Comes now the sordid tale of Silicon Valley Bank which failed spectacularly last week triggering the Biden admin to BAILOUT their donor class pals in the venture capital and startup world under the authority granted to the Federal Deposit Insurance Corporation to deal with “exceptional” situations that present a “systemic risk” to the entire banking system.
“Come on, man, you thought we were going to let our pals in the VC and startup world play by the rules? Oh, ye, of little faith. Get out of here.”
How did we get here, Big Red Car?
Silicon Valley Bank was formed in 1983 in — wait for it — SILICON VALLEY to cater to the unique requirements of innovators of the venture capital and startup world. Silicon Valley was the epicenter of that world and they needed an equally innovative bank to meet their “special needs.”
Why, Big Red Car? Well, because they are special.
By all accounts, SVB did a very credible job of serving their customers — for about 38 of their 40 years — handling some magnificent portion of the VC/startup world — I have seen numbers as high as fifty percent. Wow!
The bank grew from $59B in total assets in Jan 2019 to $220B in Mar 2022 — almost quadrupling assets in three years.
More assets = bigger management risk.
What went wrong, Big Red Car?
Management is what went wrong. It is always the management.
1. Assets grew because the VC world was shoving money out the door to their startups and the startups were putting that money in Silicon Valley Bank. That’s where the assets and extraordinary asset growth came from.
Like any bank, SVB required loan customers and other customers to keep their deposits in their bank. This is not unusual.
2. Huge consideration alert: Those startups did not require loans because they were bloody well flushed with cash. Makes sense, right?
3. Even though SVB had a great stable of customers, they did not have much loan demand generated by those customers and, thus, the bank only had a loan-to-asset ratio of 57% which arguably should have been in the range of 75-85%.
Banks exist to gather deposits and make loans.
4. This left SVB with a problem: what to do with all that cash?
Management’s solution was to buy something safe like Treasuries and to buy the T10 (10 year Treasury) because the rate of return was great given their low cost of funds through deposits.
5. In a rising interest rate environment, the principal value of the T10 goes down as the market rate of interest goes up which is exactly what happened.
6. So, immediately you ask, “But, BRC, couldn’t they have just hedged their interest rate risk exposure?”
Yes, they could have, but they didn’t and if they did do it, it was ineffective.
The bank suddenly realized a $16B degradation in the value of their Treasuries — due to rising interest rates and declining T10 values — and that was what began the chattering class chattering.
7. The chattering class — in the person of modestly famous VC Peter Thiel — began to suggest their VC funded portfolio get the fuck out of Silicon Valley Bank.
This began early last week and by Thursday, more than $42B of Silicon Valley Bank depositors were lined up to withdraw their funds and Silicon Valley Bank didn’t have sufficient liquidity to meet these calls and became insolvent — unable to pay their obligations as they come due.
8. So, it was a garden variety, run of the mill, run on the bank, Big Red Car? Yes, pretty much so. Made worse by the speed of the Twitterverse.
What happened then, Big Red Car?
The technical term is: shit began to spiral out of bloody control.
The Feds in the person of the Federal Deposit Insurance Corporation reminded folks that they were insured up to $250,000 per account which was no comfort to companies and individuals who had many times that amount deposited with SVB.
One customer had more than $379MM on deposit.
Total deposits were $173,000,000,000.
The VC/startup world began a digital assault on the regulations saying, “But, we’re special. Very, very, very special and we don’t care WTF the regs say, we want our money.”
So, the FDIC took SVB into receivership and dumped all the deposits into an entity called: Deposit Insurance National Bank of Santa Clara.
President Biden and Treasury Secretary Yellen invoked the “special exemption” which allows the FCIC to essentially do whatever the fuck they want to do if they declare there is a systemic risk to the banking system.
So, they announced the Feds would stand behind every single $$$ of deposits at SVB and would enable depositors to start withdrawing their funds as of Monday morning, yesterday, 13 March 2023.
What really happened, Big Red Car?
Oh, come on, you look so dopey when you make your innocent face. Stop.
Peter Thiel as a baby.
The VCS and the startups played their “the world will end if you don’t save us” card and went on a digital rampage on social media and the admin realized “these are our financial supporters and donors” and BAILED THEM OUT! Boom!
BAILOUT
The Biden admin caved and the rest is history.
[If the industry involved was, say, the oil bidness? Same treatment?]
Bottom line it, Big Red Car
Fine, I know you have a busy day.
1. Silicon Valley Bank spent a lot more time on its DEI/Green Footprint policies than on its risk management.
2. SVB didn’t act like a normal bank and make loans; they bought Treasuries and then mismanaged the interest rate risk.
3. There was a run on the bank ALLEGEDLY started by Peter Thiel.
4. Withdrawal requests overwhelmed liquidity.
5. The “special” VCs/startups said, “You can’t do this to US! We’re special.”
6. As it turns out, they are special — special donors.
Is this a challenge to the entire banking system? No. Never was. It was a spit in the ocean.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.