Monday, March 13, 2023

Your Silicon Valley Bank Primer

 As is often the case, the best thumbnail comes from Matt Levine.

And so if you were the Bank of Startups, just like if you were the Bank of Crypto, it turned out that you had made a huge concentrated bet on interest rates. Your customers were flush with cash, so they gave you all that cash, but they didn’t need loans so you invested all that cash in longer-dated fixed-income securities, which lost value when rates went up. But also, when rates went up, your customers all got smoked, because it turned out that they were creatures of low interest rates, and in a higher-interest-rate environment they didn’t have money anymore. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. Now you have lost money and look financially shaky, so customers get spooked and withdraw more money, so you sell more securities, so you book more losses, oops oops oops 

For those who prefer their analysis in tweet-sized bites, Krugman  has an excellent thread. Here are some excerpts.

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"Cultivating relationships" is a bit of an understatement.

Josh Marshall has also been keeping an eye on the story. 

One thing that has come out of my exchanges with readers is unclarity about just what counts as a “bailout”. In one sense it is in the eyes of the beholder: a bailout is when someone else gets it. The more important thing is that term has no real or precise meaning. In general it’s any radical departure from the existing legal/contractual set of rules and obligations in response to a financial crisis. Websters defines it as a “rescue from financial distress.” Clearly the shareholders, i.e., the owners, of Silicon Valley Bank should be wiped out entirely or at least be last in line for any proceeds if the bank goes through a liquidation. They had a business and it failed.

The operative question is the bank’s depositors. What’s being discussed is whether the FDIC should step in and guarantee all the deposits rather than just the 2% or 3% which the FDIC guarantees up to $250,000. What complicates the question is that SVB did very, very little consumer banking. It mainly held deposits of venture capital funds and the start-ups those funds invested in. As noted earlier, the bank likely has enough or close to enough assets to cover all deposits. What it lacks is time and liquidity. So the best solution is for the bank to be purchased by another bank which has time and liquidity. Depositors are protected; risks to the broader economy are prevented; employees at the businesses which banked there have their paychecks covered. That is certainly what regulators are trying to accomplish right now. The question is what happens if they can’t. What basically all the high profile Silicon Valley notables are demanding now is that the FDIC back all the deposits. That’s a bailout by any definition. The point I tried to make above is that such a move could only be justified by grave risk to the broader economy. And that’s a factual question that regulators at the Fed, the FDIC and the Treasury will have to answer.

Still somehow it doesn't feel like a true Silicon Valley disaster until someone from the PayPal mafia makes an appearance.





And for those who are here mainly for the outrage...


 

And schadenfreude.



  And another member of the PayPal mafia pops his head in.


 

 Now, if we could just get three members of the PayPal mafia...






 



via GIPHY



And just as we were going to the presses...


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