It was the most stressful weekend ever for many tech investors and founders. The SVB implosion affected a significant percentage of tech people and many of us also bank with First Republic Bank, which has a similar high uninsured deposits and mark to market insolvent issue. I was not affected as my fund pulled out the money successfully on Thursday and I only bank with JP Morgan Chase outside SVB but the stress level is very high and some of my portfolio companies were affected. Thankfully, the Fed did a last minute backstop to make all SVB depositors whole and came up with a program to help banks with large unrealized losses. I believe it was the right thing to do as the recovery rate would have been pretty high for SVB depositors anyway, why escalate the situation? Escalating the situation would have made things super chaotic and chances are FDIC will have to close another handful of banks this week if they didn’t make SVB depositors whole. The Fed did the right thing.
Despite the backstop, stocks of many vulnerable regional banks nosedived today. During today’s trading sessions, First Republic Bank FRC 0.00 was down 61%, Western Alliance WAL 0.00 was down 47%, Pacwest Bankcorp PACW 0.00 was down 21%,. It was a total s**tshow. I can’t imagine what would have happened if the Fed didn’t backstop SVB depositors.
The very interesting thing from the joint statement was that Signature Bank was shut down by regulators. Signature has $110B of assets and $79.5B of which are uninsured deposits according to its FFIEC call report. It only has $8B of equity and has $40B commercial loans, $33B mortgage and $7B held-to-maturity securities. I think those $79.5B flighty deposits can easily bankrupt them if there’s a bank run as they most likely also have a lot of mark-to-market losses. It is not surprising that Signature Bank was closed by the regulators. Regulators don’t like crypto anyway and shutting Signature Bank down after Silvergate practically debanks crypto since the real-time settlement network by these two banks SEN and Signet are no longer available. Network participants will have to use ACH or Wire to transact and it will takes days instead of minutes/seconds to settle. It will be interesting to see what the long term impact is but it’s clear that crypto is not welcome in America.
Someone asked if I shorted any of the obvious problematic banks. After looking at SVB and FRB’s balance sheets on Thursday, I knew they were in big trouble. But as mentioned before, I never short, never buy with margin and don’t get easily involved. Philosophically, I think being fair and negative is OK but being biased and negative is not OK. If I short something, I am basically biased for a very bad outcome. I might make a lot of money but that thrill and dopamine hit will only make me want to be more negative to score more wins. There’s a place for the short sellers to make the market more fair and efficient. But I think I am negative enough. Being more negative will make me a very annoying person. I want to focus on the goodness of humanity and make money in a positive way.
On bank share price continuing to fall - the feds new facility is supposed to run until March 13, 2023. Basically gives these banks a year to get their house in order. Many will need to issue new equity as their HTM still exceeds equity. I suspect the market has sniffed this out. If long bond treasury yields fall a bunch(below 2%), and deposit runs stop these banks could do very well.
SCHW has a very different issue then BAC + FRC - watching that one closely.
Be the person you want to be :)
I personally swing both long and short. Going short is super boring 4sure. Pick from a long list of names still trading at bubble prices, short them when people think we are in a bull market again, cover when the world is ending, and repeat. We don't participate in shorting companies to 0 for a variety of reasons.
I think in probabilities both directions so don't find it impacts me much as an individual. I do get super excited about great ideas, company's and management and annoyed by having to wait 6-18 more months to buy them :) Being short just provides more capital to own more great names. There are some small caps we may accumulate board size positions in and help out. I'm hoping the capital we accumulate in this stage of the cycle might be operationally useful some day.
I'm also hoping the information we share, while sometimes unpleasant, helps people.
Note: If you are worried about infinite downside risk, check out ITM puts. We use those a lot to limit exposure.