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What people don't seem to realize is that banks themselves are a form of speculative vehicle. You pay deposits to the bank, and they then invest these deposits

What people don't seem to realize is that banks themselves are a form of speculative vehicle. You pay deposits to the bank, and they then invest these deposits in commercial loans. Banks are incredibly risk adverse as a rule, however, in this case the amount of deposits that SVB took in between 2020 and 2022 doubled from 40 to 80 billion dollars. The only way that this can happen is if the amount of available loans that the bank can make at the same risk profile increases through greater demand, or if the bank acquired several other regional banks. Well. That wasn't happening. So the bank started making riskier and riskier loans rather than reduce the number of incoming deposits. Arguably, given inflation, the value of FDIC should be increased beyond the $250,000 limit. But it's difficult to have much sympathy for companies that invested large sums of money into SVB without doing their due-diligence. If these companies need to be taken over by the federal government to prevent stock market contagion it would be nice to see some political consequences as well. It's absurd that a Lehman Bro.s CFO chairman was an executive at this bank. There will be lawsuits that come from this, but I'd expect that the federal government should also be an aggrieved party (as in, "the People Against...") given the risk of this collapse to the finances of the larger public.

placatedmayhem 4y ago
> But it's difficult to have much sympathy for companies that invested large sums of money into SVB without doing their due-diligence What due diligence would a bank customer do that would uncover the sort of escalating risk profile you've outlined? I ask as someone very far from finance and banking.
- patientplatypus 4y ago
  Silicon Valley Bank had 80 billion dollars in assets, which includes funds from Venture Capital (VC) firms. If you have a billion dollars in assets (or a few 100 million) then you would hire lawyers, tax attorneys, and financial analysts to make sure that where you put your money is safe. Given that the FDIC will only insure up to $250,000, then those account holders that have much more than that are considered people who "should know" the risk profile of the bank they're investing in (as compared to a mom and pop savings account). These FDIC limits were put in during the 1930s and never raised with inflation (which isn't ideal). In any case, if you have a large amount of money you're investing in a bank as opposed to the stock market then you should be primarily concerned that the bank will have a stable return that's slightly higher than inflation with a low risk profile (ie remain solvent). That means that you need to make sure that the loan book (that is, the loans that the bank is giving out) are non-risky, the treasuries that the bank has on hand won't devalue the banks asset base if the Federal Reserve decides to raise rates (another problem that SVB had), in addition to the risk profile of any other assets on hand and how much each individual asset class affects the solvency of the bank. In short, the more money that you are investing in a bank (or any other financial vehicle) the more investigation you should be making into that bank. In simplistic terms, if you're spending a couple dollars on a candy bar you don't examine the purchase with as much attention as compared to if you were buying a car or a house. And if you suddenly have come into large amounts of money and need to make complex financial decisions I would talk to a licensed financial professional. These guys are the financial professionals and they didn't do their homework.
AbrahamParangi 4y ago
To be clear, what you're describing when you say "invested large sums of money into SVB" is the act of keeping your money in a bank. If you think that we should treat the act of keeping money in banks as a risky choice, then fine, but there will be fairly substantial implications to that.
- patientplatypus 4y ago
  Take a look at my other comment in this thread. These weren't mom and pop investors, these were institutional investors that should have known better than to invest in a bank with such a portfolio mismatch. If they didn't they should have hired financial advisors and lawyers to investigate the bank. I have zero sympathy with someone with $100 million dollars who loses it because they weren't willing to hire a financial advisor to look into what they're putting their money into. That's saving a penny losing $100 million.
  - AbrahamParangi 4y ago
    “invest in a bank” it’s not an investment in any normal sense. These people were not equity holders of SVB. They weren’t getting any return in exchange for risk.
    - patientplatypus 4y ago
      I would refer to my other comment. Investing in a bank always carries the risk of a bank collapse, a threat that people that are under the FDIC limit implicitly are insured against. Large stakeholders that didn't pay an asset management firm to diversify their holdings or expect their holdings to be diversified at SVB were not acting with the competence necessary for that level of investment. A bank doubling their assets over a two year time period is a clear indication that something was wrong.
mlindner 4y ago
> Well. That wasn't happening. So the bank started making riskier and riskier loans rather than reduce the number of incoming deposits. You have a source on that? Pretty sure this is incorrect. They weren't making risky loans. They bought 10 year treasury bills (a secure investment normally) that were then substantially devalued by the fed versus new treasury bills.
- patientplatypus 4y ago
  Yes and no. I'm going to backpedal (a little bit). It will take the FDIC looking through all of their books to determine everything that happened - with bank implosions like this there were probably people on the take who knew what was happening. I suspect that more than one person will go to prison for financial fraud. Take a look at this - https://www.macrotrends.net/stocks/charts/SIVB/svb-financial-group/total-assets https://www.macrotrends.net/stocks/charts/SIVB/svb-financial... So total assets of the bank doubled over a two year time period. That's bad. In the financial world having too much money is (typically) a big no-no, because it means that you have to invest that money in worse and worse performing assets (in this case assets with a worse risk profile). That's why a large number of successful small cap VC and hedge fund operations don't scale. It also means that in this case the firm had most of it's cash from institutional investors (so they weren't FDIC insured) - which makes them more liable to bank runs. I will agree with you that it looks like the firm primarily had a mismatch of ten year security treasury bills versus their responsibilities to clients. However, this is a symptom of the same problem - the bank, most especially since it was servicing mostly institutional clients - should not have been so overly sensitive to a single financial instrument. There should have been dollar cost averaging of buying securities over smaller time frames, as well as buying a mix of US treasuries with shorter maturities. There also should have been, and this seems obvious in retrospect, a mixed basket of international treasuries and other assets to counter the risk profile of institutional investors that are primarily in the technology space. If technology stocks mirror the broader US economy but with higher volatility, then there should have been other assets held that would be counter cyclical to technology firms, such as a mixed basket of industrial stocks and commodities. So I will say that you're right in that they weren't making riskier loans so much as they weren't diversifying their portfolio given the size of their asset base. Given that these were large sized institutional investors as opposed to FDIC insured clients, not investing in a mixed basket of asset classes is not good. You're effectively paying for the lower rate of return that a treasury bill has because it's insured against risk, without being able to take advantage of that insurance. This is true in a roundabout way - given that the Federal government has to bail out banks during a financial crisis their return to the investor reflects that risk (not only in absolute terms but in the way the yield tracks the overall economy). Most banks should stick to treasuries because they don't service institutional clients and so can take advantage of that insurance. That wasn't the case here. It doesn't look like diversifying their portfolio would even be possible given how fast their assets increased. I suspect that they started absorbing a large amount of crypto money because people didn't know where to put it and there should be some investigation into whether other banks are diversified enough. It looks like possibly corrupt banking leadership and probably ignorant clientele. The intelligence of people is often inversely proportional to how fast they can make money for nothing. In short, massive increases in assets is a huge red flag. Here's a Barron's article on the subject which has some more numbers - https://archive.ph/r2vEk https://archive.ph/r2vEk

