64 Comments

Great explanation, Jay. I work in banking and was around during the 2008 crisis - this is definitely different. Clear and concise summary of the situation. SVB’s two main mistakes, imho, is that they weren’t diversified enough, so they were particularly susceptible to the fortunate of one industry (ie tech). The other mistake is not having a Chief Risk Officer for almost 8 months, so no one was there to tell them - “hey, maybe we should start scaling back some of these long term investments..”

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Why do they keep raising the interest rates when it isn’t actually working to control inflation? It seems like it just puts additional strain on the average American who is already struggling with obscene price increases while still allowing corporations to bank record profits as result of their price gouging and failure to pay a living wage.

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Impressed by the way it is being handled. Also interested to know 1) that Trump bears some responsibility and 2) that Peter Thiel got his money out. Couldn’t we exile him and Roger Stone for their malign influence on our lives.

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Mar 13, 2023Liked by Jay Kuo

Thanks for the lay-person's explanation Jay!

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Thank you. I'm among the many many who have been wondering how the depositors of SVB can be made whole without use of taxpayers' money. As you point out also, this situation is an opportune time to revisit the excessive deregulation of small banks, railroads and I assume others. The Boeing 737max failures, if I recall correctly, were at least partly due to handing over to Boeing the ability to test and approve their own design technology instead of having an outside agency ensuring that potential problems weren't being overlooked by the company regulating itself - just as the railroads seem to have been doing.

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Mar 13, 2023Liked by Jay Kuo

"Did deregulation contribute to the collapse?

I would offer that the answer to that question is clear, no matter that Manchin and other Dems voted to eliminate the regulations. Warren, who probably has as much expertise as anyone, clearly lays out the path to the failure of the bank: https://www.nytimes.com/2023/03/13/opinion/elizabeth-warren-silicon-valley-bank.html

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What I don’t understand is how could the directors of the bank not understand that interest rates were going to continue to rise and the implications of those increased rates. The FED has signaled that rates were going to continue to rise until inflation was under control yet, seemingly, SVB ignored that.

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Mar 13, 2023·edited Mar 14, 2023Liked by Jay Kuo

Thank you for putting so much effort into comprehending the problem.

I only wish to comment on your final paragraph by trying to give it some context. What we saw with SVB were people who were supposed to be experts growing too lazy or complacent to use their expertise and exercising their due diligence. (You cannot plug every leak in the stupidity boat.) Inflation was what caused the value of SVB's bonds to plummet. The failure of the bank managers to diversify their holdings produced the bank run.

I graduated from college into the ruinous stagflation economy of the late 70s. Inflation was above 14% a year. Jimmy Carter listened to Paul Volcker and gave the go ahead for a hike in interest rates that went all the way up to 20%. Real mortgage rates reached 24%. It created a short but severe recession. It was bitter medicine, but after only two years inflation was back down below 3%.

After 40 years of suppressed wage growth, most Americans have become accustomed to using credit cards to get themselves out of financial jams. Low interest rates made this possible. Businesses have been able to borrow start up money and put more employees on the books because of those low interest rates. If the federal reserve does not do what is necessary to check inflation, Americans already surviving from paycheck to paycheck will no longer be able to cover short term emergencies with credit. Businesses faced with increasing interest rate payments will begin to lay off employees. peoples investments and savings will be at risk of being wiped out.

The SVB failure was a casualty of bad inflation management. We cannot prevaricate on whether or not the Fed should be aggressively fighting inflation. The consequences are far worse than most living Americans have ever experienced.

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It’s with wonder and gratitude that you are able to clarify and make understandable this kind of information for me, a person who understands nothing at all about the subject of banking and investments.

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Mar 13, 2023Liked by Jay Kuo

It's sounding like that because this bank wasn't a traditional savings and loan type community bank (lot of short term deposits) coupled with investments in long term bonds is a big part of what happened here.

Perhaps the stress testing should include the types and amount of deposits as well as the liquidity required for the specific clientele and investments by the bank itself.

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Mar 13, 2023Liked by Jay Kuo

Thanks for your research and for explaining this in layman’s terms.

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Mar 13, 2023Liked by Jay Kuo

Thank you! This was very helpful.

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HCR wrote about this too. I agree with her that these are the very people who pushed for deregulation and want less government oversight. Freakin geniuses are now begging for help from the government.

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Mar 13, 2023Liked by Jay Kuo

Thank you for your great explanation of what happened. I learned a lot.

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I am not economically savvy, and maybe I missed something. But if the bank has lots of long term investments it can't cash out now, shouldn't they be able to pay back the bail out when those investments mature? So wouldn't it really be more of a loan to stabilize the bank?

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Thank you so much for helping to make this understandable to this old lady. My son-in-law’s employer uses SVB for payroll. He did get his paycheck this morning (Monday) after not getting it Friday, having spent the weekend worrying.

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