MY THOUGHTS ON SILICON VALLEY BANK COLLAPSE

MY THOUGHTS ON SILICON VALLEY BANK COLLAPSE

Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 903 votes

The following are my thoughts on the collapse of Silicon Valley Bank and any thoughts of upcoming bailouts. As an advocate for responsible financial practices, I believe that the government should not bail out banks that collapse due to their own risky investments. Such bailouts not only create moral hazard but also set a dangerous precedent that banks can engage in reckless behavior with little or no consequences.

Depositors should not be bailed out for savings over the $250,000 FDIC limit because they should share the risk of banking with a particular institution. When depositors place all their cash in one bank, they are essentially placing all their eggs in one basket, which can be risky. Therefore, it is important for depositors to diversify their savings across multiple institutions to mitigate risk. Additionally, depositors should consider investing their money in assets like real estate, which can provide long-term returns and mitigate the risks that come with being too liquid. Ultimately, depositors should take responsibility for their financial decisions and not rely on the government to bail them out in the event of a bank failure.

When the government bails out a bank, it sends a message that the bank's risky investments were acceptable and that taxpayers should bear the cost of the bank's mistakes. This creates a moral hazard, where banks are encouraged to engage in risky behavior with the knowledge that the government will bail them out if things go wrong. This, in turn, puts taxpayers at risk and undermines the integrity of the financial system.

Moreover, when the government bails out a bank, it effectively rewards poor financial management and risk-taking. This sends the message that there are no consequences for engaging in such behavior, which can ultimately lead to a culture of complacency and a lack of accountability in the banking sector.

In addition to the moral hazard, bailing out banks can also be costly for taxpayers. The funds used to bail out a failing bank are typically drawn from the public coffers, meaning that taxpayers foot the bill.

As a real estate investor, I am aware that financial distress in the market can create great buying opportunities. An economic downturn can create great buying opportunities in commercial real estate for savvy investors. When the market is down, sellers are more flexible on price and terms, and may be more willing to negotiate seller financing or other creative financing options. Additionally, there is likely to be less competition from other buyers as money may be less accessible. This can be particularly beneficial for real estate investors who have preexisting relationships with investors who have cash, creativity, and resourcefulness, allowing them to take advantage of market opportunities that others may miss. Ultimately, an economic downturn can be a great time for investors to acquire high-quality assets at a discount and position themselves for long-term success in the real estate market. With that said, as a real estate investor I would be extra careful with what banking institution I do business with and put my reserve money in moving forward.

In conclusion, I strongly believe that banks and depositors should not be bailed out over the FDIC amount. Bailing out banks creates moral hazard, sets a dangerous precedent, and can be costly for taxpayers. As a society, we should encourage responsible financial practices and hold banks accountable for their actions, rather than rewarding them for their mistakes.

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Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
3y

If this was a crisis that happened because of risky investments I would agree. That being said, this is a crisis that was created because the bank chose the safest asset on earth (US treasury bonds) to put their depositors money into and the Fed kept rates low too long and then raised rates too fast, and focused on lagging indicators all the while knowing they risked collapsing the banking system. If the Fed does not step in, it is likely that there will be a rush on the banks, and these banks will not be able to liquidate assets fast enough to handle the pressure and collapse. As RE investors we like buying opportunities, but we should not like government created banking system failures. 

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    3y
    Quote from @Bill F.:
    @J Scott their WAM as of 31 Dec 22 in their HTM book was something like 6.2yrs with $3b/month coming from interest and roll off. Hindsight being 20/20 yes, they should have held t-bills, but they didn't have a portfolio stacked with bonds. Being an honest broker the portfolio was medium term at best. 

    I imagine that would be a reasonable assessment of risk for a typical bank, but SVB wasn't typical. 

    Their depositors were mostly tech startups who had raised large equity investments.  The runway on these equity investments is typically 12-24 months -- in other words, the company expects that whatever money they raise will be gone in 1-2 years.

    That means that SVB could expect at least 4-8% of their deposits going away on monthly basis -- more than half of their total deposits in any given year.  That meant that if deposits slowed, the bank would need much more short-term liquidity than a typical institution.

    Knowing that in a worst case the bulk of your deposit base of $200B could go away in 1-2 years, putting all your eggs in even a mid-term HTM bucket doesn't make sense to me.

    That said, I'm not pretending to be an expert here.  Maybe they had some risk-management strategy that makes perfect sense to someone with more knowledge than I have, but it certainly doesn't make sense to me.

    Additionally, it makes no sense that when the Fed started screaming at the top of their lungs that they planned to raise rates higher and faster than anyone expected, that SVB didn't realize this was a risk to both their future deposits and to their bond portfolio is crazy.  They should have taken the smaller loss a year ago, as opposed to kicking the can down the obvious road to ruin...

  • Salt Lake City, UT · Member since 2019 · 2 posts · 1 vote
    3y

    @Jason Malabute

    I think the banks should have made a better decision on liquid assets. BOLI is considered a teir 1 asset on their balance sheets and many banks use it. A well managed bank should have had enough in it to cover an issue like that.

