5 ms·

> This whole story is so bewildering, probably the only bank I can think of that was killed by its own customers (flaky VC herd) despite being generally healthy

by nico 4y ago

> This whole story is so bewildering, probably the only bank I can think of that was killed by its own customers (flaky VC herd) despite being generally healthy So essentially it was all just panic. Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior. Hope that panic slows down and First Bank doesn’t have to go through the same as SVB (people were lining up to withdraw their money today).

santoshalper 4y ago
As ever, the markets can stay irrational longer than you can stay solvent.
everydayentropy 4y ago
How is withdrawing your cash before everyone else withdraws their cash irrational? It's the Nash equilibrium.
- mertd 4y ago
  After a large concert ends, would you say everyone stampeding to the exits is the rational behavior?
  - ccn0p 4y ago
    Yes if there's a material chance that the last third of folks at the concert get torched in a fire.
  - PKop 4y ago
    The bank failed. How could you possibly argue that withdrawing wasn't rational?
    - mertd 4y ago
      That isn't the case. To continue the concert analogy, the concert hall had more than enough doors to let everyone out if people left in their usual walking pace, but some doors were locked and the security was paying someone to unlock them. People took this as a sign that they should sprint to the gates.
      - PKop 4y ago
        The bank has failed and those with deposits in excess of 250k have not been guaranteed and cannot withdraw now what are you talking about? The bank failed!! lol. If one had withdrawn fast enough, they have their money; those who waited lost. The analogy is, it doesn't matter, those who didn't leave quickly got stampeded and died. Anyone who had huge amounts of cash in excess of the FDIC limit sitting there is an idiot. Doubly so if they heard of the "run" and did nothing. As long as Fed has rates way way above 0% checking accounts, the gravity is going to pull deposits out of banks and into US Treasuries. I've been withdrawing personal and business account cash for months and rolling in short term treasuries, many others are too as commercial bank deposits have been declining at record pace this year. Now this bank run. Anyone over the FDIC limit + those who begin to notice the interest rate differential (so..safety plus excess returns) are going to be incentivized to pull money out. This might not be the last bank failure... even if technically there is not danger on paper, human psychology will probably dictate that more will withdraw. The rational choice is clear in this situation: anyone with excess deposits should move quickly. Who cares if nothing else breaks? Better to do it and not need to, than to need to but not do it.
        mertd 4y ago
        Sorry but that's not correct. SVB is dead but solvent. People will eventually get their money back.
        PKop 4y ago
        "Eventually" You are just plain wrong that withdrawing was the wrong choice. What about those needing to make payroll or pay other expenses in the mean time? When will they get their money back? You have no idea lol The bank failed. It has been closed. It was a bank failure. Here's the official source that calls it a "failed bank" [0] [0] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley.html https://www.fdic.gov/resources/resolutions/bank-failures/fai...
        mertd 4y ago
- brunooo 4y ago
  It is, but if that’s how you apply it to your partner who built 4 decades worth of plumbing that underpins your community, then stuff falls apart.
- mrcode007 4y ago
  Nash Equilibrium has nothing to do with efficiency. In fact Prisoner’s Dilemma is the game you’re playing here and the equilibrium is NOT Pareto efficient at all
- ummonk 4y ago
  It's not the only Nash equilibrium. The other Nash equilibrium is that everyone keeps their money in SVB. That would have also been the Pareto optimal Nash equilibrium. The fact that VCs settled on the suboptimal Nash equilibrium actually reflects poorly on them as a community.
  - deleted 4y ago
    [deleted]
  - hatsunearu 4y ago
    I don't see how keeping the money in SVB is another equilibrium; the payout matrix seems exactly like the prisoner's dilemma.
    - mrcode007 4y ago
      An INDIVIDUAL payoff. Not the global one. By your argument, nothing stops the nuclear powers from destroying themselves. Yet somehow in the 60s the nuclear powers figured out the mutually assured destruction is also a prisoner’s dilemma and they COOPERATE despite the individual payoff being greater.
    - ummonk 4y ago
      No, because if everyone else keeps their money in SVB and it avoids going under, there is no payoff for defecting - you simply disrupt your own operations for no reason by trying to switch banks.
  - bostik 4y ago
    It's not an accident that the "V" is often read as "vulture". The only way to prevent someone from stabbing you in the back is to stab them first. People often equate finance to gambling, because even the terminologies overlap: you don't make "risky investments", you "place bets". But that's too simplistic a take, because there are two MAJOR differences between finance and gambling. 1: In finance you gamble with other peoples' money. Not your own. And when your bets go the wrong way, you ruin lives of thousands of families. Not just your own. 2: If you manage to find a loophole and turn the letter of a contract against the spirit of the contract, in finance that's a cause for celebration and a big bonus. ("Well played.") In gambling, that's called a breach of regulations. Both are amoral, highly utilitarian ecosystems.
