Banking Contagion

An examination of the 2023 SVB collapse

SVB, the 16th largest bank in the USA, collapsed March 10th, 2023 from $5.7b mark-to-market write-down on long-term low interest bonds. It was forced to sell after VC firms began withdrawing their deposits on questions of the bank’s solvency. It was the largest holder of convertible debt and other common Silicon Valley style startup investment instruments, with holdings across thousands of companies. SVB had many large depositors, with only 2.7% of its deposits covered by FDIC limits of $250k. Roku, for instance, had nearly 25% of its cash reserves in question, with $471m in lost deposits.

Federal regulators have taken over the business as of the morning of Friday, March 10, 2023. Over the next week, the bank’s assets will be liquidated in as expedient and productive manner to recover as many of the depositors’ funds as is possible. It is anticipated that much of the depositor funds may be recovered, but the level of loss will remain unknown for the immediate time being.

Most funds above $250k will be held in recovery for at least the week, with the majority of funds that can be recovered, will be recovered over coming weeks and months. In the meantime, depositors will require other sources of capital to pay their expenses in the upcoming time, and will inevitably suffer losses to an unknown extent.

SVB was the primary depositor of both VC firms and their startup investments, with 65,000 startups holding depositor accounts. Many of these firms were using SVB as their accounts receivable and accounts payable, as well as cash reserves. Several large payroll firms had their major accounts at SVB. So do many large former startups that are now prominent tech companies, some publicly traded. Many of these companies have acted diligently and kept their funds distributed appropriately among multiple depositories, ensuring that losses at one location would not significantly impair ongoing operations. However, many firms both new and experienced were not so diligent.

These firms will need to access cash from outside sources within the next five days to make their mid-month payroll deadlines. Without available cash, many otherwise solvent companies will be forced to decrease or stop work until funds can be recovered. New cash access may come with significant difficulty and costs. This includes the VC firms, the startups, and the former startups that are now large businesses. Most of these business will not be significantly affected, and will suffer to an extent but survive. Many of them will experience further difficulties.

Bank depositors to the Federal Reserve held deposit ratios of approximately 12% in prior decades. This means that for every $1 deposited into the bank, $0.12 is kept by the bank to pay out to depositors as requested. The other $0.88 is invested in a variety of investment vehicles to produce long-term returns. These include treasury bonds, corporate and municipal bonds, and other forms of long-term fixed income. For SVB, these include instruments like convertible debt instruments and loans to startups and tech companies. They also include shorter-term instruments that can regularly and rapidly be swapped to increase or decrease liquidity as required.

For large depositors, in the last 10 years during expansionist ZIRP, deposit requirements went down to 3% for larger banks. Many large banks have been able to have their deposit requirements reduced further. This dramatic over-weighting of long-term instruments vs short-term instruments was profitable when deposits were significantly greater than the FDIC limits. These large over-deposits were excess deposit that could be leveraged to increase returns, resulting in greater profits for the bank and higher payment to bank owners, executives, and employees. Over-deposits, despite being liabilities, were encouraged, as they created more reserve leverage for lending and securities.

The instruments that SVB held decreased in value as the interest rate went up. These instruments are widely held by many banks. Many institutions much larger than SVB have larger amounts of losses not yet realized on the books. Currently JP Morgan has $65b in unrealized losses as a consequence of holding low-interest T-bills after rates have risen. SVB was particularly exposed because it’s mark-to-market write-downs represented more than 1/3 of its annual income, so many of its deposits were dramatically larger than the FDIC limit, and it was holding long-term instruments that decreased in value rapidly as rates went up. Yet because of its over-deposited status and low reserve requirements, the bank was particularly sensitive to withdraws by large depositors.

The banks unrealized losses from low-interest T-bills are not problematic as long as recurring withdraws do not exceed the reserve ratio that the bank keeps. In that case, other instruments can be cycled without disturbing the currently-nonproductive investment. If held to maturity, the currently undervalued T-bill investments produce the exact return they were expected to have. Their current below-par value is a short-term consequence and would never be realized as long as the instrument is held to maturity. Unfortunately, being short on cash required SVB to dispose of the instruments long before they were to mature.

