I am seeing a lot of revisionist history in the mainstream media, on Twitter, and in other places. Let’s be clear about what the failure of Silicon Valley Bank was and wasn’t:
isn’t a failure of regulation
isn’t Trump’s fault
isn’t because the Bank CEO lobbied the Fed to change regulations on bank stress tests
isn’t because of social media
isn’t because VCs wanted it to fail
isn’t because a bunch of short sellers put pressure on the bank
Why did SVB fail?
The bank was 100% unhedged in its portfolio. If they hedged, NO FAILURE
The bank engaged in what city/state/national government does when financing is called “flip and toss”. The bank borrowed at low rates from their depositors and bought longer-term treasuries hoping to reap the profit on the spread between the interest they paid and the interest they received. However, see bullet point 1. When you are unhedged, you are assuming all the risk in the fluctuation of the interest rate on the treasury you bought. When deposits are redeemed, you have to sell them at the market rate, not the rate on your note.
The bank was focused on efforts other than banking. It wanted to be “hip”.
What’s the fix?
We don’t need a lot of Congressional hearings on banking. Banks don’t need more regulation. They need to be led by competent people focused on the basic blocking and tackling of banking. The risks a bank takes ought to be in its loan portfolio, not in its held-to-maturity portfolio.
If a bank is hedged and manages its hedges, it’s not going to fail for the reasons SVB, Signature, or First Republic failed.
I scanned a few Boards of Directors of some isolated regional banks. One thing I noticed, bank boards at the regional level can be large. FWIW, JP Morgan has 12. Citibank has 8. Wintrust has 17. Fifth Third has 14. Regions bank has 15. Hancock Whitney has 15. You get the idea.
Many of the boards of regional banks are so large because Dodd-Frank regulations have caused so many of the regional banks to merge. They are too costly to bear in a single entity so the solution is to get bigger in order to defray the high regulatory costs imposed by Dodd-Frank, many of which are unnecessary and not even germane to operating a good bank.
Dodd-Frank doesn’t protect depositors. As a matter of fact, it harms them because it makes banking more centralized, limiting competition.
There are people on those regional boards that are there for appearance's sake, and not for their banking expertise. Boards should have a diversity of experience, with non-overlapping business networks that they can bring to bear for the benefit of the bank’s shareholders. Banks do not need color-by-number equity style diversity. It doesn’t benefit the bank or the shareholders.
For the sake of argument, I wonder what the management teams of those banks I scanned are like. Honestly don’t know, but if I were an analyst looking at publishing material for investors, I would take a really deep dive into more than the numbers and I would not be reticent to call out any problems I saw, no matter if they were politically correct or not.
As always, (ok, almost always) you are right. HOWEVER!!!
AS ALWAYS!!! WITHOUT EXCEPTION!!! The evil, corrupt idiots in Congress and in the White House will use this as another pretext to garner more power. They will hold hearings and the result (in addition to the opportunity to get a blurb on their local TV station's news) will be that the bureaucracy will grow and ratchet tighter around an industry already hamstrung.
SVB was only 57% loaned up meaning only 57% of their assets were in loans. This should have been 75-85%.
They are a bank.
They had an overweighting toward VC, tech, startups, and a smidgen of crypto. They were after all "Silicon Valley" bank.
This low loan level left them holding a lot of cash that they failed to manage correctly as you note. I was flabbergasted to see they had such a low loan portfolio and would have thought the bank examiners would have been all over them to hold more loans.
Then, there was a RUN ON THE BLOODY BANK, apparently, started by Peter Thiel whispering to his portfolio to GTF out of SVB. That is the light that set the fuse and the rest of the herd followed that lead.
In a classic sense, they forgot they were a bank, they had a poorly constructed asset mix, they made some horrendously inappropriate investment decisions, they were diverted to being woke AF, and they had a spot of bad luck.
Perfect. Storm.
Oh, yeah, then the Feds/Dems stepped in to bail out -- BAILOUT -- all their VC pals and startups. Boom!
This was done under the "exceptional situation" authority granted to the FDIC by Congress -- perfectly legit -- the exceptional situation being a slice of the donor class being scalped. It pays to have pals in high places.
JLM
www.themusingsofthebigredcar.com
Add'l comment: It is worth noting that the bank's customers were so concentrated in VC/startups that it impacted loan demand.
In 2021, VC money was flowing like the Nile River and the startups -- customer of SVB -- did not need loans. They were bloody well blushed with cash.
While SVB did a fuck all job on managing their rising interest rate risk, they had virtually zero loan demand from their VC funded, flush with cash customer base and that is why they so heavily dove into the treasuries pool and that is why they were so exposed to a rising interest rate environment.
They did a for shit job managing that risk.