avoid that.

Agreed with the first part, amazing how quickly Tan and Sacks turned to government for a handout. If they get one, that will only incentivize bigger problems next time.

arnonejoe• 3 years ago

So that's it, all 6500 employees are out of work? Is there any severance in this situation?

bagels6• 3 years ago

They may get to continue to work for the bank in the short term, under new management.

sam3452• 3 years ago

lots of comments about bank but what about business clients ? WSJ says lots of startups in danger of losing their funds over FDIC limit ? Anybody having experience with that ? https://archive.is/tetbD

Here's a good thread https://news.ycombinator.com/item?id=35094447. on affect to startups

formvoltron• 3 years ago

Sorry but why didn't the VCs get together and bail this bank out themselves???

egiops2• 3 years ago

Umm our CEO just posted on the team channel that SVB is our bank and we don't know what happened yet

What does this mean for the company I work for, are they screwed?

positr0n• 3 years ago

Worse case, imho, is your company has trouble making the next payroll since most of it's funds are temporarily inaccessible. And after the dust settles they take a ~10% haircut on all the cash they had in the bank.

SVB still has lots of assets, they just aren't very liquid and it's possible the value (if you sold them all today) isn't quite enough to cover all deposits.

egiops2• 3 years ago

Thanks for your opinion, this makes me feel a little bit better apart from all the doom and gloom

havkom5• 3 years ago

Is this a good guess as any?

* With-in a week or so uninsured accounts will get 40-60 cents per dollar

* In years when the liquidation process is finished they will have gotten 5-20 cents more in addition per dollar

* Shareholders will get nothing in this scenario

Are there any better guesses or any flaws that makes this guess unresonable?

havkom5• 3 years ago

I dont see why this was downvoted looking at some historical examples:

* IndyMac Bank: In 2008, IndyMac Bank, a large savings and loan association, failed and was taken over by the FDIC. At the time of its failure, IndyMac had $1 billion in uninsured deposits. The FDIC estimated that it would be able to recover only 50 to 80 cents on the dollar from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 50% of the uninsured amount, or $500 million, to the bank's depositors.

* Washington Mutual: In 2008, Washington Mutual, a large bank, failed and was taken over by the FDIC. At the time of its failure, Washington Mutual had $4 billion in uninsured deposits. The FDIC estimated that it would be able to recover only 30 to 50 cents on the dollar from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 30% of the uninsured amount, or $1.2 billion, to the bank's depositors.

* First National Bank of Nevada: In 2008, the First National Bank of Nevada failed and was taken over by the FDIC. At the time of its failure, the bank had $200 million in uninsured deposits. The FDIC estimated that it would be able to recover only 90% of the uninsured amount from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 90% of the uninsured amount, or $180 million, to the bank's depositors.

The question basically asks humbly what factors may be special now and are important in this specific case and queries others humbly on how to think about this.

artur_makly• 3 years ago

So what happens to all the startups that were created via Stripe/ATLAS with an SVB account currently less than 250k in cash balances? Should they move their $ to a new bank? if so which one is recommended? thanks!

mtoner23• 3 years ago

All those accounts are 100% totally fine, the fdic will move their money to a new bank. YOu can google how this works but its 100% seamless

arthurofbabylon• 3 years ago

I am most curious about the decision to park so much capital in such a low-yielding and long-term investment. Why?

bluecalm• 3 years ago

Why do we have this system that to be able to use your money in convenient way you have to deposit it in a bank that can then lend it out? Lending and keeping deposits should be completely separated things. There is no reason whatsoever for me to have a stake in lending business just because I want a convenient way to keep and operate my money. Charge me for that and don't do business with my deposits.

Bank going bust should mean stakeholders in the lending business losing their money. The whole federal reserve system can be preserved. Just raise capital to meet the minimum and don't use money from people who just want an account.

tbarbugli• 3 years ago

Dumb question perhaps: why only SVB crashed? I imagine all banks in US had an influx on money deposited in the same period as SVB

b0tch7• 3 years ago

Good q, wondering the same..

DonsDiscountGas• 3 years ago

Presumably they did a better job managing liquidity risk. Or maybe the recent tech downturn has disproportionately affected startups, so a bank for startups would have issues.

Then again, you never know what tomorrow/next week/next month will bring. It may not only be SVB, it may be that they just happened to be first.