SVB was overweight on deposits, with only 2.7% of its depositors being under the FDIC limit, and with many of the depositors being extremely over-large. It held high-risk, high-return instruments that had historically been productive across prior decades. These include instruments that are evaluated against the corporate valuation of many significant Silicon Valley companies. The bank only had a reserve ratio of 3% or less, with an excess of its assets held in high-risk, high-return, long-term instruments. As a hedge, the bank also held low-risk, low-return treasury bonds. These treasury bonds became less valuable in the short term because of increasing interest rates reducing relative yields.

Markets for these currently-non-producing instruments have become difficult in recent quarters. Despite their value if held to maturity, current short-term cash demands have caused their holders to seek to liquidate early at a loss in exchange for cash. The buyers of these instruments are thus trading their ready cash for an instrument that is losing value rapidly and must be held for a long time before it can be productive. If the buyers become short of cash themselves and seek to sell onward, the recent transactions of the same instruments for the same reasons will continue to devalue the instruments.

The devaluing instruments are the treasury bonds that must be sold, which are hedged against the long-term corporate securities that cannot be sold. The sale of the treasury bonds implies a reduction in the strength of the dollar, and the sale of the corporate securities implies a reduction in the value of the companies. If the value of the dollar goes down, and the value of a company denominated in the dollar goes down too, then the loss in value of the company denominated in dollars is compounded by the loss in value of the dollar itself. This reduces the availability of cash as it becomes harder to find buyers for these instruments. Many of these companies are the same ones who had very large deposits at the bank, while also having large cash consumption requirements.

These depositors became concerned about the depreciation of the assets underlying their deposits at SVB and began to make withdraws to liquidate their deposits and move them to another bank or vehicle. As its very large depositors withdrew very large amounts, with a very small reserve ratio, and very large deposits, SVB was especially at risk of being overwhelmed. The bank liquidated all of the instruments it could before selling the undervalued long-term instruments. Once it began having to sell the instruments at a loss, the blood was in the water, and the withdraws increased. This created a vicious cycle, a bank run.

But SVB is not a typical bank. It is the depositor of many VCs, startups, and established tech companies. Many of them will lose significant amounts of cash, and some of them will halt business the week of March 13. This comes as the VC industry is at historic lows for returns and fund reinvestments, while major tech companies are significantly off-peak, and while startups are already struggling to raise continuing cash investment to fund their losses as they develop their businesses.

Their investors will assist when possible by financing the companies. These financings will shift the transactions formerly handled by SVB to other banks, increasing their own cash draws and demands. The companies will trade lower due to their cash losses, the risks, and the uncertainties. And many of the companies own instruments will likely be sold at a loss to other banks and investors during the post-mortem of SVB, resulting in additional downward valuation pressures on these companies.

This all occurs as the total expansion of the money supply has turned negative for the first time in decades. This is a relative annual measure, and COVID had created unprecedented monetary expansion as governments worldwide paid out support packages to residents and businesses during the pandemic. A reduction in the rate was anticipated, but a contraction has only occurred three times in near-time economic history, all of which were followed by a period of significant economic disruption.

With a 15-year period of ZIRP leading to unprecedented monetary expansion, then COVID super-accelerating that same amount in the period of 3 years, the economy has been fed a steady diet of cost-free cash for half a generation. The supply chain effects and rampant profiteering of the COVID era led to dramatic increases in inflation. When the Fed rate was finally increased above near-zero, almost immediately multiple markets began to degrade: CMBS, speculative instruments, startup valuations. These instruments represent consumers of large and continuous cash demands.

They consume cash continuously, but take a long time to produce it, and require operation at high volumes to produce reliable outcomes. Cash availability spiked to an all time high and these investments proliferated, but now as cash availability falls, the same businesses are starving. They need more value to justify the cash they consume, but as cash availability reduces, their values are falling, but they can’t stop consuming cash until they reach maturity.

The beneficiaries of these instruments are consuming cash at an all time high, while cash availability has gone from an all-time high to an all-time near-term decrease in availability. The CMBS instruments were used to build high-cost commercial and residential real-estate as leases and rents were reaching all time highs. The already overextended commercial demand collapsed with COVID work-from-home policies, leading to idling of large amounts of prime class A real estate in major urban areas. Those areas economies depend on the personnel that temporarily fills the real estate. These are restaurants and service businesses, among others. With the loss of the commercial tenants, the retail tenants suffer and decline. Both commercial and retail mortgages are packaged into CMBS assets for long-term structured returns based on risk/reward tranches. This is the same asset structure as mortgage-backed securities, MBS, that collapsed the banks in 2008. Now the banks are overleveraged on commercial and retail real estate. These overleverages are concentrated on the highest-cost and highest-return areas, which are the same areas most affected by COVID lockdowns and work-from-home.

