I'm a bit confused by some of the discussion here. Many people talk as if there was factually no underlying issue with the bank, and the run was caused purely by panic. For that to be true though, I think the rationale presented alongside the urging to pull out would need to have been fabricated, or "mistaken". But I haven't seen anyone explicitly claim that. Am I missing something? Is there just a lack of general understanding of the prisoner's dilemma?
I think the understanding issue is that all banks are basically insolvent by design under any situation that differs from normal because the business model is to take in customer funds and then deploy them (lend them for mortgages, but mortgage backed securities and other bonds, buy stock, make loans, etc) and that will always involve a duration mismatch given that those customer funds can all be withdrawn on demand and whatever you deployed those customer funds into will not be able to be withdrawn on demand (and may have a multi year withdrawal limitation).
How this is managed is by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals, which wasn't possible for SVB because 20-30% of their total customer deposits were leaving each day by the end. In that regard it is true that the bank run caused the failure. However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators) and the loss on them from the sudden increase in interest rates was large. In addition they had a very large portfolio of loans to startups that were questionable given the massive shift in that market so there really is a big question mark on how many billions that portfolio would be down which makes it really questionable whether the bank was actually solvent or not and that drove the panic to get out.
So the correct answer here is the regulators screwed up allowing losses to not be marked to market, the bank management screwed up exposing themselves to a very risky duration mismatch and very risk asset mix and when the bank customers figured it out they caused the bank to officially fail by trying to protect their assets by moving them elsewhere.
No, all banks are illiquid by design, not insolvent. Sure the banks don't have cash in the vault to cover all deposits, but the mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent due to the interest rates increasing since they bought their mbs's.
Yeah. The only justification for HTM accounting is an expectation that depositors will be irrationally "sticky", i.e. that when interest rates increase they won't move their money to a bank (or Treasury bill, etc.) offering a correspondingly increased return. It's a real economic loss no matter what; the HTM accounting just assumes that the depositors' irrational behavior will allow the bank to earn its way out of it. For the SVB it clearly didn't.
> mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent
SVB wasn’t insolvent if they held their assets to maturity though. The issue was that the market to market vale was significantly lower than the hold to maturity value.
The difference was still a liquidity issue. It was magnified by the fact that the market value of their assets was dropping precipitously.
It's a solvency issue, not a liquidity issue, and HTM accounting does not reflect economic reality. Let's say that I have $1000 cash, but owe $1200 due tomorrow. I assume you'll agree I'm insolvent.
I can take my cash and purchase a 10-year zero-coupon Treasury paying ~4%; so my $1000 now buys me a payment of 1000*(1.04)^10 = $1480 in ten years. Would you say that I'm solvent now?
NPV is what matters for solvency; a cash flow later is worth less than the same cash flow now. Interest rates were ~zero for long enough that everyone seems to have forgotten this, but I guess Peter Thiel didn't.
I do agree that so far, the SVB's HTM accounting seems to have been entirely compliant. Indeed, I think those rules are the root cause of the failure--if the SVB had been forced to mark to market, then they'd have recognized the loss earlier, causing them to raise equity (or wind down less abruptly) before the hole got so deep.
Regulators can draft whatever they want, but if their rules depart too much from economic reality then bad stuff tends to happen. I think that's what happened here.
This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid asset is greater than the value of the deposits outstanding when I am trying to make payroll next week. What's the liquidation value of that illiquid asset? What games have been played to "mark to market" said illiquid asset? If you want to mark it at liquidation price (likely 10 cents on the dollar or less for a large portion of this stuff) then you might have a point that is relevant to the average person but at the same time my statement about all banks being insolvent by design would be technically true instead of practically true if you did that.
The difference is that if a bank is solvent but illiquid, you can find a buyer to assume the deposits and the depositors will have access to all their money ASAP. If they bank is both insolvent and illiquid, then there's no way that could happen. Either the depositors have to take a haircut, or the government has to bail them out. I agree that both cases would cause a crisis that might cause a company to miss payroll, but the latter case is obviously worse than the former. The best analogy I can think of is having your server explode and having a backup, and having your server explode and not having a backup. Sure, both cases will result in downtime, but the former is obviously preferable to the latter, and it's not exactly "a distinction without a difference for pretty much everyone except [computer] nerds".
You are arguing from the perspective that the mark to market is correct and perfectly or nearly perfectly knowable when that is not the case pretty much all the time. This bank was solvent according to the regulators until the day or a few days before it was taken over and yet could not find a buyer or raise capital. Why was that? It is because the accounting allowed to determine solvency allows hold to maturity and no marking to market on nearly perfectly knowable assets like MBS and this bank held a significant portion of its assets as loans to startups and warrants in same startups that are all basically valued on hopes and dreams and swing in value by a huge margin on market sentiment changes without necessarily changing the value they have to be marked at on the bank's books. I agree in the finance nerd sense there is a large difference, but for practical purposes for the average depositor there isn't really any difference.
