Every conversation I had with bankers this week touched on or was dominated by the collapse of Silicon Valley Bank (SVB), the seemingly muted immediate impact, and wondering if the other shoe will drop for regional and community banks. There’s plenty of mainstream and industry coverage on the topic. Here we try to bring you the thinking that goes beyond the headline and helps you with what’s next.
1. Around the horn on SVB
First, we have another banger from Matt Levine at Bloomberg. In addition to the machinations of who did what, an interesting side note was the absence of JPMorgan in the auction for SVB’s assets last weekend:
JPMorgan didn’t show up as an emergency lender to SVB and didn’t bid on SVB after the bank failed and came up for government auction, the people said. …
Lessons from the financial crisis are still seared into management’s brain at JPMorgan. After the 2008 crisis, it got slapped with the label of a bailed-out bank profiting from taxpayers’ generosity, and it eventually paid billions of dollars of fines and legal expenses after buying Bear Stearns and Washington Mutual, including a then-record $13 billion penalty over mortgage lending. The irony was that it completed the takeovers partly at the request of the government, which had encouraged JPMorgan to acquire the stressed banks to prevent further instability in the financial system.
As CEO Jamie Dimon said in his 2018 letter to shareholders: “In case you were wondering: No, we would not do something like Bear Stearns again—in fact, I don’t think our board would let me take the call.”
Patrick McKenzie of Bits about Money presents the risk view of the event. In it, he offers an analysis of the $620 billion in unrealized losses from held to maturity securities on banking balance sheets and the perils of claiming how safe your FI is:
Financial institutions are also adjusting to the new reality rapidly. Over the weekend, like every other customer of a particular bank, I got an email from the CEO explaining that they had ample liquidity but had just secured a few tens of billion of additional liquidity, prudent risk management, no problems here, all services are as up as ever, yadda yadda yadda.
Securing more liquidity may be prudent, and the announcement of securing liquidity may be prudent, but this is not an email you send to all customers in good times. Banks typically take communications advice from the Lannisters: anyone who needs to say they have adequate liquidity does not have adequate liquidity. History is replete with examples. Bank CEOs know this. They know their sophisticated customers know this. And yet that email was still written, reviewed by management and crisis comms and counsel, and then sent.
And for the academic take, see Shawn Tully of Forbes’ interview with Douglas Diamond of The University of Chicago (and recent Nobel laureate). While not a fan of the Fed’s pace of interest rate hikes, he places the blame for the failure on SVB’s management. However, regulators should have seen this earlier:
Diamond worries that the Fed’s oversight of regional banks, in itself, is far too light to prevent further blowups. In the early years following the passage of the Dodd-Frank legislation in 2010, the central bank imposed the same tough annual tests on midsize lenders as the likes of Wells Fargo or Citigroup.
“I looked at the latest stress test, and the Fed was assessing how the banks would perform at rates from 0% to 2%, as if 2% was as high as they’d ever go. So almost any bank would pass. The standard should have been 0% to 7%.” (SVB was exempt from what would have been its last stress test in 2021 because its assets were still below the required level. It was not scheduled for testing in 2022 when its assets passed the threshold.)
BONUS: Ben Thompson of Stratechery writes on the events leading to SVB collapse in the vein of the classic Prisoner’s Dilemma game theory framework, and how the VC industry’s collective action is moving funds seems to come from a shift of placing many repeated bets, to maximizing the few big wins.
There may be short-term gain in screwing over a founder or bailing on a floundering company, but it simply is not worth it in the long-run: word will spread, and a venture capitalists’ deal flow is only as good as their reputation.
[However, VC firm] Benchmark was willing to sue founder and Uber’s then-CEO Travis Kalanick, destroying its reputation amongst founders, because the absolute return that would result from getting Uber to an IPO was worth so much more than any other investment, past and future.
What I increasingly suspect is that Uber was not a one-off, but rather a preview of a new era for Silicon Valley. In the six years since that Article it became normal to have private company valuations in the tens of billions; venture capital firms ballooned to billions of dollars under management, effectively changing their economic model from one driven by returns to one driven by fees; in both cases success became less about a series of victories and more about going big or going home.
That meant that tech has been shifting away from greenfield opportunities and expanding the pie to taking share in zero sum contests for end users, from their attention to their pocketbooks.