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naraburns  nihil supernum  1yr ago (text post)   34967 thread views

Culture War Roundup for the week of March 6, 2023

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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.

any business that depends on SVB and has a > $125K bimonthly payroll will have to do furloughs or layoffs.

I don't think your math is right. That's $650,000 to $870,000 per person per year. EDIT: Never mind.

Also, you're assuming that SVB doesn't have enough to pay any of the deposits. They probably can pay most if not all of them.

You're also assuming these companies won't be able to borrow more money. There's also the possibility that the depositors will be bailed out. Failing that, why wouldn't their investors reinvest the same amount? If these companies were good investments last week, they mostly still will be next week.

I'm going to register a prediction now with 80% confidence that there will not be a large number of layoffs because of this. Let's say under 1,000.

I don't think your math is right. That's $650,000 to $870,000 per person per year.

250000 USD / 15 = 16,667 USD per person per bi-week. 52 weeks in a year, 26 bi-weeks, 26 * 16667 = 43,334 USD/year. Which is... pretty low, these days, even by startup standards. Corrected: 433k USD/person/year, nevermind.

((In practice, any business worth mentioning has non-payroll expenses, on top of this.))

Also, you're assuming that SVB doesn't have enough to pay any of the deposits. They probably can pay most if not all of them.

The issue is less how much SVB can pay out eventually, but also how long it takes for that to be resolved. If you don't have a functional bank account Monday, it's probably illegal to let anyone work for you even if you have a very-likely-to-be-valid IOU. And it might be the better part of a month before you get all of the assets you're going to get.

((This may even be a problem the other direction: if you do payroll monthly and have until the 31st, that's great, but you might still be trying to spin up a whole new bank account and connect your payment processing system to it because some processors won't hold money for you (or in Paypal's case, shouldn't be trusted to).))

Now, this ultimately boils down to a Weird Cashflow Problem, and Weird Cashflow Problems are absolutely the sort of thing that your typical startup (and even a lot of small businesses) have a lot of experiences dealing with, and the ones new enough to not have that experience can also have a ton of vendors quite happy to be paid for the privilege of giving that experience. Some will have open lines of credit; some very few will actually have available cash on it. Most businesses will get loans, or additional venture funding, or pull cash out of a funder's 401k, or sell a kidney, whatever, if nothing else comes up; some few others will be able to pause for a week or two, or have an executive willing to bet his or her bacon that his employee #2 means it when promising not to sue for a late paycheck.

On the flip side, that Weird Cashflow Problems are a thing in startups also makes employees incredibly risk-averse about them. A car mechanic may -- though I wouldn't be the business on it -- look askance at an employee who fucks up direct deposit once, but he's got Options. Startup employee, less so.

Failing that, why wouldn't their investors reinvest the same amount? If these companies were good investments last week, they mostly still will be next week.

Investors will usually evaluate every opportunity individually; there's a specific name for anyone not doing so, but the general one is 'fool'.

But more specifically, this event itself is a reason to reevaluate a lot of investing. Even outside of the question of more widespread bank runs, since other banks have a lot of exposure to interest rate risks, this particular institution was very well-regarded mere months or even weeks ago. It's normally great business to be selling shovels, but this is the sorta time that approach dies.

I've read elsewhere that the FDIC will make sure they have access to their deposits by Monday. But failing that, I don't understand why a company couldn't open a bank account at another bank on Monday and take out a loan.

I've read elsewhere that the FDIC will make sure they have access to their deposits by Monday.

The current FDIC page says "All depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds." (emphasis added).

((And a lot of the assets for that might be currently worth only ~60-70 cents on the dollar. Which won't be that way forever! But that risk is a discount factor.))

But failing that, I don't understand why a company couldn't open a bank account at another bank on Monday and take out a loan.

The median company affected probably will over time, although that comes with its own costs and overhead. Monday specifically is a harder sell; business accounts and business account transfers can be a lot of paperwork and checking, and even if the startup has crossed all their is and dotted all their ts today, it doesn't necessarily mean that the banks will (or may even be able) to finalize an account the same day, especially for anyone without an SSN or with a more complex situation. There's a lot of frictions to KYC that aren't obvious to normal people.

This is further complicated if most uninsured depositors are taking 10-20% losses on their accounts, because then most mid-sized businesses who aren't already banking with someone too-big-to-not-bailout will be trying to make a new account with them, startup or otherwise; anyone who's read and understood what this chart means knows that they can't be sure their small bank isn't vulnerable to the same problems.

