If anyone else has been lost in the SVB weeds like me, this is the clearest explanation of what went wrong at SVB and why the Fed inflation fight has introduced systemic risk to the banking system.
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Aside from the fact that a lot of additional information has come out and a lot of actions have happened since this piece was written on Friday, it really comes off as a hit piece against the Fed.
Start with the headline - trying to lay the blame for this bank failure on the Fed, when the blame should like on the bank’s executive management. SVB took in a lot of fresh money in 2020 and 2021 as the tech world expanded because of the pandemic. But the bank put that money into long term bonds as they tried to make money off of all this new money. The Fed didn’t force the executives to make that decision.
SVB’s management also chose to keep cash reserves pretty low. At the end of 2021 and 2022, they had about 8% of deposits in cash. By contrast, B of A had 12% - 16% of their deposits in cash. That’s another sign they were trying to squeeze every drop of profit out of the deposits that they could.
Then later in the article, the author tries to draw some conclusions. The first is sort of obvious:
the Fed’s rapid pivot on interest rates couldn’t help but spill over into the broader economy.
Well, duh. The Fed is trying to affect the broad economy. The economy was (and still is) experiencing inflation. The fed is trying to keep inflation from getting out of control. And they do that by raising interest rates to slow down the economy. That’s kind of their job.
He then quotes someone I can only classify as a nitwit with a megaphone:
“The Fed’s actions to fight increasing inflation will need to be materially adjusted, which it should be anyway because inflation is driven by many factors that are beyond the Fed’s control,” Kelleher said. “Causing financial instability and a recession (of any depth and length) while missing the mark on inflation should cause a fundamental rethinking of the Fed’s powers, authorities, and role.”
Clearly, this Kelleher guy doesn’t understand the Fed’s role - in spite of the fact that he worked for the Federal Reserve earlier in his career. On the other hand, it looks like he’s been doing some good work in consumer advocacy, so he’s not all bad. I’m not fully sure what to think of him yet.
Still, claiming the Fed has missed the mark on inflation makes me think he doesn’t understand how long it can take for the Fed’s actions to result in the desired outcome. He’s claiming the Fed has missed the mark on inflation - which I don’t entirely agree with. In spite of one of the fastest rises in their target rate ever, the target rate is still in an accommodative range - lower than or equal to the inflation rate. And because of his lack of understanding, he want to use his megaphone to fundamentally re-think the Fed? I think not!!
Back to the article.
The second “takeaway” is this gem:
Larry Summers told Bloomberg that the financial system should be fine, as long as depositors get every penny of their money back, which would be a $150 billion bailout.
Ummm. No. Not even close. SVB’s deposits only total about $170 billion. Does Summers not understand that, while the bank’s equity is gone and the bank is technically bankrupt, there are still a lot of assets available? My simpleton’s reading of SVB’s financials show that it’s likely their assets are roughly equal to deposits. And bailout would be - at the VERY most, and using the information available at the time of writing (therefore ignoring the announcements on Sunday) - one-tenth of that 150 billion. $15 billion tops. And more likely closer to one-tenth of that - maybe $2 billion. So Summers is only off by two orders of magnitude.
And yet this writer chooses to use idiotic statements to try to make his point. Instead, he’s just showing off his ignorance. And heaven knows we’ve had more than our share of publicly flaunted ignorance lately.
I’d dismiss this entire article as useless. About as far from a clear explanation as you can get.
–Peter
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Does this one pass your muster?
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Yes, it’s a much better article.
–Peter
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That’s a great article. Worth the time.
Thanks,
'38Packard
→ former tech guy
The bank lost (or got rid) of its risk manager in April of '22, and the replacement arrived only this January. The bank got rid of its interest rate hedges last year. All other banks hedge their interest rate risk. (So they officially became Kamikaze Bank in 2022, but in spirit they always were)
A VC partner mentioned that he would tell startups to immediately open an account at SVB, which suggests they didn’t have any other bank accounts, or something, (maybe kickbacks)
. . . . . . . . . . . . . . . . . . . . . . . . .
Likely SVB realized it was dead more than a year ago. It didn’t try to adapt. Signalling any distress one or two years ago would have spooked the the VC/startup world, of which they are the smaller part. IMO, they died to save their hedge fund/venture capital masters (whose deposits were all made whole by the Feds)
Of course the entire group look like clowns now, but they delayed that fate for over a year. Always delay looking like a clown.
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That seems unlikely. The Feds interest rate increases only started a year ago, and SVB didn’t have an equity problem, they just didn’t have enough cash on hand to satisfy a sudden spike in withdrawals (because they had put so much of deposits in long bonds, reaching for that teensy bit of extra yield.)
Until the interest rate increases they could have redeemed the bonds at par or very close to it; it was only after the continuing set of Fed increases that the bonds were so far underwater (short term) that they couldn’t get the liquidity back out. At that point they tried for cash via secondary stock offering and/or preferred, but that took time and that spooked everyone.
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