lazide 4y ago
Looking at where inflation and interest rates were going, they were far from healthy. This was inevitable, as they locked away too much capital in bonds that were losing money every month in a way they can never recover. It’s the wrong way to bet when interest rates have been low, but are going up soon.
- rocqua 4y ago
  Their bonds weren't losing money. They were losing value. Value that would inevitably recover as the bonds reached maturity. There was an easy and plausible scenario here where everything was fine. Heck, the core of the problem here is that they got too many deposits over the last few years.
  - lazide 4y ago
    Correct on value vs money! I was being sloppy. What is that easy and plausible scenario? The only one I can think of is if they suddenly started getting a lot more cash deposits than withdrawals, or we entered a deflationary spiral (unlikely).
robryan 4y ago
Is it really just panic though? If their assets marked to market were of greater value than their liabilities there would be no reason for a panic in the first place.
- brunooo 4y ago
  Good point, and obviously not a great time for SVB equity holders or EVE sensitivity regulation, but looking through their 10Ks or Marc Rubenstein’s great math yesterday at https://www.netinterest.co/p/the-demise-of-silicon-valley-bank https://www.netinterest.co/p/the-demise-of-silicon-valley-ba... also not that much worse than Goldman at some points in 2008. Not great, not terrible as they say, but aside from a couple of very niche specialists no bank on the planet would survive getting 25% of deposits pulled in a day.
  - JumpCrisscross 4y ago
    > no bank on the planet would survive getting 25% of deposits pulled in a day Systemically important ones would, due to the Fed’s discount window and liability diversification.
phpisthebest 4y ago
> Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior. The systems of finance are only as strong as the currency that underpins it, and when your foundation is based on nothing more than "hopes and dreams" then you will have this... Our "financial systems" are smoke, mirrors, and heavy complex set of scams we all pull on each other everyday... The true "irrational behavior" is the system itself, and everyone that buys into it, you have to suspend rationality to engage with the banking system, and fiat currency
ryanSrich 4y ago
> So essentially it was all just panic How? What was “all just a panic”? The bank run? Of course, that’s what a bank run is. People panicking to not be the last ones out the door. Do not get this story twisted. SVB wildly mismanaged their risk, and went permabull in 2021/22. This lead to buying shit MBS’ and subsequently being forced to liquidate those securities to stop the bleeding.
- mlindner 4y ago
  > Do not get this story twisted. SVB wildly mismanaged their risk, and went permabull in 2021/22. This lead to buying shit MBS’ and subsequently being forced to liquidate those securities to stop the bleeding. Do you have any objective points on what they actually mismanaged and what they should have done instead for each point? Most of the people I see saying this don't actually understand what happened. As someone said up thread. What SVB did was the "least bad option". The people to blame are the VCs and the fed for creating this situation by extreme devaluing of treasuries.
  - aardvarkr 4y ago
    It’s not so much as mismanaged, which implies negligence, but more that they made a bad bet that kicked off a chain of events that led us to this point.
  - rocqua 4y ago
    Could perhaps 'park most of the money at the FED' been a safer option even without hindsight? Ofcourse with hindsight pouring money into hedged stock positions would have been much better. But that is very much hindsight dependent.
  - isignal 4y ago
    Banks do not park such a big fraction of their funds in such a long term investment. They should have chosen a ladder of differently maturity timelines to trade off between yield and availability. For example, they could have invested more in short term treasuries instead, which yield 4.5% now. In finance terms, they were not hedged against interest rate risk.
wolverine876 4y ago
> Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior. Ironically, that response is the herd mentality and irrational. Depositor funds aren't fragile: They receive 100% of $250K, and a substantial amount of other funds. The financial system isn't fragile at all: There is no systemic impact.
MiscIdeaMaker99 4y ago
I see it as a self-fulfilling prophecy. People perceive their bank as unsafe (whether it is or not), so lots of people start withdrawing their funds, and suddenly the bank fails because it can't fund those withdrawals. It reminds me of the toilet paper shortages here at the beginning of the pandemic. People heard about others hoarding toilet paper, so they started doing it, and before you know it we had a huge national shortage for a while. Some folks had none or little toilet paper -- while others had tons. I knew some assholes who did that, and bragged about it like they got one over on everyone else.

