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In more common banking situations the problem is that the value of bank loan assets has been significantly reduced by deterioration in the market value of those assets. That is not the case with Silicon Valley Bank- evidently their problem is mostly due to the deterioration of the PRESENT VALUE of otherwise secure government paper.The FDIC is expected to sell the bank’s remaining assets and use the proceeds to pay the uninsured depositors.
Federal officials faced growing pressure Saturday to bail out even the biggest customers of the collapsed Silicon Valley Bank, igniting a ferocious political debate over Washington’s role in tamping down potential threats to the broader U.S. financial sector.
Companies that did business with Silicon Valley Bank are already warning that the bank’s failure may force thousands of layoffs or furloughs, and prevent many workers from receiving their next paycheck.
Some experts worry that large numbers of companies could move to transfer their money from regional banks similar to SVB to safer giant commercial banks Monday, leading to a fresh round of destabilization.
“All the choices are bad choices,” said Simon Johnson, an economist at MIT who previously served as chief economist of the International Monetary Fund. “You don’t want to extend this kind of bailout to people. But if you aren’t doing that, you face a run of really big — and really hard to predict — proportions.”
But officials at the FDIC — which, in a stunning move Friday, took over Silicon Valley Bank during normal trading hours — are facing some calls to go beyond giving smaller customers their money back.
On Friday, the FDIC said in a statement that... uninsured depositors with accounts bigger than $250,000 — would get some of their money back, but it did not specify how much. Uninsured depositors make up the overwhelming majority of the bank’s customers.
A slew of federal regulators — including those with the FDIC, Federal Reserve and Treasury Department — have scheduled a number of private briefings with top lawmakers since the bank’s collapse, including members of the House Financial Services Committee, which oversees banking, according to two people familiar with the matter who spoke on the condition of anonymity to describe the conversations.
Unwinding the bank’s balance sheet will begin in the next few days if the FDIC can’t find another bank to take over all of SVB’s business. Customers who had uninsured deposits will receive some amount of money back by next week, the FDIC said, without specifying how much. The FDIC is expected to sell the bank’s remaining assets and use the proceeds to pay the uninsured depositors.
SVB held roughly $150 billion in uninsured deposits, according to the company’s latest financial statement, issued late last month. That amounts to more than 93 percent of the firm’s deposits, Bloomberg News reported. Many of the deposits came from wealthy venture capitalists or tech firms that Washington would face certain fury for aiding, although the precise percentage held by businesses is unknown. Roku, California vineyards and philanthropic efforts backed by venture capitalists were all among the firms that had money at SVB.
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Former Treasury Secretary Lawrence Summers warned that there will be “severe” consequences for the innovation sector of the US economy if regulators don’t smoothly work out the collapse of Silicon Valley Bank.
“It certainly is going to have very substantial consequences for Silicon Valley — and for the economy of the whole venture sector, which has been dynamic — unless the government is able to assure that this situation is worked through,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin.
Earlier Friday, regulators stepped in and seized the bank known as SVB after it mounted an unsuccessful attempt to raise capital and saw a cash exodus from the tech startups that had fueled its rise. The lender had plowed the tens of billions of dollars it took in from venture-capital-backed startups into longer-term bonds, a move that led to massive losses.
The Federal Deposit Insurance Corp., which has been appointed as SVB’s receiver, only insures bank deposits of up to $250,000. But a large share of the money deposited at SVB was uninsured: more than 93% of domestic deposits as of Dec. 31, according to a regulatory filing.
“There are dozens, if not hundreds, of startups that were planning to use that cash to meet their payroll next week,” according to Summers, a Harvard University professor and paid contributor to Bloomberg Television. “If that’s not able to happen, the consequences really will be quite severe for our innovation system.”
Summers said he hoped that regulators will be “aggressive about containing the problem and containing possible contagion.”
“I don’t think this is a time for moral-hazard lectures or for talk about teaching people lessons,” he said. “We have enough strains and challenges in the economy without adding the collateral consequences of a breakdown in an important sector of the economy.”
The sudden implosion of SVB delivered a deep blow to a sector already reeling from layoffs, falling stock prices and diminishing funding for startups. The bank is most known for its financing in the venture capital community but also serves as a financial supermarket for tech executives, providing mortgages on mansions, personal lines of credit and financing for vineyards.
