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.

Anosognosia: The Biggest Risk Is Not Knowing What You're Doing

NYTimes  |  On Saturday, an entrepreneur named Alexander Torrenegra, who was an S.B.V. depositor for two companies as well as his own personal accounts, explained what happened on Twitter. “Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area), questions about SVB start to show up.” he wrote. “10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.”

It’s easy to see how a whisper network of a few hundred C.E.O.s — all convinced they have exceptional vision, all working themselves into a panic — could spiral out of control. But what happened in that chat is an extension of the fundamental way that these venture capitalists operate, which is groupthink on a staggeringly consequential scale.

Top tier firms like Andreessen Horowitz, Sequoia Capital and Kleiner Perkins subject candidates to a rigorous screening process that ensures that only the strongest founders leading the most promising businesses proceed to the next level. Or that’s what I once believed, anyway. But the screening process places significant emphasis on “culture fit,” which is industry speak for whether a founder fits into the venture capital firm’s full portfolio of companies and conforms to their ideas about how a founder is supposed to look and behave. A founder’s ability to navigate this process is considered a good indicator of the company’s success. Unfortunately for women and people of color, culture fit often boils down to being a white male engineer with a degree from an elite university.

Some screening mechanisms are more subtle, like whether the V.C.s are already in your professional network, or one or two degrees removed. The industry line is that relationships will help founders attract capital, talent, and business partners. True, but the result is a largely homogeneous and even self-reinforcing community that’s difficult for outsiders to crack.

It’s this sort of insularity, emphasis on existing relationships, and reliance on intangible measures of competency that fueled last week’s bank run. The V.C.s expect the companies in their portfolio to use approved vendors. When it comes to legal counsel, that generally means tech-friendly law firms like Morrison & Foerster or Wilson Sonsini. When it comes to banks, it has meant S.V.B.

S.V.B., in turn, assessed its clients’ creditworthiness in part by who their funders were. As my colleagues and I saw, an investment from a top tier V.C. could be the ticket to a package of favored services, including things like home mortgages for the founders of these start-ups.

I opened my account at S.V.B. in 2017, when I had meetings lined up with some top tier V.C.s to raise money for a digital media company. Like everyone else who heads to Buck’s of Woodside (a favored venue for early-stage deal making) with a deck and a dream, I tried to anticipate the screening mechanisms and make sure I passed. And despite the fact that I was not a first-time founder, and having worked in tech and tech adjacent companies, was decently well networked, I suspected they might regard a 40-year-old woman without an engineering degree as not quite the culture fit of their dreams. I wasn’t contractually obligated to bank with S.V.B., but as with so many other unspoken norms, I was aware that I would be evaluated by my choices.

Disaster has now struck, but I don’t see any public introspection from the investment community participants who both helped create the dangerous conditions and triggered the avalanche by directing portfolio companies to withdraw en masse.

Janet Yellen: Treasury Secretary Struggles....,

 

Israeli Banks Pumped Billions Out Of SVB Before Last Friday

timesofisrael  |  Prime Minister Benjamin Netanyahu said Saturday he’d been in touch with senior Israeli tech figures vowing to assist affected companies.

“If necessary, out of responsibility to Israeli high-tech companies and employees, we will take steps to assist the Israeli companies, whose center of activity is in Israel, to weather the cash-flow crisis that has been created for them due to the turmoil,” Netanyahu said in a statement.

Finance Minister Bezalel Smotrich said he was forming a special team to look into the potential consequences for Israel from the collapse, which will include the director general of the Treasury and officials from the Bank of Israel, Securities Authority and Innovation Authority.

NextVision, a maker of micro stabilized cameras, said it managed on Thursday to withdraw almost all of the $2.7 million it held in its account at SVB, according to a regulatory filing to the Tel Aviv Stock Exchange.

Qualitau Ltd, a developer of test equipment for the semiconductor industry, said it held $16.8 million at SVB out of a total of about $22.3 million it has in and outside the US.

In a statement to the TASE, the company disclosed that it has “no information regarding the amounts it will be able to withdraw in the future from the balance of the funds deposited in SVB and in relation to the timing when it will be possible to withdraw these funds.”

“The company believes that despite the material impact of the event, taking into account the cash balance of the customers, the existing balance, and the backlog of orders (…) it is able to continue its activities during the normal course of business.”

