How do you arrive at this conclusion? Without a run on the bank none of this would have happened.
However it is not the rational decision for a fund to do so. You have a) substantially larger voice and also ability to coordinate for better outcomes, for a fund it is no longer a gamer theory 101 prisoners dilemma.
The larger funds could have
- Banded together and made a joint statement ( like they were able to organize and do after the run) reassuring every startup of their confidence in the bank
- Participated in the equity infusion into the bank
- Organized and bought debt in the bank to give it liquidity
- Simply moved their own money as new deposits into the bank.
Just doing a joint statement - which wouldn't have costed them a single penny would have gone long way to reassure the markets and also given the key guys a lot of clout and established their influence J P Morgan style.
The bank was appears to have been insolvent (from the currently available information), though they avoided their books showing the fact by having bonds marked as “HTM”.
When a bank is insolvent, it’s best to shut it down as soon as possible, to avoid the bank engaging in risky behavior to ‘make back’ the missing money.
But without that pressure, there probably would have been enough time for this to have been a much more orderly transition. The panic didn't help anyone, it just made SVB's existing problems more difficult to manage.
To put it another way -- SVB went bankrupt the old fashioned way... slowly and then all at once. The bank run was the inflection point.
The only way to make back the $100 they spent on a 1.25% 10 year $100 treasury was to wait 8 more years.
Those 8 years they'd either have to become slowly become insolvent by offering their depositors 3-4% savings accounts like every other bank, or become illiquid because what depositor would keep their money in an account earning 0.5% so that SVB can keep the lights on. They had to sell and book the loss eventually.
If it were only illquid, it would be far easier to find a buyer and it would have already been sold by now.
[1] https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
So, only after the run did they become insolvent. The change from illiquid to insolvent happened quickly, but without those withdrawals, the illiquidity could have likely been managed to avoid an outright insolvency (probably through a sale).
If you’re going to take a loss by selling an asset prematurely, it is illiquid. Otherwise you’d have to say things like the houses people own are liquid because the person could sell it in a day if they were willing to do so for 80 cents on the dollar.
That is not the financial world’s definition of “liquid”
Things one can sell at fair value in a few mins are liquid, and things one has to sell slowly or take 80 cents on the dollar to get rid of it fast (like a house in your example) are illiquid. It's a function of buyers and process, not my accounting treatment or tax treatment or whatever other treatment might make me not like the idea of selling right now.
What's next? The FX markets aren't liquid because I don't feel like realizing a gain from a tax perspective?
>> That is not the financial world’s definition of “liquid”
Yeah, it is, to us in the financial world.
>Yeah, it is, to us in the financial world.
I get the feeling we're talking around each other, your response indicates that we (probably) agree, and I'll assume it was my own communication failure, so I won't otherwise remark on this snarky & somewhat inaccurate (in its implications) comment.
The comment you were replying to said "quickly and at fair value".
At a simple scale, If I own a $200k home outright and have $50k in credit card debt that I cant pay then I file for bankruptcy, negotiate with creditors to sell my home and pay the debts, and come out with $150k in assets with no liabilities. I was always solvent.
This happens daily in the business world’s bankruptcy courts. (Of course some of them are also insolvent)
My small scale example illustrated the concept, my large-scale citation of bankruptcy courts show a bit of how it plays out in real life & validates the analogy.
Ugly, but rational.
A bank run is an almost inevitable consequence of a loss of confidence in a bank.
The loss of confidence was caused by their $1.8B loss on securities sales and plan to go to the market for $2B in funding.
The next day shares plummeted, and people began to remove their money (including those advised by VCs)[1]
Given the fact that only $250K of funds is FDIC guaranteed, in the face of a balance sheet crisis at the bank the withdrawal of funds was entirely rational. Arguably not doing it would have been irresponsible.
Even if there hadn't been a bank run it's pretty easy to see cases where the bank would have "temporarily restricted the amount of money an entity can withdraw in a day" or something. That potential restriction on liquidity is something any responsible business owner would want to avoid.
[1] https://abcnews.go.com/Business/timeline-silicon-valley-bank...
https://www.bloomberg.com/news/articles/2023-03-11/thiel-s-f...
Unless those first people were actively trying to create an insolvency crisis, it seems to me they were either being prudent or prescient. There's a reason it's called the "tragedy" of the commons, and not the "tyranny" of the commons.
I don't really have a horse in this race, but: while the above argument makes sense, what about all their future startups? Everyone says nice things about how it was good to have this bank that understood startups and treated them well, and now that is all gone. And no one who had deposits lost their money anyway.
It seems to me that everyone is worse off. It was a lose/lose move.