Treasury Secretary Janet Yellen earlier in the day convened a meeting of top regulators, after which she issued a statement saying that the US banking system “remains resilient” and that regulators “have effective tools” to address developments around Silicon Valley Bank.
For his part, Summers said, “I don’t think this is likely to be a broadly systemic problem.”
The hammering of SVB’s stock triggered a broader selloff in US lenders, with the KBW Bank Index tumbling 16% for the week — the worst selloff since the March 2020 Covid shock to the financial system.
Summers said it doesn’t now look like the biggest banks had the kind of mismatch between the kind of deposits SVB had and “the ways in which they had invested their money in longer-term bonds.”
Earlier Friday, Summers said that “there may be a need for some consolidation” in the banking sector as a result of the latest developments. That could then pose a test for regulators, he said.
A number of Democrats have pushed to limit bank mergers. For example, Senate Banking Committee Chair Sherrod Brown last year called for “ensuring that bank mergers, if approved, serve American families, small businesses, and communities – not Wall Street and big corporations.”
Summers warned that “one of the mistakes the authorities could make would be — out of a fear of consolidation coming from some kind of populist concern about concentration — blocking combinations that would ultimately operate in the direction of financial stability.”
“That’s something I think that we’re going to need to be attentive to going forward,” the former Treasury chief said.
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Now evidently SVB was actually running a pretty reasonable operation: they didn't invest their deposit money in anything shaky- they invested it in "ultra safe" US Treasury stuff. As explained elsewhere in this thread, the market value of that Treasury stuff deteriorated, mostly because of the Fed's continuing increase in rates, which eroded the present market value of that that Treasury stuff. The ultimate maturity value of "that stuff" wasn't affected- just the present value. But SVC needed to cash in some of that ultra safe stuff now, in order to meet the withdrawal demands.
You can see the slippery slope here- the more SVC had to sell, the less they had to meet withdrawal demands. Fade to black.
I'm still hoping for some commentary by the MFO heavy-hitters on my real question regarding this:
The FDIC is expected to sell the bank’s remaining assets and use the proceeds to "partially" pay the uninsured depositors. Those assets have a reduced present value, which is a major part of the problem.
In more common banking situations the problem is that the value of bank loan assets has been significantly reduced by deterioration in the value of those assets (aka "stupid investing"). That is evidently not the case with Silicon Valley Bank- reportedly their problem is mostly due to the deterioration of the current value of otherwise secure government paper, including long-bonds, mainly due to the actions of another US government agency: the Fed.
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?
I can see that the eventual recovery value of the government paper, especially the long bonds, might incur some eventual loss to the "rescue" authority, but that seems to me to be a lot better than the potentially disastrous alternative of immediately inflicting major losses on bank depositors.
The financial system doesn't appear to have any decent alternative for those types of business depositors to park the large amounts of cash necessary to maintain their operations. Where exactly were they supposed to keep that money safely? I just don't see any real "bad guys" in this one... and that's surely unusual.
Even if the deep pocket was Uncle Sam, you would be asking it to settle a 10-yr obligation right away and it cannot be at 100%.
Moreover, there is a lack of willing deep pockets. Warren Buffett? Elon Musk? (on Twitter, somebody suggested this and Elon tweeted that he could be interested. He shouldn't joke about things like this - he should have learned from his Twitter experience.)
In situations like this, a deep pocket will demand equity and/or warrants in any successor entity, in addition to the lousy-rate T-Note portfolio, to cover 100% now.
It's of course the responsibility of those businesses to raise the cash reserves in the first place- I'm not suggesting that governments should be involved in that. But, once raised, why is it the responsibility of those business to protect those cash reserves against government actions- ie, the Fed, which of course has an entirely different set of problems of it's own. And if it is their responsibility, exactly how are they supposed to do that?
It didn't have to do that. It could have stopped taking the deposits by offering very unattractive deposit terms. My neighborhood bank (a MAJOR regional bank) is paying 0.01% (no mistake) on savings, and 0% on checking with a minimum to avoid monthly charges. I would be foolish to keep any money there beyond walk-around money (I do have a safety deposit box there; they have cashed my maturing EE bonds on spot; and provided Medallion Signature Guarantee when I needed it). My point is that this bank clearly doesn't need any more deposits and it isn't attracting them to just put in Treasuries.