Israel’s two largest banks, Bank Leumi and Bank Hapoalim, set up a situation room that has been operating around the clock to help firms transfer their money from SVB — before it was seized — to accounts in Israel. Over the past few days, teams at LeumiTech, the high-tech banking arm of Bank Leumi, have been able to help their Israeli clients transfer about $1 billion to Israel, the bank said.

LeumiTech said it will provide financing assistance and loans to startups and other tech firms that were left without access to credit lines and liquidity due to SVB’s collapse.

“I promise that we will continue to do everything to help and accompany the companies and startups to safely overcome the challenges and continue to support their growth,” said LeumiTech CEO Timor Arbel-Sadras.

To help tech companies in immediate distress, Poalim Hi-Tech opened a hotline offering bridge loans for the purpose of assisting companies in paying salaries in the coming month against their commitment to transfer deposit funds to their bank accounts in Israel.

Meanwhile, venture capital funds hoping that a fast solution will be found in the form of a buyer that will purchase SVB as a going concern or a federal bailout that will quickly get money to affected depositors.

Alan Feld, co-founder and managing partner of Israeli tech investment firm Vintage Investment Partners, called on “regulators globally to allow SVB to be acquired and recapitalized so that this wonderful bank can serve all of us for the next 20 years.”

“Silicon Valley Bank has been a wonderful partner to Vintage and its portfolio funds and companies since we started our firm 20 years ago,” Feld said in a LinkedIn post.

Venture Capitalists Dictated The Use Of These Failed Incompetently Run Banks

It was not the venture-capital backed companies that chose or agreed to keep all their deposits at SVB. It was their venture capital investors that forced this arrangement on them, confirmed by a reader: “Speaking as a former customer as dictated by my VCs.” This distinction matters because it puts the locus of influence and favor-trading much higher up the food chain. 

nueberger  | It’s highly possible, one could even say likely, that those massive deposits — Roku alone kept almost half a billion dollars in a single account — were part of a corrupt set of practices by the bank itself and its big-dollar clients.

SVB would typically require, as part of its venture debt investments into emerging companies, that the money would be held in an account with SVB. SVB would then offer concierge, I think they called it white glove, services to the founders including personal LOCs, mortgages etc.

— Dhananjay (DJ) Ghildyal (@Dj_Ghildyal) March 12, 2023

David Dayen, in an excellent, comprehensive piece, writes: “So you have depositors that either didn’t know the first thing about risk management, or were bribed by the bank into neglecting it.”

Keep in mind who these depositors are: the very very wealthy in the West Coast venture capital world. The corruption didn’t start just with the bank. The VCs often initiated it. As a friend and former Silicon Valley entrepreneur pointed out to me recently:

SVB was a special case. VCs required the companies they funded to keep their cash there. So the companies (and their employees) really were victims, not incompetent at risk management. In exchange the VCs received various favors from the bank. This is how Silicon Valley works behind the scenes. I was in one deal where the lead VC for our funding required a secret kickback of a certain % of the company stock and that this arrangement be kept secret from the firm. This is typical.

Where Does That Leave Us, Part I

Where that leaves us is here: The U.S. banking system, which hasn’t been private in my recent memory, has been officially taken under the wing of the federal government, with every deposited dollar now de facto insured by the FDIC.

The Fed says its new lending facility is big enough to cover all US uninsured deposits and that it is "prepared to address any liquidity pressures that may arise" https://t.co/XwS40BS4hk @FinancialTimes

— Colby Smith (@colbyLsmith) March 12, 2023

To cover these claims, the FDIC normally collects money from the banks receiving the insurance benefit. This means that the covered banks prepay a reasonable amount for a bailout of depositor funds up to $250,000 per account.

What would a “reasonable amount” be to cover all funds on deposit in the U.S.? Are the banks willing to prepay it? Highly unlikely. After all, who’s going to make them? The government they control?

So the federal government has nationalized the banking system, or nationalized its insurance of bank deposits to 100% of risk, all at no new cost to the banks.

What do you think these banks will do next, with that worry off their backs? I hesitate to find out, but I know we’re about to.

Where Does That Leave Us, Part II?

The second “where does that leave us?” leaves the financial realm and enters the political. If Saagar Enjeti is right (see the clip above), the rich decided that taking even a 10% loss (“haircut”) via the normal unwinding process was still too big an ask.