placatedmayhem 4y ago

> But it's difficult to have much sympathy for companies that invested large sums of money into SVB without doing their due-diligence What due diligence would a bank customer do that would uncover the sort of escalating risk profile you've outlined? I ask as someone very far from finance and banking.

patientplatypus 4y ago
Silicon Valley Bank had 80 billion dollars in assets, which includes funds from Venture Capital (VC) firms. If you have a billion dollars in assets (or a few 100 million) then you would hire lawyers, tax attorneys, and financial analysts to make sure that where you put your money is safe. Given that the FDIC will only insure up to $250,000, then those account holders that have much more than that are considered people who "should know" the risk profile of the bank they're investing in (as compared to a mom and pop savings account). These FDIC limits were put in during the 1930s and never raised with inflation (which isn't ideal). In any case, if you have a large amount of money you're investing in a bank as opposed to the stock market then you should be primarily concerned that the bank will have a stable return that's slightly higher than inflation with a low risk profile (ie remain solvent). That means that you need to make sure that the loan book (that is, the loans that the bank is giving out) are non-risky, the treasuries that the bank has on hand won't devalue the banks asset base if the Federal Reserve decides to raise rates (another problem that SVB had), in addition to the risk profile of any other assets on hand and how much each individual asset class affects the solvency of the bank. In short, the more money that you are investing in a bank (or any other financial vehicle) the more investigation you should be making into that bank. In simplistic terms, if you're spending a couple dollars on a candy bar you don't examine the purchase with as much attention as compared to if you were buying a car or a house. And if you suddenly have come into large amounts of money and need to make complex financial decisions I would talk to a licensed financial professional. These guys are the financial professionals and they didn't do their homework.

