While we’re on the subject can someone explain Roku’s behavior to me? Why are they holding a whole year’s worth of operating revenue as a deposit in the late Silicon Valley Bank? Unless there’s some sort of ploy going on that sounds like corporate mismanagement to me. Roku management appears to be assuming that even uninsured deposits will be covered by the federal government, a clear instance of moral hazard, while not scrutinizing the risks as is its fiduciary responsibility to do.
So, we’ve got the bank not scrutinizing its risk profile, corporate management not scrutinizing the bank, shareholders scrutinizing neither the bank nor the corporations, and the Federal Reserve failing to scrutinize the banks.
That’s not how it works. That’s not how any of this works.
And I haven’t even touched on the reality that every single public/private hybrid, “parastatals”, on which we’ve been depending has been a flop in the U. S. They’ve become a method for avoiding accountability, either to the voters or under the law.
If they were really holding an entire’s years worth of operating revenue in a savings account that seems bizarre. Why not have some of that in 3 or 6 month CDs or something similar? I dont feel sorry for them at all. What I do have sympathy for are small business who may have a couple of million in the bank at a time ie they are averaging in the neighborhood of $100k-$200k deposits a day and paying almost all of that out by the end of the month.
Steve
That is my point precisely. IMO what they were doing was financial mismanagement. Unless there’s more to the story.
And by far the greatest amount of money that will be required to underwrite those deposits will go to Roku and other companies engaged in the same sort of mismanagement. That needs some explanation, particularly when the companies involved are foreign-owned or even foreign state-owned.
Potential stock buybacks are enticing for investors, so keeping it on the balance sheet is a plus. Useful as well for acquisitions, probably. Also, I’m guessing they came out of the pandemic flush with cash they were hoarding and turning that around is grindingly slow in public companies. Roku is not alone in this. I have no idea if it’s even feasible to put 500 million into 2000 discrete accounts.
That was one of my guesses, MM. I don’t quite understand why the federal government should have to underwrite uninsured deposits being retained to do a stock buyback. Any more than the federal government should underwrite other speculations.
I guess the question how much uninsured risk is inherent in modern banking. 250k for an entire year is 91 million dollars. In a very dumb way, that means any company with expenses over 91 million a year is exposed. And 91 million seems a bit low for major corporations. Also, overall 40% or so of deposits are uninsured, with unsurprisingly CA, NY, and CT leading the way.
The government was maybe being realistic and assuming that if they didn’t stop the panic at the beginning more banks would fall because uninsured depositors would yank their money.
It looks like the current regime in Washington has maneuvered itself into a whole bunch of dead ends, each of which has regime-threatening possibilities:
interest rates, inflation, banking system, trade deficits, immigration, race relations, Ukraine, Taiwan, Greece/Turkey… (my money’s on Turkey)…
I cannot remember when such a large collection of existential threats faced Washington. It looks like the whole US economic, constitutional, war making “system” is about to explode. Have Biden et al. set in motion another Great Depression + World War + Constitutional Crisis?
He wanted to be another FDR. He might be getting his wish, just not in the way he presumably intended.
A SVB CD?? Last time I looked they were insured only up to $250K as well. What are you trying to accomplish? Like any other depositor, what was Roku doing with so many eggs in one basket?
“Potential stock buybacks are enticing for investors, so keeping it on the balance sheet is a plus.”
What? Their asset is always on the balance sheet. No matter the form of asset.
“I have no idea if it’s even feasible to put 500 million into 2000 discrete accounts.”
That’s why corporations have a treasury function that (should) invests in a diversified portfolio of mostly liquid public securities, not bank time deposits.
“I don’t quite understand why the federal government should have to underwrite uninsured deposits being retained to do a stock buyback.”
They shouldn’t have to underwrite any uninsured deposits, period. But once you do that you can’t pick and choose what are appropriate uses of funds. You are just speculating about them being used for stock buybacks or acquisitions. BTW – buying stock back, a return of capital, is about the least speculative action I can think of if the cash does not increase leverage to unwarranted levels.
My observations.
CD’s is a loan to the bank, as checking and savings accounts are. FDIC insurance rules apply to them and currently anything over 250K is uninsured.
For Roku, if they want $500 million in on-demand accounts at banks and be fully insured, the known method is to put $250K into many banks. For $500 million, that is 2000 banks, however Roku $500 million was only 25% of its cash, so they actually need to split their cash in 8000 banks, which isn’t possible since that’s more than the number of banks in the US.
This is where I agree with Drew, Roku CFO org should have a treasury function manage their cash by deploying it in other asset classes besides bank deposits. But then you hit a problem.
One traditional asset class companies should put their cash in — money market funds — broke the “buck” in 2008 and before the most recent hiking cycle, were in some cases earning 0% after management fees. So not as “safe” as bank deposits at first glance.
Short term treasures ( < 30 days) are the other asset class — but until the recent hiking cycle, they were yielding 0.1%. On $500 million, that is $500,000 of interest per year. i.e. the interest would barely pay the cost of 2 employees to mange the funds.
You know the observation that the Fed's actions in forcing interest rates distorted how capital is deployed, that played out in part here.
As for why Roku has so much cash — its not for dividends or buybacks, since Roku hasn't engaged in either. Having a relatively large cash balance is actually par for the course in the tech industry — Apple famously didn't do buybacks or dividends until after Steve Jobs died; by which point they had $100 billion dollars in cash. Bill Gates insisted Microsoft have enough cash to run the business for one year with no revenue.
“You know the observation that the Fed’s actions in forcing interest rates distorted how capital is deployed, that played out in part here.”
Curious’ observation is correct, and long commented upon here. That’s why the yields on short term securities were so low. It is but one of the issues the Fed screwed up in its easy money campaign. A pox on Bernanke. A pox on Yellen. Powell should have moved sooner.
Of course, a pox on Congress. No doubt they jawboned the Fed into monetizing their little spending spree. And what lit the fire was the hysterical response to Covid, and then subsequent Biden initiatives. Green New Deal. Inflation Reduction Act my ass.
Of note:
https://www.barrons.com/market-data/stocks/stock-picks?mod=BOL_TOPNAV