People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be.<p>Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.<p>It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
Today the big banks collectively agreed to inject $30bn of deposits into First Republic to sure it up: <a href="https://www.bloomberg.com/news/articles/2023-03-16/first-republic-to-get-30-billion-of-bank-deposits-in-rescue?srnd=markets-vp&leadSource=uverify%20wall" rel="nofollow">https://www.bloomberg.com/news/articles/2023-03-16/first-rep...</a><p>Meanwhile, all the benevolent VC techbros had to do was collectively agree to just <i>not</i> withdraw all of their deposits from SVB en masse, and they couldn't even muster that. How deep is the rot in SV?
All banks are suffering, buy some are suffering more than others. It's also unclear how the Fed's actions are going to impact the situation going forward. Here are my unanswered questions:<p>1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk?<p>2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently.<p>3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.
So what should SVB have done instead? It's well known..<p><a href="https://www.proshares.com/browse-all-insights/insights/bond-strategies-for-rising-ratesshorten-float-or-hedge" rel="nofollow">https://www.proshares.com/browse-all-insights/insights/bond-...</a><p>But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...
Silicon Valley Bank was giving executives easy 50 y mortgages for mansions and commercial real estate. This is the garbage now in SVB's balance sheet. It's not just 10y treasuries. Read the actual reports.<p>In turn, VCs/founders/executives promoted SVB. And now they don't want to be their own counterparties on a bet gone wrong.<p><a href="https://twitter.com/one4thecashbag/status/1635337106376769538" rel="nofollow">https://twitter.com/one4thecashbag/status/163533710637676953...</a>
I'm seeing a lot of comments along the lines of "What should SVB have done? They bought the best bonds they could have for the time, and then the Fed screwed them over."<p>Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do.<p>(Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...)<p>Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view.<p>Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs.<p>There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?
SVB executives knew exactly what they were doing.<p>The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1] and successfully lobbied for lax rules for banks like SVB. The current risk officer worked at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6].<p>They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [8]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles.<p>[1] <a href="https://www.reuters.com/markets/us/ceo-failed-silicon-valley-bank-no-longer-director-sf-fed-2023-03-10/" rel="nofollow">https://www.reuters.com/markets/us/ceo-failed-silicon-valley...</a><p>[2] <a href="https://www.svb.com/news/company-news/svb-hires-kim-olson-as-chief-risk-officer" rel="nofollow">https://www.svb.com/news/company-news/svb-hires-kim-olson-as...</a><p>[3] <a href="https://www.linkedin.com/in/laura-izurieta-1370144" rel="nofollow">https://www.linkedin.com/in/laura-izurieta-1370144</a><p>[4] <a href="https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/" rel="nofollow">https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...</a><p>[5] <a href="https://en.wikipedia.org/wiki/Janet_Yellen" rel="nofollow">https://en.wikipedia.org/wiki/Janet_Yellen</a><p>[6] <a href="https://en.wikipedia.org/wiki/Mary_C._Daly" rel="nofollow">https://en.wikipedia.org/wiki/Mary_C._Daly</a><p>[7] <a href="https://nypost.com/2023/03/13/silicon-valley-bank-execs-worked-at-lehman-brothers-deutsche-bank/" rel="nofollow">https://nypost.com/2023/03/13/silicon-valley-bank-execs-work...</a><p>[8] <a href="https://twitter.com/unusual_whales/status/163455502148748083" rel="nofollow">https://twitter.com/unusual_whales/status/163455502148748083</a><p>And this is just scratching the surface.
Minority?? Opinion follows:<p>The rot is at the core, the Federal Reserve. My parents saved money in a savings account for their eventual retirement. It was a prudent and accepted way to do things. Over time, with Reagan and deregulation of everything that followed, their savings rate effectively dropped from 5-8% to zero. That income was expected to fund part of their retirement, and <i>it was stolen from them</i> in order to prop up wall-street.<p>Those zero and near-zero rates distorted fiscal reality in the US and elsewhere they've effectively broken the system. At some point, we'll be bailing out whole countries to keep kicking the can down the road, and that's when things will be <i>too big to save</i> and we get to The Great Simplification.<p>I only hope we've got alternatives to fossil fuels figured out at scale and somewhat in place, otherwise civilization could collapse in World Depression II.
I was pleased to read Nathan Tankus' take[1] on all this, although I wish I understood it better, which was that a lot of policy ideas that have been somewhat fringe are becoming mainstream in the last week:<p>> The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars.<p>I imagine that's usually how real policy progress happens: interesting ideas are always getting thought up and proliferated, but it takes a big upheaval to move them over to being really possible.<p>[1]: <a href="https://www.crisesnotes.com/every-complex-banking-issue-all-at-once-the-failure-of-silicon-valley-bank-in-one-brief-summary-and-five-quick-implications/?ref=notes-on-the-crises-newsletter" rel="nofollow">https://www.crisesnotes.com/every-complex-banking-issue-all-...</a>
Steeped. Americas banks are still investment firms.<p>Until we categorically prevent banks from attempting to "satisfy shareholders" with returns, these occurances will continue in one form or another.<p>Banks dont need to be sexy or shake up the industry. We need boring people in banking making okay-ish money.
Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If the fed continues to raise I’d guess we will see more bank failures
lol, the media frenzy is hilarious to watch. This was a badly run bank facing some headwinds. I forget how much people like writing about things in a flurry instead of taking a step back and providing real analytics oversight.