Honestly this makes a ton of sense. The FDIC will be returning most (or all) of the deposits in SVB, so the debt is reasonably safe (at least as far as debt that startups take on ever is). Whoever is funding this is probably not taking on all too much liability, and if they're heavily invested in the startup ecosystem could easily be making enough back from this indirectly to make it worthwhile.
For brex this has to be the best marketing ever. Sign up a bunch of customers with real businesses at someone else's expense.
What would happen if SVB customer themselves went bankrupt? Say some risky investment startup was banking with SVB and had $1 million with them. They can now take out a bridge loan. What if that investment startup now suffers its own liquidity crisis (or even just waste all the money) and default themselves. How is brex covered in such a case? Wouldn't they have to get in line with all the other creditors/investors?
Isn't the loan backed by the deposit at SVB? That seems like the whole point of it.
Yes some startups will go bankrupt and most of the remaining ones won't be profitable any time soon.
Surely Brex isn't counting on the profit from operations of the borrower to repay the loan, but rather that company's deposits at SVB being released at some time in the future.
Most likely Brex would structure the bridge loan so that they would be a secured creditor due to having a charge(?)/lien(?) over the rights of the client's SVB deposits.
Not sure how this works out in practice, IANAL, etc.
That's why they charge interest, they would have calculated the risk of that happening to make sure the amount they charge in interest would still net them the desired profit.
Brex could offer loans up to 25% of the borrower's funds stuck in SVB. As long as depositors receive at least 25 cents on the dollar, the loans would be paid back in full, and the borrower would have gotten significant working capital in the interim.
SVB's carcass still has significant assets, so Brex can set that % number based on what they know about SVB's state, to make the loans almost risk-free.
I'm not a banker and have no idea if this is actually what Brex is offering. That public page doesn't discuss terms at all, which makes sense given the chaos. But there's certainly ways to structure these loans without much risk.
Loaning money to a risky borrower can be practically risk free if the borrower provides collateral. And the deposits in SVB are an excellent example of collateral. They are illiquid, but the funds are being held by the FDIC, which is highly reliable about (eventually) paying out (some portion, not necessarily the full amount).
Just because they exceed the FDIC threshold (i.e. they're over 250K) doesn't mean there's a lot of risk - it just means there's more than zero risk and you have to do some diligence.
Those deposits are backed by the assets on the balance sheet at SVB. They went under because they ran out of liquidity, not because they're massively upside down or their assets are crap. Those assets are largely medium-duration treasuries (10Y IIRC). They will pay out face value as they mature (they are the definition of risk free), and the losses on their balance sheet being reported are marked to market. Assuming they have to sell them immediately - which they did have to in order to meet withdrawals.
Now that the bank is in the FDICs hands, those medium-term treasuries need not be sold, and other liquidity options exist to make un-insured depositors mostly or entirely whole. One such option is just selling all accounts to a big guy like JPM, the way WaMu was handled in 2008. Or the FDIC can swap the treasuries for cash and since they have no time pressure, just wait until they mature.
Yes, but the assets of the balance sheet exceed the liabilities by a reasonable percentage. The vast majority of what will be paid out won't be from the FDIC's funds, it will be from those assets.
Uh, no? Do you know how they got into this mess to begin with? They were over-exposed to US treasuries. Let's talk about that for a moment:
1) When yields go up, treasury prices fall.
2) When yields go down, treasury prices rise.
3) The only way you get the basis cost for a treasury back is if you hold to maturity.
When a bank run happens, you (if you are bank) need cash. Lots of it. If you own assets, you have to sell those assets to come up with that cash. SVB had to sell ALL of their notes for less than they bought them for. See #3.
The losses by SVB were realized well before today. This has been going on for a while now. Outside of $250,000 per account type per person, the only additional money folks will get back is whatever a bank sale comes up with, which won't be as much as most folks think, since the core assets were already sold off. If I had to make an educated guess, most startups/investors will lose more than 50% of what they started with. Remember, high interest rates. SVB will NOT be sold at a good price. This is not a market for sellers, it is a market for buyers. Again, sky high interest rates and many of the very investors that could make that sale possible had money at this bank. That means a lower sale price.
