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The VCs collectively orchestrated a bank run that destroyed a bank that serviced them for 40 years, when they should have instead cooperatively organized an LTC

The VCs collectively orchestrated a bank run that destroyed a bank that serviced them for 40 years, when they should have instead cooperatively organized an LTCM-style consortium bailout for it, and helped them raise capital. The selfishness and short-sightedness of VCs never ceases to impress.

SirensOfTitan 4y ago
I think you massively underestimate how hard it is to coordinate under these kinds of conditions. Plenty of startups are going to be unable to make payroll, which can pierce the corporate veil in CA, it's not a situation where cooperation is the first thought.
- joefigura 4y ago
  Yeah, it's like a stampede in a crowded theater - once the panic sets in everyone's fleeing for the exit and telling everyone else to go too. You could call that coordination, but it's more like once the panic starts it will carry itself out.
  - 462436347 4y ago
    > Yeah, it's like a stampede in a crowded theater It was the same situation with LTCM, with their counterparties (large banks) rushing to liquidate before LTCM became insolvent, which the Fed feared would send shockwaves through the financial system. The banks quickly, collectively agreed to do the right, responsible thing and stopped the fire selling, and injected some emergency capital into LTCM, and then gradually unwound LTCM's postions (and made money in the process).
- majormajor 4y ago
  If you were interviewing for a mid-level software engineering job you might suggest "that seems like a single point of failure that could result in a big failure, let's think about how we can add redundancy." Seems like you haven't needed to think about systems design as a VC! "Yeah go to the same place as everyone else I invest in, what could possibly go wrong?!"
  - anonymouskimmer 4y ago
    The redundancy is knowing that FDIC liquidation can handle the problem soon enough. Do mid-level software engineers typically diversify across every single point of failure? Architectures? Programming languages? Compilers? Too much diversification itself can be a point of failure. As long as you have a sufficiently robust insurance backup (the FDIC) choosing a robust single point of failure seems like an okay idea for business operations (it's not like it's literal life support). The people at the FDIC aren't machines; they can do what's necessary to fulfill their function in a timely manner.
- 462436347 4y ago
  > I think you massively underestimate how hard it is to coordinate under these kinds of conditions. I think you're unfamiliar with the Long-Term Capital Crisis, and the speed with which it was resolved (two days: Sep 22-23). In fact, it's partly because the NY Fed and big banks acted so swiftly and responsibly, that most people have never heard of this and don't realize how close we came to a financial crisis: >The Fed came to be concerned that if LTCM’s extensive list of counterparties tried to exit their positions at the same time, it would create a rapid and widespread sale of assets, a fire sale, which could potentially impair the economy. >On September 22, the New York Fed invited a core group of three firms to a meeting to discuss the LTCM situation. The core group, later expanded to a fourth firm, formed three working groups to consider possible solutions, one of which came up with the idea of a consortium approach. A broader group of thirteen firms was invited to the New York Fed that evening to discuss the approach. The firms disagreed over how much each firm should contribute to a rescue package and could not commit