SVB - Goin’ to the Chapel?
That was fast.
I thought for sure that we would get a tough day followed by a shotgun marriage over the weekend.
The FDIC has to appreciate how acute the working capital problem is for the vast network of early stage businesses throughout the country. Something like 75% of venture backed CFOs that I surveyed used SVB. Putting SVB into a protracted and uncertain receivership will severely damage the VC and startup ecosystem. So, what to do?
Though the equity is toast, the assets are largely there and in the form of marketable, performing MBS, Treasuries, etc. SVB just bought the wrong end of the curve to pay for higher checking account rates. When rates went up, the balance sheet shrank. Combine that with declining deposits based on depressed VC-funding conditions and – presto.
If the FDIC sold these immediately, that would mark some $91b of assets designated as “hold-to-maturity” to market. This feels like a tough move. The year-end market value of those securities was $76.b, a $16.3b gap. They only had ~$16b in shareholder equity as of their last filing, and that was before realizing a $1.8b loss as of Wednesday’s sale of $21b of securities. Then there’s also the matter of the remaining $121b in assets.
It feels like there are two options, here.
The obvious choice would be to bless a union via shotgun of SVB and a much larger bank that can hold those securities until maturity. It’s the Bear Stearns, circa 2008 playbook.
But here’s the hiccup. The FDIC reported in February that US banks held unrealized losses of so-called available-for-sale and held-to-maturity securities that totaled $620b as of December 31. The figure amounted $8b at the end of 2021. Bank of America, alone, reported that it’s held-to-maturity assets of $630b+ were worth closer to $524b as of year-end – a $109b difference.
Bank of America isn’t enmeshed in the same trends as SVB, but they do seem to have a similar duration problem. And let’s not forget, when JPMorgan bought Bear Stearns, Jamie Dimon observed, “We were not buying a house—we were buying a house on fire.” SVB is NOT Bear Stearns. But how ready are BofA or any of the other big banks to add to their interest-rate risk, on the long side of the curve?
Which brings us to door number two. Hypothetically, the FDIC could hold those assets to maturity and pay the bad bank par value or a haircut on par value. Naturally, this entails all kinds of moral hazard, but presumably, the equity and management have paid that. The question is, should the depositors who were looking at 2.3% at SVB vs a fraction of that at BofA also pay.
Either way, SVB estimated that at the end of 2022, it was holding $151.5b in excess of the FDIC insurance limit. That’s a lot of payrolls.
