Silicon Valley Bank Was Uniquely Vulnerable To Intentional Asymetric Attack...,

I still want to know who started the run? Not the Peter Thiel run on March 8-9 brought on by SVB’s liquidation of long-maturity Treasuries and MBS and failed equity offering. Why was SVB already having to raise so much cash before March 8-9?

SVB’s 12/31/22 SEC Form 10K (now locked from public view) disclosed a huge run-up in time deposits during 2022. Page 81 of SVB’s 10K showed a nearly 5-to-1 imbalance in “non-U.S. time deposits” exceeding the FDIC limit, most having a maturity of 3 months or less.

Who were these “non-U.S.” depositors? Were they responsible for SVB’s sudden 2023 need for liquidity?

Why was SVB’s management team unable to understand the risk profile of this sudden influx of foreign time deposits — rather than local “parked” VC investment — and match their own investments to them (simple incompetence and the absence of a risk officer likely explains this part of the puzzle)?

Were the “non-U.S.” depositors state actors aware of SVB’s reckless and corrupt exemption from the Basel rules? 

Was the pre-March 8-9 an asymmetrical introduction of financial contagion and crisis into the U.S. banking system by outside state actors aware of the hubristic lack of regulation and oversight in the U.S. financial system?

Portfolio companies were forced to keep their deposits at SVB by their VC investors (which is… unusual) or by the terms of any SVB lending that they drew (which would be perfectly reasonable). In either case, it makes the depositor more of a victim since, once they took the VC investment of SVB loan, they didn’t have any banking risk options other than SVB. We just don’t know what percentage of depositors were compelled either way but it doesn’t matter because the more important players in the failure are the funds themselves.

This is the real scandal at SVB: how its managers’ and fund clients’ greed drove it into the ground in the last eight years of the ZIRP and pandemic boom, having spent the first thirty years building a solid business lending primarily to real businesses (albeit VC-backed). It is the shift from industrial to financial capitalism personified and on fast forward.

In 2015 50% of its loans were to portfolio companies and 33% to funds and 66% of its high quality liquid assets were available-for-sale securities, i.e. marked to market. SVB doesn’t publish a breakdown of depositors, but it would be reasonable to assume the split broadly follows the loan book, given the relationship banking approach and the fact that a the bank only takes deposits to cultivate a borrower.

By 2022, only 23% of loans were to companies and 56% were to funds. This is the killer change, if the deposit base mix followed suit. Deposits from companies are comparatively sticky, given lending relationship and other services like card merchant services etc. Deposits from funds are not sticky: the general partner is borrowing cash today (to accelerate investment pace) against an agreed schedule of future capital injections by the fund’s limited partners and, given these relationships are contractual, the only practical security for the loan is that the capital calls are paid into a nominated SVB account from which the loan is satisfied (1).

Worse, by 2022, the high quality liquid assets were only 22% available-for-sale (I.e. marked to market), down from 66%. The rest were held at book value.

So the stage is set. The overall asset base has increased by 400% but high quality liquid assets available for sale have lagged and only increased by 50%. The majority of the loan book is now lent to funds as hot money advances on capital calls and these funds (or the funds plus their puppet portfolio companies) are the likely majority of the deposit base. Cue a rumor among the herd mentality funds and that deposit base flees overnight, as the general partners pull their money and order the portfolio companies to do likewise.

If SVB had kept to its 2015 ratios, this would not have happened. The AFS losses would have forced an earlier capital increase and the deposit base would have been stickier because the portfolio companies would have been taking their banking decisions. Similarly, by chasing the funds as the source of loan growth and relying on the fund relationship to drag portfolio companies in for deposit base growth, SVB put its deposit base in the hands of a tiny coterie of people who promptly crashed their own bank….

I still think we should not approach SVB with Schadenfreude just because VC in the last decade has been unsympathetically triumphalist and Hobbesian (Uber, Wework, Palantir etc). But, having reviewed the numbers, I have revised my impression of SVB “doing God’s work” as a banker to startups. It has instead been a greedy enabler of a clique of general partner assholes.

