I’m still shocked that people will openly admit this. This is not an excuse.
“ Punit Soni said startup founders like himself don’t usually have timeto think about diversifying bank accounts. They are pulling all-nighters trying to build their product or service, raise capital, hire new engineers or accomplish dozens of other tasks required to build their nascent business. ”
Thank you for the insightful and informative article. Maybe an article on potentially similar issues (HTM unrealized losses) at select regional banks, such as Western Alliance, some online banks (including Marcus at GS), would be interesting to the readers
The WSJ opening paragraph from an article posted this afternoon. This paragraph boiled things down very simply.
Silicon Valley Bank’s failure boils down to a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time, and invested it in long-term assets that it was unable, or unwilling, to sell.
As an ALM actuary it always amazes me when bank regulators tell life insurers that banks do ALM better. All could improve. In today's environment too many are relying on rules of thumb that are no longer appropriate. Risk teams should all be running scenarios based on cash flows and market value in addition to those based on GAAP. Finance 101 gets forgotten as you get more sophisticated.
No one forced SVB to buy long dated highway yielding HTM bonds back when interest rates were much lower. Berkshire chose lower yielding short dated bonds because of such a risk (not the only reason Mr. Buffett chose such a strategy). Maybe Berkshire can keep SVB afloat in return for a 10% preferred?
I wish I had seen this tweet from Bill Ackman before posting this article… the idea that (sophisticated) depositors with over $250K in a bank didn’t realize what they were doing seems crazy to me. Bailouts cannot be the perennial answer.
“By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank.”
While I agree that it seems crazy many businesses didn't consider potential risk of holding so much cash in one spot -- unfortunate fact is that a TON of startups did not. I know personally many where there may be 1 person in charge of finance (or even none; COO/ops person does it) that may have raised $5-20M and didn't think twice about just "keeping it safe in the bank". And even when suggested they do something different like buy treasuries etc., it is viewed as a waste of time vs. other pressing things for business. I guess what I'm saying is it wasn't just reckless risk takers.
Mark Cuban expressed an interesting perspective which basically stated its unrealistic for a small company with $2.5 million in cash to spread that across 10 different banks in order to have FDIC protection. Cuban said that would bring in unrealistic administrative hassle and fees. https://finance.yahoo.com/news/silicon-valley-bank-collapse-mark-184209201.html
I worked for a small business in high school that installed those big satellite dishes and the owner kept his money in several different banks to ensure FDIC protection. And that was when FDIC protection was $100,000 per account versus $250,000 like it is today. My rationale opinion is that managing bank accounts is very easy today with computers and smart phones so there should not be any excuse for finance managers in todays world. If finance leaders are time challenged, they could just simply bank with a "to big to fail" bank like JPM or BAC.
It just seems like such a basic corporate finance responsibility to manage cash in a responsible way. The objections seem hollow to me. And I’m not even sure what the alternative is … fdic deposit insurance on a million? Ten million?
That's a good line of thinking. FDIC insurance has to have a limit. I wonder where Berkshire, Apple, Microsoft and Alphabet (all companies with enormous cash holdings) park their cash? A simple method for a finance manager to consider using would be simply copying the richest companies in the world.
From what I’m reading, that seems to be the case. It just seems crazy to me. As an individual, I routinely buy treasury bills and wouldn’t think of having uninsured bank deposits. I can see why a business might exceed the limit for the sake of convenience, but not at the risk of not being able to meet payroll or risking the business.
Interesting that banks don’t have to mark to market their portfolio yet other companies (like Berkshire) do? Is this to try to provide stability to bank financial statements or something?
I can see why it is done, but I think investors should understand that it is happening and it’s strange to read than many apparently were caught off guard.
In Berkshire’s case, the relatively small and short duration fixed maturity portfolio is carried at fair value. From 10-K:
I’m still shocked that people will openly admit this. This is not an excuse.
“ Punit Soni said startup founders like himself don’t usually have timeto think about diversifying bank accounts. They are pulling all-nighters trying to build their product or service, raise capital, hire new engineers or accomplish dozens of other tasks required to build their nascent business. ”
https://www.wsj.com/articles/easy-loans-great-service-why-silicon-valley-loved-silicon-valley-bank-6b3f203e
Good WSJ op-ed today:
How SVB ‘Profited’ From Interest-Rate Risk
An accounting rule created an incentive for the collapse.
https://www.wsj.com/articles/how-svb-profited-from-interest-rate-risk-accounting-rules-deposit-fdic-federal-reserve-coupon-held-to-maturity-ec43418a
really good
Thank you for the insightful and informative article. Maybe an article on potentially similar issues (HTM unrealized losses) at select regional banks, such as Western Alliance, some online banks (including Marcus at GS), would be interesting to the readers
Thank you for this artlcle.