by nico 4y ago

santoshalper 4y ago

As ever, the markets can stay irrational longer than you can stay solvent.

everydayentropy 4y ago

How is withdrawing your cash before everyone else withdraws their cash irrational? It's the Nash equilibrium.

mertd 4y ago
After a large concert ends, would you say everyone stampeding to the exits is the rational behavior?
- ccn0p 4y ago
  Yes if there's a material chance that the last third of folks at the concert get torched in a fire.
- PKop 4y ago
  The bank failed. How could you possibly argue that withdrawing wasn't rational?
  - mertd 4y ago
    That isn't the case. To continue the concert analogy, the concert hall had more than enough doors to let everyone out if people left in their usual walking pace, but some doors were locked and the security was paying someone to unlock them. People took this as a sign that they should sprint to the gates.
    - PKop 4y ago
      The bank has failed and those with deposits in excess of 250k have not been guaranteed and cannot withdraw now what are you talking about? The bank failed!! lol. If one had withdrawn fast enough, they have their money; those who waited lost. The analogy is, it doesn't matter, those who didn't leave quickly got stampeded and died. Anyone who had huge amounts of cash in excess of the FDIC limit sitting there is an idiot. Doubly so if they heard of the "run" and did nothing. As long as Fed has rates way way above 0% checking accounts, the gravity is going to pull deposits out of banks and into US Treasuries. I've been withdrawing personal and business account cash for months and rolling in short term treasuries, many others are too as commercial bank deposits have been declining at record pace this year. Now this bank run. Anyone over the FDIC limit + those who begin to notice the interest rate differential (so..safety plus excess returns) are going to be incentivized to pull money out. This might not be the last bank failure... even if technically there is not danger on paper, human psychology will probably dictate that more will withdraw. The rational choice is clear in this situation: anyone with excess deposits should move quickly. Who cares if nothing else breaks? Better to do it and not need to, than to need to but not do it.
      - mertd 4y ago
        Sorry but that's not correct. SVB is dead but solvent. People will eventually get their money back.
        PKop 4y ago
        "Eventually" You are just plain wrong that withdrawing was the wrong choice. What about those needing to make payroll or pay other expenses in the mean time? When will they get their money back? You have no idea lol The bank failed. It has been closed. It was a bank failure. Here's the official source that calls it a "failed bank" [0] [0] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley.html https://www.fdic.gov/resources/resolutions/bank-failures/fai...
        mertd 4y ago
brunooo 4y ago
It is, but if that’s how you apply it to your partner who built 4 decades worth of plumbing that underpins your community, then stuff falls apart.
mrcode007 4y ago
Nash Equilibrium has nothing to do with efficiency. In fact Prisoner’s Dilemma is the game you’re playing here and the equilibrium is NOT Pareto efficient at all
ummonk 4y ago
It's not the only Nash equilibrium. The other Nash equilibrium is that everyone keeps their money in SVB. That would have also been the Pareto optimal Nash equilibrium. The fact that VCs settled on the suboptimal Nash equilibrium actually reflects poorly on them as a community.
- deleted 4y ago
  [deleted]
- hatsunearu 4y ago
  I don't see how keeping the money in SVB is another equilibrium; the payout matrix seems exactly like the prisoner's dilemma.
  - mrcode007 4y ago
    An INDIVIDUAL payoff. Not the global one. By your argument, nothing stops the nuclear powers from destroying themselves. Yet somehow in the 60s the nuclear powers figured out the mutually assured destruction is also a prisoner’s dilemma and they COOPERATE despite the individual payoff being greater.
  - ummonk 4y ago
    No, because if everyone else keeps their money in SVB and it avoids going under, there is no payoff for defecting - you simply disrupt your own operations for no reason by trying to switch banks.
- bostik 4y ago
  It's not an accident that the "V" is often read as "vulture". The only way to prevent someone from stabbing you in the back is to stab them first. People often equate finance to gambling, because even the terminologies overlap: you don't make "risky investments", you "place bets". But that's too simplistic a take, because there are two MAJOR differences between finance and gambling. 1: In finance you gamble with other peoples' money. Not your own. And when your bets go the wrong way, you ruin lives of thousands of families. Not just your own. 2: If you manage to find a loophole and turn the letter of a contract against the spirit of the contract, in finance that's a cause for celebration and a big bonus. ("Well played.") In gambling, that's called a breach of regulations. Both are amoral, highly utilitarian ecosystems.

