Disclosure alert: SVB bought my business in 2001 and I worked there as a senior executive for 2 1/2 years. I’ll offer a little insight into what went wrong….if that doesn’t interest you, hit delete now. Any bank has three main actors; the bankers, the customers (depositors and borrowers, which often are the same), and the regulators. Let’s start with customers, who in this case had to be incredibly naïve and irresponsible to believe deposits in any bank above the insured limit of $250K are riskless. But then VC’s and tech companies have a long history of being terribly neglectful custodians of cash. They believe that their purpose in life is to make great things, and cash management is just a nuisance. The vast majority of responsible corporations and money managers put excess cash in money market programs, which invest in highly-rated, short-term securities like T-bills. In fact, SVB had just such a program that the responsible, non-lazy corporations used, and those funds will be unaffected by the collapse of the bank. That cash management program was part of what I ran while I was there; the money was actually invested by Citicorp as part of the largest cash management fund in the world (BofA also ran part). SVB staff could have advised deposit customers of the better alternative sitting right next door, but if you think bankers truly have the customer’s best interests at heart, you haven’t been paying attention. As we used to say when I was at Citicorp, if you need a friend, get a dog. BTW, any of you who use sweep accounts are every bit as naïve as SVP depositors, those accounts pay far less interest than the money market accounts also managed by your bank….banks make much of their money from customer naivete and laziness. Customers see pennies that aren’t worth the effort, banks see millions of dollars of profits as those pennies add up.
SVB execs weren’t the country’s best bankers, but they didn’t need to be, they were simply running a term arbitrage game (borrow short-term at low rates, invest long-term at higher rates) like so many others. Those games worked spectacularly well over 40 years, until the Fed pulled away the punchbowl a year ago. SVB failed to react when deposits tripled over about two years beginning in 2020 as cash gushed into the tech sector, and put most of those new assets into term arbitrage (of $140B in new deposits, $100B went to term arbitrage). Risk went through the roof, since for much of that period market observers saw the Fed reaction coming, that they would have to raise rates to stem inflation, and that would turn term arbitrage upside down. It’s always hard to walk away from an incredibly successful game – SVB stock had gone from the low $20’s to almost $600 over 20 years – but that’s what good managements do, they know when to say when. Another example is when Chuck Prince did not stop the subprime mortgage lending operation at Citi and almost destroyed the bank…he later used the incredibly lame excuse that you can’t stop dancing until the music stops. Bottom line, SVB management was every bit as lame as Chuck Prince, and did destroy the bank because, unlike Citi, SVB is not considered by the Fed to be systemically important.
Then we have the useless primary regulators who are supposed to be watchdogs for safety and soundness….for SVB, that was the San Francisco Fed. They could have stopped the excess risk-taking with a phone call, but didn’t, yet they were informed regularly as the risk built. Wall Street knew, the stock has been in free-fall for over a year, so of course the Fed knew. I have no special insight here, but would observe that everybody in the tech world and in the Bay Area treated SVB like a pet rock, loveable fools who needed hugs regularly. The many VC’s who promoted the use of SVB are like gods in the Bay Area, so who wanted to be the one in the neighborhood to point out that the emperor has no clothes. SVB naively believed that if they loved the VC’s, VC’s would love them back….then VC’s couldn’t get their money out fast enough at the first signs of a bank run. Anyone who believes that VC’s are your friend in a crisis has not been paying attention over the last 40 years….VC’s save all their love for LP’s, there is none for companies or banks.
I’ll leave you to decide who you think is more to blame, but for sure, the debacle could not have happened without major contributions from all three. There may be a silver lining….astute observes have remarked that the Fed would keep raising rates until they broke something, and now they have broken something. SVB is gone, and the economy is likely next if they don’t stop or at least slow down….it already may be too late. Fed actions take effect with a 12-18 month lag, so it seems only prudent to stop for a bit to see what those effects are. The only counterpoint to that is Biden and Democrats wanting to continue their uncontrolled spending, which has been the major cause of inflation, and we don’t know yet whether Republicans can slow that down. For the good of our economy and country, we must hope so.