I'm not sure what you're exactly arguing for here. I agree that "mark to market" might be non-trivial to calculate (although that's questionable for MBS, which are bond-like instruments that you can calculate the market value of based on current interest rates), and that regulations allowed their balance sheets to deviate from the actual market value (ie. ground truth). However, that doesn't change the fact that to "the average depositor", there's a material difference between being worth more than your liabilities and being worth less than your liabilities.
> by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals
Also by using the Fed’s discount window. If you’re illiquid, and not insolvent, you borrow from the Fed. If your assets are worth less than your liabilities, you’re insolvent, and the FDIC takes charge.
Thank you for this distinction. In all the talk about the SVB failure it didn't occur to me that this would have been an option if it weren't for the fact the mortgage backed securities were underwater.
The regulators literally increased the limit required as a response to the lobbying of this specific bank.
It's not "dumb regulators". The regulators didn't "screw up".
The government isn't coming to save you and you shouldn't expect it to, because it's literally controlled by the same griefters who have learned to perfect the art of milking money from everyone by taking innocent people hostage.
Let them blow the hostages. Or get more hostage situations. I'm all in favor of letting them blow the hostages this time. The good startups will be forced to dilute the corrupt VCs who pointed them towards SVB, and raise money elsewhere. The bad startups should just fall.
The bad startups that... failed to do due diligence on which bank they chose? Do you really think that we should add "financial risk analyst" to one of the competencies required for a startup founder?
Startups literally fail all the time and for all sorts of different reasons. It's risky for a reason. This will change nothing, startups are still more likely to fail for the other 100 reasons.
It is unfortunate, but it seems like if you allow bad people to take innocent people hostage and reward them for that, you only get more hostage situations.
This is coming from a bank who had lobbied for the regulation to be repealed. That had the CFO of Lehman brothers from 2007. These are professional hostage takers. I would say persecute them, but we all know this isn't going to happen, and they aren't the only people acting this way. They are getting away with scamming people because we let the government make up the losses to the people they scam.
It's no wonder the VCs fled the ship so fast, many of them knew what was brewing. This is VCs money that is lost. That's where startups get their money. These startups slept with dogs, they shouldn't be surprised they wake up with fleas. It's VC bank using VC playbook of zero or hero. Let them get the zero. Do you honestly think all those VCs had no choice in where their startups deposit their money?
Although I wouldn't 'blame' startups that are having issues due to the bank run, They could have been in a better position if they understood that deposits are only insured up to 250k. If they had multiple accounts, their insurance would have been better and would also sustain less risk if any bank had permanent or temporary liquidity issues.
Maybe the take should be that like you scale your infrastructure and put it in different regions, maybe your banking should be treated the same way, it doesnt require you to be an analyst, it is just another way of covering your bases.
Yes. There’s a reason that MBAs are a thing. The actual MBA degree is worthless but if you’re trying to run a company, you need to understand that you have to know all of the material that is typically taught in an MBA.
> I think the understanding issue is that all banks are basically insolvent by design
Banks are not balance sheet insolvent at all.
The problem is that their liabilities are deposits which are very short term and depositors can show up and demand money, while their assets are loan paper which is typically very long term.
They can become cash insolvent fairly quickly during a run, that doesn't mean that they are "insolvent by design" though.
> However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators)
Rather the inverse. If they had been able to hold their securities to maturity then they would have been fine. The problem is that the drawdown in deposits forced them to sell securities and inherently mark them to market, which made them balance sheet insolvent.
If regulators forced them to market to market that would have just created more panic, that isn't really a solution.
What they needed was to stress test their portfolio back in 2021 when they were buying mortgages against a 6% federal funds rate, and avoid buying so much in order to not have so much interest rate exposure. In 2021 that would probably have been considered laughable.
This isn’t true at an individual bank level. See the related post on JPM’s report. Systemically important banks need to mark to market regularly, and are still well capitalized after accounting for unrealized losses.
Even for insolvent banks, a bank run is typically rare or if it happens, is a very slow-moving event because of FDIC insurance.
The difference here is that SVB’s customers did not understand proper corporate cash management practices and had deposits far in excess of FDIC insurance. So from a game theoretic perspective if you hear a whiff of insolvency then you want to pull your cash as fast as possible.
Now you have me curious. I have no difficulty spreading my cash across a few accounts on as many institutions to be well within the FDIC insurance's limit; it's not that much ("few" might or might not be one). But how are well funded corporations supposed to do that? Clearly having the funds available as (bookkeeping) cash isn't ideal, but sometimes unavoidable, I suppose.
There are many situations where a bank is literally solvent, but cannot survive the liquidity crunch of a bank run.
In fact, it's probably true of pretty much every bank every day, since this is partial-reserve banking. If everyone wants their money back, NOW, the bank doesn't have it, but in normal banking, the institutions can be stable for centuries.
SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO).
So to service the net withdrawals that started earlier this year (lower levels of VC investment and higher expenses in the concentrated startup community SVB served), after the big interest rate increases, they had to start cashing out their T-Bonds at ~80% of face value. This lead to need to raise new capital, which reduced confidence in the bank...