The WSJ opening paragraph from an article posted this afternoon. This paragraph boiled things down very simply.
Silicon Valley Bank’s failure boils down to a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time, and invested it in long-term assets that it was unable, or unwilling, to sell.
Well written and easy to understand. Thank you.
Ravi, one of your best and most timely pieces! Thanks!
Thanks for your analysis!
As an ALM actuary it always amazes me when bank regulators tell life insurers that banks do ALM better. All could improve. In today's environment too many are relying on rules of thumb that are no longer appropriate. Risk teams should all be running scenarios based on cash flows and market value in addition to those based on GAAP. Finance 101 gets forgotten as you get more sophisticated.
No one forced SVB to buy long dated highway yielding HTM bonds back when interest rates were much lower. Berkshire chose lower yielding short dated bonds because of such a risk (not the only reason Mr. Buffett chose such a strategy). Maybe Berkshire can keep SVB afloat in return for a 10% preferred?
My guess is that Warren will tell whoever calls him to check with Charlie ...
SIPC is more than FDIC. Some firms even have supplemental insurance on securities. There are money market mutual funds yielding over 4%.
Bank customers are bound to put pressure on banks.
I wish I had seen this tweet from Bill Ackman before posting this article… the idea that (sophisticated) depositors with over $250K in a bank didn’t realize what they were doing seems crazy to me. Bailouts cannot be the perennial answer.
https://mobile.twitter.com/BillAckman/status/1634564398919368704
“By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank.”
Thank you for the article though -- gives an informative, fact-based breakdown and I hadn't seen these details elsewhere yet!
While I agree that it seems crazy many businesses didn't consider potential risk of holding so much cash in one spot -- unfortunate fact is that a TON of startups did not. I know personally many where there may be 1 person in charge of finance (or even none; COO/ops person does it) that may have raised $5-20M and didn't think twice about just "keeping it safe in the bank". And even when suggested they do something different like buy treasuries etc., it is viewed as a waste of time vs. other pressing things for business. I guess what I'm saying is it wasn't just reckless risk takers.
Mark Cuban expressed an interesting perspective which basically stated its unrealistic for a small company with $2.5 million in cash to spread that across 10 different banks in order to have FDIC protection. Cuban said that would bring in unrealistic administrative hassle and fees. https://finance.yahoo.com/news/silicon-valley-bank-collapse-mark-184209201.html
I worked for a small business in high school that installed those big satellite dishes and the owner kept his money in several different banks to ensure FDIC protection. And that was when FDIC protection was $100,000 per account versus $250,000 like it is today. My rationale opinion is that managing bank accounts is very easy today with computers and smart phones so there should not be any excuse for finance managers in todays world. If finance leaders are time challenged, they could just simply bank with a "to big to fail" bank like JPM or BAC.
It just seems like such a basic corporate finance responsibility to manage cash in a responsible way. The objections seem hollow to me. And I’m not even sure what the alternative is … fdic deposit insurance on a million? Ten million?
That's a good line of thinking. FDIC insurance has to have a limit. I wonder where Berkshire, Apple, Microsoft and Alphabet (all companies with enormous cash holdings) park their cash? A simple method for a finance manager to consider using would be simply copying the richest companies in the world.
From what I’m reading, that seems to be the case. It just seems crazy to me. As an individual, I routinely buy treasury bills and wouldn’t think of having uninsured bank deposits. I can see why a business might exceed the limit for the sake of convenience, but not at the risk of not being able to meet payroll or risking the business.
Excellent post. Not everyone appreciates the accounting nuances. Thanks!
I appreciate the cogent explanation!
Interesting that banks don’t have to mark to market their portfolio yet other companies (like Berkshire) do? Is this to try to provide stability to bank financial statements or something?
I can see why it is done, but I think investors should understand that it is happening and it’s strange to read than many apparently were caught off guard.
In Berkshire’s case, the relatively small and short duration fixed maturity portfolio is carried at fair value. From 10-K:
https://rationalwalk.com/wp-content/uploads/2023/03/1820F53D-E513-46D9-A8E0-B35B5BB72E07.jpeg
Held to maturity is an option for every company using GAAP.