Many of the high-risk startups and former-startup tech companies are also based in the same highly invested and highly urbanized areas that the CMBS assets were invested in. While the real estate and tech investments were intended to be hedges on each other long-term, and counter-hedged by treasuries, as it turns out many of the real estate and tech/startup investments were actually concurrent. Pensions, hedge funds, insurance companies, retirement accounts, and other large institutional investors continuously receive cash and need to make long-term investments for fixed returns. These long-term fixed returns are the payouts, both continuous and incidental, for the pensions, insurance, retirement, and others.

To get those returns, they would distribute their funds into a variety of vehicles, including real estate funds and venture capital funds. Many of these funds came from the same sources, and were deployed into the same channels, and then those channels were used to hedge each other. And to make matters worse, many of the companies that would occupy the real estate for the commercial office space, transact in the retail space, and live in the multi-family developments, were the same employees of the companies that were being financed with the money. The entire ecosystem was inter-dependent and inter-related, but being used as counter-forces.

And if that’s not enough, the counter-hedge to those were the treasury bonds. Those bonds are reliable, and will always pay out exactly what they say, when they say, no matter what. But with interest rates higher now than when the bonds were issued, their immediate value is less than their long-term face value because they produce a lower relative yield.

The interest rates going up increased the cost of new money, which reduced the rate of the production of money from lending and investment as newly-issued treasury bonds became relatively more preferable than alternatives below the risk-free rate.

This reduction in the production of new cash through economic means occurred at the same time as monetary tightening, where the central bank is printing less cash as it attempts to reign in inflation through the increase of the Fed rate and the reduction of cash availability.

Many of these tech companies and VCs, who are the beneficiaries of the low-cost new money, and who consume it more rapidly than they produce it (at the moment) were banking with SVB. As SVB liquidates its assets to repay depositors, the value of these assets will decrease. This includes bonds and corporate securities representing companies, both traded and startups, who are already struggling with reduced valuations and lower cash availability.

These tech companies, and their VC backers, are dependent on a complex formula of returns to justify their investment thesis. Currently 50% of VC firms fail to return their targets to investors, and 75% fail to raise a second fund. Generally the partners promise a 30x multiple on invested capital in 10 years. The VC firm partners receive in the area of a 3% fee and a 20% carry on their investments. The VC needs a 75% IRR from its investments to return its targets, and 75% of VC firms fail to return that. Only 1:1000 startups get backed. 1:3 go bankrupt, 1:3 do nothing, 1:2.9 deliver 30:1, 1:0.1 deliver 1000:1. It’s high risk, high reward, and it takes a lot of money. You can only invest 1% to 5% of your fund, at most, in a single investment. If your fund is $100m, you can only invest $1m to $5m into a company. That means if you’re writing the whole check, you want to own 20% to 30% of a company for $1m to $5m. Which means each company has to be worth $5m to $25m or less. This math dictates what you can invest in as much as it informs the company receiving the investment. It also informs you what the progression has to be for the investment to reach target profitability for the investor. For example, if a company sells 20% in the Angel round for $250k, it’s worth $1.25m pre money, $1.5m post. The Seed round raises $1m for 20%, making the company worth $5m pre money, $6m post. Series A is $5m for 20%, or $25m pre, $30m post. And so on. The VC firm then invests in startups that have to return 100x multiple on invested capital in 5-7 years. For every dollar invested, the startup must return $100 in 5 to 7 years. If you put in $1m, 7 years later you want $100m back. The target return is doable for about 1:1000 startups. 1:2.9 will return $30m in 7 years. 1:3 will return $1m, and 1:3 will return nothing.

 The companies, once “backed”, traditionally get relatively easy access to capital as long as its valuation keeps increasing. The founders sell 20% of their company for 18 months of operating cash requirements to reach their milestones. One year after closing, the founders begin raising a second round for the next 18 months requirements. This approach incentivizes companies to spend money fast, grow fast, and produce money through a liquidation event on a timeline.

If a company needs to absorb more capital to grow, like taking a $1m angel round, a $100m Series A, then its final size needs to be much larger, or its growth rate and liquidity needs to be much faster, to justify the consumption of cash. As platforms such as social media, streaming entertainment, and other digital institutions and transitions were adopted from smartphones, expectations for total size, rate, and cash flow increased dramatically. The transition to MRR, ARR, and other recurring revenue metrics from software as a service changed the financing equations and incentives for investors.