Had everyone, including Thiel, stayed calm instead of Thiel yelling "FIRE!!", it is entirely likely that it could have been at least calmly wound down or sold.
It's kind of like crossing thin ice. If you can keep your weight spread over enough surface area with no mis-steps, you can get across just fine. But if you take one wrong step focusing the pressure at one spot, you are now in the freezing water with a life expectancy of minutes if you are helped.
>SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO).
And they put even more into 30-year mortgage backed securities. Bonds are normally purchased across a mix of maturities by banks. It's strange how everyone is absolving them for the mistake of holding almost no 1-2 year bonds and instead blaming VCs for pulling out.
To be explicitly clear: it's the responsibility of the bank to maintain their own liquidity (just like the borrower needs to do the same with their loan repayments), and putting $100B (33%+) of assets into 10-30Y securities was highly irresponsible and poor risk management.
I keep screaming into the void that the real issue is the poor risk management of the bank, but nobody in the echo chambers wants to listen to anything other than VC conspiracy points
Average maturity was like 6y though, which means ~15% annual turnover. Not great (and certainly not nearly enough to redeem 20% in like a month) but far from locked up forever.
>>SVB CEO Greg Becker lobbied the government to relax some Dodd-Frank provisions on regional lenders in 2015. Trump did in 2018. [0]
All to chase a couple extra basis points (1/100 of a percent) of yield to increase the bank's profits.
Both Glass-Stengal from the 1930s and Dodd-Frank from 2010 segregated the investment (read market gambling) activities of banks from the deposit activities.
After a period of no crashes, they always lobby to gut such laws to increase their profits (of course privatizing the profits, but socializing the risk, which will fall on society whether or not the taxpayers bail out anyone).
Politicians who are fools comply with these requests because the voters will not notice right away. In this case, it wasn't until the next administration that we have the 2nd largest bank failure in history. Or when Clinton rolled back Glass-Stengal in 1999, it was nearly two full terms later before the banking system came to a new near-collapse crisis.
Fortune is washing the exclusionary rules for non-bank by saying the executive administration imposed this rule when it is actually the Board of the Federal Reserve that imposed the rule:
"Finally, the Board has determined not to impose enhanced prudential
standards on nonbank financial companies supervised by the Board
through this final ($50B stress test) rule."
>All to chase a couple extra basis points (1/100 of a percent) of yield to increase the bank's profits.
Source? My understanding is that they fucked up by buying long dated bonds/MBS rather than short dated ones. Surely the difference between a 5 year treasury and a 1 year treasury would surely be bigger than 1 basis points?
This is the prisoner's dilemma, though. Unless there is sufficient, government-esque coordination across VCs (and founders, etc) to force everyone to remain calm, no individual can rely on the others remaining calm, and they are all in a position to individually lose if they remain calm while others do not.
If anything I think it would be extremely spooky if that level of coordination did exist across VCs. The lack of strong coordination this has demonstrated is almost heart warming, in a way (if you like free markets).
I think the point is that a precipitous pull of deposits actually diminishes ability to maximize the underlying asset disposition required to cover the whole of deposits.
You are correct that there is a bit of prisoner's dilemma here. I'm sure Thiel's portfolio companies that successful transferred funds had an awesome maybe even productive weekend while the rest had to scramble to figure out what this all means for them.
I think there's also tragedy of the commons at play here and this is where some level of orchestration would have been beneficial to optimize the common good or at least prevent unnecessary depreciation for the overall ecosystem.
>Had everyone, including Thiel, stayed calm instead of Thiel yelling "FIRE!!", it is entirely likely that it could have been at least calmly wound down or sold.
But in this case the assets (at present market value) are literally worth less than the deposits. Yelling "FIRE" seems totally justified in this case.
The same situation applies at nearly EVERY bank at nearly EVERY time.
This is Fractional Reserve Banking [0].
There are almost NEVER enough immediately available liquid assets to survive a bank run.
Deposits are the inventory of a bank. They then hold a small fraction in reserve, while loaning out many times that value. They can also have other assets.
The TOTAL VALUE of all the assets is usually greater than the liabilities, which is the deposits, i.e., the bank is solvent.
That does NOT mean that the same fully solvent bank could immediately cash out those assets at full value to meet a surge in withdrawal demands.
Take any bank, both most solvent and with greatest liquidity. If we had enough clout to start enough insolvency rumors that we can precipitate a big run on Monday, they'll be shut down by Tuesday. All you need is a big enough "megaphone". Once it starts, it is self-reinforcing, because only those who pull their deposits early get anything.
Thiel had exactly such a megaphone, on a bank with assets and deposits highly concentrated in his industry. It is entirely possible, even likely that SVB would be open right now if Thiel had not openly made that call.
We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy.
You can have a huge pile of tinder with gasoline on it, but without anyone actually lighting a match to it, it could be disassembled and made safe. But as soon at that lit match is tossed, it's done.
>We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy.
