Too Rich to Fail:
The Federal Deposit Insurance Corporation took control of Silicon Valley Bank’s assets on Friday; $212bil. Over half that money is venture capital. California State law requires these start-ups (funded with SVB venture capital) to make payroll within a certain number of days, and many of these payroll deadlines come due Monday Morning according to Rep. Katie Porter (California Oversight Comm). We’re talking about Billions and Billions of dollar in venture capital that will become libel. This isn’t just about finally getting payroll money by next week. Not paying wages on time in California they can face stiff penalties, and can force companies or startups in receivership with no turning back.
VC billionaires are on the phone with Yellen clamoring for a bailout.
This is bigger than IndyMac, American Saving & Loan, Colonial Bank, FBOP, FSB, and a list of more banks combined. The real question is where are most of the assets. The interesting think here is that Silicon Valley Bank employees received their annual bonuses Friday just hours before regulators seized the failing bank.
Don’t be the last rat to jump a sinking ship.
Well, all depositors will have the $250k FDIC insured amount available to them on Monday. And the FDIC has said they expect to make more money available to depositors later this week.
Seems to me the right way to deal with this is for the California regulators to waive these payroll penalties until depositors have sufficient cash to make their payrolls. That could be as soon as the end of this coming week. Tossing a company into receivership because of a bank failure out of their control seems a bit draconian.
Perhaps that is what Porter is advocating.
–Peter
I haven’t heard anything that would support that.
Accounts under $250K account for 5% according to Yellen.
These are not regulations, this is State Law.
Of course this will not happen, the Feds will bail out SVB. They bailed out banks with 1/100th the assets in '08 '09. The S&L Bailout was smaller than this bank. As I said, this all depends where they have their assets; if it’s in crypto or treasuries. If their assets are secure, finding another bank to support their shortfall will be easy. I wonder if the executives who took their bonuses and headed out the door know something.
Today Yellen denied there would be a bail out. At minimum bank stock holders will lose their equity.
That $250K FDIC insurance will cover payroll for about 125 employees in a typical company with a median salary of $50K. But in silicon valley that is probably peanuts.
Plus you wonder how soon FDIC insurance will be paid. Or can you borrow against that asset and who will make the loans?
News reports indicate SVB tried to sell shares to raise equity but they failed to have the secrecy agreements in place to make that possible. Not enough time to close the deals needed. Those deals may still be possible. Acquiring the bank by another bank could be best solution to the problem.
Bank run was set off when they tried to arrange sale of more shares.
Now you wonder if the sky will fall. How many other banks are in similar situations. Now scrambling to raise capital.
Possibly the Moody’s bond rating agency chose SVB as a warning to the other banks. They threatened a two step downgrade in bond rating. Presumably that would put SVB in junk bond territory making bond refinancing very costly.
An expected risk of rising interest rates. Lowering mark to market value of bond investments. And causing investors to move their deposits elsewhere for higher interest payments.
“I think either California or the Treasury Department should backstop Silicon Valley Bank - thousands of companies will fold or lay people off next week because of lack of access to accounts through no fault of their own”
… “SVB’s clients - many biotech - are important for national innovation and competitiveness. Plus you need to instill trust and reduce financial contagion/panic/further runs.”
Andrew Yang
(but what would he know)
So how does one lousy bank cause “mass” layoffs? That’s why we have unemployment comp. Social safety net stuff. And some think even that’s too much “communism.” Does Yang say anything in there about what a due and proper extraction would be from the bank? What should we expect from the miscreant in terms of punishment and future dissuasion? Why don;t they just ask their banky friends: Hey, man. I need some money. I blew it all
Their troublesome assets were in long dated treasuries - mostly 10 year, I think. They bought too many of them in 2020 and 2021 with sub 2% yeilds. With inflation ticking up in 2022 and interest rates following suit, the FMV of these treasuries fell significantly.
If I remember the numbers right, they have 90-something billion in face value of those treasuries, and the current FMV is 70-someting billion. (That was as of last December 31.) So about a 20 billion haircut. Accounting rules allow them to carry the bonds at face value if the bank’s intent is to hold the bonds to maturity - which it is.
