7 ms·

SVB Financial: Blow Up Risk (2022)

224 points by AlchemistCamp 4y ago

xiaolingxiao 4y ago
Note this was published dec 2022.
- kurthr 4y ago
  So, classic bank run... except there were 6 people on the same chat channel controlling 10% of the bank's reserves. Once they notice, poof!
  - steveBK123 4y ago
    This is also why small, concentrated merchant banks like this are risky. Deposit base is too homogenous.
    - mikeyouse 4y ago
      It was one of the 15 largest banks in the country.. if depositors lose money here, every bank in US better be ready Monday morning as every company moves all of their funds to one of the top 3.
      - steveBK123 4y ago
        Most banks the vast majority 60-70% of depositors are insured. SVB was under 10% They were super concentrated in one industry, their depositors themselves were super concentrated with their deposits and they were poorly run. They’ll be open in some capacity Monday but the idea that big rich uninsured depositors should be made whole because of vibes is silly. They have a $10Bish hole. TBD how this plays out.
      - bcrosby95 4y ago
        Yet still small enough to not need to undergo stress tests after changes to Dodd frank in 2018.
      - IrnBru 4y ago
        That is irrational behaviour. Depositors should spread their cash across multiple banks. This is very basic risk management.
        mikeyouse 4y ago
        I’m just telling you what I’m seeing.. The “multiple banks” will be the few biggest ones, even if it’s 1/10th of their funds, nobody will accept the risk of a smaller bank.
        sealeck 4y ago
        Except that it's not quite so trivial to open an account at a new bank (especially if everyone decides to do it at the same time) and move US$15 billion dollars by the end of Monday.
        mikeyouse 4y ago
        I opened a new business account at Wells last fall, it took maybe a week to apply and get approval? In any case, many companies have multiple banking relationships already - if I were in their shoes I’d be moving all of the excess funds to the biggest bank available. It’s not fair to the well managed small banks but honestly I don’t care at all about my bank, I just want to pay bills. I’d bank at the Federal Reserve if they offered an interest free checking account with unlimited bank insurance.
notlukesky 4y ago
They mentioned this report in the All In Podcast this week.
- stcredzero 4y ago
  From the podcast: "The herd mentality caused us to all run for the door..." -- There was an N-way Prisoner's Dilemma that just played out in the Silicon Valley startup networks. And the startup networks in aggregate -- Failed! There was a reference made to the movie, "It's a Wonderful Life." The Silicon Valley startup scene failed like a mob, where the Building and Loan crowd succeeded as a community. Maybe that kind of thing only exists in the movies? Well, not quite. But it is rare.
toinewx 4y ago
The author had a short position. You can find it at the end of the article: Disclosure: I/we have a beneficial short position in the shares of SIVB either through stock ownership, options, or other derivatives.
- steveBK123 4y ago
  If they thought the stock was going to $0, they sure wouldn't have a Long position would they? What do you think all these guys on CNBC all day talking up stocks do.. not own it already themselves?
- tedivm 4y ago
  You say that like it's some gotchya, but someone who felt the bank wasn't in a good financial position would naturally short it. This just means the guy put his money where his mouth is.
  - dtech 4y ago
    It's beneficial for someone who is shorting a stock to put out negative press about the company. It's basically the modus operandi of some hedge funds. I also don't get the gotcha though. As long as it's disclosed and the facts are true I don't see the problem.
    - bmitc 4y ago
      I assume it's going to be much, much riskier to rely on sentiment affects of an article rather than valid research when shorting.
    - mlyle 4y ago
      > It's beneficial for ... It's beneficial for anyone has a thesis that a stock is mispriced to: * Take a position (short or long) that will take advantage of the mispricing * Broadly communicate this thesis after taking the position
- devmunchies 4y ago
hn_throwaway_99 4y ago
Wow, how prescient. Articles like this are especially damning to the execs that sold stocks just a few weeks ago. This was not some huge surprise. They may not have anticipated the ferocity with which there would be a run on the bank, but they absolutely knew they were in deep shit and would need to do a capital raise. And I hope nobody tries to defend this with "those stock sales were from 10b5-1 plans!". Those can easily be gamed by execs waiting to release bad news until after their sales go through, or by cancelling sales if things look good for the future (courts have said you can't be charged with insider trading for not selling shares, which means you can basically just set up 10b5-1 plans but cancel them as needed based on your insider knowledge).
- toomuchtodo 4y ago
  Who got hurt by execs selling stock into the market? Hopefully sophisticated investors who should’ve known better. For over a year there were indicators SVB was not healthy. “We are selling to willing buyers at the current fair market price.” Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC. If you can’t trade on positive material non public information, why would you expect them to trade on negative MNPI? Follow the rules and what is least likely to cause you to end up in handcuffs or in front of Congress. That is a logical and rational decision.
  - pixl97 4y ago
    >Hopefully sophisticated investors who should’ve known better. You mean like your retirement fund manager?
    - toomuchtodo 4y ago
      “Sophisticated” doing a lot of lifting in this case. Very aspirational. If you’re buying single named securities without any due diligence, you deserve the returns you encounter. That’s your job! No one index investing is going to feel this in a material capacity. Depositors will be made “whole enough”, and an irresponsible bank got blown out and dismantled. The system worked. If there was fraud, regardless of criminal and/or civil, prosecute those responsible.
0003 4y ago
Really great marks. Almost perfect. Except the key piece "The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk." File this under... "thought it was bad, didn't know it was THIS bad." And enjoy the millions of dollars you made :P
dboreham 4y ago
After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments". ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit. Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday. That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway. Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel. Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up. So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money. And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.
- darkerside 4y ago
  Surprising similarity to the 2008 crash in that there was systemic risk that wasn't detected or fully understood based on there being events that were entirely predictable (housing prices drop, or Fed rate increases) but happening at unpredictable rates of speed.
- eastbound 4y ago
  No bank can bet the deposits will stay the same: Through the short-term economic cycles, people will accumulate for 6 months, 2 years, 10 years, then deplete. Covid hits? Everyone needs 3 grand at the same time. Government gibs money? Everyone has 3 grand extra for a few weeks. Everyone gets paid on the 1st of the month. You can average, but everyone will hit the low at the same time.
latchkey 4y ago
Two more followup articles from the same author that are good reads as well (along with a bit of well deserved gloating)... https://seekingalpha.com/article/4586033-svb-financial-blew-up-even-faster-than-i-expected https://seekingalpha.com/article/4586033-svb-financial-blew-... https://seekingalpha.com/article/4586342-svb-financial-today-wasnt-run-on-bank-it-was-sprint https://seekingalpha.com/article/4586342-svb-financial-today...
- therealcamino 4y ago
  I have to say, the articles in Seeking Alpha are so uneven that I never read the when they pop up in a news feed. The original article is pretty startling in how accurate it was (even if it was more concerned about the loans than the mortgage-backed securities.)
  - ADefenestrator 4y ago
    Yeah, even in a case like this where they turned out to be right, it might be one of those "predicted 15 out of the last 2 recessions" sorts of things.
    - therealcamino 4y ago
      Ha, very true...
paulddraper 4y ago
> The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk. In an alternate dimension, it played out exactly like this.
funstuff007 4y ago
I guess we know who was buying all the 1% yielding 10Y notes now.
simonebrunozzi 4y ago
Key sentence: "SIVB was one of if not the most aggressive banker to many start-up companies. That worked brilliantly in the VC funding boom but could cut the other way as the industry retrenches."