But at a deeper level there's a small number of startups that probably can't get an account in today's environment, and lot of people in the startup realm that any sane loan provider's just going to turn up their nose against for the terms they need. Some people went to SVB because it was a lot more willing to accept situations like "oh, I get one lump payment of ten million dollars, and don't have any other employment history ever and probably won't have any more cash coming in for two years", or your business case requires a big-boy credit card and you're not getting one without a credit score you don't have, or because the smaller banks are not Wells Fargo and that can matter.

Some of that's not even wrong -- a Jucero-level business that has a perfectly good piece of paper claiming it will get a payout in mumblemumble months isn't actually guaranteed to have that payout, or whatever fraction of that payout makes it through the fire sale, or even that perfectly good piece of paper in six months. It doesn't even have to be intentionally-fraudy!

From that chart’s thread:

In 2008, the problem was that people lost their jobs, stopped paying, and couldn't sell their house because EVERYONE had lost their job.

So what we did was say that any foreclosed mortgage is instantly paid back by the US Government. No more interest, but no risk.

Is that what the zero interest regime this past decade really means? The idea shakes me.

I'm... not sure. The core definition of (near) zero interest is 'just' that the Federal Reserve will only offer (nearly) zero return for reserve funds or other effective loans to the government, and thus banks who are looking for investments should start looking at anything even slightly better than par once other risks are included. Which has a lot of complicated downstream effects, admittedly, many of them either marginal or just-not-good.

I think PoiThePoi is referencing the bigger emphasis on mortgage insurance and (effective) backstops from the federal government for mortgages, along with some other complexities. I think those remain even (maybe especially) at higher interest rates, they're just more boring.

anyone who's read and understood what this chart means knows that they can't be sure their small bank isn't vulnerable to the same problems.

I saw that tonight and could not figure out what it meant.

As financial products, rather than bank services, long-term securities like bonds have a sale value that can be (and often is) entirely different from the face value or estimated face value, and the transition from one format to the other can be very expensive. The best-known reasons for a discount over the face value is credit risk, that of the contract not being fully fulfilled (such as for bankruptcy, default, death, etc).

Traditionally, some assets were considered very-close-to-perfect for that sort of risk, for which you'd also get very little interest on them. Patio11 uses "marketable Treasury securities" as an example of something that you can almost always sell with very little slippage as recently as July of last year, with long-term known-good home mortgages just under that. And quite a lot of banks had a lot of this class of product: SVB was higher at ~50-60%, but a lot of very traditional banks have around 20-30%. While these are virtually always going to pay out, their sale value depends on other options.

Almost all of those options are downstream of target rates set by the Federal Reserve. In a variety of complicated ways, the Fed will offer or encourage people to offer loans at certain rates, or tell people that they can get a certain rate of interest for leaving money in their reserve accounts; most normal-people long-term loans face some further >2% (sometimes much more, if your credit sucks or the loan duration is weird) rate above that. If these change rapidly, the sales values of loans from before the change can get weird, because there are often going to be better options for your cash.

Today, someone buying 10-year treasury bonds (uh, 'note') is comparing a 2020 bond at 1.5% (or even 0.6%!), or at 2023 bond at 3.5%-4% (or even a seven-year 2023 bond at those rates). You might still make that first purchase, if only because there aren't infinite stock of the latter. But you're not going to get anywhere near the same offers as you did in 2020, even as the final value of the bond is still the same. And the same goes for non-t-bill loans.

In many cases, this is a pretty big discount now. Banks have to actually mark on their sheets the losses for available-for-sale securities (the brown lines), but they don't have to mark hold-to-maturity ones (the blue lines) unless they have to sell them or anything else in the same portfolio. But from a strict definition of liquidity, both count. And that chart -- from the Fed! -- says that they've lost about 600 billion USD. Not all of that's 'real', in the sense that a lot of the hold-to-maturity stuff (and even a small amount of the available-for-sale stuff) will actually get held to maturity and cashed out at its actual face value, or at least held until the "this cashes out soon" is worth more than the "the rate sucks" bit. But the more people have to sell in the short term, the more 'real' it gets.

Which wouldn't be that bad, except 600 billion is about 1/3rd of the 2 trillion dollars that makes up all equity in the US banking sector period. That's not quite as apples-to-apples comparison, and a lot of it's really localized (again, SVB had nearly twice the exposure as the average bank), and even if all the equity vanished that's the non-depositor money. And if nobody calls the pot, it doesn't real. But it's a big chunk of what's available for day-to-day operations.

