SVB collapse is the second-largest bank failure in US history

crimsonaudio

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:oops:

The wheels started to come off on Wednesday, when SBV announced it had sold a bunch of securities at a loss and that it would sell $2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.

The company’s stock cratered on Thursday, dragging other banks down with it. By Friday morning, SBV’s shares were halted and it had abandoned efforts to quickly raise capital or find a buyer. Several other bank stocks were temporarily halted Friday, including First Republic, PacWest Bancorp, and Signature Bank.

The mid-morning timing of the FDIC’s takeover was noteworthy, as the agency typically waits until the market has closed to intervene.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours,” wrote Better Markets CEO Dennis M. Kelleher. “That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.”
Silicon Valley Bank collapses after failing to raise capital
 

TexasBama

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I'll check it out, I've only heard good things about that movie. Great cast and I LOVED Moneyball.
I’ve googled a bit and it doesn’t look like these guys got into these crazy instruments. 4Q could probably give a good rundown.

ETA. Perhaps they weren’t very diversified in their business base. Too much into tech and startups.
 
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92tide

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I’ve googled a bit and it doesn’t look like these guys got into these crazy instruments. 4Q could probably give a good rundown.

ETA. Perhaps they weren’t very diversified in their business base. Too much into tech and startups.
it seems like a lot of the start up/tech/disruptor scene is built on a foundation of loudmouthed bs
 
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4Q Basket Case

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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.
 
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4Q Basket Case

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As I think about it, the SVB failure might, might, might be a good thing overall.

Some in Congress and some holders of non-elected offices in Washington have been making noise about pressuring banks to provide startup capital for tech companies….which for reasons I outline above is really stupid.

It’s not that I’m against banks providing startup capital for tech companies.

I’m against banks providing startup capital for any company.

For loans you wouldn’t make on an unsecured basis (another topic for another thread), maybe the most basic concept in bank loan underwriting is that you as a lender MUST have two ways out. Bankers call them the Primary Source of Repayment (PSOR) and the Secondary Source of Repayment (SSOR).

Most typically, the PSOR for a term loan being repaid in monthly installments is income — salary for consumers, profits for businesses — the amount, reliability and frequency of which has been proven for a meaningful period of time.

The SSOR is collateral — a house, a car, commercial property, business equipment, whatever. So if the PSOR doesn’t materialize for whatever long sad shaggy dog story reason, the banker has the SSOR to fall back on.

Because the bank isn’t in the business of selling that collateral at retail, they typically require the borrower to have some skin in the game — called a down payment.

In the case of startup capital, there is no proven income (PSOR). In the case of tech startups, the repossessable assets of the business aren’t worth much of anything on the secondary market. So the SSOR is problematic as well.

There are tons of potentially complicating factors, mitigating factors, ‘yeah-buts,” and, “what abouts.” There are specific government programs (Federally guaranteed student loans and loans guaranteed by the Small Business Administration (SBA) that allow a bank to overlook a deficient or non-existent PSOR or SSOR.

But the bottom line is that absent some sort of rock-solid back door like that, venture capital, whether tech or otherwise, is no place for banks to be playing.
 

crimsonaudio

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Founded in 1983, Silicon Valley Bank provided financing for almost half of US venture-backed technology and health care companies. They have been hurt by higher interest rates and dwindling venture capital.

While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of last year, according to the FDIC.

Its stunning, and seemingly rapid, fall is the largest shutdown of a US bank since Washington Mutual in 2008.
Takeaways from America’s second-largest bank failure
 
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Huckleberry

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Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.
In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.

Mr. Becker, who had been on the San Francisco Fed’s board of directors, was no longer on the board as of Friday, a Fed spokesperson said.
 

NationalTitles18

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Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.
In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which reduced how frequently banks with assets between $100 billion and $250 billion had to submit to stress tests by the Fed.

Mr. Becker, who had been on the San Francisco Fed’s board of directors, was no longer on the board as of Friday, a Fed spokesperson said.
Amazing how every time bank regulations are reduced bad investments and failures increase.
 

JDCrimson

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Banks can't absorb 500bps increase in rates in less than a year. Yes they stress for it from capital and earnings standpoint. But the liquidity impact of such an event is usually not stressed at the same time. So you stress tests that say we can weather such an event provided we have liquidity. If the liquidity leaves in the form of deposit withdrawal. Your ability to navigate rapidly rising rates gets exponentially harder.

The Fed is creating liquidity challenges in the banking sector with their rapid rate increases to curtail inflation. The Fed is sucking money out of the system with rate increases. Banks are having to turnaround and borrow the money from the Fed at much higher rates to put it back into deposit flows and loan demand - the economy. Which really doesn't make any sense.

The Fed has, imo, gotten too focused on inflation in a short-term. We are at max employment for what our economy demands now. It will only get worse as retirements pick up pace over the next 5 years. Couple this with even more onshoring of industry and we have an even greater propensity for inflation. People need stuff regardless of what it costs - that's what we are seeing now - and the people to produce it and transport are not there. The Fed needs to attack from a different angle than just interest rates.
 
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crimsonaudio

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Hopefully this is a one-off, but from what I'm reading here from guys who have forgotten more about the banking industry than I'll ever know, the rapid rise in interest rates could really make the near-future dicey.
 

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