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SVB's problem wasn't that they had too many well informed customers. It had too many lemmings and a few lemming leaders all in the same industry who pathologica

by jjeaff 4y ago

SVB's problem wasn't that they had too many well informed customers. It had too many lemmings and a few lemming leaders all in the same industry who pathologically can't keep a thought to themselves without sharing it to their many millions of social media followers.

zarzavat 4y ago
If your cruise ship is sinking and there aren’t enough life rafts, the problem isn’t that your passengers are climbing in the life rafts and sailing away. The problem is that the ship is sinking! SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. In that case the VCs did SVB a favor.
- abirch 4y ago
  The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. The market is expecting rates to drop hence the inverted yield curve.
  - gruez 4y ago
    >The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?
    - abirch 4y ago
      No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
      - gruez 4y ago
        >If the bonds didn't need to be sold, they would have paid out. Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
      - __blockcipher__ 4y ago
        > No banking investment is safe if there is a run on the bank This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates. > If the bonds didn't need to be sold, they would have paid out. This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)
  - JohnFen 4y ago
    That sounds like blaming the Fed, when the actual problem was that the bank's prediction of the future turned out to be incorrect. They placed a bet and it didn't pay out, that's all.
    - abirch 4y ago
      They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. SVB should have purchased more swaps or swaptions, but this is me Monday morning quarterbacking. If depositors had left their money like It's a Wonderful Life things would have been fine.
      - __blockcipher__ 4y ago
        > They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. Meh. Fractional reserve banking is not without risks, but I don't see any mention from you of the fact that SVB was holding bad assets.
        JohnFen 4y ago
        It's not that they were holding bad assets, it's that they put too much money into assets that took too long to mature. They were betting that they wouldn't need that money sooner than that, and that's the bet they lost.
- jMyles 4y ago
  > SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. How is this different from, you know, most banks as they stand today?
twblalock 4y ago
What did you expect, that everyone who knew there was a problem would keep it a secret and hope nobody else noticed?
- SilverBirch 4y ago
  It's pretty well understood that no bank can really withstand a complete bank run. It's simply not how banks are currently designed to be able to always and forever be able to return 100% of cash at a moments notice. And there's good reason for this, if you always need to have 100% of deposits ready at 60 minutes notice you're pulling a whole bunch of investible capital out of the economy and just sitting on it unproductively. So pretty much any bank that suffers a bank run is going to have to fire sale assets to produce liquidity, and often when that happens other banks will refuse to buy since they're afraid of being the next victim of a bank run. So very quickly this turns into a game of hot potato. What's unique about SVB though, is that despite it being a relatively large regional bank, a handful of its customers - tier 1 VCs have enough clout to force a bank run. These VCs have created a situation where their entire portfolio of companies depend on SVB, and as a result if they say "Get out of SVB" they can cause massive disruption. What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry. To put it in historical context, this is like if JP Morgan, instead of gathering institutional leaders and co-ordinating a calm and orderly response to a crisis had run on to twitter and screamed "IT'S ALL GOING TO ZERO GRAB YOUR CASH NOW".
  - twblalock 4y ago
    I can equally see a scenario where someone on Facebook or Twitter says "Get out of Wells Fargo" and millions of people would do it. > What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry. They can't even say that without causing a bank run because everyone with a brain in their heads would ask themselves "I wonder why they are saying that, something must be wrong" and that alone causes the bank run. Even a bank saying "everything is fine" can cause a bank run because people would wonder why they feel a need to say that. Plus, even if they could try to quietly de-risk SVB, everyone knew that if even one person spills the beans, the whole plan is spoiled. And what are the odds that nobody would spill the beans? Plus, what if you are a VC and that happened and then all the companies whose board you serve on find out that you didn't warn them in advance even though you knew they could have spared themselves by getting out early? It would not be good for you. Bottom line -- the incentives to quietly hide a potential bank failure and coordinate a massive (yet somehow stealthy and not scary to depositors) response just aren't there.

by jjeaff 4y ago

zarzavat 4y ago

If your cruise ship is sinking and there aren’t enough life rafts, the problem isn’t that your passengers are climbing in the life rafts and sailing away. The problem is that the ship is sinking! SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. In that case the VCs did SVB a favor.

abirch 4y ago
The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. The market is expecting rates to drop hence the inverted yield curve.
- gruez 4y ago
  >The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?
  - abirch 4y ago
    No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
    - gruez 4y ago
      >If the bonds didn't need to be sold, they would have paid out. Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
    - __blockcipher__ 4y ago
      > No banking investment is safe if there is a run on the bank This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates. > If the bonds didn't need to be sold, they would have paid out. This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)
- JohnFen 4y ago
  That sounds like blaming the Fed, when the actual problem was that the bank's prediction of the future turned out to be incorrect. They placed a bet and it didn't pay out, that's all.
  - abirch 4y ago
    They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. SVB should have purchased more swaps or swaptions, but this is me Monday morning quarterbacking. If depositors had left their money like It's a Wonderful Life things would have been fine.
    - __blockcipher__ 4y ago
      > They made a bet that people wouldn't need their money back right now. It's the constant risk in fractional reserve banking. Meh. Fractional reserve banking is not without risks, but I don't see any mention from you of the fact that SVB was holding bad assets.
      - JohnFen 4y ago
        It's not that they were holding bad assets, it's that they put too much money into assets that took too long to mature. They were betting that they wouldn't need that money sooner than that, and that's the bet they lost.
jMyles 4y ago
> SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. How is this different from, you know, most banks as they stand today?

twblalock 4y ago

What did you expect, that everyone who knew there was a problem would keep it a secret and hope nobody else noticed?

SilverBirch 4y ago
It's pretty well understood that no bank can really withstand a complete bank run. It's simply not how banks are currently designed to be able to always and forever be able to return 100% of cash at a moments notice. And there's good reason for this, if you always need to have 100% of deposits ready at 60 minutes notice you're pulling a whole bunch of investible capital out of the economy and just sitting on it unproductively. So pretty much any bank that suffers a bank run is going to have to fire sale assets to produce liquidity, and often when that happens other banks will refuse to buy since they're afraid of being the next victim of a bank run. So very quickly this turns into a game of hot potato. What's unique about SVB though, is that despite it being a relatively large regional bank, a handful of its customers - tier 1 VCs have enough clout to force a bank run. These VCs have created a situation where their entire portfolio of companies depend on SVB, and as a result if they say "Get out of SVB" they can cause massive disruption. What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry. To put it in historical context, this is like if JP Morgan, instead of gathering institutional leaders and co-ordinating a calm and orderly response to a crisis had run on to twitter and screamed "IT'S ALL GOING TO ZERO GRAB YOUR CASH NOW".
- twblalock 4y ago
  I can equally see a scenario where someone on Facebook or Twitter says "Get out of Wells Fargo" and millions of people would do it. > What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry. They can't even say that without causing a bank run because everyone with a brain in their heads would ask themselves "I wonder why they are saying that, something must be wrong" and that alone causes the bank run. Even a bank saying "everything is fine" can cause a bank run because people would wonder why they feel a need to say that. Plus, even if they could try to quietly de-risk SVB, everyone knew that if even one person spills the beans, the whole plan is spoiled. And what are the odds that nobody would spill the beans? Plus, what if you are a VC and that happened and then all the companies whose board you serve on find out that you didn't warn them in advance even though you knew they could have spared themselves by getting out early? It would not be good for you. Bottom line -- the incentives to quietly hide a potential bank failure and coordinate a massive (yet somehow stealthy and not scary to depositors) response just aren't there.