Meanwhile, in East Palestine OH where the working class makes its life, this went on:

With a population of about 5,000 people, there are roughly 2,600 residential properties in East Palestine according to Attom, a property data provider. The average value of a property there in January of this year, prior to the derailment, was $146,000, according to Attom.

Taken together, the value of all residential real estate in the town adds up to about $380 million, including single family homes and multi-family properties.

Those values are only a fraction of the money that Norfolk Southern earns. Last year it reported a record operating income of $4.8 billion, and a net income of $3.3 billion, up about 9% from a year earlier. It had $456 million in cash on hand on its books as of December 31.

It’s been returning much of that profit to shareholders, repurchasing $3.1 billion in shares last year and spending $1.2 billion on dividends. And it announced a 9% increase in dividends just days before the accident.

A year ago its board approved a $10 billion share repurchase plan, and it had the authority to buy $7.5 billion of that remaining on the plan as of December 31. (Emphasis added)

The point couldn’t be more simple. When the wealthy face losses, the government they control bails them out, within days if necessary.

When the rest of us faces losses, we’re on our own. Neither the wealthy who caused the mess nor the government that represent “the people” will step up to the plate.

And it will be this way forever unless force is applied.

A Lot Of Crypto Cash Was Parked At SVB - So..., Our Real Money Bailed Out Their Fake Money?

decrypt  |  As the fallout from the stunning collapse of Silicon Valley Bank (SVB) plays out, numerous crypto companies have signaled their exposure to the bank, which long maintained a reputation as one of the most prominent lenders to tech startups in the world.

The bank’s closure Friday by the California Department of Financial Protection marked the second-largest bank failure in American history, after the undoing of Washington Mutual during the financial crisis of 2008. Silicon Valley Bank reported $212 billion in assets last quarter.

The stock (SIVB) began spiraling late Wednesday after rumors circulated that the institution was seeking an acquisition after failing to raise sufficient capital to cover its obligations. In the hours and days that followed, numerous venture capital funds reportedly advised their clients to withdraw their funds, resulting in $42 billion of withdrawals initiated on Thursday, constituting a run on the bank. On Friday morning, the Nasdaq halted trading of SIVB shares.

Though it was venture capital firms and tech startups that were most severely affected by the SVB scare on Friday, numerous crypto companies have also disclosed their exposure to the bank. Here’s a running list of the crypto firms caught in the crosshairs of SVB's collapse, along with those that have publicly claimed they avoided the damage.

Note: On Sunday, U.S. Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg issued a joint statement saying that all Silicon Valley Bank depositors would be made whole and have access to their funds on Monday, March 13. The Federal Reserve is now investigating the bank's failure.

Crypto companies that had money in SVB

What Do Silvergate, SVP, And Signature Bank Have In Common With The Nordstream Pipelines?

Counterpunch  |  The crashes of Silvergate, Silicon Valley Bank, Signature Bank and the related bank insolvencies are much more serious than the 2008-09 crash. The problem at that time was crooked banks making bad mortgage loans. Debtors were unable to pay and were defaulting, and it turned out that the real estate that they had pledged as collateral was fraudulently overvalued, “mark-to-fantasy” junk mortgages made by false valuations of the property’s actual market price and the borrower’s income. Banks sold these loans to institutional buyers such as pension funds, German savings banks and other gullible buyers who had drunk Alan Greenspan’s neoliberal Kool Aid, believing that banks would not cheat them.

Silicon Valley Bank (SVB) investments had no such default risk. The Treasury always can pay, simply by printing money, and the prime long-term mortgages whose packages SVP bought also were solvent. The problem is the financial system itself, or rather, the corner into which the post-Obama Fed has painted the banking system. It cannot escape from its 13 years of Quantitative Easing without reversing the asset-price inflation and causing bonds, stocks and real estate to lower their market value.

In a nutshell, solving the illiquidity crisis of 2009 that saved the banks from losing money (at the cost of burdening the economy with enormous debts), paved away for the deeply systemic illiquidity crisis that is just now becoming clear. I cannot resist that I pointed out its basic dynamics in 2007 (Harpers) and in my 2015 book Killing the Host.