If all the depositors could have got together in a room, they could all have agreed to keep their money in. That coordination wasn’t possible though.
A relatively small group of VC firms effectively did coordinate the depositors very effectively to organize except it was to take money out
Saying coordination wasn’t possible is therefore incorrect. And had it not occurred, getting people to keep their money in would have been a moot point, the whole thing a non issue.
Coordinating stopping a run would take a huge amount of much more sophisticated and time consuming back and forth communication and negotiation, reassurance and confidence building. You’d have to convince people that together right now in this situation you can stop the run. How would you do that? That coordinated consensus building would have to happen and propagate through the community, all of the community, at least as fast as the news of a run in order to stop the run. If it’s slower it’s too late, the people that heard there’s a run before they heard there was a movement to stop it already pulled out their money.
You see the problem?
First, the speed of action & (so far) efficacy of containing and stabilizing things while keeping all depositor money safe is both an endorsement of traditional regulated finance as well as a sharp counterpoint to recent crypto collapses that were neither contained nor safeguarded customer money.
Second, some of the most crypto friendly finance partners are now gone.
Sure, Bitcoin is up, but from the point of view of growing an alternative I think crypto as a whole has taken yet another hit. Whatever struggle the sector would have had regaining momentum after the past year now just got at least a little harder.
Bank runs are the same way.
In previous generations the industrial titans had a sense of nobless oblige, or at least pretended to; they knew their lucrative position came with responsibilities, and in times of crisis they would step up to do their share. Whereas when a crisis hits Silicon Valley, apparently you look after number 1 and when you reach out to the government it's not to ask how you can help but to ask them to bail you out.
You are on a boat that hit an iceberg. There are enough lifeboats for half the people. If everyone bails water together, you will just barely be able to keep the boat afloat.
What do you think is easier to coordinate - a dash to the lifeboats, or getting everyone to bail water?
The rational decision, when you know you cannot control how others will act, is to minimize the pain. If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
And it is not a personal decision, continuity of business is a pretty big deal. Nobody in the company would forgive you for missing their payroll, because you thought it was the ethical thing to do.
But part of what makes that whole bit of game theory interesting is that it has a lot more complexity then just the simple version. Yes in a plain prisoner's dilemma betray can make sense, but in an iterated prisoner's dilemma that's no longer true. That's been part of the debate around the whole debacle, for much of SV's history it was very much iterated, it wasn't just about any one company for VCs or even founders, there was some interest in the overall ecosystem. Some very successful people only found success after multiple failures, but success could pay for it all in the end. VCs too, maintaining the ecosystem mattered. In that sense, killing the goose laying the golden eggs, even if there is some short term payoff, is still clearly a poor idea.
There was an HN piece sometime in the last few days I think talking about this and speculating/arguing that the rise of unicorns changed the community from iterated towards the more singular game. If it only took a single megahit to cash out forever, then incentives might be more towards selfishness vs thinking about the next company and the next after that.
>If you saw the HN thread on Thursday, there were founders posting that they were told it will be fine. How do you think they were feeling on Friday?
Sure, but how do you think they were feeling Monday? Or now? Zero threat to deposits after all for anyone including those who sat tight, but they lost a valuable service and icon, invited other problems and scrutiny, etc. While I'm sure lots will confidently say they did the right thing and that purely looking out for #1 was "responsible" I suspect there are at least a few who have some real regrets, even if SVB absolutely made very stupid choices as well.
I’m not in the field but I’ve never heard a theory that a generous strategy works in a game between an arbitrary number of (mostly) anonymous players.
And to call this event part of an iterated game at all seems… unusual.
If you are a founder who withdrew all your company’s money, then your reputation is neutral or perhaps positive. You saved your company. You did “whatever it takes”. These are good qualities in a founder.
If you are a founder who left your company’s money in SVB, nobody is going to give you a medal for that. Instead it exposes you to questions such as “Why did you have so much cash in one place?”. If depositors hadn’t gotten bailed out then you also face the collapse of your startup, your coworkers losing their jobs, etc. So this is definitely a much more negative outcome iterated or not.
I'm not sure they deserve quite so much vitriol as that website directs at them, but it really does seem to be a lose/lose situation for all the people who claimed to be fans of that bank. No one seems to be better off.
And while it's not hard to explain this outcome as 'the rational thing', it's also easy to imagine a different outcome where some more courageous leaders got together and held things together.
>I don’t understand how the iterated prisoner’s dilemma makes a difference.
