SVB Financial: Blow Up Risk (2022)(seekingalpha.com)
seekingalpha.com
SVB Financial: Blow Up Risk (2022)
https://seekingalpha.com/article/4565388-svb-financial-blow-up-risk
68 comments
Wow, how prescient. Articles like this are especially damning to the execs that sold stocks just a few weeks ago. This was not some huge surprise. They may not have anticipated the ferocity with which there would be a run on the bank, but they absolutely knew they were in deep shit and would need to do a capital raise. And I hope nobody tries to defend this with "those stock sales were from 10b5-1 plans!". Those can easily be gamed by execs waiting to release bad news until after their sales go through, or by cancelling sales if things look good for the future (courts have said you can't be charged with insider trading for not selling shares, which means you can basically just set up 10b5-1 plans but cancel them as needed based on your insider knowledge).
> They may not have anticipated the ferocity with which there would be a run on the bank
Bank runs are pretty much always ferocious because 1) that's what a run is, rather some euphemism for the prelude like "temporary liquidity processing anomaly" and 2) they're positive feedback loops that end up ferocious as soon as someone responding to the "TLPA" gets noticed by someone else.
Bank runs are pretty much always ferocious because 1) that's what a run is, rather some euphemism for the prelude like "temporary liquidity processing anomaly" and 2) they're positive feedback loops that end up ferocious as soon as someone responding to the "TLPA" gets noticed by someone else.
A more charitable interpretation of what the OP is saying: the execs may not have anticipated how fast the shit would hit the fan. I doubt they believed there would be a run on the bank this month, not even the short sellers were predicting that. They did know they were in trouble, but I think everyone, even those being against SVB, was surprised by the speed and ferocity with which this played out.
You might be validly surprised by the short time between "uh.." and a full-on run, but the run itself is no more ferocious than people responsible for avoiding one should have been thinking of.
It's like a airline blaming the ground for being unexpectedly hard and the crash happening so soon and it's not their fault why there were no survivors and not because of the deferred maintenance of the aircraft under a loophole in the FAA regulations.
It's like a airline blaming the ground for being unexpectedly hard and the crash happening so soon and it's not their fault why there were no survivors and not because of the deferred maintenance of the aircraft under a loophole in the FAA regulations.
That's true, though most bank failures aren't bank runs. IDK if there's been a bona fide bank run in the U.S. since the 1930s.
The reason this was a bank run is that FDIC insurance meant approximately nothing, as opposed the the usual situation where a huge amount of depositors are fully insured.
The reason this was a bank run is that FDIC insurance meant approximately nothing, as opposed the the usual situation where a huge amount of depositors are fully insured.
> Articles like this are especially damning to the execs that sold stocks just a few weeks ago.
You mean the reverse, right?
You can't insider trade if it's not insider information!
This article supports the execs, not damns them.
You mean the reverse, right?
You can't insider trade if it's not insider information!
This article supports the execs, not damns them.
No. Because a short seller speculates the bank is in trouble doesn't mean it gives execs carte blanche to sell their stock.
The "inside information" piece is exactly when SVB would need to do a highly risky capital raise, which SVB did (or tried to do) conveniently 2 weeks after the CEO sold millions.
The "inside information" piece is exactly when SVB would need to do a highly risky capital raise, which SVB did (or tried to do) conveniently 2 weeks after the CEO sold millions.
Yes, the timing of the sale and raise it suspicious.
The existence of the article only hurts and not helps the insider trading accusation.
The existence of the article only hurts and not helps the insider trading accusation.
At least so far the story is that SVB got in trouble because it invested in bonds that went down in value, not because of its loan portfolio. We’ll see if that is true or the whole story, but if it is true, the scenario is entirely different from what that article is suggesting.
their AAA bond assets suffered big losses, but their loan assets are even worse. there is a big PR effort to focus on the bond losses, but the real shit is the 10's of billions in loans to companies that will never make a profit, and the systemic contagion risk that entails. they lost 15% on 100B of their book, but they are going to lose 100% on 10's of billions (unknown) from the other half of their book.
if all of their assets were AAA and they were only down 15% they wouldnt be a failed bank right now. nobody knows how big the losses really are, but the people they were in business with knew best, and those people pulled their money as fast as they could, so everyone else can make assumptions based on that.
if all of their assets were AAA and they were only down 15% they wouldnt be a failed bank right now. nobody knows how big the losses really are, but the people they were in business with knew best, and those people pulled their money as fast as they could, so everyone else can make assumptions based on that.
> ... entirely different ...
The article nailed the "unrealized losses in its htm (hold to maturity) fixed income portfolio", and it nailed the risk of deposit bleeds forcing liquidation of the htm assets, realizing the unrealized losses, leading to insolvency.