Unfortunately, the portfolio companies have been used as a human shield by the VCs and they have not gotten what they deserved (2).

(1) The money advanced can likely be moved without penalty – if there was any requirement to hold the loan advances with SVB, this cannot be a very hard requirement because the fund is borrowing precisely to invest the money rapidly. I wonder if the funds also promised SVB that their portfolio companies would keep the investment proceeds at SVB, hence the compulsion from the funds to the portfolio companies…?

(2) revenge is a dish best served cold. The funds that borrowed their future capital to bet it all on black in the 2020-2021 peak will have torched their entire fund’s investment returns for good, given the active investment period us typical four of the ten fund years and they borrowed money from all four of those years to spray it around in two. So they will get a comeuppance – but they will probably raise a new fund because there seem to be no penalties for failure at the top in public life any more….

The idea that the deposit mix followed or somewhat followed their loan mix had not occurred to me. That generally makes sense. But recall also they bought Boston Private Bank and got with that (and presumably also solicited) wealthy individuals.

The Efficacy Of A Drug Being Promoted By "Right Wing Figures" Worldwide - WTF?!?!?!

Guardian |  The preprint study on the efficacy and safety of ivermectin – a drug used against parasites such as worms and headlice – in treating Covid-19, led by Dr Ahmed Elgazzar from Benha University in Egypt, was published on the Research Square website in November.

It claimed to be a randomised control trial, a type of study crucial in medicine because it is considered to provide the most reliable evidence on the effectiveness of interventions due to the minimal risk of confounding factors influencing the results. Elgazzar is listed as chief editor of the Benha Medical Journal, and is an editorial board member.

The study found that patients with Covid-19 treated in hospital who “received ivermectin early reported substantial recovery” and that there was “a substantial improvement and reduction in mortality rate in ivermectin treated groups” by 90%.

But the drug’s promise as a treatment for the virus is in serious doubt after the Elgazzar study was pulled from the Research Square website on Thursday “due to ethical concerns”. Research Square did not outline what those concerns were.

A medical student in London, Jack Lawrence, was among the first to identify serious concerns about the paper, leading to the retraction. He first became aware of the Elgazzar preprint when it was assigned to him by one of his lecturers for an assignment that formed part of his master’s degree. He found the introduction section of the paper appeared to have been almost entirely plagiarised.

It appeared that the authors had run entire paragraphs from press releases and websites about ivermectin and Covid-19 through a thesaurus to change key words. “Humorously, this led to them changing ‘severe acute respiratory syndrome’ to ‘extreme intense respiratory syndrome’ on one occasion,” Lawrence said.

The data also looked suspicious to Lawrence, with the raw data apparently contradicting the study protocol on several occasions.

“The authors claimed to have done the study only on 18-80 year olds, but at least three patients in the dataset were under 18,” Lawrence said.

“The authors claimed they conducted the study between the 8th of June and 20th of September 2020, however most of the patients who died were admitted into hospital and died before the 8th of June according to the raw data. The data was also terribly formatted, and includes one patient who left hospital on the non-existent date of 31/06/2020.”

It Makes Me Ashamed And Sad That A Kneegrow Wrote This Isht...,

bloomberg  |  Rising real-estate prices are stoking fears that homeownership, long considered a core component of the American dream, is slipping out of reach for low- and moderate-income Americans. That may be so — but a nation of renters is not something to fear. In fact, it’s the opposite.

The numbers paint a stark picture. After peaking at 69% in 2004, the homeownership rate fell every year until 2016, when it was 64.3% — its lowest level since the Census Bureau started keeping track in 1984. The rate rebounded in Donald Trump’s presidency, hitting 66% in 2020, but that trend is likely to be arrested by a housing market that is desperately short on supply and seeing month-over-month price increases greater than they were in the frenzied market of 2006.