Accounting fictions vs. market reality

No risks of loan default existed for the investments in government securities or packaged long-term mortgages that SVB and other banks have bought. The problem is that the market valuation of these mortgages has fallen as a result of interest rates being jacked up. The interest yield on bonds and mortgages bought a few years ago is much lower than is available on new mortgages and new Treasury notes and bonds. When interest rates rise, these “old securities” fall in price so as to bring their yield to new buyers in line with the Fed’s rising interest rates.

A market valuation problem is not a fraud problem this time around.

The public has just discovered that the statistical picture that banks report about their assets and liabilities does not reflect market reality. Bank accountants are allowed to price their assets at “book value” based on the price that was paid to acquire them – without regard for what these investments are worth today. During the 14-year boom in prices for bonds, stocks and real estate this undervalued the actual gain that banks had made as the Fed lowered interest rates to inflate asset prices. But this Quantitative Easing (QE) ended in 2022 when the Fed began to tighten interest rates in order to slow down wage gains.

When interest rates rise and bond prices fall, stock prices tend to follow. But banks don’t have to mark down the market price of their assets to reflect this decline if they simply hold on to their bonds or packaged mortgages. They only have to reveal the loss in market value if depositors on balance withdraw their money and the bank actually has to sell these assets to raise the cash to pay their depositors.

That is what happened at Silicon Valley Bank. In fact, it has been a problem for the entire U.S. banking system.

SVB Israel Sizzle: OY VEY!!!

Tablet  | So what sort of investments did SVB make that went bad? One type of startup appears to have occupied a large amount of space on the bank’s balance sheet: eco-tech innovators, which traditionally require large upfront investments to get off the ground. According to the bank’s website, more than $3.2 billion of its funds were invested to finance companies in “clean tech, climate tech, and sustainability industry, including solar, wind, battery storage, fuel cell, utility storage and more.” The bank’s investment in such virtuous technologies is so massive that 60% of community solar financing nationwide involves SVB. Just last week, the bank hosted Winterfest, a shindig for the climate-tech sector, at the Lake Tahoe Ritz-Carlton.

In other words, the darling financial institution of the tech industry, which donates heavily and almost exclusively to the Democratic Party, is now bankrupt in part because it spent heavily on the Democratic Party’s pet causes. SVB’s demise was followed at the end of last week by the collapse of New York’s Signature Bank, which had former Democratic regulatory guru Barney Frank on its board, and which famously stepped into the political fray in January 2021 when it cut its long-standing ties with Donald Trump and urged the president to resign.

This may help explain why Democrat-supporting big-time investors are now pressing President Joe Biden to bail out SVB. But as the president announced, he doesn’t need to do almost anything to help the banks that fund his supporters and his party’s ideological agenda: For that, there are bank fees. According to a 2020 survey, bank fees are hitting record highs, with monthly service fees now at $15.50 on average for accounts that don’t meet an ever-increasing minimum monthly balance, now at an all-time high of $7,550.

Let’s put it simply: If you have a million dollars in the bank, you suffer no consequences. If you have $10 in the bank, you have to pay the bank $15 for the privilege of keeping it there, which means you owe the bank $5. Bank fees are among our most shockingly regressive forms of taxation. When the Biden administration promises that there’ll be no bailouts and that no one will lose any money from SVB’s collapse, what they mean is that the bailouts will be paid for by the poor, not by the banks.

What to make of all this? Two immediate lessons come to mind.

First, the collapse of FTX (which gave tens of millions to Democratic Party candidates and causes), SVB, Signature Bank, and the financial institutions that will surely follow isn’t part of some complex financial machination inscrutable to all but the savviest among us. It’s part of the very same rot that has already claimed our universities, our media, and other institutions crucial to the functioning of a civil society.

SVB was the financier of choice of one political party’s donor base. It overwhelmingly paid for projects that fit that party’s agenda. And it employed people who expended a lot of time and energy preaching its gospel: The bank’s head of financial risk management in the U.K., for example, Jay Ersapah, took to the internet enthusiastically to both identify herself as “a queer person of color” and announce that she had helped launch no less than six employee resource groups at SVB, designed to “raise the visibility of multiple dimensions of diversity.” As the saying goes, you get what you paid for.

