SVB is Now In the Hands of the FDIC

Weather Man

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Rocket Lab says it held 8% of its cash in Silicon Valley Bank

RKLB -4.17%Mar. 10, 2023 5:40 PM ET6 Comments

Rocket Lab USA (NASDAQ:RKLB) disclosed in a SEC filing late on Friday that it is aware of media reports indicating that Silicon Valley Bank has been closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver.
The space company announced that it has deposit accounts with Silicon Valley Bank with an aggregate balance of approximately $38M, which was approximately 7.9% of its total cash and cash equivalents and marketable securities as of December 31, 2022.
RKLB did not address if it expects to recover the uninsured portion of the deposit balances.
 

Weather Man

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Weather Man

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In its March attestation, Circle had revealed that part of its $9.88 in cash reserves was held at SVB, although it did not disclose the total amount. Following the collapse of SVB, withdrawals from USDC mounted, with the crypto intelligence platform Nansen showing over $1 billion in redemptions from the stablecoin since SVB's shutdown. USDC has a market cap just north of $40 billion.

As USDC lost its $1 peg across different crypto exchanges amid withdrawals, Circle sought to instill confidence, with the company tweeting at 6:50 pm ET that it would continue to operate normally, sharing that SVB was one of the six banking partners it uses for the 25% of its reserves that it keeps in cash, although still not disclosing the amount held at SVB.
 

Weather Man

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My wife Kristen. Quote.

“I actually know one of the executives at the failed bank. He is an asshole.”


Good night sweet prince.

More than one for sure, they can pat themselves on the back for making a textbook case used at Wharton on how NOT to run a bank in a rising rate environment.
 

BrunotheBoxer

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More than one for sure, they can pat themselves on the back for making a textbook case used at Wharton on how NOT to run a bank in a rising rate environment.
This is how it starts.

They should have hired her. Not that she applied or wanted to work there.

In fact she got so sick of working in financial services for so long she applied to work at a European reinsurance company last November. They jumped at the opportunity. :)

Much better work life balance. Much more respectful executives. Much better benefits and much better pay.


She has not looked back.
 

Klaus

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yesterday was battle stations for me.

SVB was big in many markets that people did not realize.

First Republic and Pac West are in a similar position.

The cliff note version is that they were long duration and did not have to mark their book until now. They had more liabilities than assets.

This applies to plenty of other banks and insurance companies.

Let the games begin.
 

MG0h3

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yesterday was battle stations for me.

SVB was big in many markets that people did not realize.

First Republic and Pac West are in a similar position.

The cliff note version is that they were long duration and did not have to mark their book until now. They had more liabilities than assets.

This applies to plenty of other banks and insurance companies.

Let the games begin.

I guess I’m a little confused.

I believe they were in mortgage backed securities getting around 1.63%, not a good rate of return.

We’re these securities not paying out or something? Defaulting? If SVB bought into securities, how do they end up with a liability?

Correct me if I’m wrong and a very brief explanation is fine.

I guess I don’t understand how they were bleeding money now if they weren’t bleeding money when they bought them. Kindof defeats the whole purpose of a security unless I’m totally missing a piece.

Thanks.


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Klaus

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I guess I’m a little confused.

I believe they were in mortgage backed securities getting around 1.63%, not a good rate of return.

We’re these securities not paying out or something? Defaulting? If SVB bought into securities, how do they end up with a liability?

Correct me if I’m wrong and a very brief explanation is fine.

I guess I don’t understand how they were bleeding money now if they weren’t bleeding money when they bought them. Kindof defeats the whole purpose of a security unless I’m totally missing a piece.

Thanks.


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The value of bonds moves inversely with rates.

The sensitivity to interest rates is known as duration.

SVB and every other banks and insurance co has a ton of duration.

The rate moves of the last year were devastating to bond portfolios. It was the worst year for bonds on record.

The majority of bank assets are invested in bonds. They only mark them at quarter end.

SVB marks for 4q came in and they needed to plug a hole. So they issued shares. Which is a sign that they are ****ed. Depositors started to pull deposits, share price fell more, and so and so forth until they were done.

Because banks have so little equity they blow up very quickly. And regulators do not **** around, they will shut you down ASAP to protect deposits.
 

MG0h3

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The value of bonds moves inversely with rates.

The sensitivity to interest rates is known as duration.

SVB and every other banks and insurance co has a ton of duration.

The rate moves of the last year were devastating to bond portfolios. It was the worst year for bonds on record.

The majority of bank assets are invested in bonds. They only mark them at quarter end.

SVB marks for 4q came in and they needed to plug a hole. So they issued shares. Which is a sign that they are ****ed. Depositors started to pull deposits, share price fell more, and so and so forth until they were done.

Because banks have so little equity they blow up very quickly. And regulators do not **** around, they will shut you down ASAP to protect deposits.