Are you suggesting that SVB's assets at present market value might actually be worth more than their liabilities and/or that we don't know for certain? My impression is that the fact that they were insolvent was well known. See for instance matt levine's writeup:
>Basically SVB ended up with a large portfolio of held-to-maturity bonds with an average duration of 6.2 years at the end of 2022, “and unrealised losses snowballed, from nothing in June 2021, to $16 billion by September 2022.” These losses “completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet,” meaning that SVB was technically insolvent
It looks like at the end of the day, the total shortfall was something like 2-3 billion dollars, and that is at literal fire sale prices.
In a few hours on Thursday, over $42 billion was pulled.
The loan facilities simply could not react that fast, and if there was full knowledge instead of "the fog of war", they certainly would have been able to cover the full amount and make a bridge loan to keep SVB solvent.
But it all collapsed too fast. I'd be astonished if this wasn't the fastest bank run of such a scale in history (2nd largest bank to fail). Having effectively ALL of your customers concentrated in the same industry, and all connected by the fastest comms network on the planet, and electronic transfers, just made for a run of unprecedented speed. All of Theil's companies were surely transferring funds within seconds of his text msgs to them. Everyone else is only 1-3 hops away by text message, and then the public tweet t pull funds - it's over...
It has aspects of a prisoner's dilemma either way, but what happened to the SVB is indeed different from the classic "It's a Wonderful Life" style bank run.
In "It's a Wonderful Life", the bank has the money, but not right now. If the depositors all wait, then they'll all get their money. If they do a bank run, then the first movers get their money, and the rest get left with nothing, as good assets get liquidated at heavy discounts in a fire sale. So compared to waiting, the bank run is negative-sum to the depositors in aggregate, and zero-sum to the first movers. (It's positive-sum to Potter, who wants to buy the bank's assets at a discount.)
In either a mark-to-market or a net-present-value sense, the SVB doesn't have the money. When interest rates increased, their long-term bonds lost value. The hold-to-maturity accounting treatment saved them from reporting that, but that accounting is a fiction; it's a real economic loss, same as if they'd lent to a bankrupt startup. If the depositors all wait, then they'll get the right number of dollars in ~ten years, but those dollars will be worth less by then. So a bank run is positive-sum to the first movers, who can get their dollars now and buy Treasury bills at five percent (or put them in a better bank, or wherever else). It's roughly zero-sum to the depositors in aggregate. That makes a bank run relatively more attractive.
I think there's confusion because in both cases, "if you wait then you'll get your money". They're completely different reasons to wait though, the first economically rational, the second not.
Is that how people are talking about it? At this point the thread of most conversations here seems to follow this pattern: lots of deposits > overallocated to interest-rate-sensitive long-term bonds > short-term withdrawal pressure forces SVB to sell assets at a loss and then attempt to sell itself > Thiel urges pawns to pull based on that knowledge (and possibly more) > word gets out, wider bank run > FDIC takeover. A potential issue become a concrete issue through panic.
The rationale presented alongside the urging to pull out doesn’t have to be fabricated, just hypothetical. That the risk become real as a consequence of being suggested is potentially interesting, but ya know.
> the urging to pull out doesn’t have to be fabricated, just hypothetical
Isn't any identification of a run risk hypothetical? I think the question is whether it was a reasonable concern or not. If it was a reasonable concern, then the run is simply rational behavior for an uncoordinated group. If it was not a reasonable concern, then the run was irrational and panic driven. My issue with it being an unreasonable concern is that I haven't seen anyone claim this explicitly or provide a rationale. If anyone has a rationale for how it was an unreasonable concern, I am interested..
Again, I haven’t seen (or can’t recall) seeing anyone credibly make the case that the concern was unreasonable. I have seen some saying that promoting the concern within Founder’s Fund triggered the bank run, but that seems like a distinct position to me.
Another way of dealing with a run would have been to simply replace the funding through interbank lending:
Take a deposit from another bank to offset the deposits being withdrawn. Through funds or repo. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see.
And another way was for VCs to step in and help saving their piggy bank.
There was an easy mechanism for that - simply purchase the shares SVB was offering.
But no, community that claims they are going to save the world couldn’t exercise enough long-term thinking to even save their piggy bank.
There should be no bailout by the Fed. This community has enough resources. If they can think long term and act together, they’ll reorganize themselves in a responsible way. If they can’t, then they deserve to fail financially and they’ll have less resources to control.
>. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see.
It wasn't done because the assets SVB had at current market values was worth less than their liabilities. You'd be crazy to lend money to SVB.
if you’re an influential figure your words alone can trigger a bank run that wouldn’t have happened if you said nothing
Imo the question isn’t whether Thiel privately emailed founders advising them to pull money but whether they made a decision to leak their advice to the press to incite broader panic (eg how did Thiel’s advice make it into the headlines to begin with? who tipped off reporters?)
There is plenty of evidence that Founders Fund wanted to fan the flames: a Founders Fund partner literally published a “some VCs are saying to pull money out” the night before. Not sure how anyone can read this and think there was no intent to broadcast panic.