These ideological convictions aren’t coincidences. They’re requirements. Just as you have to pledge your allegiance to the most woke of persuasions to get tenure, and just as you may no longer be a part of a major American newsroom unless you see yourself as fully committed to seeing virtually any Republican as an enemy of life, liberty, and the pursuit of happiness, you may no longer be a part of the financial system unless you’re ready to support leftist candidates and causes.

The consequences of party control spreading from universities and media to professional organizations and financial institutions are now plain. It’s one thing when the ideological rot on campus leads to a gaggle of law students honking at a circuit judge; it’s another when the same convictions lead investors and regulators to slow-clap as billions vanish from their accounts, knowing that doing so is now a requirement of their jobs, and the costs will be passed on to taxpayers.

The second lesson that may be learned from SVB’s collapse applies only to Israelis, but it’s no less urgent: Sure, the Jewish state’s local customs and arrangements are flawed in many ways, but importing American-style politics and culture, at this particular moment in time, is a very bad idea. America is no longer a liberal bulwark against the storm. It is the storm. Emulating America means more contempt for voters, more erosion of norms in the name of abstract virtue, more mistrust, and, eventually, bankruptcy.

The solutions are simple: Keep politics in the parking lot. Keep banks focused on banking. Bring back trustworthy, nonpartisan regulation—the loss of which, in all fairness, was brought about as much, if not more, by Republicans as it was by Democrats. Resist the whole-of-society blob model you get when a political party merges with the tech industry and federal bureaucracies and leading newspapers and professional organizations and financial institutions and everyone become too big to fail. And realize that what’s true for the richest and most powerful country in history is even more true for Israel, a country where failure would be truly catastrophic—and is always just around the corner.

Rescuing Anything Touched By SVB Is A Catastrophic Policy Error

wired  |  When Silicon Valley Bank collapsed on March 10, Garry Tan, president and CEO of startup incubator Y Combinator, called SVB’s failure “an extinction level event for startups” that “will set startups and innovation back by 10 years or more.” People have been quick to point out how quickly the cadre of small-government, libertarian tech bros has come calling for government intervention in the form of a bailout when it’s their money on the line.

Late yesterday, the US government announced that SVB depositors will regain access to all their money, thanks to the Federal Deposit Insurance Company's backstop funded by member banks. Yet the shock to the tech ecosystem and its elite may still bring down a reckoning for many who believe it’s got nothing to do with them.

SVB’s 40,000 customers are mostly tech companies—the bank provided services to around half of US startups—but those tech companies are tattooed into the fabric of daily lives across the US and beyond. The power of the West Coast tech industry means that most digital lives are rarely more than a single degree of separation away from a startup banking with SVB.

The bank's customers may now be getting their money back but the services SVB once provided are gone. That void and the shock of last week may cause—or force—startups and their investors to drastically change how they manage their money and businesses, with effects far beyond Silicon Valley.

Most immediately, the many startups who depended on SVB have workers far from the bank’s home turf. “These companies and people are not just in Silicon Valley,” says Sarah Kunst, managing director of Cleo Capital, a San Francisco firm that invests in early-stage startups.

Y Combinator cofounder Paul Graham said yesterday that the incubator’s companies banking with SVB have more than a quarter of a million employers, around a third of whom are based outside California. If they and other SVB customers suffer cash crunches or cut back expansion plans, rent payments in many parts of the world may be delayed and staff may no longer buy coffees and lunches at the corner deli. Cautious about the future, businesses may withhold new hires, and staff who remain may respond in kind, cutting local spending or delaying home purchases or renovation work.

The second- and third-order impacts of startups hitting financial trouble or just slowing down could be more pernicious. “When you say: ‘Oh, I don’t care about Silicon Valley,’ yes, that might sound fine. But the reality is very few of us are Luddites,” Kunst says. “Imagine you wake up and go to unlock your door, and because they’re a tech company banking with SVB who can no longer make payroll, your app isn’t working and you’re struggling to unlock your door.” Perhaps you try a rideshare company or want to hop on a pay-by-the-hour electric scooter, but can’t because their payment system is provided by an SVB client who now can’t operate.

Biden Administration Effectively Nationalized The American Banking System

market-ticker  |  Next up - Republic, which apparently had lines out the door (if you believe the Internet) on Saturday.  Again: So what?

