From The Wall Street Journal:
Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital.
The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.
Insured depositors will have access to their funds by Monday morning, the FDIC said. Depositors with funds exceeding insurance caps will get receivership certificates for their uninsured balances, meaning businesses with big deposits stuck at the bank are unlikely to get their money out soon.
The bank is the 16th largest in the U.S., with some $209 billion in assets as of Dec. 31, according to the Federal Reserve. It is by far the biggest bank to fail since the near collapse of the financial system in 2008, second only to the crisis-era collapse of Washington Mutual Inc.
The bank’s parent company, SVB Financial Group, was racing to find a buyer after scrapping a planned $2.25 billion share sale Friday morning. Regulators weren’t willing to wait. The California Department of Financial Protection and Innovation closed the bank Friday within hours and put it under the control of the FDIC.
Customers tried to withdraw $42 billion—about a quarter of the bank’s total deposits—on Thursday alone, the California regulator said in a filing Friday. The flood of withdrawals destroyed the bank’s finances; at close of business Thursday, it had a negative cash balance of nearly $1 billion and couldn’t cover its outgoing payments at the Fed, according to the filing.
The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.
SVB’s troubles have dragged down a wide swath of the industry. Investors dumped the shares of banks big and small on Thursday, shaving $52 billion off the value of the four largest U.S. banks alone. The megabanks recovered Friday but many of their smaller peers continued to plunge. Several were halted for volatility.
Link to the rest at The Wall Street Journal
The reason this is of note to visitors to TPV is that a great many Northern California tech companies were holding all or a lot of their money in this bank.
Making the next payroll could be a real problem for a whole lot of tech companies.
The FDIC (Federal Deposit Insurance Corporation) covers $250,000 of a customer’s loss when a bank fails, but some tech companies had billions of dollars of deposits in the bank. It’s estimated that roughly 95% of the bank’s deposits were uninsured, according to filings with the SEC.
The thing is hardly over: as of noon today they had to stop trading on 12 regional banks, including one that had secured backing from two bigger banks.
There’s a rumor kicking around on Twitter that Harry & Meghan have lots of assets (esp. Harry) in SVB (having had it recommended to them by Silicon Valley buddies.)
The DOD has had trouble recruiting lately.
Harry’s resume isn’t bad. 😉
Bailout city. Harry & Meghan are saved, and we all pay.
Good sarcasm here: https://www.powerlineblog.com/archives/2023/03/annnnnnd-its-a-bailout.php
It’s interesting that digital currencies and these Venture capital banks are failing, just as nation wide many States are trying to pass obscure laws that would control virtual currency, eliminating all other virtual currencies. Thing is, these laws have those provisions buried deep inside a hundred pages of nonsense without overtly stating what the law is about.
– This reminds me of the 2008 crash that made some people very rich.
I stumbled across this TEDx talk about why the 2008 Housing crisis actually crashed the economy. It was because a tax law had changed. Only when they changed the tax law again was the crash stopped. Basically, somebody made a lot of money by changing the tax law in the first place.
The real truth about the 2008 financial crisis | Brian S. Wesbury | TEDxCountyLineRoad
https://www.youtube.com/watch?v=RrFSO62p0jk
BTW, All week I had BofA calling me wanting to start up a Merrill Lynch account. I get those calls now and then, but not as aggressively as this week. They basically want me to take my money, which is parked safely in a saving account, and put it in their service that is not insured.
When stuff like this happens I always feel tempted to send them the link to this Frontline episode where they point out that accounts like this routinely reduce the account by 60% with their service fees. I don’t send it because I’m not cruel. I do want to ask them if they would put their own money in Merrill Lynch, but once again, I’m not cruel.
The Retirement Gamble (full documentary) | FRONTLINE
https://www.youtube.com/watch?v=lkOQNPIsO-Q
Whatever happens, it is manufactured to asset strip the country and force everyone to adopt ESG standards that are clearly anti-human Malthusian BS.
This is all great for Story, but I’d rather not “eat bugs” and live in pods.
I have several ML accounts. I have never paid more than annual 0.5%. Even a hedge fund is nowhere near 60%. A hedge might do “2 and 20.” That’s 2% of total assets and 20% of gains.
One could hit 60% or even 100% by making lots of trades where commission adds up, and there is no trade profit . However, that kind of volume is available for free on other platforms. No reason to use a ML account for that.
That’s what was so shocking about the Frontline episode, how leaky these accounts are. The various fees that are charged each time they touch your account can wipe out 60%.
In a roundabout way, the housing crisis averted a bigger mess the rest of the world is now in.
https://www.ahp75.com/2021/05/07/a-silver-lining-the-pandemic-housing-crisis-and-unlikely-good-news/#:~:text=As%20scary%20as%20this%20might%20sound%20to%20someone,minority%20Americans%20looking%20to%20buy%20their%20first%20home.
