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Startup lender Silicon Valley Bank to sell stock to cope with cash burn
- makaimc 4y agoDo other US financial institutions have the same exposures, or is this a one-off situation based on SVB's closeness to the US tech sector?
- resters 4y agoSVB does a lot of venture debt. When venture debt is not repaid, SVB ends up owning the company, and can recover its exposure only if there is a buyer for the company or assets. In early stage land where valuations are the result of a fairly small consensus, it is plausible that SVB would have over-extended.
- willis936 4y agoIs there a way to tell how close SVB is to failing? If SVB fails does the cash kept in it simply disappear or does the fed step in?
- TuringNYC 4y ago>> Is there a way to tell how close SVB is to failing? If SVB fails does the cash kept in it simply disappear or does the fed step in? As they say themselves, Category IV organizations, like SVBFG, are subject to supervisory stress tests conducted by the Fed "every other year." So you can get Stress Test results, but they will be stale. See Page 13 here: https://www.svb.com/globalassets/library/uploadedfiles/content/corporate/2021-sivb-10-k.pdf https://www.svb.com/globalassets/library/uploadedfiles/conte... Not sure if there are other ways to get tier ratios, would be curious if anyone else could chime in?
- toomuchtodo 4y agoToo much latency with official reporting to suss out an insured institution going over the cliff, indicator would be SVB reps meeting with FDIC examiners around receivership and liquidation. Doors close on Friday, receiving bank opens all the branches back up as them on Monday. https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-takeover https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...
- toomuchtodo 4y agoIt is done. https://news.ycombinator.com/item?id=35096877 https://news.ycombinator.com/item?id=35096877
- hef19898 4y agoStupid question, but should the investment arm of a bank be separated from the banking arm?
- dmoy 4y agoThey used to be, after glass stegall in the 1930s. this was a problem we learned during the 1920s That has since been...... relaxed gradually, and almost completely done away with under Clinton in the 1990s. And then <10 years later we got the 2007/2008 crisis. But, the original separation of investment and banking didn't get re-instated during the dodd frank stuff that came after the last crisis.
- nradov 4y agoMaybe, but that's not relevant here. All banks invest their deposits in similar types of debt. SVB just made some bad decisions in terms of timing and liquidity, and now they have to recapitalize. If they can pull it off successfully then the bank will be fine but shareholders will get diluted.
- JumpCrisscross 4y ago> SVB does a lot of venture debt These losses aren’t related to SVB’s debt portfolio. It’s due to their deposits being flighty. SVB banks start-ups. Start-ups are spending cash faster than they’re getting it from VCs or customers. That leaves SVB with fewer deposits with which to fund their assets, so they must fire sell assets, which isn’t fun to do.
- resters 4y agoDoesn't SVB require a startup to keep a certain amount of cash reserves deposited in order to be eligible for things like merchant accounts and other "free" financial services?
- morninglight21 4y agodoes anyone have a list of venture debt firms exposed to this SVB collapse, like PFG which I believe had a close relation with SVB?
- makestuff 4y agoSo is this the start of 2008 2.0?
- candiddevmike 4y agoI think the real start of it will be after the GPT hype dies down. Everyone is racing to build/add AI things and the hype around that is preventing a freefall in the tech sector, IMO.
- vkou 4y agoA bunch of overpriced tech firms isn't the kind of systemic problem that massive fraud in the 'AAA' mortgage sector was. It is, of course theoretically possible that some crooks repackaged and sold a bunch of equities as a 'safe' investment instrument to a bunch of morons, on a truly gargantuan scale. But if that has happened, nobody has heard about it.
- htrp 4y ago>But if that has happened, nobody has heard about it. Spacs have entered the chat
- vkou 4y agoSPACs repackage garbage equities into other garbage equities, with a few institutional investors hoping to make a quick buck on their equivalent of the IPO pop. They are also a tiny percent of the overall equities market, and are largely seen as a failed experiment. They don't seem contagious.
- zer0tonin 4y ago> It is, of course theoretically possible that some crooks repackaged and sold a bunch of equities as a 'safe' investment instrument to a bunch of morons, on a truly gargantuan scale. But if that has happened, nobody has heard about it. I'm pretty sure it has not only happened but pretty much everyone is aware of it.
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- pavlov 4y agoIs the tech-aligned banking sector getting fragile? Just yesterday Silvergate Bank collapsed. It was the #1 bank in the US for crypto companies. The FTX fallout caused a tidal wave of crypto-related deposits leaving the bank and they were unprepared, apparently having invested the money in bonds that were deep in the red. The Feds stepped in and told them to shut down the bank and repay deposits before things get worse. (A weird thing about Silvergate is that they bought Facebook's aborted Libra/Diem cryptocurrency tech just last year. It's like there's a curse on Libra.)
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- this_steve_j 4y agoI am not an investment or banking guy. And I’m not sure what category of activity this type of lending falls into. But wouldn’t it make more sense to write off the investment losses rather than throw more bags of money on the burning pile?
- Quarrel 4y agoThey're a bank. They have capital ratios to maintain. If the underlying assets (the assets backing the bank), move in value, then they need to provide extra capital from somewhere. This is them securing that capital base that they need due to the change in value of their current assets (largely US treasuries and mortgage back securities- this isn't really about the value of their tech portfolio).
- notch898a 4y agoWhat are those ratios? Can I find them somewhere?
- hn_throwaway_99 4y agohttps://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm https://www.federalreserve.gov/supervisionreg/large-bank-cap... https://www.statista.com/statistics/1097633/cet1-ratio-large-banks-usa/ https://www.statista.com/statistics/1097633/cet1-ratio-large...