Folks, bubbles attract stupidity.  Stupidity is a constant in the universe; in fact it is likely the only thing that is truly infinite (with all due respect to the late Mr. Einstein.)

The so-called "Chief Risk Officer" at SVB had a masters in..... public administration.  Anyone care to bet if she passed any form of advanced mathematics -- you know, like for example Calculus or Statistics?  Do you think she understood exponents and why this graph made clear that concentration of risk and duration was stupid and likely to blow up in everyone's face -- including hers?

How about Bill Ackman and the others on the Internet screaming for a bailout?  How about the CFOs of public companies like Roku that stuck several hundred million dollars in said bank?  Was it not widespread public knowledge (and available to anyone who took 15 minutes to do research, which you'd think someone would do before putting a hundred million bucks somewhere) that this institution was chock-full of VC-funded startup companies which, historically fail 90% of the time and their debt becomes impaired or even worthless?

Where are the indictments for fiduciary malfeasance among these people?

It takes a literal five minutes with Excel to prove to yourself that if debt is rising faster than GDP no matter the interest rate eventually the interest payments on that debt will exceed all of the economy.  This of course is impossible because you cannot use over 100% of anything as its not there, but long before you reach that point you're going to have trouble putting food on the table, fuel in the vehicle and paychecks are going to bounce.  It was for this reason that one of the first sections in my book Leverage, written after the 2008 blowup which I chronicled and laid bare upon the table featured exactly this chart.

The last bit of insanity was just 15 years ago by my math.  Did we fix it?  No.  What was featured in the stupidity of 2008?  Allowing banks to run with no reserves.  Who did that?  Ben Bernanke, who got it into the TARP bill that eventually passed and which I reported on at the time.  It accelerated that which was already going to happen because Congress is full of people who think trees grow to the moon, leverage is never bad and exponents are a suggestion.

Oh by the way, your local Realtor thinks so to as does, apparently, the former SVB "risk officer" who, it is clear, didn't understand exponents -- or didn't care.

The simple reality is that it must always cost to borrow money in real terms.  This means the rate of interest must be positive in said real terms, which means across the curve rates must be higher than inflation -- again, in real terms, not in "CPI" which has intentional distortions in it such as "Owner's Equivalent Rent" when you're not renting a house, you're buying it.  Had said "CPI" actually had home prices in it then it would have shown a doubling in many markets in that section of the economy over the last three years.

In other words housing alone would have resulted in a roughly 10% per year inflation rate, plus all the other increases, which means the Fed Funds rate should have been 300bips or so beyond that all the way back to 2020 -- which would put Fed Funds at about 13% for the last three years.

It isn't of course but if it had been then all those "housing price increases" would not have happened at all.  Incidentally even today the Fed Funds rate is below inflation and thus the crazy is still on.

It's a bit less on however, and now you see what happens when even though they're still nuts being slightly "less" nuts means that these firms are no longer capable of operating without the wild-eyed crazy; even a slight reduction of the heroin dose caused them to fail.

Never mind the wild-eyed poor choices of executives (who signed off on all of this?) at SVB which the regulators all knew about and ignored.  The CEO?  A director of the San Francisco Federal Reserve.  Why don't you look up a few of the other "chief" positions and what they used to do.  Bring a barf bag.  No, really.

And what did Forbes think of all this?  Why it was good for five straight years of SVB being rated one of their BEST BANKS!

Negative real rates are never sustainable.  The insidious nature of that nonsense is that it extends duration in pre-payable debt, specifically mortgages.  Mortgages have had a roughly 7 year duration forever, despite most of them being 30 year paper nominally because people move for other than necessity reasons (e.g. "I want a bigger house", "I want to live here rather than there" and so on.)  A huge percentage of said paper was issued at 3% and now is double that or more.  Since a mortgage is not transportable (when you sell the house you extinguish the old one and take a new one) and changing that retroactively would be both wildly illegal and ruin everyone holding said paper you can't retroactively patch the issue -- which is that now nobody with a 3% mortgage is going to prepay it and move unless they have to and so the duration is extending and will continue for the next couple of decades.  This in turn means if you have a 3% mortgage bond, the new ones are 7% and there's 10 years left on the reasonable expectation of its life you're now going to have to discount the face value by the difference in interest rate times the remaining duration or I won't buy it since I can buy the new one at the higher rate!  This is not a surprise and that it would happen and accelerate was known as soon as inflation started to rise and thus force The Fed to withdraw liquidity.  The Fed cannot stop because inflation is a compound function and at the point it forces necessities to be foregone the economy collapses and, if continued beyond that point THE GOVERNMENT collapses because tax revenue wildly drops as well.  The only sound accounting move at that moment in time as a holder of said paper was to dispose of the duration or immediately discount the value of that paper to the terminal rate's presumption and adjust as required on a monthly basis.