224 points by AlchemistCamp 4y ago

xiaolingxiao 4y ago

Note this was published dec 2022.

kurthr 4y ago
So, classic bank run... except there were 6 people on the same chat channel controlling 10% of the bank's reserves. Once they notice, poof!
- steveBK123 4y ago
  This is also why small, concentrated merchant banks like this are risky. Deposit base is too homogenous.
  - mikeyouse 4y ago
    It was one of the 15 largest banks in the country.. if depositors lose money here, every bank in US better be ready Monday morning as every company moves all of their funds to one of the top 3.
    - steveBK123 4y ago
      Most banks the vast majority 60-70% of depositors are insured. SVB was under 10% They were super concentrated in one industry, their depositors themselves were super concentrated with their deposits and they were poorly run. They’ll be open in some capacity Monday but the idea that big rich uninsured depositors should be made whole because of vibes is silly. They have a $10Bish hole. TBD how this plays out.
    - bcrosby95 4y ago
      Yet still small enough to not need to undergo stress tests after changes to Dodd frank in 2018.
    - IrnBru 4y ago
      That is irrational behaviour. Depositors should spread their cash across multiple banks. This is very basic risk management.
      - mikeyouse 4y ago
        I’m just telling you what I’m seeing.. The “multiple banks” will be the few biggest ones, even if it’s 1/10th of their funds, nobody will accept the risk of a smaller bank.
        sealeck 4y ago
        Except that it's not quite so trivial to open an account at a new bank (especially if everyone decides to do it at the same time) and move US$15 billion dollars by the end of Monday.
        mikeyouse 4y ago
        I opened a new business account at Wells last fall, it took maybe a week to apply and get approval? In any case, many companies have multiple banking relationships already - if I were in their shoes I’d be moving all of the excess funds to the biggest bank available. It’s not fair to the well managed small banks but honestly I don’t care at all about my bank, I just want to pay bills. I’d bank at the Federal Reserve if they offered an interest free checking account with unlimited bank insurance.

notlukesky 4y ago

They mentioned this report in the All In Podcast this week.

stcredzero 4y ago
From the podcast: "The herd mentality caused us to all run for the door..." -- There was an N-way Prisoner's Dilemma that just played out in the Silicon Valley startup networks. And the startup networks in aggregate -- Failed! There was a reference made to the movie, "It's a Wonderful Life." The Silicon Valley startup scene failed like a mob, where the Building and Loan crowd succeeded as a community. Maybe that kind of thing only exists in the movies? Well, not quite. But it is rare.