The article nailed the "unrealized losses in its htm (hold to maturity) fixed income portfolio", and it nailed the risk of deposit bleeds forcing liquidation of the htm assets, realizing the unrealized losses, leading to insolvency.
Who got hurt by execs selling stock into the market? Hopefully sophisticated investors who should’ve known better. For over a year there were indicators SVB was not healthy.
“We are selling to willing buyers at the current fair market price.”
Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC. If you can’t trade on positive material non public information, why would you expect them to trade on negative MNPI? Follow the rules and what is least likely to cause you to end up in handcuffs or in front of Congress. That is a logical and rational decision.
“We are selling to willing buyers at the current fair market price.”
Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC. If you can’t trade on positive material non public information, why would you expect them to trade on negative MNPI? Follow the rules and what is least likely to cause you to end up in handcuffs or in front of Congress. That is a logical and rational decision.
> Edit: if you don’t like the 10b5-1 rules as they stand, feel free to submit a comment to Gensler and Co at the SEC.
The SEC already tried this. Courts have ruled that you can't be charged with insider trading for not executing a trade, but the end result is the same: just set up plans that you cancel if you don't want them to trade. Can't remember the name of the court case but shouldn't be too hard to find by Googling. SEC has tried to tighten the rules by requiring that cancellation of any trade cancels the whole plan, but their hands are also tied based on court rulings.
The SEC already tried this. Courts have ruled that you can't be charged with insider trading for not executing a trade, but the end result is the same: just set up plans that you cancel if you don't want them to trade. Can't remember the name of the court case but shouldn't be too hard to find by Googling. SEC has tried to tighten the rules by requiring that cancellation of any trade cancels the whole plan, but their hands are also tied based on court rulings.
> “We are selling to willing buyers at the current fair market price.”
A line from the really good movie Margin Call:
* https://en.wikipedia.org/wiki/Margin_Call
Worth checking out.
A line from the really good movie Margin Call:
* https://en.wikipedia.org/wiki/Margin_Call
Worth checking out.
"It's not a panic if you're the first one out the door."
Another great quote from Margin Call. Love every bit of that movie. Very underrated too, as it was (unfairly) overshadowed by The Big Short.
Another great quote from Margin Call. Love every bit of that movie. Very underrated too, as it was (unfairly) overshadowed by The Big Short.
In my opinion, it’s the best movie ever about finance, and it’s not even close.
It really is. Above referenced scene: https://www.youtube.com/watch?v=ag14Ao_xO4c
>Hopefully sophisticated investors who should’ve known better.
You mean like your retirement fund manager?
You mean like your retirement fund manager?
“Sophisticated” doing a lot of lifting in this case. Very aspirational. If you’re buying single named securities without any due diligence, you deserve the returns you encounter. That’s your job!
No one index investing is going to feel this in a material capacity. Depositors will be made “whole enough”, and an irresponsible bank got blown out and dismantled. The system worked. If there was fraud, regardless of criminal and/or civil, prosecute those responsible.
No one index investing is going to feel this in a material capacity. Depositors will be made “whole enough”, and an irresponsible bank got blown out and dismantled. The system worked. If there was fraud, regardless of criminal and/or civil, prosecute those responsible.
When you say "the system worked" because depositors will get back some as-yet-undetermined percentage of their deposits, that's not relevant to an insider trading discussion -- that's shifting the topic from whether investors in SVB were harmed, to whether depositors were harmed.
I don't quite understand your position on insider trading. The idea behind making it a crime is that no matter how "sophisticated" an outsider is, they don't have insiders' non-public information. Insiders can profit from the information gap between them and the people they sell their shares to. There's certainly disagreement about how to ban insider trading while making it possible for officers of the company to trade at all, but the basis of the law is that no amount of due diligence can undo that imbalance in information.
It sounds like you're saying that one might decide, as an individual, that the system is unfair or imperfect or corrupt, and decide to diversify. That's probably good advice. But that is a practical measure that doesn't really address the problem being discussed.
I don't quite understand your position on insider trading. The idea behind making it a crime is that no matter how "sophisticated" an outsider is, they don't have insiders' non-public information. Insiders can profit from the information gap between them and the people they sell their shares to. There's certainly disagreement about how to ban insider trading while making it possible for officers of the company to trade at all, but the basis of the law is that no amount of due diligence can undo that imbalance in information.
It sounds like you're saying that one might decide, as an individual, that the system is unfair or imperfect or corrupt, and decide to diversify. That's probably good advice. But that is a practical measure that doesn't really address the problem being discussed.
Please explain what action could’ve been taken. Cancelling the 10b5-1 scheduled sale of securities based on material non public “inside” information?
>No one index investing is going to feel this in a material capacity.
Over what timeframe are you making this claim? A week? A year? 10?