When the pandemic lockdowns stopped construction, the US had/has a backlog of underwater properties. As the recovery began and inflation took over, those properties *exist*. Elsewhere, there’s housing crises all over as what construction money (and workers) is available is going to the high end.
(And as a side effect, factory-built housing is starting to ramp up.)
And to add to the fun, they still haven’t really fixed their bank problems in the EU. Russia’s banks are winding down and China, well in China instead of slowly deflating their bubble, they’re throwing money at it to inflate it some more. 30% of the economy and growing, whie exports are going down.
Like in 2008, the US has tools to moderate the problems. It’ll be…tough…but not catastrophic. Elsewhere they don’t.
This blogger gives a clear explanation of the problem.
https://m.youtube.com/watch?v=tbc1ooJWG3I
Two bank runs in 3 days.
Because of inflation.
TL:DR – Both banks were cash rich holding investments in SiliValley startups. They needed to park the stash somewhere and in an age of low interests rates the best they could do was long term bonds.
Then the market got flooded with cash, inflation took over, and the companies needed more liquidity than planned. More than the banks kept free. Suddenly they had to sell the bonds at a loss, word got out and eveybody wanted to cash out.
Odds are the story is just starting.
I don’t know why I’m still surprised by the stupidity of bankers, or of the people who are supposed to be regulating them. Compound interest and bond valuation is the simplest bit of financial mathematics and in a period of very low interest rates their eventual rise is the obvious risk to worry about. The missmatch of assets and liabilities was glaringly obvious but I guess that they were only thinking about profits – and the bonuses that would come from big rises in deposits – and shut their eyes to risk.
Presentism.
Not only has the dead past have to be judged solely by today’s ivory tower theories, the future will be *exactly* like today. Nothing will change and changing today’s (fiscal, in this case) policies will *never* have blowback. No way, no howm
Small minds at work.
In this case, there’s this look at some *possible* side effects:
https://m.youtube.com/watch?v=H7C9oXK0-70
Mentioned in passing: bonds aren’t the only source of liquidity risks the banks face. Equities are also a risk and with many Wall Streeters dreaming on China (oh, are they in for a rough ride) and ignoring the second and third order effects of inflation, a big drop can lead to a few more bank runs all by itself.
Not mentioned:
– The SVB losses are going to hit startups (and especially successful, growing startups bringing in good money) particularly hard. Those outfits burn cash fast and, more importantly, pay out significant amounts in stock options; company folds, staff loses job and a big part of their compensation. Back to the drawing board into the job market. Jobs they’ll find, but not under terms to make up the losses.
– The losses will be reflected in reduced tax revenues for California which is notorious for its boom/bust government finances that are already in bust mode with a $25B shortfall. They’ll, of course, raise taxes once more and likely go ahead with the proposed wealth tax. Which includes non-realized wealth. Kinda like the “assets” they can’t reach at SVG but still on the books.
– Also, those startups (and their staff) spend on rent and other services and tech in general has one of the highest multipler effects in modern economies. This works both ways, so taking money *out* of the tech sector takes out a much bigger amount out of the rest of the economy. SVG is taking $150B out? The likely impact might reach a trillion. And that is without contagion spreading to other backs.
– The startups do have an out, in some cases: selling out to a big cash rich company in the same sector. Those companies are effectively banks in their own right. And they’d love a fire sale of innovative products they can gobble up and either monetize or shut down if it threatens a cash cow.
And that is just part of the ripples to come.
Already IdiotPoliticians™ in California, the most overregulated state, are calling for more regulation on tech. The state’s cash cow. The Texas governor is licking his chops. Business types in Austin, Dallas, and Houston are drooling at more companies moving their way.
It will be a while but those ripples *will* filter down to the likes of us, most likely in the form of higher prices and even more inflation.
All of this was unavoidable and coming anyway. SVG was simply unlucky enough to be the first non-crypto to get dinged. Oh, and the crypto mess is just beginning to unravel. Wait on that one.
Interesting times.
I see that we watch the same YouTube videos.
I’m conflicted about your claim that “All of this was unavoidable”. On the one hand it was inevitable that bad decisions would be taken and that these would come back to bite the guilty parties. However, the fate of SVB could have been very different if their management had taken a less risky response to the huge inflow of funds. Given the speed with which start-ups burn through their funds, putting assets in ten year treasury bonds to chase yield was less than sensible (given that they could not afford to sell these if interest rates rose, this in some ways reduced the bank to a form of pyramid scheme – though admittedly this is true to some extent of all banks).