There were definitely issues with SVB. They reportedly didn’t hedge at all against interest rate rises. That didn’t present a big issue until this year… Also apparently they had an unusually huge amount of deposits backed by mortgage-backed securities.
This is potentially going to be a problem for other banks (although SVB seems to have been unusually susceptible), as when interest rates are so high but banks can’t afford to pay anything like that on deposits (because all their loan book and much of their bonds is at lower rates), there will be a lot of cash flowing out of banks into treasuries…
Unfortunately, this is a universal phenomenon. Bank runs are always blamed on the runners, not on those that precipitated the runs.
It's part of a general sliminess that is and always will be a part of corporate finance, and that sounds quite reminiscent of narcissism: when we're doing good, it's because we're super smart, innovative, good, and hard working (oh and that means we should keep all the rewards); and when we're doing bad, it's because other bad and silly people have done it to us, we did nothing wrong and are blameless, and we're the victims (oh and that means we should be bailed out at everyone else's expense).
Never forget 2008. None of them have paid for it yet.
And by the way, without commenting either way on their politics, a handy trick anyone can use to determine if a behaviour is narcissistic, is to ask "if this position came from the mouth of Trump or Trudeau, would it sound like them?".
> Is there just a lack of general understanding of the prisoner's dilemma?
The answer to this question is a resounding "yes." As far as I can tell, the prisoner's dilemma, as well as a wide-spread ignorance of it, can pretty much explain the totality of human behavior.
there is a very concerted pr effort to spin it that way, and people regurgitate pr memes.
the underlying issue was that SVB knew they were f'd and so they were begging VCs to stop taking money out because they knew they couldnt cover and those VCs turned around and pulled money faster, because that is what smart money does.
SVBs bargaining chip was that the VCs wouldnt want the books being opened, which is what happens when the fed takes over, but the VCs called their bluff, because they figured they were well enough insulated from any potential fall out.
this is america, so we have the keating S&L scandal, ltcm, enron, worldcom, countrywide financial, 2008. the game never stops.
This is the only place I've read the idea of SVB hoping VCs wouldn't want their books opened. Is it common when the FDIC comes in for them to be auditing for criminal behavior and not just looking at what balances are so they know how much money to give each account? Is there precedent?
It's not a question of criminal behavior but the bank's interpretation of the law versus the government's. As long as banks don't draw attention to themselves and don't get sued, they can operate largely in gray areas of the law to get and keep clients, make a little extra profit, take a little extra risk, etc. Once they are getting audited with a fined toothed comb, anything that comes up where the bank's interpretation is at odds with the government's can be easily found out and people can get punished.
This can be anything from how the bank values its assets (which... who cares, they're going bankrupt anyway, right?) to director malfeasance or negligence which can result in jail time. In normal circumstances almost all businesses operate this way at least a little bit, but in banking there's a paper trail and when it's under a regulator's microscope, it's much more likely to get noticed and punished.
it doesnt have to be criminal behavior. if a startup had X cash balance with SVB because they got a loan from SVB, then that startup is looking very f'd right now, because their runway just got bombed. nothing criminal, but it changes market perception a lot.
I recall seeing that title at the time. I wonder how their "foresight" works so effectively, "stepping in" just before an adverse incident happens. Is it superior acumen, or insider information?
I recently listened to an episode of the How I Built This podcast with one of the members of the PayPal mafia.
He mentioned that one of Peter Thiels greatest abilities is to spot and predict upcoming economic declines. Max Levchin said that Peter seemed to always know when to get in and out of markets.
I’ve gone back a few times in the last 2 years and watched his startup school talk on “Competition is for losers”. A lot of his theories and principals sounded brilliant at the time. As each year passes, a lot of his ideas quickly seemed silly.
For example, he compared an airline stock to Google. Google was worth more than the airline, but he believed the airline provided a much greater valued service. He asked the class to imagine life without the airline, or Google. He said he could live without Google, but not without airlines.
Fast forward to today, I would argue that Google provides the greater service. We couldn’t live without Google today, but I can think of a number of ways to travel across the country without using a plane. Greyhound, Uber, rent a car. Heck, there is even an app for cyclists to find a backyard to camp in overnight.
I recall reading in "Wanting" by Luke Burgis that he was a follower of Rene Girard. "Thiel left the corporate world and co-founded Confinity with Max Levchin in 1998. He began to use his knowledge of mimetic theory to help him manage both the business and his life. "
"When there was risk of an all-out war with Elon Musk’s rival company, X.com, Thiel merged with him to form PayPal. He knew from Girard that when two people (or two companies) take each other as mimetic models, they enter into a rivalry for which there is no end but destruction—unless they are somehow able to see beyond the rivalry."[1]
Maybe he has found a way to identify when things will self-destruct based off of mimetic theory.
I’m worried about setting a precedent that the right thing to do is head to the exits the moment rumors start to circulate. It’s hard to argue now that that wasn’t the right move for any individual depositor in retrospect.
I can easily imagine this being weaponized by short sellers and foreign actors.
>I can easily imagine this being weaponized by short sellers and foreign actors.