The entire index dropped, driven by a selloff in the Financial Services sector after FDIC placed them on the failed bank list, so in effect it has already affected the index.
Over what timeframe are you making this claim? A week? A year? 10?
The entire index dropped, driven by a selloff in the Financial Services sector after FDIC placed them on the failed bank list, so in effect it has already affected the index.
If you are investing in actively managed funds, then you chose that agency risk.
> If you can’t trade on positive material non public information,
In America you can, if you're not an insider and didn't get the information from an insider in violation of their duty of trust. For instance, it is legal for a trader to use satellite LIDAR/SAR data to estimate the fill level of oil storage tanks and trade on that obviously material non-public data.
In America you can, if you're not an insider and didn't get the information from an insider in violation of their duty of trust. For instance, it is legal for a trader to use satellite LIDAR/SAR data to estimate the fill level of oil storage tanks and trade on that obviously material non-public data.
Well, in case of those SVB execs we talk potential insider trading. Margin Call is fiction, and MBSs or MBS based CDOs are not shares in the company you run.
“Even though we have insider knowledge that indicates it’s worth less than market and quite possibly nothing at all.”
We don't need to assume the execs knew their held to maturity MBS scheme would blow up when they are selling weeks before announcing a loss (which they would definitely be acutely aware of).
If they're regularly selling securities, there is no good time to make the announcement
The executive stock sales were only for a few million dollars, and a relatively minor percentage of their holdings. I doubt there will be any criminal charges.
After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments".
ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit.
Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday.
That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway.
Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel.
Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up.
So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money.
And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.
ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit.
Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday.
That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway.
Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel.
Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up.
So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money.
And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.
I think you're right. They did not understand the needs of their customers (companies) that contributed the bulk of their deposits.
They were not assessing the risks and changes occurring in the market that could affect the behavior of their primary customer base.
I read they went 8 months without someone in charge of risk management, so it appears this is completely an own goal.
They were not assessing the risks and changes occurring in the market that could affect the behavior of their primary customer base.
I read they went 8 months without someone in charge of risk management, so it appears this is completely an own goal.
Surprising similarity to the 2008 crash in that there was systemic risk that wasn't detected or fully understood based on there being events that were entirely predictable (housing prices drop, or Fed rate increases) but happening at unpredictable rates of speed.
Borrowing short term and lending long is what all banks do. The problem here is a lack of diversification.
No bank can bet the deposits will stay the same: Through the short-term economic cycles, people will accumulate for 6 months, 2 years, 10 years, then deplete. Covid hits? Everyone needs 3 grand at the same time. Government gibs money? Everyone has 3 grand extra for a few weeks. Everyone gets paid on the 1st of the month. You can average, but everyone will hit the low at the same time.
Not true. Imagine there was only ONE bank.
I see what you’re getting at but people could still withdraw paper money or do international transfers.
A single global bank in a world without paper money/gold/etc might be different.
A single global bank in a world without paper money/gold/etc might be different.
Of course I am being simplistic and a run can occur precisely because there is more than one bank...
But on the international transfer thing... you selling USD and buying EUR doesn't result in the creation or destruction of any USD or EUR deposits overall, unless the central bank/government is intervening.
But on the international transfer thing... you selling USD and buying EUR doesn't result in the creation or destruction of any USD or EUR deposits overall, unless the central bank/government is intervening.
Especially with more and more companies leaving (and start-ups not staring in) Silicon Valley.
The author had a short position. You can find it at the end of the article:
Disclosure: I/we have a beneficial short position in the shares of SIVB either
through stock ownership, options, or other derivatives.You say that like it's some gotchya, but someone who felt the bank wasn't in a good financial position would naturally short it. This just means the guy put his money where his mouth is.
It's beneficial for someone who is shorting a stock to put out negative press about the company. It's basically the modus operandi of some hedge funds.
I also don't get the gotcha though. As long as it's disclosed and the facts are true I don't see the problem.
I also don't get the gotcha though. As long as it's disclosed and the facts are true I don't see the problem.
> It's beneficial for ...
It's beneficial for anyone has a thesis that a stock is mispriced to:
* Take a position (short or long) that will take advantage of the mispricing
* Broadly communicate this thesis after taking the position
It's beneficial for anyone has a thesis that a stock is mispriced to:
* Take a position (short or long) that will take advantage of the mispricing
* Broadly communicate this thesis after taking the position
I assume it's going to be much, much riskier to rely on sentiment affects of an article rather than valid research when shorting.
So... he put his money where his mouth was? Sounds better than putting it in SVB.
If they thought the stock was going to $0, they sure wouldn't have a Long position would they?
What do you think all these guys on CNBC all day talking up stocks do.. not own it already themselves?
What do you think all these guys on CNBC all day talking up stocks do.. not own it already themselves?