This process is painful, but it’s not all bad. Slowly but surely, most Americans’ single biggest asset — their home — is becoming more liquid. Call it the liquefaction of the U.S. housing market.

Even in the best markets, single-family homes have historically been an extremely illiquid asset. Appraisals have to be made on an individual basis, and mispriced homes can sit on the market for months waiting for a potential buyer — only for that buyer’s financing to fall through.

 

Liquid assets, like publicly traded stocks and corporate bonds, earn what’s known as a liquidity premium: Their market price is many times the dividend or coupon that investors get from holding them. The more liquid an asset, the higher that premium goes. On the flip side, those same high-flying stocks and bonds can see their prices collapse when investors get spooked and withdraw their cash from the market.

Houses have typically traded with very little liquidity premium. That meant a relatively low purchase price compared to what it would cost to rent — the equivalent of the dividend from housing investment — and stable prices over time.

These two factors made houses a good investment for moderate-income families who often lacked the cash and the risk tolerance for market investments. As investments went, single-family homes were cheap and slowly grew in value in both good times and bad.

In the early 21st century, automated appraisals and mortgage underwriting began to change that. Combined with the repackaging of subprime loans into presumably safer CDOs, they created a far more liquid market for housing. In response, housing prices soared — and became more sensitive to the vagaries of the markets. When investors pulled out of CDOs, buyer financing dried up and the whole housing market crashed.

It may have seemed at the time like a failed experiment. But financialization had changed the housing market forever. Houses are now more prone to be priced high relative to rents, and to see their prices fluctuate with the market. The very features that made home buying an affordable and stable investment are coming to an end.

America Is Designed To Incentivize Crime At The Highest Levels

nakedcapitalism |  In America you always had two systems of justice, but it’s particularly bad right now. So it’s just like if you commit fraud, if murder people, as long as you do it with a spreadsheet, you get a bonus instead of a jail sentence. And I think that’s a crisis. It is also the crisis that we’re dealing with, with big tech. It is the crisis… Mark Zuckerberg and Facebook, they have been caught for fraud multiple times, lying to advertisers, lying to publishers knowingly to induce more spending on Facebook. There are multiple consent decrees with the Federal Trade Commission. It’s similar with the other firms as well. They routinely lie, commit perjury and whatnot. And that’s kind of like a legacy of this policy framework and ideological framework that we inherited from the Bush administration and the Obama administration of simply not enforcing the rule of law against the powerful.

So that’s I think the dynamic that we’re dealing with today and it’s across every sector of the economy, right? It’s not just opioids, it’s not just big tech, it’s kind of everywhere. And what this does is two things. When you have effectively lawlessness for white collar elites, it both penalizes honest business people who cannot compete when they’re not willing to lie, steal and cheat. If the other guy’s allowed to lie, steal and cheat and you don’t want to do that, you lose, right? So it undermines honest business. And then it also creates a situation where criminals become the pinnacle of society. And I think we saw that with Trump, where Trump… Cy Vance who was the DA of Manhattan, a Democrat. He had them dead to rights on real estate fraud years ago, way before he was kind of in politics. And he just… Trump’s lawyer gave Cy Vance campaign money and Cy Vance didn’t bring the case.

And so if he had just brought that case, if he had said, this is a criminal act to defraud people of their money, Trump wouldn’t have been in politics, right? But because he didn’t, Trump was in politics. And I think what people saw in 2016 was, well, they’re all crooks. So I’m going to pick the guy that appeals to me. And the thing is, is that analysis, they’re all crooks, is right. They are all crooks. Not everyone obviously. But the structure of our elite society, if you look at it, it’s just designed to incentivize criminal behavior, lying, cheating, and stealing at the highest level. And that’s the reaction… We’re seeing a reaction to that and there are many different reactions to that. One of them is this sort of Trumpist reaction. Another one is kind of the Lina Khan and the FTC reaction. But that’s where our politics is right now.

