more on Silicon Valley Bank (SIVB)

A lot is now being written about the collapse of SIVB. The political left, for example, is blaming Trump, the political right the diverse composition of the board of directors. The latter, I think, is just crazy; the former a bit disingenuous. Cathie Wood of ARK has also chimed in with the, I think, totally bizarre opinion that the Fed is the root cause of the SIVB affair, having pushed short-term interest rates far too high.

From my vantage point, it looks as if SIVB made a huge all-or-nothing bet that interest rates would remain at 2021 levels. It did this in two ways: by using customer deposits to buy enormous amounts of long-term Treasuries, and by choosing not to hedge against the possibility of higher rates. Dynamic hedging, a strategy that has been around for close to forty years, comes to mind as a more bank-like way to proceed.

What strikes me as equally odd, if press reports are correct, that a company like ROKU would place close to half a billion dollars on deposit with SIVB without having taken a glance at the SIVB annual report–as did a bunch of companies in the Peter Thiele orbit.

SIVB clearly saw the crisis coming as withdrawals mounted. One of the first actions we on the outside can see is the then-CEO selling a bunch of his stock. Then came plans for a private placement, to be followed by a public offering of preferred stock the following day, aimed at raising a total of $2.5 billion. The private placement fell through (my theory: SIBC put off the placement, on the idea that a successful offering would mean the placement could be made at a better price).

In a JP Morgan note I read, the author makes the point that depositors took the enormous risk of putting their money with SIVB but were only compensated with a paltry extra 60 basis points in yield.

The financial press coverage has, by invoking memories of 2007-09, been both uninformed and at least borderline irresponsible.

The only party that comes out looking good in this mess is the Federal government, whose quick and decisive action has hopefully nipped a possible panic in the bud.

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