- notch898a 4y agoThank you! I kept seeing the 0% reserve ratios and was wondering what they were actually going off of.
- kasey_junk 4y agoBank capital requirements are huge and cross many regulatory regimes. The simple ratios you’ll see online are reserve requirements which are orthogonal to capital requirements.
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- fairity 4y agoIf I'm not mistaken, SVB has a huge venture debt portfolio that presumably includes warrants for companies whose valuations have plummeted. Does anyone know what portion of SVB's market cap is accounted for by these warrants? My guess is that many startups are withdrawing their deposits due to this news. I wonder if SVB can cope with a significant bank run.
- mistrial9 4y ago> I wonder if SVB can cope with a significant bank run since there are legions of bureaucrats whose entire professional life revolves around this, and there are legal stress-tests to measure this, and the banking and finance world has a huge whisper network.. maybe one-off speculation is obviously pointless and also maybe manipulative in some way?
- wmf 4y agoSilvergate just failed due to a bank run.
- slt2021 4y agoSVB is inderwater not only because of tech decline, but mostly because they bought huge amount of agency MBS at the generational high prices (during low rates), thus tying lot of capital for a very long time. If they were to sell those MBS today to get cash, bank’s equity would be wiped out Source: https://twitter.com/ragingventures/status/1615826088038473733?s=46&t=ZACeP3X-ZelzZfMwWOr1wA https://twitter.com/ragingventures/status/161582608803847373...
- fairity 4y agoI wonder if a bank run (triggered by this news) could force them to liquidate that portfolio.
- slt2021 4y agoliquidating HTM will mean bankruptcy, because bank will realize mark to market losses on MBS that exceed equity. They will hold onto these MBS with their "Diamond Hands" (r) and hope for Fed pivot. Even if bank will go bankrupt and sold to another buyer - new owner will still have to hold onto these MBS
- JumpCrisscross 4y ago> will hold onto these MBS with their "Diamond Hands" (r) and hope for Fed pivot No, they’ll hold them to maturity and get back their principal.
- cameldrv 4y agoWith what funds are they going to hold them to maturity? Are the depositors going to be willing to finance these bond purchases with zero interest deposits indefinitely when they could be earning more interest at another bank?
- paganel 4y agoVery interesting link. I found this [1] pretty interesting: > $SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!! > Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10 [1] https://twitter.com/RagingVentures/status/1615826094271217664 https://twitter.com/RagingVentures/status/161582609427121766...
- Octokiddie 4y agoMore context from another article: > The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise. https://markets.businessinsider.com/news/stocks/silicon-valley-bank-svb-stock-price-bond-portfolio-firesale-treasury-2023-3 https://markets.businessinsider.com/news/stocks/silicon-vall... More general context: - Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC. - UST prices fall as interest rates rise - the fall of UST prices in the last year is abnormally abrupt and deep - banks are not required to "mark-to-market" their UST holdings if they plan to hold to maturity - cash crunches can cause banks to sell UST before maturity, turning unrealized losses into real losses - SVB joins Silvergate as a previously high-flying tech-related bank suffering a cash crunch and forced to liquidate bond holdings at a loss It's hard to judge the scope of the problem that Silvergate and SVB might point to. What's clear is that unrealized UST losses on bank balance sheets can surface very quickly and lead to very ugly outcomes.
- tikkun 4y agoCan you send me an email? Email in profile. I have more thoughts on the UST situation
- WJW 4y agoWhy not just post them here in the comments?
- deleted 4y ago[deleted]
- hn_throwaway_99 4y agoExcellent summary. The interesting thing to me comparing Silvergate and SVB is that they both got hit by a fall in value of their long-duration bonds, but they had pretty different reasons for the "run on the bank". That is, in Silvergate's case, depositors wanted their money out because people were so fearful after FTX for anything with even a hint of crypto exposure (and Silvergate had more than a hint), and in SVB's case it's because a lot of their tech startups that hold deposits at the bank actually need their money out to spend.
- pphysch 4y agoAre "slide" and "slump" accurate terms to describe a ~50% drop in a single day?
- zippergz 4y agoThe flip side is when they say "plunge" for a 3% drop.
- testfoobar 4y agoThe wild thing is that the Federal Reserve is suffering from its own asset-liability mismatch due to the rise in interest rates. Income from its $8+ trillion balance sheet of Treasuries and MBS isn't covering its expenses (interest it must pay on reserves+operating expenses). But unlike a normal bank, the Federal Reserve cannot go bankrupt. It just books negative income and pays out by creating new money. https://www.reuters.com/markets/us/feds-net-income-turned-negative-september-it-was-no-surprise-2022-10-12/ https://www.reuters.com/markets/us/feds-net-income-turned-ne... https://thehill.com/opinion/finance/3886002-the-feds-trillion-dollar-bridge-to-nowhere/ https://thehill.com/opinion/finance/3886002-the-feds-trillio... https://fred.stlouisfed.org/series/RESPPLLOPNWW https://fred.stlouisfed.org/series/RESPPLLOPNWW This is a strange world.
- CPLX 4y ago> But unlike a normal bank, the Federal Reserve cannot go bankrupt. It just books negative income and pays out by creating new money. I mean that is literally the entire point of their existence.
- testfoobar 4y agoAgreed. The Fed is the backstop to the banking system. But I think the Fed has been over-accommodative since 2008. Their reaction function to crises has been to lower rates/print money and then wait. They should've tightened much faster post 2008. Did Silicon Valley Bank really screw up in 2021 by buying Treasuries if the Fed itself was doing the same? The Fed was doing QE and buying Treasuries in March-22 well into inflation. I think the error was trusting the Fed to be a good steward of inflation. It is not. We're all learning the hard way.
- deleted 4y ago[deleted]