I Did Promise "Bank Failure Friday!!!' Comments Today

So, we have the first (or 1½th) bank failure of the year.

The reason why I am saying that it is the 1½th bank failure is because the "Voluntary" liquidation of Silver Lake Bank, where an increasingly concerns by regulators, including the FDIC.

On Friday, the FDIC shuttered Silicon Valley Bank, [SVB] in what is the 2nd largest bank failure of all time, after the 2008 failure of Washington Mutual, with total assets of $209 billion before everything went pear shaped.

It should be noted now that every account in the bank is insured by the FDIC, to a cap of $¼ million.

This was a classic bank run, with a panic leading to massive withdrawals.  It was solvent on Wednesday, and dead on Friday:

Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital.

The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank [DINB] of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.

It should be noted here that this arrangement, the creation of a DINB, rather than selling the assets to another bank for them to run, is rather uncommon, and likely indicates that they could not find a buyer because of the nature of the deposits.

The vast majority of SVB's deposits were well over the FDIC insurance cap, many in the tens or hundreds of millions of dollars, which is probably why the FDIC could not find a buyer.

………

Customers tried to withdraw $42 billion—about a quarter of the bank’s total deposits—on Thursday alone, the California regulator said in a filing Friday. The flood of withdrawals destroyed the bank’s finances; at close of business Thursday, it had a negative cash balance of nearly $1 billion and couldn’t cover its outgoing payments at the Fed, according to the filing.

The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.

It appears that this run was triggered by Venture Capitalist, member of the PayPal Mafia, professional bigot, and literal vampire Peter Thiel.  (More on that further down)

………

SVB catered mainly to the insular ecosystem of startups and the investors that fund them. Its deposits boomed alongside the tech industry, rising 86% in 2021 to $189 billion and peaking at $198 billion a quarter later. The bank poured large amounts of the deposits into U.S. Treasurys and other government-sponsored debt securities.

Tech tumbled after the Federal Reserve began raising rates last year to curb inflation. Startups, as a result, drained their deposits with SVB faster than the bank expected. And new investment stalled, meaning fresh money wasn’t coming into the bank. 

Rising interest rates, meanwhile, dented the value of SVB’s massive bond portfolio. The bank needed fresh capital.

The short version of this is as follows:  The bank caters to large depositors associated with the tech industry.  It backstopped those deposits with US Treasury Notes, the safest investment in the world.

Unfortunately, while the government will always pay its debts on time, it won't pay them early, so if something happens, like a bank run, you need to sell those assets, and when interest rates go up, the value of the bonds go down.

In mid 2020, a  5 year T-Note yielded something around 0.27%, and today, it yields something like 3.97.

If you were to try to sell that 2020 T-Note today, you would probably get something like 60-80¢ on the dollar, because it is less attractive than higher yielding instruments.

So SVB took a haircut, and ended up insolvent.

So now, on to Thiel's role in all of this:

Peter Thiel’s Founders Fund had no money with Silicon Valley Bank as of Thursday morning as the bank descended into chaos, according to a person familiar with the matter.

Founders Fund withdrew millions from SVB, said the person, who asked not to be identified discussing private information. It joined other venture funds that took dramatic steps to limit exposure to the now-failed financial institution. Founders Fund also advised its portfolio companies that there was no downside to moving their money away from SVB, even if the risk was low.

Founders Fund acted in other ways to move its business away from SVB. On Thursday, as the bank was beginning to unravel, the firm started what’s known as a capital call. That’s a run-of-the-mill activity in the venture capital world, in which a VC firm asks its investors, or limited partners, to send it money in order to make investments in startups — the core function of most VC firms. It began by asking those backers to transfer the funds to accounts at SVB, as it has done for years, the person said.

But the firm learned that its limited partners were encountering issues using SVB services as they tried to transfer the funds — they weren’t immediately going through as expected, the person said.

Quickly, Founders Fund asked its investors to transfer the money to other banks instead. The fund acted to ensure that startup funding deals that were slated to close in the coming days were not delayed, the person said.

I have no knowledge as to whether Thiel was shorting the bank when he did this, but given his history, touting Crypto while selling it all off, I would not be surprised.

And there are other dicey things going on as well, such as the bank's CEO selling $3. million in stock just days before the institution's collapse, as well as the same CEO's aggressive lobbying of regulators and members of Congress to weaken regulations:

Eight years before the second-largest bank failure in American history occurred this week, the bank’s president personally pressed Congress to reduce scrutiny of his financial institution, citing the “low risk profile of our activities and business model,” according to federal records reviewed by The Lever.

Three years later — after the bank spent more than half a million dollars on federal lobbying — lawmakers obliged.

It should be noted right now that about 93% of deposits were over the the FDIC cap, and so these folks stand to get a significant haircut, along with delays in accessing their funds.

As always, because no financial crisis cannot be made worse by advice from Larry Summers, it should be noted that the former Secretary of the Treasury is demanding that taxpayer funds be used to bail out the the big guys, because it is capitalism for the poor, and socialism for the rich:

Former Treasury Secretary Lawrence Summers said the meltdown of SVB Financial Group shouldn’t pose a risk to the financial system as long as depositors are made whole.

“What is absolutely imperative is that, however this gets resolved, depositors be paid back, and paid back in full,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. And as long as that’s the case, while there will be risks to banks’ asset values, “I don’t see — if this is handled reasonably, and I have every reason to think that it will be — that this will be a source of systemic risk,” he said.

No.  The "Whales" need a significant haircut, because bailing them out again creates a moral hazard, and leads to more reckless behavior.

I just want to note here that I cannot f$#@ believe that I am arguing moral hazard here, but unlike the behavior of ordinary people, the big fish do watch what happens to their peers, and change their behavior accordingly.

They need to have the fear of God put into them.

Finally, there may be some good to come of this, because it is likely that the Federal Reserve will reexamine its regulations and perhaps tighten them up a bit.

Also, the collapse of Silicon Valley Bank may get the FOMC to reconsider further rate hikes, as has been shown here, this could have the effect of creating a new financial crisis.

If there is a pause, banks will have an opportunity to unwind their less liquid assets, something like moving from 5 or 10 year notes to 3 to  month notes, gradually.

Fasten your seat-belts, we are in for a bumpy ride.