I don’t know the specifics of SVB’s problems. But what has come out in the press is loans to tech startups.
Absolutely what the [many non-TF words] is that?
I’ll tell you what it is: Taking equity risk for a banker’s return.
IOW, unfathomably stupid.
Makes betting 10-team parlays look like prudent long term investment strategy — 100:1 payoff in exchange for 1,024:1 chance of winning?!?!?! Sign me up!!!!
At its core, the banker‘ business model is: Take deposits, pay interest on some of them, operate non-interest bearing checking accounts on others, and lend that money out at a higher rate of interest. Their gross profit is the difference between the two — also called the Net Interest Margin.
From that gross profit, you have to subtract a lot of stuff including operating expenses and (most pertinently) loan loss provision.
Now the boring math: Net Interest Margin fluctuates a bit, but is typically between 3% and 4% on a large portfolio of both consumer and commercial loans.
Problem there is that when you lend to a startup, your Primary Source of Repayment (PSOR) is profits that don’t yet exist.
More problem is that the generator of the PSOR isn’t really assets….it’s one or more ideas. Which are both (1) impossible to repossess and sell, and (2) worthless if they don’t generate profit…which profit, given the worthlessness of the tangible assets, just happens to be the only way you get your depositors’ money back.
Now the nastiness: If you write off a loan to a tech startup whose raison d’etre didn‘t pan out, you might repossess a few used computers and servers. IOW nothing worth anything. So you write off, if not 100% of the loan, then dang near it.
Which means that, at a 3 % - 4% gross interest margin, you need to make between 25 and 33 other loans just like the one you lost, to get to zero, ….forget any profit.
Point of all that being: If
(1) SVB lent money to tech startups, which
(2) In turn depended on artificially low interest rates to operate, and
(3) SVB did so for a 4% +/- topside vs. A 100% downside, well….
(4) They’re just too [more non-TF words] stupid to call themselves bankers, and I have no sympathy for them.
The Big Short is a great illustration of a similar idea, and I highly recommend it, both as a documentary of the 2005 - 10 real estate run up, bust and aftermath, and as a reminder that there is no Tooth Fairy, no matter how many zeroes some talking head says she has in her bank account.
Specifics were different then, but the bottom line then as now is far under-priced money thrust into the hands of people who had no stinkin’ idea what they were doing, and bankers taking equity risk in exchange for a banker’s return.
IOW, morons who deserve nobody’s sympathy.