Silicon Valley Bank's crash and knock-on effects
The first thing I determined (and actually already knew) was that there is no apparent effect on the A2E portfolio from the SVB crash. That's because we don't keep more than $250K in any one account at a bank, which in practice means each of 2 accounts at any one bank (a checking and a savings) for no more than $250K each. It's common risk management for small companies and individuals. We advise clients at this level or higher to manage their financial risks to mitigate such consequences in various ways.
But if your payroll / cash flow requirements are such that you need to have more than that in an account, you are basically screwed, which apparently many companies were. There are ways to watch for this and you should when you are at that scale, but now you know it.
So what happened?
I am not an expert on all aspects of finance and accounting and economics. But I have read up a bit, and here is my understanding in simple terms.
As I understand it, one of the losers is an insurance company that insures against losses from crypto-currencies. They had over $3B in assets now unavailable. So if you had that insurance, your crypto-currency losses may be uninsured. Which might mean another run on crypto-currencies which might plummet.
A so-called startup apparently just got $50M investment last week, all in SVB - of which likely $250K is now available. Of course it's ridiculous to call it startup at a $50M investment. But I suspect they will find a legal way out of that one, without getting the money perhaps...
Making payroll might be a big problem in the coming week, since weekly pay was on Friday and bi-monthly is this coming Friday. The companies with cash for payroll that was sitting in SVB ready to go out now have a bunch of employees about to not get their pay, and that means big trouble legally for the companies and financially for the workers. The emails are no doubt going out as I type...
Folks are saying it won't spread to other banks which didn't have that problem, but a few graphs I have seen show that it might well have a significant effect. Any big bank with decent risk management folks will most certainly have spent the end of Friday and most of the weekend figuring out what to do Monday morning to mitigate against something similar happening to them. We will see what values drop and which raise soon enough.
Lots of startups will likely be effected by the reduction in hundreds of billions of dollars available for investments. Many investors were sitting on cash instead of investing, and many of those in SVB just lost a pile, at least for now. That means it's not currently available to invest, which makes the world for real startups all that much harder to get funded. And it was already hard this year and last.
If the debt ceiling isn't raised, the Fed won't be able to pay off on FDIC insurance, which means that (1) we are likely much closer to debt ceiling failure because of the billions that have to get released on Monday, and (2) when that limit hits, the next crash will be insured by the Federal government which will not pay off till the debt ceiling is raised. So even your $250K per account will not be certain after that point.
The increased uncertainty right now means different things to different folks. My opinion is that folks are scrambling for more diversity in their accounts, more processes to move money faster, better surveillance of what's happening with their banks, and more ways of seeking safety, perhaps globally.
I think the best hope at the lower end of the spectrum is to invest in many smaller companies sooner and stop doing huge investments following others into big money speculative bets. But the other thing I see as critical is doing a better job of diligence across the board.
There are a lot of treasury strategies strategies for larger companies that many are likely ignoring but likely to start paying more attention to. Similarly, there are a lot of financial engineering solutions that are being ignored by most early stage companies that should be attended to so as to spread risk and properly associate risks with sources of funds.
Cash reserves are also an issue, and those holding too much cash in reserve are now alerted to the fact that it can go away.
All of this is adding back items to risk management checklists, or at least causing another review of them... Here are some ideas from some of our checklists:
Why risk management is a critical theme
SVB had a chief risk officer who departed in Q2 of 2022. They did not replace them till Q1 of 2023. That was the critical period when they should have been looking at and understanding this issues and addressing it. Their projections should have reasonably anticipated the effects of the Fed continuing to raise rates, and they should have been doing the calculations along the way to anticipate and constrain the potential futures against this outcome. They didn't.
It was reasonably anticipatable, and prudence should now of course make it obvious for everyone else in the banking industry. Some may not have the time to fix it before other bad things happen. Some may choose to ignore some of the potential futures. But all should be examining it and making their bets internally clear in this regard.
Other financial institutions cannot now say they were not warned. And as such, executives have a duty to their shareholders to make sure they are taking this into account in their financial planning and risk management decision-making.
A call to action
If you want to look at your risks more systematically and examine your financial engineering more carefully, you should come to our next
When you see these sorts of things happen, you have a responsibility to address them. Let us help you.
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