An explainer on what is going on with Silicon Valley Bank:
In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.
As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.
97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.
The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield.
This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.
However, yesterday afternoon, SVB announced that they had sold $21bn of their Available For Sale (AFS) securities at a $1.8bn loss, and were raising another $2.25bn in equity and debt. This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio.
SVB have always given off the very dodgy outfit vibe but prospered as long as the 2/20 VC Ponzi Scheme money kept flowing. This is the bank were the sleaziest VC’s kept their money. It was a basic rule, if the VC’s banked with SVB then they were automatically very suspect. All the other big banks gave essentially zero cost business a/c’s to new / growing businesses (and legit investor vehicles) but SVB are notorious for blowing off smaller businesses as “not worth their time”. By small I mean up to $50m of revenue. You know, companies with actual paying customers. SVB was only really interested in Dot Com play companies. Thats why any company that wrote checks on SVB was automatically suspect.
If a client wrote a check on this bank (which meant they had to bank there at the behest of the VC’s) then it was straight to main office in Santa Clara to cash it in person. SVB and Bank of America are two banks that never ever could be trusted. Going back decades. No knowing how long they would screw around. Often weeks
This story may get very interesting fairly soon. Might even take some very big names down with it.
First I dont think they added $100B+ to the balance sheet in one year. This was a longer time scale story.
Second if you have $100B to place somewhere no one who had the slightest idea what was going on with various MBS trading desks that last few years would have placed it in the MBS’s that SVB did unless they had a very sophisticating risk hedging strategy. The first Mark To Market loss of almost $20B showed they had not even a basic hedging strategy in place. This sounds like a “buddies deal” between one of the principals at SVB and whoever “suggested” the placement. So the old story, incompetent insiders. Plus I suspect there maybe a money laundering angle of some sort. A lot of bottom rung VC money is from very dubious sources.
Is suspect the nearest analogy will be with with LTCM in 1997. The “Smartest Guys in the Room”. And will probably be just as totally stupid as selling lots of naked puts to dig them out of a hole.
What going on with the German and Swiss banks is separate clusterf*ck. If SVB goes pop then this might be a mass extinction event for the 90% of VC funds that never make any money. Except for the management fees for the principals. Andreessen Horowitz is the one to watch. If that goes dead parrot so will a lot of the rest.
Get out the pop-corn time.
I’ve been in a lot of finical institutions over the years. Including the Washington Mutual main branch just as 2008 was getting going (nice guys, great bank, still miss them). But the first time I was in the SVB main office on Tasmin in Santa Clara about 25 years ago the vibe was so off that ever since I made sure every check drawn on them was cashed immediately. In person. Same day. I always did the same with Bank of America but in their case it was just that their utter incompetence was notorious. And always to their benefit.
So think of SVB as the local Anglo Irish and you wont go too far wrong.
We’re only scratching the surface of the sleaze and corruption here.
The reaction to this collapse will be very interesting. I am full expecting Biden and the Dems to circle the wagons in order to limit the contagion. There’s simply too much political damage to be exposed if this “bank” was to be allowed to unwind in a typical way.
I don’t see how Silicon Valley Bank and Anglo Irish Bank are anywhere near an approximation to each other.
Silicon Valley Bank is failing because it bought long duration US securities at low yields, right before those securities have taken massive haircuts because of inflation and the dramatic rise if the fed fund rate.
Anglo failed because it ballooned its loan book in risky development land at the very top of the boom.
What I am looking for in all this is how the tentacles of big tech and the biden regime weaseled their way into all of this, and how they will now try to extradite themselves from it.
The collapse of Silicon Valley Bank (SVB) in the US eliminates a significant source of funding for Irish tech startups, but the direct impact on firms here will be limited, according to one industry leader.
"What I would say in terms of impact is that it is not ideal for funding options for Irish startups to be reducing further, and the loss of an investor is never a good day for the ecosystem,” said Sarah-Jane Larkin, chief executive of the Irish Venture Capital Association.
“We are very limited in this country in terms of additional private sources of capital to match state investment in VC funds.”
The view comes after Californian regulators stepped in on Friday to shut down Silicon Valley Bank after a run on its deposits.
SVB has been a funder of the Irish tech scene since 2012 and has committed hundreds of millions in funding since then in a partnership with the Irish Strategic Investment Fund (Isif).
"Obviously SVB have invested in a number of Irish companies, but not such a significant number that it would have a systemic impact,” said Ms Larkin. “And the nature of their model means that by and large funds have been drawn down already.
"I think the impact on the Irish ecosystem will be fairly contained,” she said, although she added that the full effect of SVB’s dramatic collapse has yet to be seen.
As of the end of February 2023, Isif had approximately $100m (€94m) invested in five investment funds managed by SVB Capital, a subsidiary of SVB Financial Group, and received distributions in excess of that amount since 2012, an Isif spokesperson said.
Anglo and SVB were exactly the same. Both very dodgy banks handling dodgy money killed by huge losses on mind numbingly stupid trades (Anglo was mostly FX - $5 billion’sh) and by depositor flight.
Anglo went from 30 billion euro deposits to over 70 billion euro in a few years then in less than 18 months 35 billion plus euro walked out the door. (the Austrian connection?) But Anglo had written about 60 billion plus of loans on deposits that mostly no longer existed. This was not like Northern Rock or the Scots Gits banks, who borrowed short and lent long. Anglo was recycling hot money as loans. No deposits and CB involved check kiting, sorry cross deposits - then its NAMA time.
Most of SVB’s deposits was VC money from the second tier and below VC’s who have been running a very lucrative Ponzi since the early 2000’s. All the 2 for them. Management fees. Almost no 20 for the investors. Almost all schmucks and rubes from the pension / “private equity” funds who in the last 10/15 years have been in a desperate search for yield. Another side effect of the zero / negative interest rate CB policy.
It will be interesting to see how many dot coms / unicorns cant make payroll the next few weeks. As none of them had positive cash-flows. Quite the opposite. For local interest watch Strip. Even for a dot com there was always something very odd about the optics. A zero margins business and not very impressive guys with none of the usual connections. A front for something or someone. One way or another. A eCommerce version of the old time laundromat or carwash maybe.