1970-01-01• 3 years ago

I've seen double black diamond slopes with less of a drop:

https://www.google.com/finance/quote/SIVB:NASDAQ

ecf2• 3 years ago

With so many banks dropping 20%+ I don’t see how this doesn’t result in an economic catastrophe.

jaxomlotus• 3 years ago

We bank with SVB and our funds are now frozen. This is going to be an incredibly painful weekend of waiting for news. For anyone else impacted, wishing you the best - stay strong.

theonething• 3 years ago

If you don't have more that 250k cash in there you should be good.

jetpks• 3 years ago

Unless they needed to pay their employees or vendors today.

sneak5• 3 years ago

Two is one and one is none. I am an individual person with no payroll to run and I bank in three US retail banks because they fail closed so often (most frequently from card use while traveling, but also for myriad other reasons).

iguana_lawyer• 3 years ago

You should have deposited your money into a bank that wasn’t going to fail.

steponlego• 3 years ago

We basically only have petty cash now at my small startup. LOL luckily everybody is WFH and we can always switch to paying in stock again like in the early days.

consumer4513• 3 years ago

Wow:

Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.
In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which removed the requirement that banks with assets under $250 billion submit to stress testing by the Fed, and changed requirements for the amount of cash they had to keep on their balance sheets to protect against shocks.

https://www.nytimes.com/2023/03/10/business/silicon-valley-b...

subarctic2• 3 years ago

This was new information for me, but somehow I don't share your surprise that there's a NY Times article that mentions that Trump is to blame.

consumer4513• 3 years ago

My surprise was not partisan in nature.

But that information is not going to come from Fox News, so the system is working as intended then?

dragonwriter13• 3 years ago

I mean, really Clinton is to blame for Glass-Steagall repeal, but Trump weakened the measures put into place that partially mitigated the risk from the Clinton policy. Just as Clinton threw out the risk mitigation measure put into place after the Great Depression, Trump undermined the partial replacement put into place after the Great Recession.

If Trump deserves more blame, its because the reason the idea was bad was much more fresh at the time of his action.

Animats4• 3 years ago

"System Maintenance Notice"

"SVB Online Banking (US, UK, Canada Branch Accounts) will be unavailable throughout the weekend, but will resume next week in accordance with the guidance provided by the FDIC. Please check this page again next week for availability. Our apologies for any inconvenience this may cause."

That's the current login page for Silicon Valley Bank. The main page still doesn't show they're down.

hinkley2• 3 years ago

If we’re going to treat the US government like an underwriter, maybe we should allow the FDIC to charge fees that look a bit more like insurance.

We won’t stop you from doing X, but the fees are higher because you’re more likely to default.

As things are every time so thing like this happens either taxes go up, the national debt goes up, or we trigger inflation to solve it.

mouse_• 3 years ago

FDIC -is- insurance, and it's not supposed to make money, it's supposed to cost money. It's a safety net for when shit hits the fan. There should, in fact, be things you're not allowed to do as a traditional banking establishment. And I'm sure this event will be precedent for more.

hinkley2• 3 years ago

It uses a pretty fixed set of rules though. So every fifteen years or so someone finds a new way to go bankrupt while following “the rules” and the FDIC and the public get to foot the bill because they technically did everything right.

That’s not how underwriters work. They look at your behavior and your business and they grieve you a quote based on how crazy you seem. And they do that with a bunch of legal verbiage about what they will cover.

auntienomen• 3 years ago

FDIC is entirely supported by fees it charges banks. It doesn't get money from the US taxpayers.

ecshafer• 3 years ago

I am naive in this area. But what I don't really understand is.. why are all of these start ups using Silicon Valley Bank? It's a relatively small regional bank, that happens to have a ton of cash. Why aren't start ups using Bank of America, Wells Fargo, etc. It's odd to me that >90% of a sector uses this one regional bank.

sneak5• 3 years ago

As I understand it, it was a matter of personal connection. Also, if most/all of your vendors and customers are there, payments settle faster (historically).

NegativeLatency• 3 years ago

Some startups do use those other banks

bumbledraven• 3 years ago

https://www.fastcompany.com/90864382/silicon-valley-bank-was... :

In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!
So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.

hayd• 3 years ago

doing so was listed as a covenant of their debt!

why??

im_down_w_otp• 3 years ago

We used to keep all our operating capital in a different bank, but then we did a venture debt deal to bring some AR cash forward, and the terms placed on us by the venture debt lender required us to move all our money to SVB, where they already had systems & experience in being able to monitor the accounts.

The irony is, if this doesn’t resolve itself relatively soon, we won’t be able to pay down the loan precisely _and only_ because of the terms of the loan that they set in the first place.

I don’t know yet how it’s all going to shake out, but I’m pretty excited to have the experience of trying to navigate through all of it.

paulddraper6• 3 years ago

relatively small regional bank

Top 1% of U.S. banks is not "relatively small." Technically regional, but had locations across the country. I'm in Utah there's a location across the street from my office.

why

It was tech-forward and offered debt financing based on ARR.

Why do >90% of online retailer companies use Shopify? If it's better, people will use it.

woeirua4• 3 years ago

For those saying that depositors will probably only take a small haircut, it’s all going to come down to the recoverable value of SVBs outstanding loans. 40% of their assets were loans made to startups, their founders, etc. The value of those loans is inextricably tied to those startups accessing their funds at SVB.

Even _if_ depositors are made whole those loans could still be called in and wreck a lot of startups.

bhawks2• 3 years ago

I would be very surprised that SVB would be able to write terms into their loans that gave them the option to demand immediate loan repayment (these would be puts not calls). Those terms would have to come with much lower interest rates for borrowers and in a low interest environment I don't think it'd make sense.