Nobody did this yet to not do it is fraud as these are not only expected outcomes they're certain.

Where was the OCC on this that is supposed to prevent such mismatches from impairing bank capital?  How about The Fed itself, or the FDIC?  The San Francisco Fed was obviously polluted as the CEO was on their board (until he was quietly removed on Friday) but isn't it interesting that all these people who were intimately involved in firms that blew up in 2008 were concentrated in one place in executive officers with direct fiduciary responsibility?

And isn't it further quite-interesting that all the screaming you're hearing right now is about how "terrible" it will be that "climate change" related firms will be unable to make payroll and the new upcoming VC-funded startups won't because their favorite conduit has been disrupted?  What's that about -- the entire premise of these firms requires them to not only force their startups to bank in specific places with large amounts of money (since they don't earn anything they have to have access to and consume tens of millions or more a year) but cash management, you know, putting all of it other than what you need to make payroll next week in 4 week bills is too much to ask?

There's a rumor floating around (peddled by Bloomberg) that over one hundred venture and investment firms, including Sequoia, have signed a statement supporting SVB and warning of an "extinction-level event" for tech firms.  Really?  Extinction for technology or extinction for cash-furnace nonsense funded by negative real interest rates which make all manner of uneconomic things look good but require ever-expanding, exponentially-so, levels of debt issuance?

Again, that is not possible on a durable basis and once again the reason why is trivially discernable with 5 minutes and an Excel spreadsheet and graph.  It takes about an hour to do it manually using graph paper, a basic 4-function calculator or the capacity to perform basic multiplication on said paper and a pencil.

It's Decentralized Bro, That Means It's Safer Bro, Please Believe Me Bro!!!

 CNBC  |  The two biggest banking institutions serving crypto businesses in the U.S. have shut down in the last four days. Investors have worried that the collapse of Signature Bank, whose assets were seized Sunday evening by regulators, was inevitable following the impending liquidation of Silvergate Bank and given the increasing regulatory hostility toward crypto companies. Now that event is past us, and has left young U.S.-based crypto startups with few options for banking relationships. 

 “There’s kind of a black mark on crypto deposits for the next few weeks,” said Conor Ryder, research analyst at Kaiko. “It could be that one of the smaller banks decides to raise their hand and take on the deposits but I don’t think they’ll be jumping on that opportunity after everything was done over the weekend.” The biggest priorities for the industry now are around diversifying on-ramps into crypto and focusing on policymaker education. 

 Before the end of Silvergate and Signature, the regulatory crackdown on crypto had already started. The days before the industry had crypto-forward banks to turn to were some of the darkest for the industry. The inability to form banking relationships was a big obstacle to growth. At the end of February, three major banking regulators issued a joint statement warning banks of the liquidity risks associated with banking crypto companies. In January, the Wyoming-chartered special purpose depository institution and famously unleveraged Custodia Bank set off the de-banking wave when its application to become a member institution of the Federal Reserve was denied. “Banks and law firms are getting a clear message from regulators: distance yourselves from crypto companies,” said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. “This is blatant bias without legal standing, and if sustained, it will harm U.S. innovation for decades to come,” he said of the Signature closure. “But for the moment, crypto companies are increasingly finding themselves where cannabis companies were a decade ago.” 

Stablecoins in focus Stablecoin regulation is set to take center stage with the industry scrambling for banking alternatives, according to various crypto market participants who are skeptical the remaining banking institutions will welcome crypto with open arms. One of the most clear paths forward is for crypto firms to transact in stablecoins. “We’ve seen stablecoins crypto-pairs rise to an all-time high 90% of trading volume on exchanges, up from 79% a year ago, at the expense of the dollar,” Ryder said. “The industry has become less and less reliant on the U.S. dollar and crypto firms are familiar with stablecoins, so this could be a smoother transition than people expect.” Stablecoins also satisfy the need for 24/7 payment rails, he added. 