I agree with your assesment but the impairment in those long maturity assets were not 50% to begin with, so the realized losses couldn't be as high.
Back of the napkin, take the 10yr and 30 yr spot prices today for issues from 1-2 years ago, and that's your max haircut. I believe some are trading at 70 cents , so we are talking about 30%. And that's worst case (not all assets would have sold at that price, but better).
Remember this is highly liquid assets. Not some exotic stuff.
Its a big loss, but not 50%
Brex's offer is collaterized up to 25 cents per dollar. SO, unless SVB lost huge money elsewhere, there's no way SVB lost > 75% mostly off their MBS portfolio (or other assets, for that matter).
> Back of the napkin, take the 10yr and 30 yr spot prices today for issues from 1-2 years ago, and that's your max haircut. I believe some are trading at 70 cents , so we are talking about 30%. And that's worst case (not all assets would have sold at that price, but better).
Depends upon how much was liquidated and already went to paying out fleeing customers at 100% of deposits. The average haircut could be 30%, but late to move depositors could have it worse (this is why you participate in a run on the bank).
> Brex's offer is collaterized up to 25 cents per dollar.
Do you know this? That's a number I (and some other posters) pulled out of a hat as a reasonable thing to do, but I don't think any of us had any sources for it?
Over exposed to US treasuries? I don't think anyone has put those words together before. It's like saying they were over exposed to cash. You're saying a bank run occurred because they had a duration mismatch on US government debt where maturities were less than 1 year. I don't buy that explanation at all...
Let's say you're a bank. You have $1B in deposits. You use it to buy bonds that will be worth $1.1B in 2030. All good so far.
Then the government starts selling those bonds a lot cheaper. To buy the same bonds you have today would only cost $900k.
Even though the 2030 value of those bonds is the same, the 2023 value just plummeted. (And they will gain more per day to eventually make up the difference.)
When your customers demand their money, you have to give them 2023 dollars.
A bond that you can redeem early has the safety of cash here. A bond that you can't redeem early does not.
There could be a bailout though. A massive fire in Silicon Valley caused by the Fed tweaking interest rates doesn’t look like a good thing, so we’ll likely see a fire brigade coming along and pouring some money in.
I really hope it's not the fed though, or any federal authorities. They shouldn't invent a new higher level of FDIC protection. They should allow losses here even if they want to do that. Just covering all of the losses which of course they could do, that's a bad precedent.
Banks hold a lot of treasuries as part of their capital requirements. So long as they intend to hold them to maturity, they don't have to mark them to market.
Banks collectively hold about $620 billion in loses in held-to-maturity securities right now since they have declined rapidly in value during the Fed's interest rate hikes.
If you can hold them to maturity, you're fine. If you need to sell them to raise cash (to cover other losses or during a bank run) those losses become real.
And if your startup had $10m in cash in SVB, but now you find out you're only getting back, say, $7m, that's very bad news for your business.
> Treasuries can and do lose value. They are not like cash which does not lose face value.
> Long term treasuries have declined 40% in value since they peaked in 2020.
This is inaccurate. What you linked to (TLT) aren't bonds, these are bond funds. The way a bond ETF works is that they have a stack of bonds that track the benchmark interest rate. They periodically sell off their old bonds and buy new ones, they don't just sit on them and wait for them to mature. That means TLT's NAV goes down when interest rates go up because they're selling lower interest rate bonds, and buying higher interest rate bonds.
Treasuries cannot lose value just like cash. They are as good as cash in almost every context. You can always sit on them until they mature and you'll get the full amount plus interest. You cannot lose money this way.
Where you can lose money though is if you have to liquidate them sooner. Why would someone buy a 3% 30y treasury for $X from you when they can get a 4% 30y treasury from the source for the same price? You have to sweeten the deal by paying out the difference in rates. This is where you can lose money.
SVBs issue was a mismatch in durations. They had too many demands for money out now, and too little available now. They have plenty of money coming in the future, but that's too late.
Reply to two basically correct statements, make a claim that's completely false, and then — and here's the genius — say a bunch of true statements that come around to support the view you're disagreeing with!
> Treasuries cannot lose value just like cash. They are as good as cash in almost every context. You can always sit on them until they mature and you'll get the full amount plus interest. You cannot lose money this way.
