You might find this first-hand account of the collapse of Silicon Valley Bank interesting. Darius Rafieyan and Mattathias Schwartz report at Business Inside:
Over the last two weeks, Insider has conducted a series of interviews with an employee of Silicon Valley Bank who gave a firsthand account of the bank’s March 10 implosion as experienced by rank-and-file staff. Their identity is known to Insider, which agreed to kee
Here’s a snippet:
The weekend after the FDIC takeover was crazy. Originally there was a list of 13 VC firms, which said they were willing to sign a statement saying that they supported us. We needed to grow that number. We spent a whole weekend on the phone, email, chat, any sort of way to get in touch with the VC firms, partners of the VC firms, operating partners, CFOs, anybody we could to try and get them to rally. I think the number is at 630 supporters as of today. It’s been amazing to see the VCs themselves rally and create this awareness. Many folks had our back from the beginning. Once they knew their money was safe again, other folks changed their tune.
I wouldn’t even say that they were rallying for SVB. It was for an institution like SVB to exist, for the sake of the innovation economy. Our goal that first weekend was to get as many clients as we could on board. Because if they’re on board for support, that will help send a signal to the Fed or the FDIC to step in in some capacity. And they did — it worked. On Sunday, when the Fed said, “We’ll make depositors whole,” that was a huge sigh of relief for VCs trying to make payroll. We’d had so many clients tell us that they might have to shut down or cover payroll by borrowing with a personal guarantee.
“Many folks had our back from the beginning. Once they knew their money was safe again, other folks changed their tune.” (Drew – Heh.)
“I wouldn’t even say that they were rallying for SVB. It was for an institution like SVB to exist, for the sake of the innovation economy.”
LOL. They figured they would invest in the bank, and at least own a (hopefully long term viable) bank, to protect their deposits.”
That’s not what their investment charters are about. For the sake of the innovation economy my ass.
So was this not a normal bank? Did it have a lack of diversity in its customer – one too focused on VC and Silicon Valley that created vulnerabilities that other banks don’t have? That seems to be the implication of what that guy is saying.
In my opinion their customer base concentrated risk in the loan portfolio. If they were funding what should have been bottom of the cap structure fundings simply disguised as “loans,” that would be unwarranted risk. And in the investment portfolio they overweighted long duration investments and/or failed to hedge interest rate risk.
It was a risk management failure of epic proportions. I wouldn’t want to be on that board even if the D&O was huge.
What bad thing would/will happen to the board other than maybe looking sort of stupid? AFAICT no bank board member paid a fine or had anything bad happen to them as a result of the spate of bank failures in the aughts. The big payout by BoA didnt affect the board it looks like. I am betting they are well insured. I am betting that at worst a few lose their position and end up on a board somewhere else.
The early reports indicated that the bank’s insolvency was caused by the Federal Reserve raising interest rates. SVB was heavily invested in long-term, low interest treasury notes, and when the resale value of the notes fell (mark to market) the bank couldn’t cover its deposits, causing a notional bankruptcy.
I suppose the bankers thought that really safe T-Bill would offset somewhat risky loans, but it was the T-Bills that killed the bank.
Other early reports suggested that there were hundreds (thousands?) of banks both in the US and overseas that were in the same predicament. Credit Suisse was just the tip of the iceberg. Evidently, the situation in Switzerland was so severe that the bank was essentially given to UBS to sweep the problem under the rug. Is Deutsche Bank next?
This problem is not solved, not one bit. REIT’s have a big problem , too, with bundles of low interest house mortgages, now substantially devalued.
“The early reports indicated that the bank’s insolvency was caused by the Federal Reserve raising interest rates. SVB was heavily invested in long-term, low interest treasury notes, and when the resale value of the notes fell (mark to market) the bank couldn’t cover its deposits, causing a notional bankruptcy.”
The early reports indicated that the bank’s insolvency was declared by regulators because its assets – deposits, investment portfolio and loan portfolio -were deemed to be less than its liabilities. (Drew – that’s what insolvency is.) SVB was heavily invested in long-term, low interest treasury notes. When the resale value of the unhedged notes fell (mark to market) the bank became insolvent, and, further, wouldn’t have been able to cover the inevitable deposit withdrawal run through sale of the devalued treasury notes. The decline in the value of the treasury notes in its investment portfolio was caused by the Federal Reserve raising interest rates, coupled with its outsized exposure to long term treasuries and failure to hedge the interest rate risk inherent in those treasuries.
We can debate whether or not the Fed raised rates too fast. They are scared shitless of inflation right now. But the rate increase was a byproduct of years of the Fed monetizing deficits, most recently a massive injection of money due to Covid hysteria, and Bidens wild spending spree, coupled with irresponsible political denial that spending was wildly out of control and that inflation was “transitory” or declining rapidly. Never listen to Joe and Janet.
Yes, other central banks have pursued easy money policies that they are now dealing with. But Joes position of pointing towards, say, Europe is cowardly. Its like telling someone their stage 3 cancer isn’t a problem because the guy in the next bed has stage 4. This Administration doesn’t have a clue, or a leadership bone in its body.
How long have I been saying the Fed was mispositioning itself – putting itself in a box? Inflation or recession. And now they have another dimension to deal with: banking system stability vs inflation. That witch who has been touting MMT should be burned at the stake, along with Yellen.
At least Kamala likes venn diagrams and school buses. So we got that goin’ for us.