They may try to sell their loan books to another bank in order to meet withdrawal- which may be very challenging in the current environment.

SVB did exactly this with some of it's mortgage backed securities (a much deeper market) and took a significant hair cut to par value. This was the move that kicked off the bank run. If they tried to do it with corporate loans it'd be even more bloody.

woeirua4• 3 years ago

I agree that its unlikely that SVB can call in the loans at any moment.

The bigger issue is that the loans that they made are not properly collateralized because SVB accepted startup equity as the collateral. After all, startups and their founders typically don't have a ton of assets to offer up as collateral on loans at the beginning. If the startups are unable to operate because they no longer have access to their funds, then the value of that collateral is unknowable and the borrower has limited (if any) ability to make regular payments. That would mean that any institution interested in purchasing the loans from SVB would have to go through on a case-by-case basis to assess the true risk associated with each loan. IMO, that makes it very unlikely that we'll see a major institution step in over the weekend. Over time, perhaps those loans will eventually make it to stronger banks, but it will take time, that many startups don't have.

ccorxi• 3 years ago

Funny there're still people and companies trusting bank with everything they got. Hopefully lesson learned

borgchick• 3 years ago

So when every country in the world started printing money like it's going out of style in the prime of COVID years, to help stimulate the economy, they effectively wrote the first few chapters of this story?

vivegi• 3 years ago

From SVB Financial Group's latest 10-K filing (Source: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d..., p12, Jan 31, 2023):

Liquidity Requirements. Category IV organizations with greater than $50 billion in WSTWF, as well as Category I-III organizations, are subject to LCR and net stable funding ratio (“NSFR”) requirements and must maintain high-quality liquid assets in accordance with specific quantitative requirements. However, the above-mentioned Category IV organizations, as well as Category III organizations with less than $75 billion in WSTWF, are subject to reduced LCR and NSFR requirements. Category III organizations with greater than $75 billion in WSTWF and all Category I-II organizations are subject to the full LCR and NSFR requirements. As of December 31, 2022, we have less than $50 billion in WSTWF, therefore, we are currently not subject to LCR and NSFR requirements.

Any other financial institutions that was exempted under same conditions as SVB should also be looking at the quality of their liquid assets.

dhosek2• 3 years ago

It seems to me that there is an upper limit to a bank where they just cannot do business efficiently. If a bank has more deposits than they can grow their loan book, they’ve crossed that line. This bumps up against the too-big-to-fail problem we had in 2008 as well. If the banks can’t manage their growth, perhaps they should be broken up and/or have limits placed on their size.

dhosek2• 3 years ago

And if you think about it in terms of what deposits look like from the bank side, every deposit a bank takes in is effectively money they’re borrowing. SVB borrowed more money than they could afford to borrow.

afinlayson• 3 years ago

I’d love to see a list of startups who bank with svb. If I worked for them I’d be saving my money

sacnoradhq2• 3 years ago

Friends of mine who were acquired by VMware used SVB 2010-2015 because their investors preferred it.

20/20 hindsight: they were too niche and not diversified. It would've been a slam-dunk to send out flyers to local property owners in the South Bay Area and Santa Cruz Mountains.

For my consulting LLC, I went with Comerica because I figured SVB had the issues of being like a credit union but without CU behind it.

If I were in a founder's shoes today, I would stick to a credit union because they're potentially more flexible and it promotes a local co-op rather than a corporation out to monetize customers with an unknown risk profile.

bravo22• 3 years ago

Comerica doesn't look so great these days either. I expect something to pop off there in the next little while. I would diversify away from them as well.

bluefqcebaby• 3 years ago

идиотизм

kbrkbr• 3 years ago

Weren’t the events that lead to this a massive multiplayer prisoner‘s dilemma, with a large defect wave?

djfobbz• 3 years ago

Prior to joining SVB, CEO Gentile was CFO for Lehman Brothers GIB - https://news.ycombinator.com/item?id=35110431

chris123• 3 years ago

Fiat and fractional reserve ponzi. Watch them get bailed out, privatize the profits, socialize the losses. Same as ever. Let's see.

readonthegoapp• 3 years ago

If you knew your bank was going to fail in about six months, what would be your plan of action?

set up your stock sales.

hire a risk officer.

what else?

graderjs• 3 years ago

I was just thinking it would be cool if FDIC posted status reports like an incident update thing…when you have you know a technical issue or an outage this kind of like a running stream of commentary and updates posted by the company if they’re handling it well.

9 am We’re currently experiencing a liquidity issue with our SVB partner and are investigating

11 am Access to 23% of accounts is now restored

12 noon The issue is worse than we first thought. We are taking remediary steps to prevent contagion of the issue

1 pm We aim to have access to under-250k accounts back up by Monday Eastern 9am. Status of larger accounts is unclear as we assess the scope of the damage

Etc…

It’ll be cool if FDIC was posting this kind of info over the weekend…but they probably want to avoid that because it just be fueling the social media speculation mill but it would be good I think.

FDIC Takes over Silicon Valley Bank

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