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Silicon Valley Bank: Greed and Stupidity Strike Again
"All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” - John Kenneth Galbraith. It is the same story over and over again with each crash. Greed causes people to make leveraged bets to amplify returns on borrowed money and then at some point leveraged bets implode. If the problem was an unleveraged position failing, only the initial investor would lose their money, but when leverage is involved a chain reaction of borrowers and lenders also implode and the problem snowballs, especially as depositors/investors try to withdraw their money, but there is not enough money because of losses to pay them back. As another saying, goes, "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." This scenario has occurred repeatedly throughout financial history. It is the reason why enlightened economists demand regulation of the financial sector and a social safety net to deal with the inevitable dislocations capitalism creates via leverage. The question is here whether the existing safeguards such as the FDIC insurance system can contain the crash. It seems like they can from what I'm reading: https://nytimes.com/2023/03/11/technology/silicon-valley-bank-failure-lessons.html I think, or at least hope, the fallout will be temporary and limited.
IT appears, as I posted elsewhere that SVB had not had a risk officer since Dec 2021. The last one resigned with all her stock. The CEO actively lobbied Fed to avoid being required to do a stress test. Exposed far far more than what is even "adventurous" to interest rate risk with all depositors from same industry therefore likely to all act at the same time.
Begging his friends and long time customers, like Peter Thiel to "Stand by us as we have stood by you" CEO found out the hard way how much customer relationships matter to people like Thiel and in general in Silicon Valley.
So assuming they sold everything they could to pay the depositors, the question is how big are the remaining accounts that have not been liquidated, and what they can get for the people, the relationships (?) etc
I read their loans were only about 30% of assets. These are still probably good. Assume they had almost all of the rest of the deposits in their now gone bonds, and they sold them at even 70% of face value, this would imply they got 50% of total assets in sale and handed that out to depositors and then became insolvent.
FDIC covered 9% I think so they still have 41% of pre crash depositors to make whole with the loans and whatever else they can dredge up
Early on in this post I posed the following question:
Question: If a major source of the problem is that Silicon Valley Bank was forced to sell US Gov't securities at a loss because their current value is less than their maturity value, why would the FDIC or any other "rescue" authority do the same thing? Rather than take an immediate loss, why wouldn't a "rescue authority" provide immediate funding equal to the actual maturity value of the underlying assets, and then retain those assets until they actually mature, thus minimizing the loss due to the maturity problem?
And from today's commentary by Matt Levine's "Money Stuff" of Bloomberg Opinion:
The FDIC and other banking regulators spent the weekend trying to sell SVB, apparently with no luck. Here is what they came up with instead:
The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. jointly announced the efforts aimed at strengthening confidence in the banking system after SVB’s failure spurred concern about spillover effects. ...
The Fed in a separate statement said it’s creating a new “Bank Term Funding Program” that offers loans to banks under easier terms than are typically provided by the central bank.
Fed officials said on a briefing call that the facility will be big enough to protect uninsured deposits in the wider US banking system. It was invoked under the Fed’s emergency authority allowing for the establishment of a broad-based program under “unusual and exigent circumstances,” which requires Treasury approval. ...
Under the new program, which provides loans of up to one year, collateral will be valued at par, or 100 cents on the dollar. That means banks can get bigger loans than usual for securities that are worth less than that — such as Treasuries that have declined in value as the Fed raised interest rates.
My proposed solution was met with dismissive comments by knowledgeable MFO contributors. Evidently very high federal financial officials saw some merit in the concept.
Comments
Begging his friends and long time customers, like Peter Thiel to "Stand by us as we have stood by you" CEO found out the hard way how much customer relationships matter to people like Thiel and in general in Silicon Valley.
So assuming they sold everything they could to pay the depositors, the question is how big are the remaining accounts that have not been liquidated, and what they can get for the people, the relationships (?) etc
I read their loans were only about 30% of assets. These are still probably good. Assume they had almost all of the rest of the deposits in their now gone bonds, and they sold them at even 70% of face value, this would imply they got 50% of total assets in sale and handed that out to depositors and then became insolvent.
FDIC covered 9% I think so they still have 41% of pre crash depositors to make whole with the loans and whatever else they can dredge up
Better watch out They will make you CEO of National Bank of Santa Clara
You live nearby don't you? Hold out for limo and driver