AbrahamParangi 4y ago

To be clear, what you're describing when you say "invested large sums of money into SVB" is the act of keeping your money in a bank. If you think that we should treat the act of keeping money in banks as a risky choice, then fine, but there will be fairly substantial implications to that.

patientplatypus 4y ago
Take a look at my other comment in this thread. These weren't mom and pop investors, these were institutional investors that should have known better than to invest in a bank with such a portfolio mismatch. If they didn't they should have hired financial advisors and lawyers to investigate the bank. I have zero sympathy with someone with $100 million dollars who loses it because they weren't willing to hire a financial advisor to look into what they're putting their money into. That's saving a penny losing $100 million.
- AbrahamParangi 4y ago
  “invest in a bank” it’s not an investment in any normal sense. These people were not equity holders of SVB. They weren’t getting any return in exchange for risk.
  - patientplatypus 4y ago
    I would refer to my other comment. Investing in a bank always carries the risk of a bank collapse, a threat that people that are under the FDIC limit implicitly are insured against. Large stakeholders that didn't pay an asset management firm to diversify their holdings or expect their holdings to be diversified at SVB were not acting with the competence necessary for that level of investment. A bank doubling their assets over a two year time period is a clear indication that something was wrong.

mlindner 4y ago

> Well. That wasn't happening. So the bank started making riskier and riskier loans rather than reduce the number of incoming deposits. You have a source on that? Pretty sure this is incorrect. They weren't making risky loans. They bought 10 year treasury bills (a secure investment normally) that were then substantially devalued by the fed versus new treasury bills.

patientplatypus 4y ago
Yes and no. I'm going to backpedal (a little bit). It will take the FDIC looking through all of their books to determine everything that happened - with bank implosions like this there were probably people on the take who knew what was happening. I suspect that more than one person will go to prison for financial fraud. Take a look at this - https://www.macrotrends.net/stocks/charts/SIVB/svb-financial-group/total-assets https://www.macrotrends.net/stocks/charts/SIVB/svb-financial... So total assets of the bank doubled over a two year time period. That's bad. In the financial world having too much money is (typically) a big no-no, because it means that you have to invest that money in worse and worse performing assets (in this case assets with a worse risk profile). That's why a large number of successful small cap VC and hedge fund operations don't scale. It also means that in this case the firm had most of it's cash from institutional investors (so they weren't FDIC insured) - which makes them more liable to bank runs. I will agree with you that it looks like the firm primarily had a mismatch of ten year security treasury bills versus their responsibilities to clients. However, this is a symptom of the same problem - the bank, most especially since it was servicing mostly institutional clients - should not have been so overly sensitive to a single financial instrument. There should have been dollar cost averaging of buying securities over smaller time frames, as well as buying a mix of US treasuries with shorter maturities. There also should have been, and this seems obvious in retrospect, a mixed basket of international treasuries and other assets to counter the risk profile of institutional investors that are primarily in the technology space. If technology stocks mirror the broader US economy but with higher volatility, then there should have been other assets held that would be counter cyclical to technology firms, such as a mixed basket of industrial stocks and commodities. So I will say that you're right in that they weren't making riskier loans so much as they weren't diversifying their portfolio given the size of their asset base. Given that these were large sized institutional investors as opposed to FDIC insured clients, not investing in a mixed basket of asset classes is not good. You're effectively paying for the lower rate of return that a treasury bill has because it's insured against risk, without being able to take advantage of that insurance. This is true in a roundabout way - given that the Federal government has to bail out banks during a financial crisis their return to the investor reflects that risk (not only in absolute terms but in the way the yield tracks the overall economy). Most banks should stick to treasuries because they don't service institutional clients and so can take advantage of that insurance. That wasn't the case here. It doesn't look like diversifying their portfolio would even be possible given how fast their assets increased. I suspect that they started absorbing a large amount of crypto money because people didn't know where to put it and there should be some investigation into whether other banks are diversified enough. It looks like possibly corrupt banking leadership and probably ignorant clientele. The intelligence of people is often inversely proportional to how fast they can make money for nothing. In short, massive increases in assets is a huge red flag. Here's a Barron's article on the subject which has some more numbers - https://archive.ph/r2vEk https://archive.ph/r2vEk