Be careful with absolute statements like that. While it hasn't happened so far with USA treasuries, its equivalents in many countries have lost value in the past.
> Over exposed to US treasuries? I don't think anyone has put those words together before.
Only if your definition of risk is limited to default risk.
It looks like a lot of their holdings were in MBS and a lot of the treasuries were recently sold at losses (which necessitated raising capital, which appears to have set this whole thing off), but there is no reason this couldn't have happened if they only held treasuries anyway.
If I lend you 25% of your SVB deposit secured against your SVB deposit, I should still be fine (as long as my claim comes early enough in any ensuing bankruptcy).
This is materially false. The issue was with their MBS holdings in their HTM book. Treasuries are so liquid institutions never hold them like that. MBS are not.
Right but that's why loans make sense. We know the assets are good quality but it will take time to liquidate them. Companies that can't wait for that to happen will benefit from taking a loan to buy themselves time.
Yes it's a good quality but have they been marked to market recently? Mortgages at 3% aren't worth near as much as they used to be. Ditto treasuries at 1%.
If they bought them near the peak value what they can actually sell the income streams for is going to be a lot less than what they paid.
Yeah but they will get some money for them. Plus there might be some other options. The FDIC is going to try whatever they can, and it's only been a day.
In the meantime, impacted account holders can get their IOUs and borrow money to make payroll.
> the assets of the balance sheet exceed the liabilities by a reasonable percentage
Until the FDIC pores over their books, nobody can say anything sensible about what they own, what they sold, what they sent out and what is secured as collateral.
> as of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits
December 31st, or even March 1st, are virtually irrelevant to a bank collapse today. Assets were sold at a deep discount, presumably some were pledged, and deposits fled.
Word is that 50% of assets already sold by FDIC. Which will allow a large chunk of each account to be unfrozen by Wed so companies can make payroll. FDIC is not fucking around. Hat tip to them.
Balance to take 2-3 months. Will require an actual application and paperwork.
The FDIC threshold is a minimum guarantee. If they are able to negotiate assets into liquidity, they will be able to pay more than the minimum guarantee.
It's a gamble not only on what's recoverable but also future lifetime value of newly acquired customers from this effort (remember, there are a bunch of ventures looking for a new bank now that their banking provider is gone). Public service meets rapidly evolving growth marketing campaign. Can't fault Brex, there is no downside to anyone except them (correction: it appears a third party is taking the credit risk per gpm, even better for Brex as they're simply facilitating the lending ops and aren't exposing themselves to the credit risk). Kudos.
All lending is a gamble, but if they only lend 25% of what you have stored with SVB it's (approximately) a gamble that the FDIC will pay out more than 25c on the dollar. Which as lending goes is a pretty safe gamble.
Brex isn't making the gamble, they're just managing it-
> This credit line is funded by 3rd-party capital (and not Brex directly), who are working with Brex to minimize the impact of this event to the startup ecosystem.
It sounds like a bunch of VCs are gambling on the return, while also knowing it helps stabilize the system that built (and likely holds, in some way or another) their wealth.
The run, predominantly by VCs, is what destabilized the bank.
In a regime of rising interest rates this gives them pricing power on the loans where they were just passive depositors previously. Since SVB loans were essentially only to companies who were already customers of these VCs, you could view this move fairly cynically.
losing 20% of your cash-on-hand, where that's above $250k. For most startups, that's going to be a haircut their investors take, where the founders can say "yeah, literally none of this was our fault".
For mature, profitable businesses with recurring income, this is going to bite, but they haven't lost 20% of their customers or 20% of the amount of money they expect to get paid next month.
For startups, where the money was investment, unlikely their investors are going to blame them for this loss. It might shorten runway by up to 20% for some pre-revenue startups, by less for startups with actual revenue.
I wonder though how big the risk is. SVB is, according to the business press, in trouble because they parked a large excess of deposits over loans in low interest rate US government debt. The mark to market value of that debt has fallen as interest rates have risen, but it's not like the bottom has fallen out. The bonds still retain 90+% of their value. Note that the capital hole SVB was trying to plug when the run started was that large relative to their deposits. If Brex is loaning a fraction of verified deposits, against the money those depositors will get back once a buyer is found for SVB, there shouldn't be that much risk. It's likely that depositors will get back most of their money - I don't think you'll see a fire sale, pennies on the dollar deal here.