I believe this is called "talking your book" and it should be your default assumption of investor behavior.
You would be stupid not to after stumbling on a gem like this.
Yes, but the author was also completely correct about their financial situation. The disclaimer doesn't mean "I'm making this up."
Two more followup articles from the same author that are good reads as well (along with a bit of well deserved gloating)...
https://seekingalpha.com/article/4586033-svb-financial-blew-...
https://seekingalpha.com/article/4586342-svb-financial-today...
https://seekingalpha.com/article/4586033-svb-financial-blew-...
https://seekingalpha.com/article/4586342-svb-financial-today...
I have to say, the articles in Seeking Alpha are so uneven that I never read the when they pop up in a news feed. The original article is pretty startling in how accurate it was (even if it was more concerned about the loans than the mortgage-backed securities.)
Yeah, even in a case like this where they turned out to be right, it might be one of those "predicted 15 out of the last 2 recessions" sorts of things.
Ha, very true...
Really great marks. Almost perfect. Except the key piece "The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk."
File this under... "thought it was bad, didn't know it was THIS bad." And enjoy the millions of dollars you made :P
File this under... "thought it was bad, didn't know it was THIS bad." And enjoy the millions of dollars you made :P
Note this was published dec 2022.
So, classic bank run... except there were 6 people on the same chat channel controlling 10% of the bank's reserves. Once they notice, poof!
This is also why small, concentrated merchant banks like this are risky.
Deposit base is too homogenous.
It was one of the 15 largest banks in the country.. if depositors lose money here, every bank in US better be ready Monday morning as every company moves all of their funds to one of the top 3.
Most banks the vast majority 60-70% of depositors are insured.
SVB was under 10% They were super concentrated in one industry, their depositors themselves were super concentrated with their deposits and they were poorly run.
They’ll be open in some capacity Monday but the idea that big rich uninsured depositors should be made whole because of vibes is silly. They have a $10Bish hole. TBD how this plays out.
SVB was under 10% They were super concentrated in one industry, their depositors themselves were super concentrated with their deposits and they were poorly run.
They’ll be open in some capacity Monday but the idea that big rich uninsured depositors should be made whole because of vibes is silly. They have a $10Bish hole. TBD how this plays out.
That is irrational behaviour. Depositors should spread their cash across multiple banks. This is very basic risk management.
I’m just telling you what I’m seeing.. The “multiple banks” will be the few biggest ones, even if it’s 1/10th of their funds, nobody will accept the risk of a smaller bank.
Except that it's not quite so trivial to open an account at a new bank (especially if everyone decides to do it at the same time) and move US$15 billion dollars by the end of Monday.
I opened a new business account at Wells last fall, it took maybe a week to apply and get approval? In any case, many companies have multiple banking relationships already - if I were in their shoes I’d be moving all of the excess funds to the biggest bank available.
It’s not fair to the well managed small banks but honestly I don’t care at all about my bank, I just want to pay bills. I’d bank at the Federal Reserve if they offered an interest free checking account with unlimited bank insurance.
It’s not fair to the well managed small banks but honestly I don’t care at all about my bank, I just want to pay bills. I’d bank at the Federal Reserve if they offered an interest free checking account with unlimited bank insurance.
Yet still small enough to not need to undergo stress tests after changes to Dodd frank in 2018.
> The company should be able to sell its AFS with minimal losses and about $2-3 billion of the portfolio pays down every quarter. The company also has some borrowing capacity. So, right now it looks unlikely the losses on the HTM portfolio will get triggered, it is a risk.
In an alternate dimension, it played out exactly like this.
In an alternate dimension, it played out exactly like this.
Key sentence:
"SIVB was one of if not the most aggressive banker to many start-up companies. That worked brilliantly in the VC funding boom but could cut the other way as the industry retrenches."
"SIVB was one of if not the most aggressive banker to many start-up companies. That worked brilliantly in the VC funding boom but could cut the other way as the industry retrenches."
I guess we know who was buying all the 1% yielding 10Y notes now.
They mentioned this report in the All In Podcast this week.
From the podcast: "The herd mentality caused us to all run for the door..." -- There was an N-way Prisoner's Dilemma that just played out in the Silicon Valley startup networks.
And the startup networks in aggregate -- Failed! There was a reference made to the movie, "It's a Wonderful Life." The Silicon Valley startup scene failed like a mob, where the Building and Loan crowd succeeded as a community.
Maybe that kind of thing only exists in the movies? Well, not quite. But it is rare.
And the startup networks in aggregate -- Failed! There was a reference made to the movie, "It's a Wonderful Life." The Silicon Valley startup scene failed like a mob, where the Building and Loan crowd succeeded as a community.
Maybe that kind of thing only exists in the movies? Well, not quite. But it is rare.