You are in charge of a startup and are responsible for its finances and the jobs of the people who work there. You can see that a bank run is starting. If you don’t pull out your money, what are the chances this will prevent the bank run happening?

Nobody is blaming any startup who took that decision, the rational decision is to take out the money.

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 run seems to have occurred after the insolvency.

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.

Bonds that are HTM would have been profitable. They just weren't sellable for a profit on the open market (at the time they needed to sell them), because their yield was too low. So, as far as I have read, it wasn't until there was a run that they needed to dramatically increase liquidity. With so much of their holding being HTM, they were stuck. The issue was a mismatch in the timeframes (which was the fatal problem, and should not have happened).

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.

But Fox News told me it was because they were woke?

Not insolvent, illiquid. Calling SVB insolvent is like calling Elon Musk "poor" because his income this year was $0.

Illiquid and insolvent play off each other to the point that one implies the other at this state.

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.

It was cited to be insolvent in addition be illquid when be taken over by DFPI[1] and most observers and analysts agree .

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...

The FDIC take over only happened after the massive amount of withdrawals/bank run the day before. Which is the nuance in the above statements... they had assets, but after selling what they could to meet immediate withdrawal obligations, the assets they had left (HTM) weren't worth as much if sold immediately than their booked value. If the assets could have been held until maturity (HTM), they would have been worth their book value.

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).

They were liquid. They could sell the $80 bill or so of bonds they had quickly and at fair value. Their problem was selling forced them to face the reality that they'd lost $12 or $13 bill on a wrong way interest rate bet.

Under that interpretation nearly everything is liquid.

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”

I have to disagree. Liquidity is the ability to sell, period. Not the ability to sell at a profit.

I said nothing about profit. I can sell my house today, yet houses are one of the prototypical examples of something that is illiquid. The ability to sell something fast is not the definition of liquid. Liquidity is specifically the ease (or difficulty) with which you can sell something without taking a haircut.

Nonsense.

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.

Taking 80 cents on the dollar == illiquid is exactly the point I was making. Selling quickly is a necessary but not sufficient condition to meet the definition of liquid. That 80 bil in bonds isn't liquid if they had it on the books as hold-to-maturity and took a haircut to sell it early.

>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.

>> Taking 80 cents on the dollar == illiquid is exactly the point I was making.

The comment you were replying to said "quickly and at fair value".

Illiquid to the point that you cannot satisfy your debts is essentially the definition of insolvent.

No, it really isn’t. It may lead to insolvency, but that is by no means a foregone conclusion and can play out in different ways.

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)

The key thing is you are not a bank required to pay depositors on demand.

The math & definitions of solvency & liquidity don't change with scale. They are separate things even if the mechanics of how they influence each other put them in such close proximity to each other that some people confuse the two.

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.

No, it's not

SVB was insolvent.

SVB became insolvent.

SVB was insolvent last quarter.

You don’t know what the definition of insolvent is, if you believe that.

There isn't an agreed upon definition of insolvent. SVB certainly was insolvent under some definitions of the word.

They ostensibly noticed the bank was insolvent and shared that important information with their startups. The bank should never have been anywhere near insolvent.

Rumor is uncontrollable and often unattributable – and each organization acted in the best interests of its employees and shareholders, as is their duty.

Ugly, but rational.

> Without a run on the bank none of this would have happened.

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...

Once the run started then VCs who had not previously had a negative stance on SVB may have done right by their startups, but yeah not the ones who actually started it in the first place.

I have no idea if this is correct or not, but by some accounts, there were noticeable issues with regular transfers which caused the initial concern about the bank. It's not like someone started this out of boredom.

https://www.bloomberg.com/news/articles/2023-03-11/thiel-s-f...

They lost $12 billion on an interest rate bet. The fact they didn't need to mark it to market under an accounting rule didn't mean people ignored it. It was a giant, known problem. It's why they were out trying to raise capital.

I'm talking about the "rumors" that caused the bank run. From what I've read (quoted above), these weren't really rumors but problems with day-to-day transfers that prevented the fund(s) from completing their deals, in which case one has to be insane not to let their friends know that the bank is not transferring money like they are supposed to. In hindsight we know they had problems like you said, but the "spread rumors" part seems to have been triggered by legitimate problems with regular transfers.

It wasn't hindsight though. They filed their 10-k well before the run and it showed a disaster of a situation. Their balance sheet was progressively getting worse, it was already bad the 10-q before. People knew it was problematic months ago, this didn't come out of nowhere.

This seems like distinguishing between the snowflake that falls on a sheet of snow and starts an avalanche, and the snow that collects along the way. Both were necessary conditions for the avalanche, but is either more to blame? It's an imperfect analogy but my point is this: the problem is all the loose snow sitting on a slope in the first place.

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.