No. of Recommendations: 6
I'm not saying they should have been reading bank balance sheets but I am saying that there were simple alternatives such as sweep accounts and, yes, treasury bills. I'm blown away that CFOs didn't take basic steps here and even more blown away that sophisticated VC firms did not oversee their investments in these startups more effectively.
Your idea of owning treasury bills instead of putting the VC money in a bank account makes sense, but whether you're a startup CFO or a VC fund, I can't believe it is realistic to expect people to be assessing the solvency of a bank. Even the feds didn't realize SVB was insolvent, for goodness sake. A bank is supposed to be a safe place to put your money, so that if you put $1 million in the account, you can get it back in a few months, along with a pittance of interest. Two years ago, when 5-year treasuries were at sub 1% anyways, it would hardly make sense to bother with owning treasuries directly, so why go to all the trouble, unless you were worried about your bank's solvency?
In fact, part of the liquidity crisis may have been that sophisticated startups and their VC overlords started deciding that earning 0% in a SVB banking account was leaving money on the table - all of a sudden, the 5y treasury that earned 0.5% is making 4% now, so why not withdraw cash from your account and invest in a safe bond that actually earns something? Then you discover that your bank is insolvent because IT has been investing in those sub-1% treasuries. You were de facto invested in treasuries without knowing it, and with expiries that were inappropriate to your cash needs.
I think the result of all this is that the right people have been punished (the banks and their shareholders and bondholders) and the right people have been protected (bank account holders who trusted the bank), and there's a good chance there will be useful systemic corrections that come out of this mess, like expanding FDIC insurance for accounts bigger than $250,000 and having the feds more closely monitor the non-SIB banks like SVB (which were previously thought to be not systemically important, but because of the risk of further bank runs, turned out to have systemic importance after all!) Banks that are too close to being insolvent like SVB was will probably have to raise capital, at low valuations to boot. The moral hazard you and other sensible people worry about, i.e. reassuring bank depositors who will not concern themselves with their bank's solvency, I think is a job better suited for regulatory agencies, not account holders.
Anyways, whether we like it or not, it looks like that's the way the banking world is going.
dtb