So, SVB was responsible for its business decisions and actions. Powell isn't going to call every CEO, or you and I, to ask if it was OK for him to change rates.
OK, I'm a business owner: why is it my responsibility to protect my cash reserves against government actions- ie, the Fed?
And if it is my responsibility, exactly how am 1 expected to do that? What financial mechanism exists that allows me to simply keep my company money safe from government-induced erosion while I try to run my business?
https://www.fdic.gov/news/press-releases/2023/pr23016.html
Maybe there will be investors in DINB. But no one will buy SVB's long term treasuries at par - which is what Yogi explained.
We can turn your question around: would the uninsured depositors be willing to lock up their money for 10 years (at a low interest rate) in order to be made whole a decade from now? Unless the depositors were forced to, they would not. They'd lose both the time value of their money and the use of the money for years. They'd rather take pennies on the dollar.
Yogi gave some places to put money - T-bills, or perhaps Treasury MMFs. Or put the money into TBTF banks. No matter what one does with cash, one will lose value to inflation. The only question is how much. And corporations are willing to eat those costs.
In Europe, during NIRP (Negative Interest Rate Policy), it was even worth their while to dump their cash into negative paying bank accounts. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2289~1a3c04db25.en.pdf
As to part of what you noted about backstopping a business, versus backstopping/bailout of a financial institution that is part of the FDIC/banking system; I recall this from the market melt in 2008. The TARP program had particular criteria for receiving bailout monies. The list and description is here. The program went further into the economy other than financial institutions. Being from Michigan, I gave a lot of attention to what was taking place with the auto industry and the many ancillary organizations that supported this vast industry. If the big 3 auto were to melt away; the impact across the U.S. would be large in many industries, all the way to the local restaurants and bars.
Although insurance companies fall under state regs (to the best of my knowledge), there influence via many insurance products travel the entire country. One such very large insurance company, about 3 days before the TARP money window closed, had made and finalized the purchase of a savings and loan in Indiana, in order to qualify for TARP funds. Note: these 'loans' did carry interest and was expected to be repaid to the Treasury. The Treasury did have a profit when all was settled and done from the various loans.
The Troubled Asset Relief Program (TARP) was instituted by the U.S. Treasury following the 2008 financial crisis. TARP stabilized the financial system by having the government buy mortgage-backed securities and bank stocks. From 2008 to 2010, TARP invested $426.4 billion in firms and recouped $441.7 billion in return.
Normally, in a bankruptcy there is a line of creditors with a hierarchy of who gets paid first. I could see there being legal wrangling here if the government held the bank’s bond portfolio after backstopping depositors. The argument could be that the bank investors want to seize that bond portfolio themselves to make themselves whole. A SVB stock or more likely bond investor could argue that the bank’s assets now that depositors are secure belong to investors. The government selling those assets immediately to pay depositors eliminates any potential legal ambiguity, even if that sale is at a loss.
I actually think nationalization of failing banks makes a lot of sense. Otherwise, you end up with capitalism on the way up and socialist taxpayer funded bailouts on the way down. Bailouts here are socialism for the rich. In Sweden when they had a similar banking crisis to our 2008 one in the 1990s, they conducted a structured bankruptcy of the failed banks and nationalized them:
https://en.m.wikipedia.org/wiki/Sweden_financial_crisis_1990–1994
Krugman recommended the government do the same thing here as Sweden in 2008 but was ignored. Instead, the financial sector got a big taxpayer funded gift with few long-term repercussions for any of the largest companies and the executives involved.
As for options to avoid “government-induced erosion” from rate increases, floating rate debt comes to mind. But then investors are trading duration or interest rate risk for credit risk.
Edited excerpts from a current Wall Street Journal article:
About fifteen years ago, I worked for a small company in the SF Bay Area that was building up cash to purchase a permanent home. Folks on that end of the company were not happy with the treatment they were getting from Wells Fargo. So they went shopping around. They ended up going with Bank of Marin, because it claimed that it could break up the large sum into more than one insured deposit account.