Hate to break it to you, bank runs have been a thing for hundreds of years. This isn't new. You put your own money at risk by participating.
One of Elon's biggest achievements is normalizing demonizing "the shorts". In this case the Bank took took much risk and was insolvent; the shorts would be right.
I worked for a long/short fund and am personally (and vocally[1]) short some names. I have nothing against short selling, it’s an important function of healthy markets.
To give you an example of what I'm worried about, our accountant cautioned all of their clients yesterday about keeping funds with another bank that has had rumors circulating about it, saying that regardless the truth of the rumors, the fact that they are circulating could cause a run. This is the right thing for them to do; their fiduciary duty is to us and not to the stability of the market, but in aggregate, it's easy to imagine how everyone's accountant sending the same message at the same time could be exploited by someone who wants to destroy a small bank.
This comes in contrast of what they do in China: rumors are excised from media (including social media) and at best the government coerces certain players to “show patriotic confidence” in the market, and at worst those certain players are given a heads up so they can exit their positions before the scandal breaks.
Western investors in these markets can get very confused. Take short seller Andrew Left in Hong Kong who warned of Evergrande being dangerously illiquid in…2016. He was fined and banned from trading by the HK SAR whose judges claimed he didn’t understand the Chinese market well enough.
Bank runs have been around, but social media and easy money transfers are much more recent.
The U.S. has two major foreign powers and a noisy subset of its own elite who would like to see economic chaos right now, and it's never been easier to do that.
But if your venture relies on excessively inflated stock values to harvest the capital you want/need, then you really don't want short sellers exposing that discrepancy.
So, yes, anyone in that position demonizing short sellers should be pretty much ignored (or taken as a sign that this is a good short oppo).
That said, short sellers trying to manipulate the market or stocks can actually do real damage that would not otherwise occur. I see strong indications that Peter Theil is in this category. It looks very much like he made first significant public "Pull Your Money Out!" calls; if he was short SIVB at the time (or had other positions or situations that would gain from SVB's failure), that's very suspicious.
>(or had other positions or situations that would gain from SVB's failure)
Like for example he and all his startups keeping their money while some of their competitors don't? No need for any other bets for a bank run to benefit him
'Byrne then emerged as a leading figure in promoting conspiracy theories, including the "Deep State" conspiracy theory. In 2020 and 2021, he repeatedly promoted unevidenced claims that Donald Trump had won the 2020 U.S. presidential election due to voter fraud.'
involved with...
"Maria Butina worked as an assistant for Aleksandr Torshin, a former member of the Federation Council, a member of Vladimir Putin's United Russia party, and a deputy governor of the Central Bank of Russia. In this role, she worked to infiltrate conservative groups in the US, including the National Rifle Association, as part of an effort to promote Russian interests in the 2016 United States presidential election. The Senate Intelligence Committee later concluded that she attempted to persuade the Trump campaign to establish a secret communications back channel with Russia."
nope. nuh uh. wrong. the right thing for any individual to do in a potential bank run is always to withdraw. this is basic game theory. you expect someone to take a junk bond level of risk for 0.5% interest? miss me with that
there is one possible way to solve the coordination problem: just stop allowing withdrawals. the chinese figured this out. but you have to limit withdrawals on ALL banks because you bet your ass if one bank gets frozen, everyone will think another one is next and run that one too.
the only time we've rushed a serious contagion before was by instituting a bank holiday and basically putting in 100% deposit insurance. and that was when we had someone in charge whom most people trusted (FDR). biden, yellen, powell aren't so loved.
Well yeah, everyone is a genius in retrospect. If you know it’s going to be a bank run, you get out. The problem is that by the time you know a bank run is happening it’s probably too late.
The logical conclusion of this thinking is a system where any rumor about any bank can cause a bank run, because people who take the time to figure out if the rumors are true lose out.
no, a credible rumor that a bank with an odd deposit structure and a hole in its balance sheet causes a bank run. the horror! also, given that the cost to me is negligible, why wouldn't i just pull my money as soon as there were rumors? i get literally 0 benefit but could lose a third of my money if i don't.
as for timing... i guess that's the benefit of being terminally online, you get a chance to get out :D
> also, given that the cost to me is negligible, why wouldn't i just pull my money as soon as there were rumors
Right, that’s my point. It doesn’t make sense to try to figure out if the rumors are true, by the time you do it may be too late. This makes sense for you as the individual, but is dangerous for the overall stability of the system.
you're literally blaming the prisoner in a prisoner's dilemma. it makes no sense to bet with 0.7:1 odds that only a few times above normal withdrawal volumes will actually occur. that is a shitty be to make, especially since every time people do, it usually works out against them.
we can opine about how to resolve confidence and coordination issues but you can not go victim-blame people who just don't wanna get fucked over.
one of the core values banks provide is confidence and peace of mind. if my bank can no longer provide that, i am full sending my cash somewhere else.
No, I’m not blaming them at all! In retrospect they made the right move. Companies that moved funds early had a duty to their employees and investors, and did right by them.
