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Silicon Valley Bank crashed just a day ago, and many folks in the VC/startup world are freaking out. I’ve seen predictions that 50-100 different startups will go bankrupt over the next month. This could cause a contagion effect and lead to worse effects, although I’m skeptical of a major economic collapse as some doomsday prophets have discussed.
Apparently the bank was mostly into mortgage backed securities, which lost a ton of value due to the Fed’s precedented* rate hikes. I don’t know enough about finance to confidently hop on my soapbox here - @BurdensomeCount may have a better idea of what’s going on.
As this collapse mainly affects very left coded super technical folks, I don’t expect many on the right to shed tears. That being said I do think this speaks to a larger issue of growth in the economy as a whole. Tyler Cowen has famously backed the stagnation hypothesis, or the idea that overall production has been slowing down.
Tech startups have recently been the major sector looked to for economic growth, especially with all the AI/LLM hype. This collapse not only will slow the industry but shows a marked incompetence from this growth sector which may cool investment there in the future.
How can we sustain economic growth without the recent massive gains from Silicon Valley technology?
If the FDIC or other banking entity does not cover deposits, any business that depends on SVB and has a > $125K bimonthly payroll will have to do furloughs or layoffs. That's basically any business above ~15-20 people.
Directors of a company are criminally liable if they ask people to work knowing they have no means to pay them. Wednesday is March 15 (payday, for work done March 1 - 15). That means companies unable to make payroll #2 in March need to furlough or have layoffs before start of work Thursday.
There's something on the order of 1,000 series A or higher deals per year (even in 2022, decreased from 2021). The average time between raises is about 2 years. Thus, conservatively there's something like 2,000 venture-companies that have > $125K bimonthly payroll, and many small businesses that use SVB but are not venture-backed are not counted in this.
SVB purportedly services 50% of all startups per their advertising. From a survey of my VC and startup friends, it seems reasonable to assume that 25% of that are extremely dependent on SVB (e.g. payroll, no cash sitting elsewhere, and incoming customer payments aren't going to cover anything).
If these assumptions hold, we're looking at around 10% of the entire startup ecosystem laying off effectively everyone in March (e.g. either by going under, or reducing headcount so drastically that they're cashflow positive... which for most startups would be extremely painful). Another large batch will effectively go under in April (e.g. they have one months' payroll at another bank but that's it).
So in the short term we're talking about somewhere on the order of tens of thousands of jobs. A lot of future value creation is lost. Sure, some of these startups are the Juiceros or latest crypto scam, but others are meaningful companies that provide meaningful services. The latter group typically doesn't get as much press because they're optimizing for value rather than hype.
In the medium term, if you're a business that requires having an account with a >$250K balance, why would you now use any bank other than JPM? Sure you can do "diligence" on your bank, but SVB had an A rating from Moody's and a "buy" rating from JPM. Now obviously those are bullshit but for anyone claiming that this collapse was obvious -- please share a screenshot of your brokerage account where you made tons of $ shorting SVB.
So the default will be to go with JPM, rendering most small and medium-sized banks uncompetitive.
At the end of the day, SVB's shareholders will (and deserve to) get wiped out. Their bond creditors and such will mostly (and deserve to) get wiped out. I am not for bailouts of either of those parties. And maybe how we think about the banking system where depositors are creditors should be re-interrogated, because who the fuck is wanting to risk all their money for like a 0.5% interest rate? But I do NOT think startups and small businesses deserve to be randomly decimated.
Why? Do big banks not want to service startups? Did SVB offer better terms?
SVB offered higher deposit rates than most big banks. They were paying 4.5% on money market deposits. Chase is paying 0.01% on everything account short of 48 month CDs which get a generous 1.49%.
This is the key detail I was looking for and it makes me a lot less sympathetic to the depositors now demanding a bail out.
In fairness, it's not good if the safe (because the government can't afford to let them fail) banks use their position to pay peanuts on their deposit rates but attract deposits because no one can bear the risk of banking elsewhere.
I think it's perfectly fine if lower-risk deposits pay substantially lower interest rates
It's one thing if JP Morgan/BoA/Wells were lower risk because of better management but they're lower risk mainly because the US Government can't afford to let them fail so if this happened to them the Fed would have swapped their bonds at par or launched a new round of QE.
I'm not a huge fan of the government picking winners and then those winners taking monopsony rents as a result.
The big banks are regulated in a way which reflects their too-big-to-fail status. As part of this, they are required to prove that they are not doing the specific thing that SVB did - i.e. taking non-mark-to-market interest rate risk by investing floating rate customer deposits in long-dated fixed-rate securities.
Medium-sized banks like SVB were exempted from these rules in 2019 - to quote from the SVB annual report,
increased from $50 billion in average total consolidated assets to $250 billion. The Federal Reserve may also impose enhanced prudential standards on bank
holding companies with between $100 billion and $250 billion in average total consolidated assets.
(SVB had $211 billion in total assets)
SVB CEO Gregg Becker was personally involved in the campaign to relax the rules. He stood up in front of a Congressional Committee and said it was OK for banks like SVB to do this stuff because they were not too big to fail and wouldn't need a bailout.
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