Do you know of an easily available on-line source as to what SVB’s losses actually are based on marking their holdings to market? I could sit down and do the valuation calculations to see how much above par they likely paid (compared with the current price of about 98) but its midnight here and I really can’t be bothered – though my guess would be that the greater part of the value is still there, unless the amount already sold and used to pay the first comers in full had too great an impact. I’m guessing that most of the start-ups could cope with a haircut if they had access to most of their funds without delay (but I fear that delay will not be avoided and will drag a lot of firms down unnecessarily).
To clarify: the losses from ten year pre-covid bonds at 1.5% in an age of 10% inflation was unavoidable.
That this particular bank would be the first to fail wasn’t guaranteed but *somebody* was going to fail. SVC isn’t the only bank deep in long term bonds.
Fair?
The actual trigger for the run seems to be Thiel’s VC group not getting a cash transfer through in time. In reaction, Thiel pulled all his cash and instructed the startups they were backing to do the same.
As for their losses, the reports I’ve seen list $150B in unsecured deposits at risk of which maybe 50% could be lost, atop the $20B lost in trying to raise liquidity and the zero-ing of shareholder value. How much of the $150B loss materializes depends on how the FDIC (and UK) efforts to find somebody willing to take on the assets of the corpse. In a best case scenario, somebody might buy the bond portfolio cheaply enough to make good on the full amount of the deposits. More likely, the depositors will take a haircut of something less than 50%, as you suggest. My own guess is losses of another $30B for a total of $50B. (Totally a WAG.)
(BTW, on the youtube side, I’m eagerly awaiting Zeihan’s take tomorrow. He’s been cool on venture capital availability for tech startups vs government, infrastructure, and manufacturing sucking all free cash.)
As the SVU story unfolds, it is notable that the VC supporters of the impacted have (so far) uniformly refused to provide any more cash. (Doesn’t bode well for new startups looking for support.) And, of course, the gerontocracy immediately dismissed the call for help despite the screams from their brethren in California, unlike the SVC victims in the UK.
Investment capital is looking to get harder to find and cost more for all startups but particularly in California. I’ve been expecting SiliValley to lose its luster for a couple years and this just might be the tipping point.
Edit: Another bank was just shutdown.
SIGNATURE BANK in NY.
https://www.msn.com/en-us/money/companies/svb-collapse-federal-regulators-shut-down-signature-bank-in-new-york/ar-AA18xr7m?ocid=Peregrine&cvid=169d10bea8614822f06df15f46418ea1&ei=23
This one is crypto tied.
Let’s not forget the brilliance of the current administration when it declared that “Milton Friedman isn’t running the show anymore.” This was part of the “New Economics” that held government can create as much money as it wants without concern for inflation. They tried it. Didn’t work as planned. Milton Friedman is indeed running the show.
They ran into the problem most Ivory tower academic theories encounter: how to get there from here.
The so called “modern economic theory” is neither modern nor economic. It is a political strategy that dates back to post war Japan and has been replicated all over north east Asia, most notably China, that sees currency as a *political* tool instead of an economic instrument.
In Japan’s case the strategy of currency manipulation worked for 30-40 years, a financial crisis, and 30-plus (and counting) years of stagnation.
In China it worked for about 30 years and was showing increasing signs of stagnation just before the pandemic. It’s hard getting good data out of China but by the best estimates they overstated the size of their economy by 40%, possibly the size of the population by a similar amount, and a peak of both around 2005-2008. Since then, stagnation hidden by pumping more liquidity into the bubble.
Both those cases were starting from essentially nothing whereas the strategy of flooding the US economy with liquidity to advance ideological goals ran into the reality of a (previosly) stable economy with a mix of short term and long term currency flows. Also, with the Dollar serving as the global reserve of value, any change in its supply ripples all over.
As is, it took the gerontocracy just two days to realize the extent of the SVC ripples, look at other banks similarly vested, and panic into reversing their position that “a $200B bank failure in a $23B banking system is no problem, let it sink” to “all depositors will be made whole and all accounts will be open monday” with bailouts at SVC and SIGNATURE. Both operating in California, oddly enough.
Now to see how much extra liquidity (taxpayer money) it will take to reduce contagion and how much extra inflation it costs.
In the case of SIGNATURE they took over the bank before a run could start but the new policy is that crypto deposits will *not* be secured beyond the FDIC maximum of $250,000. That will have its own ripples. And serve the political goal of deflating the crypto bubble.
More ripples incoming.
(Actually useful story fodder for world building.)
Rename failed policies from the past and do it right this time because we are smarter.
We hear lots of talk about reducing federal spending. But, we don’t hear much about rising interest rates pushing up the amount the government pays in interest. The 1-year bill is now at 4.9%. Two years ago it was just above zero. Ten years are 3.7%. Two years ago they were around 1.5%. Much of the debt has been financed by turning over short terms. It’s going to get really expensive even if spending increases stop today.