Despite everyone on the planet knowing FDIC insurance covers up to $250,000 per depositor per bank, the Federal Reserve, FDIC, and Treasury Department decided over the weekend to increase the coverage at Silicon Valley Bank (SVB) to $1,000,000,000 per depositor. Yeah, up from quarter of a million to a billion.
Don’t know how this will develop over the next few days or weeks, but at the moment it looks like yet another bailout for the ultra-rich and ultra-connected. Oh, and a second massive bailout over the weekend.
It also looks like these bailouts will likely increase panic. It absolutely will increase of moral hazard, in other words, running a bank poorly knowing the feds will bail you out and investing in banks without due diligence because you will get bailed out.
SVB was taken over on Friday after a bank run drained massive amounts of cash. On an depressing tangent, the run is reported to have been fueled by venture capital investors calling their investees and clients, telling them to pull money as fast as they could. Essentially, we saw word-of-mouth spreading via social media at the speed of electricity. Thus a run appeared out of nowhere that collapsed a huge bank in a couple days.
Treasury Department says these are nationalizations, not bailouts
Regulators also took over Signature Bank on Sunday: WSJ, 3/12/23, SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis.
That is the third largest bank failure in the history of the US. The feds guaranteed all uninsured deposits, bailing out another set of ultra-rich depositors. SVB was the second largest.
Oh, excuse me. This is not a bailout.
I will quote the WSJ article so you don’t think I’m making this up:
“A senior Treasury official said the steps didn’t constitute a bailout because stock and bondholders in SVB and Signature wouldn’t be protected.”
I get it. The depositors will be made whole by FDIC. The stockholders and bondholders are wiped out.
I think the proper term for that is nationalization.
So it wasn’t a bailout, it was nationalization, with the bank now being property of the federal government.
Jaw-dropping negligence
I have been staggered by some of the ridiculous mistakes made by SVB. Let’s explore their alleged risk management and risk mitigation strategy.
Wall Street Journal, OpEd column by Vivek Ramaswamy – 3/12/23 – SVB Doesn’t Deserve a Taxpayer Bailout – Do keep in mind Mr. Ramaswamy is an announced candidate for president. That doesn’t change the facts he cites.
Article says 11% of depositors were below the insured cut off. That means 89% of deposits were uninsured. Typically large banks sweep excess balances into cash management programs which in turn invested in T-bills. SVB did not do so.
Lending base and deposit base is concentrated in high-tech startups. Those companies are very sensitive to interest rates. To my CPA eyes, that is a dangerous concentration ono both sides of the balance sheet.
The bank saw a large influx in cash in the last few years which led them to have an investment portfolio equal to 57% of their total assets, in contrast to the bank’s peers which run 24%.
Article says the bank has the highest concentration of mortgage-backed securities in their peer category. That is another concentration that is quite interest rate sensitive.
Tidbit that only accountants will appreciate – of the $120 billion investment portfolio, $91 billion is categorized by management as held-to-maturity (HTM). For the non-accountants, that means fluctuations in fair market value are not reflected on the financial statements. To get that special treatment the company has to commit to not sell any of those securities before maturity. This means that there was only $26 billion of their portfolio in the available-for-sale (AFS) category that could be liquidated if the need arises.
The impact of management deciding to put such a large portion of their portfolio into HTM category is they could take on significant interest rate risk, incur an economic hit from rising interest rates, without ever recognizing the resulting losses in the financial statements.
Staggeringly, the oped says SVB held only $10 billion of interest rate swaps on their $120 billion securities portfolio. The average duration of the portfolio is 5.6 years. Astoundingly, the article calculates a 200 basis point move in the five year interest rate would drop the value of their portfolio by $14 billion. For perspective that $14B risk in the securities portfolio is approximately equal to their capital.
Let me rephrase that analylsis – If interest rates rise 2% then the loss in market value of their securities portfolio would basically wipe out all their equity. That is a staggering interest rate exposure (have you caught on that I’m starting to run out of extreme adjectives to describe the foolishness of their investment strategy?).
OpEd indicates the bank probably had enough liquidity to cover normal operations. That is until the CEO snuck into securities filings the news that the bank needed to raise additional capital. Article points out the CEO compounded this by telling everyone to “stay calm”, which would reasonably be expected to make jittery everyone who wasn’t already scared.
Article points out that venture capitalists and start-up executives were arguing there was a horrible, frightening systemic risk that other banks were destined to collapse if they didn’t get a 100% bailout…excuse me,,, if they didn’t get nationalization with guarantee of all deposits. They insist they be made whole at taxpayer expense.
Article closes with saying the other banks in the country aren’t in the same risk portfolio.
Let’s review:
Other banks have diversified lending portfolios.
Other huge banks have a diversified deposit base that isn’t a mirror reflection of their lending base.
Other banks don’t have 90% uninsured deposit making them vulnerable to a panic and bank run.
Other banks start with sufficient capital.
Other banks have more cautious investment portfolios that don’t make a huge bet on permanent low interest rates.
Other banks actually manage their interest rate risk.
I guess the argument is that since SVB didn’t do any of those things their failure justifies a complete bailout. I’m sorry. I mean nationalization.
Partial list of ultrarich depositors made whole
Just a few beneficiaries of the bailout, according to the WSJ on 3/13/23 in the article Companies Whose Deposits in Silicon Valley Bank Were Just Freed:
- $487,000,000 – Roku
- $300,000,000 – Bill Holdings
- $150,000,000 – Roblox
- $74,000,000 – Ginkgo Bioworks Holding
- $21,000,000 – Lending Club