I do, though, worry about the message it sends to say that everyone who didn’t flee is SOL. Fortunately, the fed seems to have played the same scenario out and did the right thing.
You don't really need precedent, it's just the logical thing to do to get your money out when collapse seems possible. The prisoner's dilemma isn't a dilemma because of 'precedent' or because of arguments, it's just a structural fact.
> > I can easily imagine this being weaponized by short sellers and foreign actors.
There is nothing to weaponize. If we taught the basics of finance everybody would know that the money you have in the bank is not yours but they are a IOU from the bank.
And if you wire them out to another account that you hold with another bank that is going to still be an IOU aelbit from a different bank.
The only true and true money guaranteed by the Federal Reserve is the Federal Reserve Note. All the rest is an IOU.
We accept to deal in IOUs because physical transportation, storage and protection of physical notes would be a nightmare, but still the nightmare can AND WILL show up for somebody randomly in the sample of participants in the form of insolvency of the banking institution issuing their IOUs.
It's all very clear and also the reason why some people refuse to deal with banks and opt for cash transactions and metals. Not to mention the hard assets such as water, gasoline, weapons, animals, vehicles, real estate etc.
These people seem loons 364 days out of 365, but there is a reason why evoloution put that seed thought inside their brains.
I believe SVB is going to be relatively unique. Their deposits were highly concentrated in startups. Startups receive funding from a highly concentrated number of funds. This ends up with an unusual concentration of influence and group-behavior.
A very interesting risk in hind-sight, but unlikely to be a wide-spread issue.
I think you’re right from a rational, look-at-the-balance-sheet point of view, but I think that’s less important than it might seem. If people see other people heading to the exit, they don’t have time to look at the balance sheet, they join the stampede.
There’s already rumors going around about other banks, and even though I think SVB is a structural outlier, I would be moving money around if I were with them above the FDIC limit, even if I knew for a fact they were solvent.
To be clear, most VCs advised the same. This was a massively-multiplay prisoners dilemma - with withdrawing your being the safest option.
Same thing happened at the start of the pandemic. Even if you thought the panic buying was overblown, you couldn't afford to be left with empty shelves if things got bad.
"There are three ways to make a living in this business: be first; be smarter; or cheat. Now, I don't cheat. And although I like to think we have some pretty smart people in this building, it sure is a hell of a lot easier to just be first."
I think "lucky" is the better word here. He was lucky because he was able to get all of his money out of the bank while he could. Maybe he knew something was happening before others? Maybe he was just able to move faster? ¯\_(ツ)_/¯
Regardless, he definitely helped contribute to its collapse, as well as everyone else who took their money out of the bank during the run. To what degree is Peter Thiel responsible? I don't know and I don't think it really matters.
I'm not a Thiel fan, but I see no reason to suspect insider information. Their stock was already down Wednesday night. Articles about SVB's conference call started showing up almost immediately it happened mid-day on Thursday.[1] I'm not much of a finance person, but the SVB CEO's comments[2] set off alarm bells for me as soon as I saw them on Thursday.
Withdrawing their funds was the action that both short-term game theory and act-utilitarianism would point to,[3] so it seems like a no-brainer that Thiel would have his organization pull their funds immediately. If they saw transaction oddities as well, it's even more understandable.
There is a lot of concern around SVB within the 90 days leading up to the event. But the timing is interesting. The day before? And the CEO dumping stock?
The difference here is likely insider information. It's obvious Mr. Thiel is well connected and so it's not likely he made this decision uniformed beyond the normal flow of chatter. The question is if he was tipped off and had insider information is that even illegal in this context?
Source? I feel like every time this gets brought up, it turns out that it was part of a rule 10b5-1 sale (ie. it was scheduled months/years in advance), because if you actually thought the company was going to go under pretty soon, dumping stock will look so suspicious.
That's, ultimately, a loophole many CEOs use. They have to preschedule the sale of stock so it's not insider trading. However they can cancel those trades. At least that's how it was the last time I checked. I was told this by a large, prominent, network security organization CEO years ago.
Basically, from this [0] article:
"This general prohibition addresses a significant loophole in the current Rule 10b5-1, which permits insiders to adopt multiple trading plans and selectively cancel certain plans based on material nonpublic information."
So it looks like 10b5-1 was supposed to change. But I'm not aware that it did. Regardless 10b5-1 was just a cover so they couldn't be prosecuted for insider trading as it was operating.
It really doesn't matter. He had insider information that this was about to happen. He should have cancelled the trades knowing what he knew. See the loophole is this only works one way: in favor of the CEO.
And just as an aside - keep in mind Greg Becker was not only the CEO of SVB, but also on the Federal Reserve Bank of San Francisco [0]. It also appears he very well knew the loophole he was abusing [1]:
"Silicon Valley Bank Chief Executive Officer Greg Becker sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure.
The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26."
...and...
"“While Becker may not have anticipated the bank run on Jan. 26 when he adopted the plan, the capital raise is material,” said Dan Taylor, a professor at the University of Pennsylvania’s Wharton School who studies corporate trading disclosures. “If they were in discussion for a capital raise at the time the plan was adopted, that is highly problematic.”"