Both Silvergate and Signature offered a service that allowed fiat money to easily flow into crypto assets. Even if another bank opened its arms to crypto companies, the industry is still feeling the loss of the Silvergate Exchange Network and Signature’s Signet platform. Kaiko reported Monday that liquidity is already suffering at U.S. exchanges. Gemini’s was down 74% in for the month, while Coinbase’s fell 50% and liquidity at Binance.US dropped 29%. Binance, however, suffered a smaller, 13% impact. The problem with the stablecoin route is it concentrates trust in a handful of stablecoin issuers, who would likely need to be more heavily regulated, Ryder said. Over the weekend Circle’s USDC stablecoin broke its peg to the U.S. dollar, dropping below 87 cents. The frenzy came after Circle said it has about $3.3 billion in SVB. It regained its peg Monday.

Uninsured Bank Depositor Bailouts Make A Mockery Of "Too Big To Fail"

 nationalreview |  The 2008 financial collapse and resulting Wall Street bailout popularized the concept of “too big to fail” — the idea that certain institutions were so massive, and so intertwined with the rest of the financial system, that their failure could trigger a complete meltdown of the economy. 

Kinda insane that this entire debacle was potentially caused by @ByrneHobart's newsletter. Here's how the butterfly effect happened.

1) Byrne posts this article/Tweet calling out SVB's risk.
2) Pretty much every VC I know reads this newsletter
3) They all start to pay very,… https://t.co/zUSKF1ZW4J

— Evan Armstrong 📧 (@itsurboyevan) March 11, 2023

While I opposed that bailout on ideological grounds, I at least recognized the tremendous risk that the implosion of the nation’s major investment banks would pose for the broader financial system. But Sunday’s decision by regulators to bail out uninsured depositors of the failed Silicon Valley Bank would dramatically lower the threshold for federal intervention in financial markets. 

To be sure, there are reasons to believe the collapse of SVB carries broader consequences. While the FDIC guarantees deposits up to $250,000, the overwhelming majority of SVB deposits exceeded that amount. It was the bank of choice for many tech start-ups. Without access to their cash, those companies would have difficulty meeting payroll. Additionally, the sudden collapse of SVB could lead companies and individuals who have deposits in other similar financial institutions to withdraw their money starting on Monday, triggering more bank runs, and more bank collapses. 

While regulators are not stepping in to rescue SVB as an institution, the Treasury Department, Federal Reserve, and FDIC have announced that they will make sure that all depositors at SVB as well as another failed institution, Signature Bank, will have access to their money on Monday even if those deposits exceed the $250,000 threshold. In a statement, regulators promise, “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”  

Defenders of this decision will try to make it seem as if it’s an extraordinary, one-off decision by regulators, but in practice, it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess. There are plenty of ways in which poor decisions made by financial institutions could have larger implications. But in 2008, the justification for intervention was systemic risk. 

This was not a case in which the whole economy would be threatened if an intervention were not taken. There would be disruption to a number of companies in the tech sector and their employees, as well as potential problems for similarly situated financial institutions. But the vast majority of banks are well capitalized right now, and there is no credible risk of this causing a complete financial meltdown. 

In fact, it isn’t even clear that depositors were going to be wiped out, absent federal intervention. When SVB was shut down, it still had real assets that were worth money, which can be sold to pay back investors. Due to poor risk management, what they were not able to do is avoid a panic in which a large number of depositors tried to withdraw their money at the same time, which is what happened last week. Under one estimate from a Jefferies analyst, when liquidated, SVB has the assets to pay off 95 percent of deposits. This is no doubt one reason why regulators are stating so confidently that they don’t expect this to cost taxpayers money. Another reason is that they claim any losses incurred would be repaid by “a special assessment on banks” which will inevitably end up being passed on to their customers. 

Anybody who considers themselves a free-market conservative should be especially concerned about this action. Regardless of the particulars, it will just add to the talking point that when Wall Street or well-connected tech companies are in trouble, the government swoops in to the rescue. And yet lawmakers won’t eliminate student debt, give away free health care, pay for child care, guarantee affordable housing . . . and insert whatever cause you like. If you support socialism for tech companies, don’t be surprised when you get it for everything else.