to such an effort on such short notice (Siconolfi 1998). >The talks on a combined rescue reconvened on the morning of September 23, but were soon halted by news that an investor group led by Warren Buffet had made an independent offer to buy out the firm's partners for $250 million and subsequently inject $3.75 billion capital into the fund (Loomis 1998). This appeared a clean solution to both the creditors and the Fed, and McDonough advised Meriwether that it was likely his best bet (Schlesinger and Schroeder 1998). By the 12:30 p.m. deadline, however, the offer was not accepted due to reported legal issues. >With no other solution in sight, the talks resumed with more haste inside the New York Fed. The consortium ultimately came to an agreement at about 6:00 p.m. on September 23. Together, fourteen firms put up $3.625 billion in capital in exchange for 90 percent of the fund’s ownership (two firms included in the talks declined to participate). https://www.federalreservehistory.org/essays/ltcm-near-failure https://www.federalreservehistory.org/essays/ltcm-near-failu... Coincidentally, this took place ten years before, and nearly to the day (Sep 15th), of the collapse of Lehman Brothers in 2008, which had also been especially exposed to LTCM in 1998.
  - readthenotes1 4y ago
    4 main firms, plus 11, and many of the players located in Manhattan with the Fed making the phone calls. Does svb have a similar client list?
JumpCrisscross 4y ago
> when they should have instead cooperatively organized an LTCM-style consortium bailout for it I was on the phone with portfolio companies, friends and clients yesterday ensuring they pulled their funds to a back-up bank account. SVB was a national bank. It's not a charity, or even a local bank serving a niche community. It was a big bank, and a badly-run one at that. Nothing they do isn't done by others. I believe in my friends and their missions more than anything SVB was up to. (I'm not a VC.)
- 462436347 4y ago
  > SVB was a national bank It was more of a regional bank, specifically one servicing SV, with at most sporadic branches elsewhere, usually just one in a given state in its largest major city (e.g., one in NY: in NYC; one in D.C.; one in Colorado: in Denver). In many states they have no branches (e.g., Florida): https://www.svb.com/locations https://www.svb.com/locations > Nothing they do isn't done by others Then why did so many startups and VCs bank with them? > my friends and their missions I would personally be hesitant to use this terminology for others, unless they're actually doing something truly impactful and impressive, like curing some horrible disease, going to Mars, or at least actually in the military on some mission.
  - JumpCrisscross 4y ago
    > was more of a regional bank, specifically one servicing SV, with at most sporadic branches elsewhere Top 20 by assets and with a branch in New York. That’s a national bank. > why did so many startups and VCs bank with them? They were first and did what they did well. That doesn’t make them preciously unique. > would personally be hesitant to use this terminology for others, unless they're actually doing something truly impactful and impressive, like curing some horrible disease, going to Mars, or at least actually in the military on some mission Over a bank?
    - 462436347 4y ago
      > Over a bank? Over a financial contagion that could sap the liquidity and solvency of the startups these VCs have invested in, and possibly cause harm to the wider economy (which I doubt they care very much about)?
hgsgm 4y ago
Why would they want to bankrupt the banks that holds their money and makes their loans? The entire VC model is to make investments with 10+ year time-to-profit.