toinewx 4y ago

The author had a short position. You can find it at the end of the article: Disclosure: I/we have a beneficial short position in the shares of SIVB either through stock ownership, options, or other derivatives.

steveBK123 4y ago
If they thought the stock was going to $0, they sure wouldn't have a Long position would they? What do you think all these guys on CNBC all day talking up stocks do.. not own it already themselves?
tedivm 4y ago
You say that like it's some gotchya, but someone who felt the bank wasn't in a good financial position would naturally short it. This just means the guy put his money where his mouth is.
- dtech 4y ago
  It's beneficial for someone who is shorting a stock to put out negative press about the company. It's basically the modus operandi of some hedge funds. I also don't get the gotcha though. As long as it's disclosed and the facts are true I don't see the problem.
  - bmitc 4y ago
    I assume it's going to be much, much riskier to rely on sentiment affects of an article rather than valid research when shorting.
  - mlyle 4y ago
    > It's beneficial for ... It's beneficial for anyone has a thesis that a stock is mispriced to: * Take a position (short or long) that will take advantage of the mispricing * Broadly communicate this thesis after taking the position
devmunchies 4y ago

hn_throwaway_99 4y ago

Wow, how prescient. Articles like this are especially damning to the execs that sold stocks just a few weeks ago. This was not some huge surprise. They may not have anticipated the ferocity with which there would be a run on the bank, but they absolutely knew they were in deep shit and would need to do a capital raise. And I hope nobody tries to defend this with "those stock sales were from 10b5-1 plans!". Those can easily be gamed by execs waiting to release bad news until after their sales go through, or by cancelling sales if things look good for the future (courts have said you can't be charged with insider trading for not selling shares, which means you can basically just set up 10b5-1 plans but cancel them as needed based on your insider knowledge).

toomuchtodo 4y ago
Who got hurt by execs selling stock into the market? Hopefully sophisticated investors who should’ve known better. For over a year there were indicators SVB was not healthy. “We are selling to willing buyers at the current fair market price.” Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC. If you can’t trade on positive material non public information, why would you expect them to trade on negative MNPI? Follow the rules and what is least likely to cause you to end up in handcuffs or in front of Congress. That is a logical and rational decision.
- pixl97 4y ago
  >Hopefully sophisticated investors who should’ve known better. You mean like your retirement fund manager?
  - toomuchtodo 4y ago
    “Sophisticated” doing a lot of lifting in this case. Very aspirational. If you’re buying single named securities without any due diligence, you deserve the returns you encounter. That’s your job! No one index investing is going to feel this in a material capacity. Depositors will be made “whole enough”, and an irresponsible bank got blown out and dismantled. The system worked. If there was fraud, regardless of criminal and/or civil, prosecute those responsible.

0003 4y ago

Really great marks. Almost perfect. Except the key piece "The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk." File this under... "thought it was bad, didn't know it was THIS bad." And enjoy the millions of dollars you made :P

dboreham 4y ago

After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments". ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit. Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday. That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway. Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel. Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up. So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money. And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.

darkerside 4y ago
Surprising similarity to the 2008 crash in that there was systemic risk that wasn't detected or fully understood based on there being events that were entirely predictable (housing prices drop, or Fed rate increases) but happening at unpredictable rates of speed.
eastbound 4y ago
No bank can bet the deposits will stay the same: Through the short-term economic cycles, people will accumulate for 6 months, 2 years, 10 years, then deplete. Covid hits? Everyone needs 3 grand at the same time. Government gibs money? Everyone has 3 grand extra for a few weeks. Everyone gets paid on the 1st of the month. You can average, but everyone will hit the low at the same time.

latchkey 4y ago

Two more followup articles from the same author that are good reads as well (along with a bit of well deserved gloating)... https://seekingalpha.com/article/4586033-svb-financial-blew-up-even-faster-than-i-expected https://seekingalpha.com/article/4586033-svb-financial-blew-... https://seekingalpha.com/article/4586342-svb-financial-today-wasnt-run-on-bank-it-was-sprint https://seekingalpha.com/article/4586342-svb-financial-today...

therealcamino 4y ago
I have to say, the articles in Seeking Alpha are so uneven that I never read the when they pop up in a news feed. The original article is pretty startling in how accurate it was (even if it was more concerned about the loans than the mortgage-backed securities.)
- ADefenestrator 4y ago
  Yeah, even in a case like this where they turned out to be right, it might be one of those "predicted 15 out of the last 2 recessions" sorts of things.
  - therealcamino 4y ago
    Ha, very true...

paulddraper 4y ago

> The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk. In an alternate dimension, it played out exactly like this.

funstuff007 4y ago

I guess we know who was buying all the 1% yielding 10Y notes now.

simonebrunozzi 4y ago

Key sentence: "SIVB was one of if not the most aggressive banker to many start-up companies. That worked brilliantly in the VC funding boom but could cut the other way as the industry retrenches."