    Financial malfeasance on my end would lead to bankruptcy without the government holding my hand through it (bailing me out). I don't think our tax dollars should go to a bank that managed their funds improperly. We should have had more restrictions on fractional banking as well....

    With that said, it isn't the citizens fault so I think they should get the bailouts if they lost money. Not the other way around.

  • Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    3y
    Quote from @J Scott:
    Quote from @Bill F.:
    @J Scott their WAM as of 31 Dec 22 in their HTM book was something like 6.2yrs with $3b/month coming from interest and roll off. Hindsight being 20/20 yes, they should have held t-bills, but they didn't have a portfolio stacked with bonds. Being an honest broker the portfolio was medium term at best. 

    I imagine that would be a reasonable assessment of risk for a typical bank, but SVB wasn't typical. 

    Their depositors were mostly tech startups who had raised large equity investments.  The runway on these equity investments is typically 12-24 months -- in other words, the company expects that whatever money they raise will be gone in 1-2 years.

    That means that SVB could expect at least 4-8% of their deposits going away on monthly basis -- more than half of their total deposits in any given year.  That meant that if deposits slowed, the bank would need much more short-term liquidity than a typical institution.

    Knowing that in a worst case the bulk of your deposit base of $200B could go away in 1-2 years, putting all your eggs in even a mid-term HTM bucket doesn't make sense to me.

    That said, I'm not pretending to be an expert here.  Maybe they had some risk-management strategy that makes perfect sense to someone with more knowledge than I have, but it certainly doesn't make sense to me.

    Additionally, it makes no sense that when the Fed started screaming at the top of their lungs that they planned to raise rates higher and faster than anyone expected, that SVB didn't realize this was a risk to both their future deposits and to their bond portfolio is crazy.  They should have taken the smaller loss a year ago, as opposed to kicking the can down the obvious road to ruin...


     I agree with 90% of your position J. As with most things that go wrong, there isn't one clear cut simple answer, but rather multiple overlapping and intertwined partial causes that if one didn't happen, everything would have worked out fine. 

    I don't quite agree that their deposit base could, in normal course of business, fluctuate to the degree you say; I think your analysis omits the idea that 1. those startups, even pre profit ones, have some degree of cash flow and 2. VCs will fund other ventures, which replenish their deposit base. However those are technical squabbles about the relative stickiness of deposits; it suffices to say we both know SVB's deposit base was a lot more concentrated than your normal reginal bank, both in geography and ownership. 

    We are also in 100% agreement that their balance sheet strategy didn't pair well with their product market strategy. To use a BP related analogy, they tried to do a high end flip with bridge loans and credit cards. When it works, they crush it, but when it doesn't things fail spectacularly.

    I'm not 100% sure of the timing of when they classified assets as HTM, but possibly it occurred before mid '22? I'm not sure, but nevertheless, I agree it doesn't make a ton of sense, when rates are super low, to tie up 80% of your cash where you can't get to it in a maturity mismatch to how your your deposit base could behave when rates do rise. 

    To me that's the key issue here; they wanted to have their cake and eat it too: get all the positives of having only the most affluent customers but not have any of the downsides, i.e. the things you mentioned, shorter duration, which in turns means lower yield, which means lower EPS or ROC than comps. That's not a way for the C suite to get outsides bonuses or have their RSU/RSA's vest in the money. 

    “For what every man wishes, that he also believes to be true.” -Demosthenes



  • Member since 2022 · 485 posts · 216 votes
    3y

    Hmm anybody want to bet on bank run tomororw on FRC? 

    https://www.cryptopolitan.com/...

  • New to Real Estate · Denver · Member since 2020 · 75 posts · 81 votes
    3y

    @Jason Malabute

    Ever heard of TARP?
    The ‘bailouts’ of 2008 were NOT the bailout that you think they were. The US government owned essentially proffered stock in each bank that was bailed out. Meaning there was no free money, the government owned a portion of each bank, meaning the taxpayer owned a portion of the banks equity. 
    The troubled asset relief program (tarp) was one of if not the only tax payer funded government programs to actually make a profit! When the economy returned the government sold its equity positions in the banks and made the taxpayers money. There was No Free Money in the 2008 bailouts. And in terms of actual money it was only $431 billion , with a reported $15billion profit on the program after assets were sold.

    The real bailout with the free money you are not thinking of was Covid. The PPP loans gave out over $800 billion in free forgivable loans. That’s almost double the 08 ‘bailout’ for absolutely FREE. Taxpayers got no equity, stock or return on any of that money. It was printed, sent and forgiven with little oversight. 
    Money was literally free for 2 years. Not to mention the other $1.8 billion sent out to individuals and family’s, while student loan payments are still on pause (interest paid by the government). In total $5 Trillion was spent on Covid relief that added 0 value to the American taxpayer. 

    Literally this is a fight for the US dollars survival. A run on banks would crash the Dollar and it would never recover as the world reserve currency. The government has to back the banks at all costs. $31 trillion in debt backed by nothing but a printer. If we all go to the bank and make a withdraw it would call the US governments bluff, then game over, no one wins. 



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