And the Biden administration is kind of a transition moment, right? Just like the Trump administration was kind of a transition moment to a new kind of politics. We’re not totally sure what that’s going to be. I think that, that’s similar with the Biden ministration. It’s a transition moment to a new form of politics. And we’re a little bit unsure about whether we’re going to address this problem with the rule of law. It’s not just criminal law. It’s also antitrust law, insider trading, kind of all of finance. And you can look at SPACs, that’s just corporate behavior, insider dealing. Are we going to address that in a meaningful way? Are we going to restore equal political rights to all, or are we going to go and kind of transition sort of officially into an oligarchy and shed the vestiges of democracy that we have?

Rob Johnson:

Well, I think the fact that Donald Trump got elected in 2016 and his, if you will, bumper sticker, his credo was the system is rigid and people felt like they were hearing what they understood and it appealed to them out of their despair or their despondency related to where the system was. And I would say what’s perhaps hopeful now is after four years of Donald Trump and the January 6th insurrection, some of the people in power are afraid of going back to that, to a repeat performance. And while they may be under the same pressures, money and politics and enforcements and revolving doors for senior public officials enticed what you might call to not enforce or to enforce and subsidize powerful interests, all of this collectively frightens elected officials that they may be sending us in the direction of an authoritarian and perhaps violent person who does not abide by any rules.

So I think that your diagnosis is exactly right, and this place, this limbo you describe with the Biden administration is fascinating. They are at what that blues singer with my name, Robert Johnson, called the crossroads. They got to choose the path. But let’s talk a little bit about… You’d said with regard to Mark Zuckerberg or others, who’s going to call out the truth here? I mean, you do, but many think tanks are tax deductible, what would you call it? Marketing institutions for power. That’s where they get their source of funding. Many institutions in the media depend on advertising. Many universities depend upon donors and wealthy alumni. And even the arts now depend on big corporate power for structure of live shows, radio promotion, visibility that inspire sales. Where does the truth come from and where does the impetus for deep structural reform in response to the despair of a Trump like return? How do you see that?

Matt Stoller:

It’s a really good question. And I think that the truth, this is going to sound cheesy, but I think that the truth lies in the heart of the public. I think the public has views about how politics works and politicians respond to those views. And you have a bunch of elite institutions, which I think are corrupt across the board. But the public kind of creates the wind. Those elite institutions are kind of like the sailboat, right? And you can put the sail in lots of different ways, but ultimately if the wind is blowing in one direction or the other, that determines what you can do more than how amazing the boat is.

But the boat is something that you can control. So you’re kind of looking at… Elites like to look at the boat and decide, should we do this thing or should we use that sail or this other mechanism? But the wind is what really matters. And I think one thing that I’ve noticed, and I think people don’t really… Particularly Democrats, they don’t want to admit it but Obama was a really bad president and it matters that he was a really bad president. That his policies-

… That he was a really bad president. He pursued policies that concentrated wealth and power into the hands of corrupt actors. Not necessarily for bad reasons. He might’ve been doing it in good faith. It’s not a personal comment on him. But the consequences of his policies were horrific, and they made us a weaker country, an angrier country, a more frustrated country. The opioid crisis exploded on his watch. And it wasn’t that the Republicans were mean to him. He had bad ideas. And he used his political power to pursue those bad ideas. He put people in like Geithner and Michael Froman and a whole bunch of others to do bad things, to offshore jobs. And they did it because they thought to bail out Wall Street, to enact a foreclosure crisis, to essentially grant amnesty for white collar executives for crime.

America's Ruling Ideology Has Yielded A Bounty Of Poverty, Homelessness, and Crime...,

nakedcapitalism |  Ross What do you think was revealed in 2020 that we all intuitively knew but couldn’t actually see because it hadn’t crystallized?

Michael Hudson Well, it’s obvious that the economy never recovered from the Obama depression after he bailed out the banks, not the economy. So the question is, how long can the economy limp along without recovery?

