SVB Financial: Blow Up Risk (2022)

https://seekingalpha.com/article/4565388-svb-financial-blow-up-risk

by AlchemistCamp • 3 years ago

224 68 3 years ago

Note this was published dec 2022.

kurthr• 3 years ago

So, classic bank run... except there were 6 people on the same chat channel controlling 10% of the bank's reserves. Once they notice, poof!

steveBK1233• 3 years ago

This is also why small, concentrated merchant banks like this are risky. Deposit base is too homogenous.

notlukesky• 3 years ago

They mentioned this report in the All In Podcast this week.

stcredzero• 3 years ago

From the podcast: "The herd mentality caused us to all run for the door..." -- There was an N-way Prisoner's Dilemma that just played out in the Silicon Valley startup networks.

And the startup networks in aggregate -- Failed! There was a reference made to the movie, "It's a Wonderful Life." The Silicon Valley startup scene failed like a mob, where the Building and Loan crowd succeeded as a community.

Maybe that kind of thing only exists in the movies? Well, not quite. But it is rare.

toinewx• 3 years ago

The author had a short position. You can find it at the end of the article:

   Disclosure: I/we have a beneficial short position in the shares of SIVB either 
   through stock ownership, options, or other derivatives.

tedivm• 3 years ago

You say that like it's some gotchya, but someone who felt the bank wasn't in a good financial position would naturally short it. This just means the guy put his money where his mouth is.

dtech• 3 years ago

It's beneficial for someone who is shorting a stock to put out negative press about the company. It's basically the modus operandi of some hedge funds.

I also don't get the gotcha though. As long as it's disclosed and the facts are true I don't see the problem.

devmunchies• 3 years ago

So... he put his money where his mouth was? Sounds better than putting it in SVB.

kortilla• 3 years ago

You would be stupid not to after stumbling on a gem like this.

steveBK1233• 3 years ago

If they thought the stock was going to $0, they sure wouldn't have a Long position would they?

What do you think all these guys on CNBC all day talking up stocks do.. not own it already themselves?

therealcamino4• 3 years ago

Yes, but the author was also completely correct about their financial situation. The disclaimer doesn't mean "I'm making this up."

rufus_foreman• 3 years ago

I believe this is called "talking your book" and it should be your default assumption of investor behavior.

hn_throwaway_993• 3 years ago

Wow, how prescient. Articles like this are especially damning to the execs that sold stocks just a few weeks ago. This was not some huge surprise. They may not have anticipated the ferocity with which there would be a run on the bank, but they absolutely knew they were in deep shit and would need to do a capital raise. And I hope nobody tries to defend this with "those stock sales were from 10b5-1 plans!". Those can easily be gamed by execs waiting to release bad news until after their sales go through, or by cancelling sales if things look good for the future (courts have said you can't be charged with insider trading for not selling shares, which means you can basically just set up 10b5-1 plans but cancel them as needed based on your insider knowledge).

toomuchtodo3• 3 years ago

Who got hurt by execs selling stock into the market? Hopefully sophisticated investors who should’ve known better. For over a year there were indicators SVB was not healthy.

“We are selling to willing buyers at the current fair market price.”

Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC. If you can’t trade on positive material non public information, why would you expect them to trade on negative MNPI? Follow the rules and what is least likely to cause you to end up in handcuffs or in front of Congress. That is a logical and rational decision.

pixl97• 3 years ago

Hopefully sophisticated investors who should’ve known better.

You mean like your retirement fund manager?

jeremyjh• 3 years ago

“Even though we have insider knowledge that indicates it’s worth less than market and quite possibly nothing at all.”

throw0101c• 3 years ago

“We are selling to willing buyers at the current fair market price.”

A line from the really good movie Margin Call:

* https://en.wikipedia.org/wiki/Margin_Call

Worth checking out.

hn_throwaway_993• 3 years ago

Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC.

The SEC already tried this. Courts have ruled that you can't be charged with insider trading for not executing a trade, but the end result is the same: just set up plans that you cancel if you don't want them to trade. Can't remember the name of the court case but shouldn't be too hard to find by Googling. SEC has tried to tighten the rules by requiring that cancellation of any trade cancels the whole plan, but their hands are also tied based on court rulings.

hef19898• 3 years ago

Well, in case of those SVB execs we talk potential insider trading. Margin Call is fiction, and MBSs or MBS based CDOs are not shares in the company you run.

stametseater• 3 years ago

If you can’t trade on positive material non public information,

In America you can, if you're not an insider and didn't get the information from an insider in violation of their duty of trust. For instance, it is legal for a trader to use satellite LIDAR/SAR data to estimate the fill level of oil storage tanks and trade on that obviously material non-public data.

adhesive_wombat2• 3 years ago

They may not have anticipated the ferocity with which there would be a run on the bank

Bank runs are pretty much always ferocious because 1) that's what a run is, rather some euphemism for the prelude like "temporary liquidity processing anomaly" and 2) they're positive feedback loops that end up ferocious as soon as someone responding to the "TLPA" gets noticed by someone else.

eloff• 3 years ago

A more charitable interpretation of what the OP is saying: the execs may not have anticipated how fast the shit would hit the fan. I doubt they believed there would be a run on the bank this month, not even the short sellers were predicting that. They did know they were in trouble, but I think everyone, even those being against SVB, was surprised by the speed and ferocity with which this played out.

paulddraper4• 3 years ago

That's true, though most bank failures aren't bank runs. IDK if there's been a bona fide bank run in the U.S. since the 1930s.