But depositors started taking too much out of the bank last week, and they had to start selling the bonds and recognizing the losses in order to have the cash to pay off departing depositors. Basically, it’s a run on the bank just when their long-term assets are at a low point. Unfortunately, George Bailey wasn’t available to talk the depositors out of withdrawing their money, and the bank’s capitalization fell to roughly zero, forcing state regulators and the FDIC to act.
Then again, while we’ve been bloviating, government agencies have been acting, and all of this is moot. The FDIC and other agencies announced today at 6:15 pm ET that all depositors will be made whole and all deposits will be fully available on Monday.
This doesn’t surprise me, as there was approximately enough assets to pay all depositors. The only question was how badly creditors would be hit. I believe shareholders will be wiped out.
I had earlier run back-of-the envelope numbers that showed the current FMV of total assets are about 2%-3% less than the total of deposits and other liabilities. So the question was who would bear that shortfall? If depositors and creditors shared the shortfall equally, depositors would, on average, lose that 2-3% of their deposits. But in dollar terms, the shortfall is roughly the same as the liabilities to creditors. So it wouldn’t be a hard decision to make depositors whole - demonstrating the stability of the banking system - and stiffing creditors as well as shareholders. That appears to be the choice that was made.
–Peter
yes, what a coincidence.
The CEO sold 28% of his shares in the bank last week as did the CMO and the CFO. They took their bonus checks and headed outta town. The George Bailey analogy is too kind.
I get it. That’s what we know so far. That’s about 2/5 of their assets. These Silicon Valley venture capital investment bankers are not shy, nor fearful of risk. There is one thing you can be sure of, they know more than about SVB than the rest of the public currently knows about SVB.
Yellen has already mentioned that it will for sure be on the creditors and shareholders.
My point was to contrast their actions to George, not equate them. These bank execs are the polar opposite of George. I also expect to see some clawback of executive compensation and perhaps even sale proceeds. That might be in the SEC’s realm - not quite sure which agency would be doing that.
Well, we do have their 12/31/22 financial statements. And there doesn’t appear to be any junk assets. (Yes, I pulled them back up again to take a closer look.) $14 billion cash. $26 billion in securities available for sale (with 0.5 billion pledged as collateral). $91 billion in the troublesome Treasuries. (FMV of $76 billion). $3 billion on other securities. $74 billion in loans. $3 billion in accrued interest receivables. $1 billion in the normal business assets (buildings, equipment, goodwill, intangibles.)
There is a big red flag waving that I missed in my quick analysis. The bulk of their non-deposit liabilities is $14 billion of short term borrowing. At the end of the previous year, that was $0.07 billion ($71 milliion). They were getting loans from somewhere to have cash on hand. That liability is roughly the same as their cash. In short, they spent 2022 borrowing to keep from having to recognize losses in their Treasury portfolio.
OK - I had to look at the footnotes to their financials. Turns out my understanding was wrong. There aren’t many Treasury bonds in their portfolio. The largest category is MBS and CMOs (presumably from Fannie, Freddie, and the GNMA, as they are referred to as agency issued securities). Those account for $82 billion of the $91 billion total. $7 billion of muni bonds and $1 billion of corporate and treasury bonds round out the total (with a rounding error - yes, I noticed.)
Still, the problem was the same. This portfolio was dropping in value while accounting rules allowed them to be carried at cost.
And no crypto to be found anywhere.
–Peter
Further evidence that they were blindly reaching for yield. These yielded slightly more than equivalent treasuries. Last week, they were yielding about 1/2 or 3/4 percent more than treasuries. It really does appear that, over recent years, as deposits came in, they simply (blindly) looked out there to see what had the highest yield at the time … and bought it. I suppose that could happen when you have no risk manager at all at a bank.
From a recent Berkshire Hathaway Annual Report -
“As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate.”
Remember that the risk that bit them was not the risk in the securities. These securities are pretty darn safe. And they didn’t default or stop paying. Frankly, because they are ultimately mortgages written at rates lower than the borrowers can get today, they will likely pay like clockwork.