Apparently the new rules go into effect on April 1st. How convenient, and ironic.
For the record I like Thiel but I don't think it's controversial to say that he was a large catalyst in SVBs demise.
It was probably also a smart move to remove the funds, but I'm not sure it was sensible for someone with his level of influence to encourage a bank run. Even if you believe a bank run is likely telling people to withdrawal their funds doesn't solve the problem that some people will be too late. If you want to help you should try to ease nerves if anything.
There's a difference between "at risk" and doomed and Thiel at the least accelerated things to the latter. Something probably could have been worked out with a little bit of cooperation instead of screaming fire, but I think he likes chaos and this helps his startups by damaging competitors. I'm sure we'll find out a lot more in the future about the timing of things and whether he was really reacting to urgent problems or just creating them.
It's both, also it's a sign of how this industry is full of followers, once word got out Thiel fled the bank the run started and it was over within what 30 hours?
There is nothing lucky about his pull. When you are super rich you get access to highly restricted network. You will know people and have access to them directly that ordinary peasants like us cant. He most likely have been warned months ago. And his own ai tech can piece together how reliable his warnings are.
Find me a potential scenario and I'll find a random newsletter or tweet thread predicting it.
Things like this remind me of the hindsight lens of many conspiracy theorists ("We're wrong 99/100 but look at this one we got right") or even people (mostly playfully) saying things like "The Simpsons predicted 9/11".
To say that the average startup founder/team should have taken action based on a random newsletter or tweet thread predicting this (storied 40 year old bank failing) in January is pretty absurd.
The newsletters based everything off of publicly available information.
By Thursday, the news were already abuzz with SVB being in dire straits and the CEO calling people to tell them their deposits were safe.
It's funny you compare this to the hindsight of a conspiracy theorist when this whole notion that Peter Thiel used secret insider knowledge is by definition a conspiracy theory. I only present the alternative, that there was information publicly available that could have led one to draw this conclusion.
Again, publicly available information (from months ago) resulting in a thesis - not any different than that of any short seller, talking television head, Twitter account, or “newsletter” predicting anything throughout history.
This thesis happened to be proven correct in this instance. Now let’s go talk about the thousands that have been wrong.
I didn’t and don’t support any conspiracy regarding Thiel in any of this. I don’t think that conversation is productive.
What I am saying is the timing is interesting and anyone who thinks the playing field is level with a 25 year SV power player veteran billionaire is delusional.
"Unfortunately, the flipside of the tech bubble is fairly ugly for the company with added pressure coming from higher operating costs, higher costs of deposits, and unrealized losses in its htm (hold to maturity) fixed income portfolio. Both these htm losses and potential losses from the loan portfolio could wipe out book equity value."
because SVB was making loans to the startups they invested in. startups had a contractual obligation to bank exclusively with SVB and then SVB would give them loans, so they had a fat cash balance on their balance sheet, but they couldnt actually withdraw the money. SVB was getting paid to make startups look good so they could raise more money.
no, your deposits in a bank are yours. you can withdraw them at any time. the bank has a contractual obligation to return your money whenever you demand it.
If special considerations is given to any depositors. I think it is reasonable to clawback any money withdrawn outside what could be considered normal operations in past week or fortnight.
Yikes. It shouldn't surprise anyone that deeply entrenched and connected SV power players are in a better position vs "everyone else" in scenarios like this.
That said, scenarios like these highlight the gross imbalances in tech which is often portrayed as a relatively pure meritocracy.
Getting at least a half-day jump on everyone else is a big enough lead - not to mention the access they have.
Once the situation was known outside of the SV insider-insider circle I assure you startup founders and teams - threatened with the scenario of potentially losing their hard earned capital, potentially not being able to make payroll, and even shutting their doors were not "staying at home and watching TV". They were working a lot harder under far worse conditions than calmly being one of the first to make a phone call or send an e-mail Thursday morning.
To be honest, the analysis of recent days show that the public information was there from Q3 on. So Thiel could just have hired financials with a tad more professionalism than SVB. Even the plain reported story is plausible. Don’t use a bank ever again if they do not make their SLA. Pretty simple reasoning and risk management can save you a lot of hassle.
There were also short positions on SVB taken out after some of those financials.
Startup founders/teams should not be spending their time reading their 40 year old bank's quarterly financials, analyzing various short positions, or hiring resources to do so. Then there's (as always) the absurdity of making significant financial decisions for your startup based on a more-or-less random fund/personality twitter account that may have an undisclosed short position spreading FUD (or just be flat-out wrong).
Hindsight is 20/20 and even the most sophisticated actors taking short positions have failed spectacularly. For cases as dramatic as this ($200b bank failure) it's the stuff they make movies of ("The Big Short").
The fact remains that other than a few hawks this came out of nowhere last Thursday, and as the article and other sources describe not even Thiel and other sophisticated insiders were that far ahead but as we all know when it comes to a bank run those hours are precious.
