Observations of the bank that just failed
The collapse of Silicone Valley Bank is an interesting business story. 1, I guess it’s a pretty big bank, and its collapse will have material impacts of the nascent tech startups that banked and stored their money there - starting immediately with missed payroll, and only snowballing from there.
From my perch it’s interesting to already see pleas that not just $250,000 of deposit insurance gets covered, but that all amounts of lost deposits get covered - I guess the ‘too big to allow to fail’ is a lot smaller than it used to be.
2nd, this seems, even to a non-banker like me, as to be wholly predictable, based on what I’m reading - they had large deposits, they safely invested them into safe havens, which became less safe as interest rates rose, and people pulled money out at first because higher yields were possible elsewhere (with simple CD’s paying 4.5% and more), so that began to stress SVB’s cash flow, and the only way to raise money was to sell the safe haven investments at increasingly bigger losses. That should have been highly predictable - seems almost obvious. Why would anyone keep money in a bank paying 1.5% when you can get 5% with no added risk? And these deposits were held by a lot of institutions and corporations, which move money seeking yield faster than say you and me.
3rd, the capital markets are no help, especially for a bank, since if a bank is seen in need of raising money, then people lose confidence in that bank and a bank run logically follows, as people want their money to move to safer shores. There’s a cliche, which I can’t remember and I’m not close enough in my guessing for Google to help, that says - more or less - that if a bank has to reassure depositors about the safety of their money, then it’s too late for that bank. The suspicion of distress is all it takes for a panic that feeds on itself.
3, I didn’t know it at the time, but it seems like the failure of Real Eats, the company that has shipped delicious food to my door for the past 12 months is related to the Fed action as well- that yields can be had that are attractive in very safe CD’s, bonds, treasuries, what have you, that not as many people are investing in capital raises these companies need. That was one of the reasons the CEO gave, meaning the company had only existed, and possibly only could exist, in an environment of low interest rates and eager capital markets and private equity, since it was not profitable. Of course, to me, it seems like having a business plan that generated profits would have hedged this.
4. All this happens as I moved out a good portion of investable funds into CD’s, and considered as 100% some of the banks that are now subject to the liquidity rumor mill.
This just reminds me again that the investing professionals out there really have no real crystal ball or even much forecasting ability. If you weren’t predicting this simple concept of how interest rates could impact banks, then how can you pretend to know something about more complex situations. One thing is for sure, it will be a great couple of weeks for business journalism, which is right up my lane.
I saw this post on Instagram about my friend Piers, moving out of Lot 5 at Dawson Lane - Farmhouse 42. He sold after 4 or 5 years and is moving to Boulder. Our houses always sell, and I bet he made $400k. The diversity of our clients, their individual and family achievments and accomplishments, is one of the neatest parts of our Catskill Farms journey, and I’ve said it before that what would really round out this Founder’s job the best, was if I actually had time to hang and get to know them better, since they really are best in class.
The men laying some stone at my house clearly were enjoying the views at breaktime, judging from their chair set ups.
And a snow man at a client meeting, that they had just constructed. Reminds me of my son's art - everyone is always smiling in his sketches and drawings.
I don't think I've blogged this much in a decade. Fun to be back in the saddle and leading from the front.