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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Then that responsibility defaults to the CEO. Interesting that in the 2022 10-K, the info on executive officers is incorporated by reference from the Annual Meeting Proxy, with no notation that at least one of those named officers (the CRO) was no longer at the Company. I audited banks for a then Big 8 firm back in the day. In my opinion, their risks were also not adequately disclosed. Their 10-K risk factors section is very generic. No discussion of their industry concentration, and one sentence even reads "The primary source of funding for the Bank is client deposits, a majority of which are maintained in cash and highly liquid assets.", a patently untrue statement to make on February 24 when the report was filed.

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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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It does start to seem like they are doing it because they feel they have no other tool. But the side effects are now becoming clearer.

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Totally agree with you. It appears to me that Powell et al are financial generals fighting the last war with a blunt weapon. I am not seeing nuanced thinking or other management options other than painful interest-rate increases that are really squeezing avg. consumers like us.

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Robert Reich has explained a lot about exactly this over in his Substack. Why the Fed is doing what it’s doing, and why what it’s doing is exactly backwards from what it should be doing.

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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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She lays it out very clearly. This bank totally mismatch assets and liabilities.

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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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We’ll find out more now that others are in charge. Were they buying 10 year notes thinking that we’d never hit an inflationary period and rates would rise rapidly? Did they keep buying them through 2022? We’ll have to rely on regulators now to tell us the whole picture.

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I think the short answer is that’s not what Boards do. That’s what management is supposed to do.

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Seemingly? Do you have a theory about it?

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No theory, just ignorance and wanting to know more.

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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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Graduated from college at the same time. You are so right.

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The three little dots to the right of Like/Reply provide an edit function.

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thank you!

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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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author

I had to do a lot of reading this weekend on this myself!

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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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I’d like to add that while Don jr. never heard of any banks failing under his father’s watch according to HCR there were 16 that failed. It’s common apparently.

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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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The bank is pretty much kaput because it simply couldn’t function any more, with short term obligations squeezing it and no way to sell long term bonds without making their balance sheets worse. A bigger entity with more liquidity (like the government) needed to step in.

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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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