SVB isn't fungible, this isn't the case of "a bank is a bank", it was heavily used for a reason and that was it had developed specialized services, expertise, and culture around supporting startups. Losing it may mean that SV as a whole is permanently, or at least temporarily but significantly, impoverished. New startups may become harder to start and operate. This doesn't mean the end for existing businesses, certainly not already grown successful ones with stable income and sufficient size for in-house expertise, so in a singular game it's not a big deal. But to the extent VCs or founders care about the next game and the one after, the startups to come that don't yet exist even on napkins, they may now be worse off than if through cooperation SVB had been saved and reformed.
You're missing the entire point of iteration, that it's not just about this one game. Startups fail for all sorts of reasons, what has made SV successful long term wasn't the success or failure of any single startup but that there was an overall environment where it was straight forward to have new ones try again and again.
tobyjsullivan sibling wrote:
>Any research recommending alternative strategies for iterated games is almost certainly looking at repeating games between a consistent pair of players.
Historically though SV has indeed been relatively consistent players, from VCs to founders to employees to, well, services like SVB! Silicon Valley Bank was founded in 1983, not yesterday. What is that to Silicon Valley itself if not consistent?
The iterated game here is all the startups after the current batch. Where do VCs and founders go to and deal with in Fall 2023? In March 2024? Will it be exactly and perfectly as good as SVB, or better? If so then sure, no problem. If not, they've sacrificed advantage in future iterations for the short term.
RyanGWU82 wrote:
>The Prisoners' Dilemma analogy was covered in Ben Thompson's Stratechery article this week
Thank you! There it is, glad I can read it now. Much better than anything I wrote. And to add on for the future here is the HN discussion on it:
He first made this argument in 2017 in an article about Uber: https://stratechery.com/2017/the-uber-dilemma/
https://stratechery.com/2023/the-death-of-silicon-valley-ban...
It is, but also it's even worse. The usual prisoner's dilemma is explained with 2 parties. In this case, it was thousands of parties with a choice of: a) do what's best for your business, b) bet that almost all the other parties with also choose b.
2-person prisoner's dilemma is a fun game theory exercise. "All the customers" prisoner's dilemma is a social "have you met other business people" exercise.
From their article:
https://www.google.com/amp/s/www.circle.com/blog/an-update-o...
> We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally.
In other words it shouldn't be entirely dependent on whether they were in the bank run. Earlier transfers, yeah.
In a bank run situation people were rushing to the bank and tying up the phone lines. Panicking shouldn't be encouraged to such a degree as to make millions of dollars depend on it.
The amount recoverable ended up not depending on whether an SVB customer attempted a late withdrawal. And that's good. I would have expected it even if depositors had to settle for a portion of their funds.
In this case, starting from the perspective I have a choice (and thus the bank is still liquid), I can only do at best the same as I would have done if I pulled out.
What does Friday matter? Friday was when the cynics would rejoice in righteous indignation. Monday was when responsible people were redeemed; when society through its government recognized that the real moral dilemma here was whether or not to vindicate the cynics.
There is a solution to the Prisoner's Dilemma, and it's called civilization, and in the modern era government. Like their communist cousins, die-hard libertarians to be forced to live in truly libertarian countries (i.e. those with an extremely weak government) and only then be allowed to opine on what's rational.
I mean, it was fine for them by Monday.
I don't blame them. It was irrational if they were omniscient beings with knowledge of what would happen.. they aren't.
But within 24 hours we had VCs from Founder’s Fund and the All In podcast personas who intentionally and knowingly fueled a panic on social media.
That panic was designed to benefit them and it worked, to the detriment of everyone reading this who has a deposit at a US bank, and who will now be assessed a fee to cover the cost.
>Joseph Gentile, the subject of the viral tweets, is currently the Chief Administrative Officer at SVB Securities, which is an investment firm. SVB Securities is a subsidiary of Silicon Valley Bank’s former parent company that is financially independent from the collapsed bank. He had previously been the CFO of a division within the greater Lehman Brothers’ bank and left about a year and a half before the bank filed for bankruptcy.
Was it a requirement or recommendation to concentrate cash in SVB, and why?
The raindrop never feels responsible for the flood, but it is.
That's not really how this works. The CAO of the bank was CFO of Lehman. People in these positions just get credit for the fact that they had a front row seat for this sort of financial implosion, so they can (theoretically) help whoever else's board they join avoid that sort of thing.
> But those players within the venture capital community who were singularly responsible for triggering and then exacerbating this run will not escape accountability.
The people in the VC community who triggered the bank run did the right thing by their startups. They don't have a responsibility to SVB. If they saw a run on the bank starting, it was in their best interests and the best interests of the startups in which they invested for those startups to get their money out as quickly as possible.