SirensOfTitan 4y ago

I think you massively underestimate how hard it is to coordinate under these kinds of conditions. Plenty of startups are going to be unable to make payroll, which can pierce the corporate veil in CA, it's not a situation where cooperation is the first thought.

joefigura 4y ago
Yeah, it's like a stampede in a crowded theater - once the panic sets in everyone's fleeing for the exit and telling everyone else to go too. You could call that coordination, but it's more like once the panic starts it will carry itself out.
- 462436347 4y ago
  > Yeah, it's like a stampede in a crowded theater It was the same situation with LTCM, with their counterparties (large banks) rushing to liquidate before LTCM became insolvent, which the Fed feared would send shockwaves through the financial system. The banks quickly, collectively agreed to do the right, responsible thing and stopped the fire selling, and injected some emergency capital into LTCM, and then gradually unwound LTCM's postions (and made money in the process).
majormajor 4y ago
If you were interviewing for a mid-level software engineering job you might suggest "that seems like a single point of failure that could result in a big failure, let's think about how we can add redundancy." Seems like you haven't needed to think about systems design as a VC! "Yeah go to the same place as everyone else I invest in, what could possibly go wrong?!"
- anonymouskimmer 4y ago
  The redundancy is knowing that FDIC liquidation can handle the problem soon enough. Do mid-level software engineers typically diversify across every single point of failure? Architectures? Programming languages? Compilers? Too much diversification itself can be a point of failure. As long as you have a sufficiently robust insurance backup (the FDIC) choosing a robust single point of failure seems like an okay idea for business operations (it's not like it's literal life support). The people at the FDIC aren't machines; they can do what's necessary to fulfill their function in a timely manner.
462436347 4y ago
> I think you massively underestimate how hard it is to coordinate under these kinds of conditions. I think you're unfamiliar with the Long-Term Capital Crisis, and the speed with which it was resolved (two days: Sep 22-23). In fact, it's partly because the NY Fed and big banks acted so swiftly and responsibly, that most people have never heard of this and don't realize how close we came to a financial crisis: >The Fed came to be concerned that if LTCM’s extensive list of counterparties tried to exit their positions at the same time, it would create a rapid and widespread sale of assets, a fire sale, which could potentially impair the economy. >On September 22, the New York Fed invited a core group of three firms to a meeting to discuss the LTCM situation. The core group, later expanded to a fourth firm, formed three working groups to consider possible solutions, one of which came up with the idea of a consortium approach. A broader group of thirteen firms was invited to the New York Fed that evening to discuss the approach. The firms disagreed over how much each firm should contribute to a rescue package and could not commit to such an effort on such short notice (Siconolfi 1998). >The talks on a combined rescue reconvened on the morning of September 23, but were soon halted by news that an investor group led by Warren Buffet had made an independent offer to buy out the firm's partners for $250 million and subsequently inject $3.75 billion capital into the fund (Loomis 1998). This appeared a clean solution to both the creditors and the Fed, and McDonough advised Meriwether that it was likely his best bet (Schlesinger and Schroeder 1998). By the 12:30 p.m. deadline, however, the offer was not accepted due to reported legal issues. >With no other solution in sight, the talks resumed with more haste inside the New York Fed. The consortium ultimately came to an agreement at about 6:00 p.m. on September 23. Together, fourteen firms put up $3.625 billion in capital in exchange for 90 percent of the fund’s ownership (two firms included in the talks declined to participate). https://www.federalreservehistory.org/essays/ltcm-near-failure https://www.federalreservehistory.org/essays/ltcm-near-failu... Coincidentally, this took place ten years before, and nearly to the day (Sep 15th), of the collapse of Lehman Brothers in 2008, which had also been especially exposed to LTCM in 1998.
- readthenotes1 4y ago
  4 main firms, plus 11, and many of the players located in Manhattan with the Fed making the phone calls. Does svb have a similar client list?

JumpCrisscross 4y ago

> when they should have instead cooperatively organized an LTCM-style consortium bailout for it I was on the phone with portfolio companies, friends and clients yesterday ensuring they pulled their funds to a back-up bank account. SVB was a national bank. It's not a charity, or even a local bank serving a niche community. It was a big bank, and a badly-run one at that. Nothing they do isn't done by others. I believe in my friends and their missions more than anything SVB was up to. (I'm not a VC.)

462436347 4y ago
> SVB was a national bank It was more of a regional bank, specifically one servicing SV, with at most sporadic branches elsewhere, usually just one in a given state in its largest major city (e.g., one in NY: in NYC; one in D.C.; one in Colorado: in Denver). In many states they have no branches (e.g., Florida): https://www.svb.com/locations https://www.svb.com/locations > Nothing they do isn't done by others Then why did so many startups and VCs bank with them? > my friends and their missions I would personally be hesitant to use this terminology for others, unless they're actually doing something truly impactful and impressive, like curing some horrible disease, going to Mars, or at least actually in the military on some mission.
- JumpCrisscross 4y ago
  > was more of a regional bank, specifically one servicing SV, with at most sporadic branches elsewhere Top 20 by assets and with a branch in New York. That’s a national bank. > why did so many startups and VCs bank with them? They were first and did what they did well. That doesn’t make them preciously unique. > would personally be hesitant to use this terminology for others, unless they're actually doing something truly impactful and impressive, like curing some horrible disease, going to Mars, or at least actually in the military on some mission Over a bank?
  - 462436347 4y ago
    > Over a bank? Over a financial contagion that could sap the liquidity and solvency of the startups these VCs have invested in, and possibly cause harm to the wider economy (which I doubt they care very much about)?

hgsgm 4y ago

Why would they want to bankrupt the banks that holds their money and makes their loans? The entire VC model is to make investments with 10+ year time-to-profit.