So yeah, Silicon Valley Bank (SVB) had a run last week. Over the weekend various (self interested) people posted takes that ranged between pleading for bailouts, begging FDIC/Fed/Treasury to do things, all the way through people (without obvious self interest) who seem to know and understand the processes that need to occur.
You see, while SVB is based in Santa Clara California, the nature of its business was in (large) part providing services to venture capital funded companies of all sizes, as well as companies that have gone public and are traded on the stock market. Public companies kept their money there. Roku is an example.
I joke with my karate students that roku (number 6 in our counting) was the 6th iteration of the streaming device and the first that worked. Probably not true, though I always look for ways to help them learn the lingo.
Roku the company, had something to the effect of 1/4 of its liquid assets in account(s?) at SVB. That money was (note the past tense) about $500M USD. About 4000x the FDIC insurance maximum per account. So it was, as far as I understand it, an uninsured deposit.
There are many similar stories out there as of this weekend. Including startups, with a venture debt instrument that required they bank at SVB. These startups have payroll. And bills due vendors. Many of them may not be able to make payroll without extraordinary intervention.
See how this spreads out in an economy? Its not just startups in California. Its all over. A founder in Ohio, a working mom, talked about her path to where she is now, and the impact upon her company and team.
Hi, I’m Lindsey. A bit about me:
— Lindsey Michaelides (@lcmichaelides) March 11, 2023
- Ohio mother of 4
- I employ a team of 15 as a start-up founder & CEO of Strongsuit
- drive a used Honda Odessey
- husband works in manufacturing
- The financial future of my company, team and family are at risk w/ the collapse of SVB (1/23)
The bank had about $190B USD of deposits. Most of which are not covered by insurance. I've heard estimates of 5% of deposits are covered.
Others will, and have been discussing the business reasons for the collapse. It comes down to a bad bet, that they couldn't liquefy in a way that made positive profit needed to cover deposits used and provide the interest they needed to pay, due in large part to rising interest rates.
Regardless of the reason, depositors asked for their money back. Some of them got it. Others, not so much. Currently various distressed asset hedge funds are offering something between 60-90 cents on the dollar for deposits. This is a haircut for anyone taking this deal, one that few, if any of these organizations, can afford. These haircuts will (not may) have employment and other impacts.
All of this is based upon twitter posts which I read yesterday and today. And the occasional news article. I've read posts speculating on whether or not the FDIC can/will find a white knight (larger bank to absorb the failed bank) before markets open on Monday.
The FDIC has created a special purpose vehicle to guarantee depositors at SVB. And apparently signature bank has failed in connection with SVB.
What basically happened was a run. Driven by fear. The government is stepping in to try to get ahead of this. Not because a bank is too big to fail. But, because this failure could spread.
Simply due to fear.
Bank runs are driven by fear, and a drive to do something to protect yourself. We entrust banks to hold our money, and we ask for interest as a fee for them loaning out our money. The issue is, if we depost X USD at bank Y, what is the likelihood of not being able to get this money back when we need it. In a perfect world, banks wouldn't fail. Depositors would have 100% insurance coverage of their assets.
We don't live in that world.
Right now, the Fed, FDIC, and Treasury are taking action specifically to reduce this fear. Because this fear is a contagion, that can and will impact other institutions. Today there were rumors of First Republic Bank being on the brink of insolvency. They denied it in a press release. ZeroHedge has an article up on the fear.
From their article
The entire $17 trillion deposit base is now on a hair trigger expecting instant liquidity.
Add in social media and millions get a message, like Peter Thiel telling Founders companies to pull out, or Senator Warren gloating that SI went under, and pick up their phone open a Chase account and Venmo-ed their life savings into it in 10 minutes.
[ZH: Once SI died, Warren's dancing on its grave started the dominos falling...]
The goal, right now, is to stop the fear spreading.
Because in today's nearly frictionless world of banking, you can go from rumor to implosion in 48 hours. Or less. As SVB demonstrated.
The implications of such a run on a bank, and the failure of a connected bank is largely the spread of fear that one will not be able to access their funds. We entrust these funds to banks because of the theoretical safety of the institution. If banks are not safe harbor for our liquid assets, then we have a problem.
We need to choose sanity and patience. We don't want to get to the point where banks are averse to performing their functions due to distrust of counterparties solvency. That's how you get a 2008 all over again, though with the laws on the books, we may not be able to respond as well as in the past.
The implications for us are instability of our economy if we can't reign in our fears. Others could try to stoke our fears. We have to resist succumbing to them.