Well, it’s obvious now that the debts can’t be paid, but the coronavirus only catalyzed that. It’s made it even clearer. So in a sense, the Biden administration is going to be picking up just where the Obama administration left off, namely with huge evictions. Obama evicted about 10 million families. Most of them were black and Hispanic, lower income families who were the victims of the chump mortgages. Biden’s going to start his administration by kicking out probably another five million families. Again, black and Hispanic families are going to be the big losers because they were the people who had the highest coronavirus or were the first to be laid off. So it’s going to begin with a large eviction.

This reverses the trend in homeownership going up to 2008. It’s been going down, and this is going to continue now. People somehow imagined that there was going to be a recovery, that somehow we could recover from the post 2008 breakdown. But now it’s obvious we can’t recover. You’re going to have the polarization of the economy that has been occurring for the last 12 years. It will simply accelerate.

Ross What do you think are the megatrends that we should be looking at in 2021? What do you think is the direction of travel, if you like, for so-called developed economies?

Michael Hudson Well, the big trend in any economy is the growth of debt, because the debt grows exponentially. The economy has painted itself into a debt corner. We can see that in real estate. We can see that for small business. There’s also almost no way to recover. The Federal Reserve has been printing quantitative easing to keep stock and bonds high. But for the real economy, the trend is polarization and lower employment.

The trend also is that state and local finances are broke, especially in the biggest cities, New York City, San Francisco and Los Angeles. They’re not getting income tax revenue from the unemployed or closed businesses. They’re not getting the real estate tax with so many defaults and mortgage arrears. In New York City there’s talk of cutting back the subways by 70 percent. People will be afraid to take the subways when they’re overcrowded with people with the virus. So you’re having a breakdown not only in state and local finances, but of public services that are state run – public transportation services, health services, education is being downsized. Everything that is funded out of state and local budgets is going to suffer.

And living standards are going to be very sharply downward as people realize how many services they got are dependent on public infrastructure.

Ross Which, of course, opens the door for vulture funds and predatory capital, whether it be private equity, VCs or whatever else to come in and do public infrastructure deals?

Michael Hudson Well, you’ll have privatizations. The American economy will be privatized because the states can’t support their transportation system and other systems. The pressure to privatize subway and transport system, schools are going to be more privatized, as jails have been in the United States. So you’re going to have a huge privatization trend.

Though Enshrined In The Constitution - The USPS Is First On The Privatization Hit List

dcreport |  There have been bipartisan efforts to unstrap the unnecessary economic weights from the organization and to provide pandemic aid.

Trump, Mnuchin and Senate Majority Leader Mitch McConnell (R-Ky.) have all taken steps to block any such changes.

Trump could clear up his objections, as he appointed a majority of the Postal Regulatory Commission. The commissioners must sign off on deals like the delivery rates that Amazon pays. He also appointed the entire USPS Board of Governors.

“It’s apparent that there are some folks for whatever their reasons are opposed to the postal service,” Pete Coradi, national business agent for the American Postal Workers Union, told DCReport.

There are two potential rationales for the ongoing attempts to break the agency.

One is that privatization would transfer enormous amounts of value. There are untold billions in real estate, trucks, contracts and intellectual property. There is high marketing value, if harnessed, to tell which people and companies sent letters or packages to any individual.

The other rationale would be to attack what is the third-largest employer in the nation, with more than 600,000 mostly unionized workers, historically allies of Democrats.

Although not considered federal employees, postal workers are eligible for federal health and retirement benefits. Push them into the private sector and suddenly there’s less of a burden on federal taxpayers, but not Americans.

Privatize the postal service and hundreds of thousands of workers would be affected, potentially seeing worse benefits and pay. That’s particularly bad for the African American community, which has historically been heavily represented in the institution.

And by overloading the agency and then sinking it further, denying the pandemic help freely handed out to large corporations, the GOP might get its way.