Ah ok. I thought these securities were a fixed income.

And I understand that the “value” of the bonds would go down as rates go up but isn’t this like unrealized loss? Rates will likely be lower when the maturity hit dates so just hold?

Or is this more of an issue with a bank because they have capital requirements that they have to maintain and report?


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Klaus

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As someone on the front lines this happened spectacularly quick.

timeline
Thurs afternoon: haha SVB shares getting destroyed.

Thurs evening: looks like SVB has a problem

Fri morn: get call from someone we finance saying they are sweeping cash from their bank and bringing balances below 250k FDIC limit (which is hard to do when you have 100s of mil in cash)

an hour later: talking to everyone we finance ordering them to sweep cash

10 min later: hear from someone that they were wiring cash out of SVB when FDIC announced and the wire disappeared.

5 min later: ordering everyone we know to sweep cash from first republic

5 min later: first call seeking to borrow funds to finance payroll (this is a huge issue, never heard this in GFC)

so and so forth

have a conference call today to set up a 25m to 50m facility to finance payroll for tech companies that are hung in SVB.

And it's not just tech. The worst exposure I have heard was an oil services fund that had a wire dissappear through SVB.

They were also a big provider of infra finance and we have solar projects where SVB was the take out.
 

Weather Man

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Everybody and their mother are filing SEC updates for SIVB exposure. The SA news ticker is just filled with company exposure updates.
 

Klaus

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Ah ok. I thought these securities were a fixed income.

And I understand that the “value” of the bonds would go down as rates go up but isn’t this like unrealized loss? Rates will likely be lower when the maturity hit dates so just hold?

These are USTs. Yes fixed income. All bonds are fixed income.

This example might make sense to you.

Pretend cash rates are 0%. You buy a 3p year UST that pays 2%. You are taking 30 years of risk for 2% of spread.

1 year later cash rates move to 4%. You still hold the 30 year UST. A newly issued 30 year pays 6%.

You now have 29 years of risk and are being paid -2% for the risk. You are *paying* 2% for the privilege of lending money to the US government for 29 years. And you are earning -4% yhan equivalent risk UST.

As you can see this security is worth significantly less than when you bought it.

What do you do? You sell the UST that you originally bought and replace it with cash or the newly issued UST.

This is the concept of duration. It is deadly.
 

MG0h3

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These are USTs. Yes fixed income. All bonds are fixed income.

This example might make sense to you.

Pretend cash rates are 0%. You buy a 3p year UST that pays 2%. You are taking 30 years of risk for 2% of spread.

1 year later cash rates move to 4%. You still hold the 30 year UST. A newly issued 30 year pays 6%.

You now have 29 years of risk and are being paid -2% for the risk. You are *paying* 2% for the privilege of lending money to the US government for 29 years. And you are earning -4% yhan equivalent risk UST.

As you can see this security is worth significantly less than when you bought it.

What do you do? You sell the UST that you originally bought and replace it with cash or the newly issued UST.

This is the concept of duration. It is deadly.

Makes sense, but we’ve all been caught on a bad trade so to speak. In all but one, if I’d held, I would’ve made money.

So word got out that they had some huge unrealized losses on the books when they reported. Liquidity gone with the stock collapse and following withdrawals.


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Klaus

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Makes sense, but we’ve all been caught on a bad trade so to speak. In all but one, if I’d held, I would’ve made money.

So word got out that they had some huge unrealized losses on the books when they reported. Liquidity gone with the stock collapse and following withdrawals.


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Not to besmirch retail investors but institutions manage their assets in a very different way. It is on par with physics.

The duration concept that I articulated is math. It's not "I feel the value of the bond I own is x."

Instead it is "fed funds moved 0.00000x% and now my portfolio is worth 0.000000y%."

it is an objective measure. not subjective.

and bank regulators require a certain level of equity relative to debt.

Cliff notes: SVB did not have sufficient equity because their assets were less than carrying value. Full stop.
 

Klaus

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I will shut up after this one but:

as soon as you understand the concept of duration you will realize that you are long duration across your portfolio.

every asset has duration. every single one.

thumbnail explanation:

the less cash flow an asset generates during its life the more duration

and

the longer the hold the more duration.

so

if you hold a stock that does not pay a dividend you have a shitload of duration. A tiny move in cash rates results in huge fluctuations in value.

this is why tech stocks and bitcoin were destroyed by the move in fed funds. they are perpetual securities with no cash flow.

similarly as rates fall these assets will increase in value.

to contrast a short dated security that pays a lot of CF will not be affected by moved in fed funds.

what has the shortest maturity and greatest cash flow of all? cash.

similarly what performs the worst as rates are falling? cash

once you truly understand duration you will realize the only actual risk you have is duration risk.

go on youtube and search for "bond duration" to learn more.
 

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