And that chart -- from the Fed! -- says that they've lost about 600 billion USD.

Who has lost it? The fed or the entire bond market? That's what I'm confused about.

It's from here, but it's of FDIC-insured organizations, mostly banks.

52 weeks in a year, 26 bi-weeks, 26 * 16667 = 43,334 USD/year. Which is... pretty low, these days, even by startup standards.

You're out by an order of magnitude. It should be 433k, which seems unrealistic even in Silicon Valley.

Corrected, and thanks. That does significantly reduce my concerns. Still a huge problem, but every 40- or 50-person employer is a smaller field.

SVB purportedly services 50% of all startups per their advertising.

Why? Do big banks not want to service startups? Did SVB offer better terms?

It's more a historical thing. 25 years ago, when startups were less of "a thing", a lot of traditional banks didn't approve a startup account because the below looks really weird if you're used to servicing traditional businesses.

  1. Someone with no commercial history or credit

  2. Who wants a credit card

  3. Then who one day deposits millions of dollars

  4. And the next months dollars get sent out and the bank balance goes down

  5. With minimal consistent income

These days it's more that you ask some random person in the startup world, VC, or lawyer, and they go "yeah, a plurality of the people I know use SVB" and that's not where you spend your precious hours as a founder trying to differentiate your company so you just go with the flow.

Though, next week every single founder is going to be taking money out of First Republic, Citizens, Fifth Third, Capital One, BNY Mellon, etc. and wiring it straight to JPM. I suspect there will be a broader bank run.

Though, next week every single founder is going to be taking money out of First Republic, Citizens, Fifth Third, Capital One, BNY Mellon, etc. and wiring it straight to JPM.

Isn't that a bad idea, though? Doing the exact same "all our eggs in one basket" that took down SVB? Being an ordinary idiot, I would have thought the lesson here was "Okay, for the love of God let's keep our payroll in this bank and make sure we have enough to cover six months' wages, then put the running costs money in this other bank" and so on. I realise that makes it a lot of bother to set up and maintain individual accounts, but if you've just had "oops, the bank where we kept all our money just imitated a dead goldfish", wouldn't you try and spread the load around?

It doesn't have to be JP Morgan in particular. Any of the Big 4 (JPM, Bank of America, Citigroup, and Wells Fargo) are both well-diversified and too-big-to-fail. I don't know why anyone with deposits over the FDIC insurance limit of $250,000 would have sensitive money anywhere else.

Apparently the traditional banks were right to be worried.

How so? I’d really like to understand the logic of this position.

I suppose if you're a big bank and startups are only a tiny fraction of your business it would be okay, but its hard to manage risk if you can't predict when customers will deposit and when customers will withdraw.

Cramer cursed JPM, though, so the question becomes- how superstitious are the people making decisions about this?

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,

In October 2019, the federal banking agencies issued rules that tailor the application of enhanced prudential standards to large bank holding companies and the capital and liquidity rules to large bank holding companies and depository institutions (the “Tailoring Rules”) to implement amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”). Under the EGRRCPA, the threshold above which the Federal Reserve is required to apply enhanced prudential standards to bank holding companies

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.

Among other things, SVB pioneered extending loans to startups as part of their funding rounds.

It's not the lack of cash, it's the timing of it.

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.

How many will be able to secure funding from VCs (who may themselves have funds tied up in SVB) before Thursday?

Probably almost all of them. Why would an investor let their investment go to waste by not providing the cash letting the company fail?

I'd like to register the prediction that zero startups with a valuation over $100 million will fail to meet payroll due to this.

For one, there is a high likelihood that SVB will be purchased and all depositors made whole by Monday, or at latest mid-week.

At what odds?

85%. Am I willing to be actual money with an internet stranger about it? No.

Edit: Bill Ackman just tweeted the following which increases my confidence in this particular prediction but overall seems to indicate potential contagion. It also makes me wonder what trash Bill Ackman is currently holding which is poised to dump without government intervention:

From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk. Absent a systemwide @FDICgov deposit guarantee, more bank runs begin Monday am.

Banks typically don’t move that fast. Credit funds will make some money.

n=1, our exec team spent all of Friday working on this and report we will be able to make payroll and that our two big name VC funders are ready to help if needed.

Given our company size I’m guessing every payroll is about $600k.

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