lazide 4y ago

Looking at where inflation and interest rates were going, they were far from healthy. This was inevitable, as they locked away too much capital in bonds that were losing money every month in a way they can never recover. It’s the wrong way to bet when interest rates have been low, but are going up soon.

rocqua 4y ago
Their bonds weren't losing money. They were losing value. Value that would inevitably recover as the bonds reached maturity. There was an easy and plausible scenario here where everything was fine. Heck, the core of the problem here is that they got too many deposits over the last few years.
- lazide 4y ago
  Correct on value vs money! I was being sloppy. What is that easy and plausible scenario? The only one I can think of is if they suddenly started getting a lot more cash deposits than withdrawals, or we entered a deflationary spiral (unlikely).

robryan 4y ago

Is it really just panic though? If their assets marked to market were of greater value than their liabilities there would be no reason for a panic in the first place.

brunooo 4y ago
Good point, and obviously not a great time for SVB equity holders or EVE sensitivity regulation, but looking through their 10Ks or Marc Rubenstein’s great math yesterday at https://www.netinterest.co/p/the-demise-of-silicon-valley-bank https://www.netinterest.co/p/the-demise-of-silicon-valley-ba... also not that much worse than Goldman at some points in 2008. Not great, not terrible as they say, but aside from a couple of very niche specialists no bank on the planet would survive getting 25% of deposits pulled in a day.
- JumpCrisscross 4y ago
  > no bank on the planet would survive getting 25% of deposits pulled in a day Systemically important ones would, due to the Fed’s discount window and liability diversification.

phpisthebest 4y ago

> Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior. The systems of finance are only as strong as the currency that underpins it, and when your foundation is based on nothing more than "hopes and dreams" then you will have this... Our "financial systems" are smoke, mirrors, and heavy complex set of scams we all pull on each other everyday... The true "irrational behavior" is the system itself, and everyone that buys into it, you have to suspend rationality to engage with the banking system, and fiat currency

ryanSrich 4y ago

> So essentially it was all just panic How? What was “all just a panic”? The bank run? Of course, that’s what a bank run is. People panicking to not be the last ones out the door. Do not get this story twisted. SVB wildly mismanaged their risk, and went permabull in 2021/22. This lead to buying shit MBS’ and subsequently being forced to liquidate those securities to stop the bleeding.

mlindner 4y ago
> Do not get this story twisted. SVB wildly mismanaged their risk, and went permabull in 2021/22. This lead to buying shit MBS’ and subsequently being forced to liquidate those securities to stop the bleeding. Do you have any objective points on what they actually mismanaged and what they should have done instead for each point? Most of the people I see saying this don't actually understand what happened. As someone said up thread. What SVB did was the "least bad option". The people to blame are the VCs and the fed for creating this situation by extreme devaluing of treasuries.
- aardvarkr 4y ago
  It’s not so much as mismanaged, which implies negligence, but more that they made a bad bet that kicked off a chain of events that led us to this point.
- rocqua 4y ago
  Could perhaps 'park most of the money at the FED' been a safer option even without hindsight? Ofcourse with hindsight pouring money into hedged stock positions would have been much better. But that is very much hindsight dependent.
- isignal 4y ago
  Banks do not park such a big fraction of their funds in such a long term investment. They should have chosen a ladder of differently maturity timelines to trade off between yield and availability. For example, they could have invested more in short term treasuries instead, which yield 4.5% now. In finance terms, they were not hedged against interest rate risk.

wolverine876 4y ago

> Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior. Ironically, that response is the herd mentality and irrational. Depositor funds aren't fragile: They receive 100% of $250K, and a substantial amount of other funds. The financial system isn't fragile at all: There is no systemic impact.

MiscIdeaMaker99 4y ago

I see it as a self-fulfilling prophecy. People perceive their bank as unsafe (whether it is or not), so lots of people start withdrawing their funds, and suddenly the bank fails because it can't fund those withdrawals. It reminds me of the toilet paper shortages here at the beginning of the pandemic. People heard about others hoarding toilet paper, so they started doing it, and before you know it we had a huge national shortage for a while. Some folks had none or little toilet paper -- while others had tons. I knew some assholes who did that, and bragged about it like they got one over on everyone else.