> 97% of deposits in SVB exceeded the FDIC threshold. The question is, by how much on average?
That's just a math problem. If you assume all deposits are at least 250K, you can get a floor for that number. If 97% of deposits exceeded threshold, then the average deposit is at least $8.3 million.
Is that number by account? By assets? By client? ROKU just announced they have close to have a billion in cash there. So 97 percent doesn't really indicate how many individuals are affected.
> This credit line is funded by 3rd-party capital (and not Brex directly), who are working with Brex to minimize the impact of this event to the startup ecosystem.
No, it’s not. It couldn’t liquidate assets fast enough to cover a run on the bank. But assets exceed liabilities substantially. What you’ll see is a line of credit issued that props up withdrawals as assets are liquidated until the bank stabilizes and it’ll reemerge under a new charter.
No, it’s not. SBV was unable to meet its obligations and was insolvent. Then the FDIC stepped in and a part of its function will be to ensure liquidity. So it’s is therefore not insolvent. The FDIC won’t take a loss so it may become insolvent again and might have to resort to insurance to make depositors partially whole. The fact that it has a) access to sufficient credit liquidity via governmental ownership b) assets to collateralize that credit means it isn’t insolvent any more. If they had secured emergency credit lines it would be still a private institution, but functionally that’s irrelevant if you have assets of functional business relationship with SVB. Beyond an operational delay as they reopen business next week it’s functionally a no-op. This stuff isn’t cut and dry, and it’s all complex, but I think the practical outcome of this is a big nothing burger for anyone but the principals of SVB.
> SBV was unable to meet its obligations and was insolvent. Then the FDIC stepped in and a part of its function will be to ensure liquidity. So it’s is therefore not insolvent. The FDIC won’t take a loss so it may become insolvent again
This is nonsense and contradictory
The bank was insolvent. FDIC took over (due to insolvency) and has no obligation to make the bank solvent again (other than the 250k insurance limit)
it is insolvent. It sold assets at firesale. That wiped out SVB's entire equity!!
If SVB literally had a way to hack the time-space continuum and wait out for asset prices they own , to stabilize ("maturity") , or to pay them back in full ( a loan)...SVB would STILL likely lack enough funds to pay back their deposits.
That hack of space time is called “credit,” and they can collateralize their entire liability sheet if they had a credit willing to lend them massive amounts of cash on their illiquid assets. The FDIC owns them now and has access to credit. As a business they’re fine.
The issue wasn’t the selling of assets, it was the panic that their actions took to prop up a balance sheet hole. It’s not like Enron or Lehman.
I don't think it is even chicken or egg. I think you have it wrong here
I contend there is no private entity credit that would go near SVB because precisely they realized more losses than they had more depositors, and such credit would have never been secured at the top of the pile with the FDIC lurking nearby.
No credit facility would save a doomed bank after the realized losses. It was a matter of time.
The panic was not the cause. The panic was always going to happen. A public company would have never been able to do a firesale/equity raise without inducing a panic in the first place.
That untrue. If they held the bonds to maturity they would be worth more than their face value. However due to time value of money other bonds with higher yields are in more demand making the current price lower. A private entity wouldn’t take the risk but a public one would. In fact the fed (quasi public) has been buying precisely these assets for over a decade. They actually made substantial returns by simply holding these MBS to maturity.
If you need $80B before your 10Y bonds mature and borrow it today, you're paying minimum 4% interest. By the time your $80B in bonds mature you owe $118B
If you're saying it doesn't matter to FDIC because they can get "free" credit, that's equivalent to a bail out
Likely that Brex will loan you up to the max of your closing balance and 250K (the FDIC limit). Note that you need to link your account (so they can see your balance and transactions) to apply.
Those assets are year old long term bonds that have to be sold at a loss now (since interest rates are way up and brand new bonds pay better than these older ones).
For brex this has to be the best marketing ever. Sign up a bunch of customers with real businesses at someone else's expense.