It was the macro economy that bit them with rising interest rates. The market value of these securities fell because of the change in interest rates. And because the return on these securities was locked in, they couldn’t pay a high enough interest rate to keep the deposits. As deposits started flowing out, SVB ran out of cash and needed to tap into these investments to pay departing depositors. They managed for a while by borrowing against these securities but that wasn’t enough to keep them afloat.
I suppose that area is also the job of risk management - to keep a watchful eye on the economy and how that could affect the bank. In the end, this is a management failure. And not even something unique. Banks have failed this way a great many times.
What didn’t fail is banking regulators. They stepped in just as the real value of the assets fell to roughly the liability to depositors. In spite of the weekend of angst, depositors will be made whole and will have full access to their funds after the closure. In short, the system worked as it should.
–Peter
Sure. But that isn’t the only risk involved. There is also duration risk … which is MUCH more important to a bank, than for example, an insurance company or a pension plans fund.
People incorrectly always assume that risks only refer to losses, but that is absolutely NOT correct. I’ve tried to explain this concept many times, but it rarely is understood.
My favorite example is people “pushing” to pay parts of a mortgage early saying that it reduces risk because you have overall less debt. This is not at all correct. For many people, prepaying the mortgage is incredibly risky, perhaps one of the most risky things they will ever choose to do with their finances. That’s because if you have $25k of free cash sitting in a bank account, and a $200k mortgage balance with a $1250 monthly payment, you can choose two extremes:
- Keep the $25k in the account even though it pays low interest.
- Use that $25k to pay down the mortgage and feel good that you have less debt.
Now for the risky part. If suddenly after paying down that $25k you lose your job, maybe a recession, maybe just an individual thing. And it’s taking a long time to find another job. That mortgage payment of $1250 is still due every single month. The bank doesn’t care that you paid it down by $25k a couple of months earlier. The $25k, if still in your account, can cover 20 month of mortgage payments, but if it prepaid the mortgage balance, it can’t. And if you don’t make your mortgage payments, they’re going to foreclose eventually. Prepaying is a very risky move.
This generally is declared well ahead of time to the SEC. I doubt he suddenly turned tail and ran.
Rule 10b5-1 currently requires 30 day advance notice. Was he aware that his bank was in trouble 30 days ago? Seems like he should have.
On April 1st, that advance notice increases to 90 days. The CEO would not have been able to sell last week if the new rule was already in place.
I don’t think this is entirely accurate. I’m not an expert, but I think 10b5 plans can be set up long in advance. For example, an executive can file to sell X,000 shares every quarter on the nearest day to 3 weeks before the end of the quarter. And I think the plan can remain in effect for any (?) length of time. So, if in early 2022, this exec filed to sell every quarter (or every month, or whatever), then the exec would still be permitted to have this particular sale go through without any questions.
So now the question is - when did the exec(s) file their 12b1? Was it a while ago, or was it after they realized the ship was going down? If the former, it is okay in the eyes of the law. If the latter, they used non-public information to time their trades, and that is not okay.
Hi Peter,
I was hoping to get your thoughts…I am a long term investor and so not bothered about short term gyrations, as long as the fundamentals are reasonably strong.
After what happened to SIVB, I see a lot of regional banks have been literally killed! I am trying to see if some of them have been unfairly punished simply because all regional banks are risky.
One I was specifically interested was the KEY CORP bank, which seems to have a pedigree, well run all these years, and have a fat dividend…
I see it has only 2% held to maturity securities compared to say 47% in SIVB!
Is the fear overblown in this stock? How would you analyze this or any other bank stocks?
I ask you, because I saw that you mentioned “back of envelope” calculation, and so wanted to learn that if possible.
Thanks in advance,
Peter
10b5 was filed in late January. Window for sale opened on 2/27 (also date of sale) and was set to close on 5/2.
This!
All those MBS/CMO’s were not marked to market on their financial statements - yet their CFO obviously knew their value was significantly lower than their purchase price and if forced to sell, would be very detrimental to their balance sheet.
Not only that, but he hadn’t sold any shares in over a year!