The reason this was a bank run is that FDIC insurance meant approximately nothing, as opposed the the usual situation where a huge amount of depositors are fully insured.

stefan_• 3 years ago

We don't need to assume the execs knew their held to maturity MBS scheme would blow up when they are selling weeks before announcing a loss (which they would definitely be acutely aware of).

darkerside2• 3 years ago

If they're regularly selling securities, there is no good time to make the announcement

PaulHoule• 3 years ago

At least so far the story is that SVB got in trouble because it invested in bonds that went down in value, not because of its loan portfolio. We’ll see if that is true or the whole story, but if it is true, the scenario is entirely different from what that article is suggesting.

panarky• 3 years ago

... entirely different ...

The article nailed the "unrealized losses in its htm (hold to maturity) fixed income portfolio", and it nailed the risk of deposit bleeds forcing liquidation of the htm assets, realizing the unrealized losses, leading to insolvency.

metalspot• 3 years ago

their AAA bond assets suffered big losses, but their loan assets are even worse. there is a big PR effort to focus on the bond losses, but the real shit is the 10's of billions in loans to companies that will never make a profit, and the systemic contagion risk that entails. they lost 15% on 100B of their book, but they are going to lose 100% on 10's of billions (unknown) from the other half of their book.

if all of their assets were AAA and they were only down 15% they wouldnt be a failed bank right now. nobody knows how big the losses really are, but the people they were in business with knew best, and those people pulled their money as fast as they could, so everyone else can make assumptions based on that.

anonymousiam• 3 years ago

The executive stock sales were only for a few million dollars, and a relatively minor percentage of their holdings. I doubt there will be any criminal charges.

paulddraper4• 3 years ago

Articles like this are especially damning to the execs that sold stocks just a few weeks ago.

You mean the reverse, right?

You can't insider trade if it's not insider information!

This article supports the execs, not damns them.

hn_throwaway_993• 3 years ago

No. Because a short seller speculates the bank is in trouble doesn't mean it gives execs carte blanche to sell their stock.

The "inside information" piece is exactly when SVB would need to do a highly risky capital raise, which SVB did (or tried to do) conveniently 2 weeks after the CEO sold millions.

0003• 3 years ago

Really great marks. Almost perfect. Except the key piece "The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk."

File this under... "thought it was bad, didn't know it was THIS bad." And enjoy the millions of dollars you made :P

dboreham• 3 years ago

After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments".

ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit.

Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday.

That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway.

Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel.

Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up.

So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money.

And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.

darkerside2• 3 years ago

Surprising similarity to the 2008 crash in that there was systemic risk that wasn't detected or fully understood based on there being events that were entirely predictable (housing prices drop, or Fed rate increases) but happening at unpredictable rates of speed.

eastbound• 3 years ago

No bank can bet the deposits will stay the same: Through the short-term economic cycles, people will accumulate for 6 months, 2 years, 10 years, then deplete. Covid hits? Everyone needs 3 grand at the same time. Government gibs money? Everyone has 3 grand extra for a few weeks. Everyone gets paid on the 1st of the month. You can average, but everyone will hit the low at the same time.

IrnBru4• 3 years ago

Not true. Imagine there was only ONE bank.

IrnBru4• 3 years ago

Borrowing short term and lending long is what all banks do. The problem here is a lack of diversification.

thevagrant• 3 years ago

I think you're right. They did not understand the needs of their customers (companies) that contributed the bulk of their deposits.

They were not assessing the risks and changes occurring in the market that could affect the behavior of their primary customer base.

I read they went 8 months without someone in charge of risk management, so it appears this is completely an own goal.

personomas• 3 years ago

Especially with more and more companies leaving (and start-ups not staring in) Silicon Valley.

latchkey• 3 years ago

Two more followup articles from the same author that are good reads as well (along with a bit of well deserved gloating)...

https://seekingalpha.com/article/4586033-svb-financial-blew-...

https://seekingalpha.com/article/4586342-svb-financial-today...

therealcamino4• 3 years ago

I have to say, the articles in Seeking Alpha are so uneven that I never read the when they pop up in a news feed. The original article is pretty startling in how accurate it was (even if it was more concerned about the loans than the mortgage-backed securities.)

ADefenestrator• 3 years ago

Yeah, even in a case like this where they turned out to be right, it might be one of those "predicted 15 out of the last 2 recessions" sorts of things.

paulddraper4• 3 years ago

The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk.

In an alternate dimension, it played out exactly like this.

funstuff007• 3 years ago

I guess we know who was buying all the 1% yielding 10Y notes now.

simonebrunozzi• 3 years ago

Key sentence:

"SIVB was one of if not the most aggressive banker to many start-up companies. That worked brilliantly in the VC funding boom but could cut the other way as the industry retrenches."

SVB Financial: Blow Up Risk (2022)

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