All Forum Posts by: Bill F.

I had a boss that used to say "If there is doubt, there is no doubt, don't do it." 

I think that applies to your situation...

 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

Having 20 different bank accounts has never been a serious suggestion by anyone who knows even a tiny bit about treasury operations and is basically a strawman. ICS Accounts have existed for decades. 

@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. 

 100% agree with @Nathan Gesner you have spent all this time and money focusing on things that don't matter, most likely in an attempt to delay yourself from having to make the uncomfortable decision to say "yes, I'll buy that house, here is a check" because you could make the wrong decision and lose money. 

Lots of ppl on BP have been there, we remember the fear, uncertainty, and doubt, but at some point you'll have to cross the Rubicon if you want things to be different than they are now. 

At least I can say all the worries I had about buying my first property turned out to be over blown and mostly a figment of my imagine.
Nothing ventured, nothing gained. 

 Before I read this thread I would have thought the same thing, but after testing that assumption, it turns out to be incorrect, at a high level they are correlated, and relatively strongly. 

Rough hypothesis, there is an exogenous variable tying these together. My bet would be interest rates. If I get the time, I'll get monthly fed funds rate and throw that in to the mix. 

 I'm with you Steve, I post a LOT less than I used to. Most of that probably for reasons internal to me (getting busier, different priorities, having more knowledge, seeing the same questions over and over again) 

The nature of the BP forums has slowly evolved as they will when anything scales and gets more popular. And the world changed around the forums. SFR/STR/Syndication/Turnkey became the hot thing and that tailwind helped BP. Low rates and lots of $$ made RE prices go nuts. All of this brought more ppl to the forums. Bringing lots of ppl togethere who share an interest means ppl will try to sell to them. Enter the influx of agents, lenders, GPs. A PE firm also bought all or some of BP which brings in its own set of pressures to hit metrics (increase mAU, Revenue per user, % of users with Pro/ Premium). Probably the worst for me was the revolving door of attempts at monetization of the forums that made the UX go from pretty good to terrible.

Now the nature of the forums is a bunch of new folks come on here hyped up on a dream and ppl scramble to reinforce their believes in hopes of selling them something while the ever shrinking community of RE nerds still do what they used to do. 

At least that's my take. 

 Not going to get any disagreement from me there Christopher, that's how it SHOULD work, but I think SVB had an uphill battle operating in the way you should. 

1. Quarterly earnings pressure. If the CEO says they will have $x of EPS and the profit centers miss some tgts, its not hard to envision a situation where they look to trim costs, risk being an attractive area since humans tend to miss weight fat tailed risk, especially in light of quantifiable certainty. 

2. They didn't have a CRO for like 9 months or something silly. Maybe that led to an out of sight out of mind situation for the C Suite. 

3, Maybe related to #1, but as Drucker says "culture eats strategy for breakfast" and the culture of SVB doesn't seem super conserative or long term oriented. 

I'm going off my gut on the prices to hedges. I'm WFH today and am not important enough to have a remote Bloomberg license and I don't work in that space so I don't have an real knowledge on swap spreads so I could be way off on this. 

 If you come up with a way to hedge that issue at an acceptable price you'd have every bank in the US knocking down your door for that trade lol. The thing is that everyone knew rates could only go up so no one would take the other side of that trade except for insane terms. 

The question cuts to the core of the issue. If SVB/any of the banks could have hedged this away 100%, they would have. In lieu of that, SVB took a risk on duration and to insulate themselves from the market to market loss that would inevitably come they rolled the dice and put 80% of their book in HTM to manage earnings. 

Hindsight being 20/20 that turned out to be a sub optimal decision based of the sensitive of their clients base to rate increases. 

 Thanks for the kind words Christopher. My previous post centered more around how the business that bank at SVB should have operated and not SVB itself.

 When you say "that their assets were primarily long bonds, while their liabilities were subject to daily withdrawals. A pretty terrible mismatch." you have defined the business model of a bank. Take in demand deposits and make long term loans, usually in the form of mortgages/ loans to RE developers, small business debt ect, but if you can't make loans yourself buy some other loans you didn't make that counter balance the volatility of your deposits in terms of credit, rate, and term. Every single bank in the US and the world does what you described.  

I don't have a research analyst level of understanding when it comes to banking, but working in adjacent an adjacent industry leads me to think what hurt SVB the most was their degree of customer concentration and how that relates to their deposit base. A lot of banks have massive losses sitting on their balance sheets (BoA is at something like $100b in their HTM book) however this doesn't matter all that much bc their deposit base doesn't contract at high rates. That's due to the fact that the ppl that have accounts at BoA on the commercial and personal side, come from all over the country and tons of different industries. Some are RE Agents who are getting crushed, others are dental practices who keep getting money in from clients and paying their bills like normal. Rising rates aren't great, but all in all they keep on chugging along. 

SVB had both geographic and industry concentration and that made their deposit base shrink super fast,  (VCs stopped pumping $ into startups, but those start ups still had to pay rent and make payroll). The operative word in demand deposits is demand and that's what happened, at a faster rate than their HTM securities could mature/ pay their coupons. Thus they liquated their AFS securities, but that wasn't enough, so they tried to go to the markets for debt/ equity, that spooked everyone and boom, 2d largest bank failure.