In this post, I’m going to use the ticker, SIVB, that Silicon Valley Bank used before it was shut down and sold.
—-Perhaps the oddest single thing about the SIVB debacle is that it was a publicly traded company, whose detailed financials were publicly available both on the SEC Edgar site and, I presume, on the company’s website. So everyone with an interest in the bank could easily have understood that SIVB was unusual in two respects:
–the average account size, including corporates, was about $4 million, with something like 90% of all deposits not eligible for FDIC insurance, and
–the majority of the bank’s assets (i.e., the way it invested depositors’ money) were in long-dated Treasury bonds. To my untutored eye, the company didn’t have much of a conventional bank lending business and apparently saw no need to develop one.
—-Most of the deposits came into SIVB during 2020-21. To make a 75 basis point spread between interest collected from Treasuries and the zero-ish interest paid to depositors, SIVB would need to buy 7-year–or longer–Treasury notes. In contrast to conventional, variable-rate bank loans, the interest payment on Treasuries is fixed. And the lender can’t have a loan committee meeting and thereafter demand immediate repayment. So the 1%-ish T note rate was locked in for a very long time.
This strategy might have made sense during the deflationary1990s in Japan, or if you thought the pandemic might continue for another four or five years. Absent either, a 1% long-dated Treasury was about the worst thing you could buy.
So SIVB customers were uniquely uninsured and the bank was in a poor position to meet withdrawals. All of this when the Fed was making it ultra-clear that rates were going to up by a lot.
—-Another weird part is that neither the tech corporation VP finances nor the high net worth individual customers bothered to take a peek at the SIVB financials–or they did and didn’t care about the risk they were taking.
—-The Fed and its San Francisco branch (the SIVB CEO was a board member of the latter) did care. Both apparently warned SIVB of the huge risk it was taking, and were ignored. Both now maintain that they could only advise and not force SIVB to comply. The Financial Times recently reported that the Bank of England was worried enough about the risk to the financial system that SIVB posed that it wrote to both Feds to express its concern.
—-In late 2022, Kim Olson took the job of SIVB’s Chief Risk Officer, a position that had been vacant for some months (also weird, and arguably very revealing). Why would someone with her 30 years of risk management experience take this job, since even a back of the envelope calculation would have suggested that the losses on Treasuries (unhedged, apparently by SIVB design) from rising interest rates had wiped out all, more or less, of SIVB’s shareholders equity? At the very least, something had to be done immediately, in early January (again, easy to say now).
—-this morning I happened to be watching CNBC when Joe Kiernan “explained” that the failures of SIVB as a company and the San Francisco Fed as a supervisor were understandable, because both have women in positions of responsibility. He forgot to mention Jim Cramer’s forceful endorsement of SIVB on CNBC at $300+/share in February.