Another example of this would be where I have my taxable investment account. The sweep account is not a money market fund, but an FDIC insured deposit account. While it is not a feature that I have been able to enjoy,
the last time I checked, they advertised that they could break my hoard of spondulicks into multiple accounts if I bought a winning lottery ticket, and needed to park the cash.
So. if this is still legally possible, why wasn't it being done at SVB?
I doubt I have command of the terms of art that would get a meaningful response out of google, but rather an inundation of advertising from banks.
https://www.intrafi.com/solutions/depositors/
BUT SVB used other m-mkt funds for its own m-mkt program, so people who used that should be OK.
https://www.svb.com/liquidity-management/deposits-and-investments/svb-cash-sweep
As for why it couldn't use IntraFi for the banking side for deposits well beyond its needs/wants, I would say that banking is a business of small bps, and SVS thought it was smart itself to pocket those bps.
There are too many "what could be...".
2023 stress-tests are in progress.
One unintended consequence of the SVB Bank failure may be that uninsured US bank deposits may move soon to the these banks. The SVB Bank also had several overseas branches, and foreigners are confused how can their money have problems in a bank from the richest country in the world. I have only seen the UK move fast on containing the fallout in the UK.
It is also unfortunate that many startups (not just in CA, but across the US and several foreign countries) were required to hold substantial deposits at the SVB Bank as part of their startup funding through the VCs + SVB Bank. This even if they had concerns or reservations about the SVB Bank.
Scenes from First Republic Bank in CA on Saturday (lining up for deposits or withdrawals?), https://twitter.com/CitizenFreePres/status/1634691876178780160
https://twitter.com/DailyMail/status/1634701406761529344
Not surprisingly, the banks listed are: "The FDIC separately insures deposit accounts maintained in separately chartered IDIs [insured depository institutions], even if the IDIs are affiliated, such as belonging to a common holding company."
https://www.fdic.gov/resources/deposit-insurance/diguidebankers/general-principles/index.html#idi_basis
"banks with assets below $250 billion (and a few more requirements) are not subject to the tighter regulatory scrutiny like big banks: no liquidity ratios (LCR), no net stable funding requirements (NSFR) forcing you to diversify your funding base and light stress tests. This allowed SVB to run wild with its investment portfolio and funding base concentration.
SVB’s management repeatedly lobbied to increase the cap for lax regulatory scrutiny and conveniently remained 20-30 billion below the $250 billion threshold?
It is hard to deny a decent amount of moral hazard was at play here
SVB was not applying basic risk management practices, and exposing its investors and depositors to a gigantic amount of risk.
Economically speaking, a $120 bn bond portfolio with a 5.6y non-hedged duration means that every 10 bps move higher in 5-year interest rate lost the bank almost $700 million.
100 bps? $7 billion economic loss.
200 bps? $14 billion economic loss.
Basically the entire bank’s capital wiped out.
As the tech/IPO boom faded, deposits stopped coming in 2022.
Recently, depositors started taking their money away and forced SVB to realize this huge losses on bond investments to service deposit outflows.
The concentrated nature of the deposit base and awful risk management meant SVB went belly up real quick. Many people are now calling for a blanket bailout.
But the evidence that moral hazard was at play are too big to be ignored.
And we should not reward moral hazard."
Author speaks to incompetence and/or moral hazard. Notes that in DEC 21, SVB DID HEDGE their portfolio but NOT in DEC 22.
Oy Vey.
what other banks are being run like this? Whiskey Tango Foxtrot.
FWIW saying ... perfect timing....
"Fortunately, Silicon Valley Bank’s resolution plan is still fresh. The bank became large enough in 2021 that regulators required it to draw up a “living will” on a three-yearly cycle. Silicon Valley Bank submitted its first one in December [2022]."
Marc Rubenstein's full piece is worth reading: https://www.netinterest.co/p/the-demise-of-silicon-valley-bank
But I do wonder if others closer to the action will begin talking about this.
Also on CBS this morning, Janet Yellen said the same "no bailout".
https://cbsnews.com/video/yellen-rules-out-bailout-for-silicon-valley-bank-were-not-going-to-do-that-again/
I shoulda known...