As early returns boosted the amount of capital available in the VC industry, the appetites of the industry expanded, increasing the scope of their operations, their overhead, their fund sizes, and their check sizes. This necessarily led to VC firms investing more money in larger rounds in companies, inflating valuations in startups and encouraging cash burn because money was so accessible. As the fund sizes increased, and the individual check size demands increased, but the multiple on invested capital remained the same, VC firms went “up the chain” on companies, keeping them private longer and investing more cash into them at higher valuations.

Once these cash-burning companies were finally sent into the market, and exposed to the obligation to produce cash instead of consuming it while growing larger, they’ve found themselves unable to generate enough free cash flow from operations to reach profitability. Now publicly traded, these unsustainable losses are no longer possible as cash becomes less available. Other firms have generated free cash flow, but have become excessively greedy to reach the necessary return targets to justify their share price.

As the cost of cash rises, and the availability of cash reduces, these companies are unable to find sufficient cash to fund their operations, so their values continue falling.

And as their backers needed to draw the reserves to fund their other cash-losing operations, the bank’s cash position deteriorated, causing a run.

But what was the bank doing with the cash?

Sequoia Capital invested $1b in Citadel in 2021. Sequoia had never before invested in a business of Citadel’s maturity, and Citadel had never before taken an investment in its history.

Citadel currently holds $65b in unrealized losses, represented by liabilities in assets sold but not purchased. At some point these losses will be realized and the liability will consume cash from Citadel’s cash flow. Citadel generated $15b in free cash flow in 2022, and paid out $7.8b in investor redemptions. The investor redemptions for the past 5 reporting years for Citadel are roughly equivalent to the total annual increase in the assets sold but not purchased for the same period.

 Citadel trading strategy has been in support of the digital economy – FAANG. Its short strategy has been focused heavily on competitors to FAANG. These include AMC Theaters, competitor to all the streaming services hosted on AWS, Apple, and Netflix; GameStop, competitor to streaming game services supported by AWS and Google; and Bed Bath and Beyond, competitor to Amazon. Previous consequences of Citadel trading strategy are ToysRUs, Sears, JC Penny, Kmart, and other dated big-box stores, also competitors to Amazon.

Citadel has benefited heavily from high-speed trading strategies that allow it to dominate level 2 and above trading, and PFOF, which allows it to front-run the majority of retail orders. In order to reduce risk, Citadel engages in complex instruments called swaps, which allow it to trade its own financial exposure with another entity’s exposure to another instrument. When Citadel shorts brick-and-mortar, it swaps those shorts with other brick-and-mortar investments in CMBS held by other banks. It backs those shorts with locates. It purchases the locates from brokers, who sell access to a share they’re in custody of for a price.

Citadel’s strategy has been to use locates to short shares of competitors to FAANG, going long on FAANG as a complementary trade, and using PFOF to steer market sentiment and purchasing pressure to support FAANG and suppress competition. It then swaps those trades with counterparty banks that are long on commercial real estate, and want to increase their returns by managing their exposure to high-risk, high-return instruments. This trade helps both of them, as FAANG consumes the CMBS real estate products, and the value of the FAANG products shields the CMBS investments from cash flow issues or depreciation.

Citadel then partners with the majority investors of the FAANG and other tech startups it has chosen, the VC firms. VC firms have cash reserves for investments, and do regular capital calls with their investors to top up the cash reserve account as it transfers funds to its investments. The larger the fund, the larger their cash reserves, and thus the larger the cash-on-hand that is not actively producing.

In exchange for cash on hand from the VC funds, Citadel swaps some of its exposure on the shorts, longs, and CMBS swaps for access to the idle money in the VC accounts. It does this through its association with the banks that VC firms bank with – Bank of America, JP Morgan, Goldman, and, of course, SVB.

When COVID hit, it seemed like many traditional brick and mortar businesses would not survive. Citadel and other investors, already short on a large array of brick and mortar competitors to FAANG, went even deeper into their position to increase their returns from the inevitable death of these brick and mortar businesses. In doing so, Citadel went even further long on tech companies, and swapped with real estate investment firms and VC firms for counter hedges. All parties benefited significantly from this arrangement – everyone made money as long as new companies and new real estate proliferated.

COVID exacerbated this dynamic, further encouraging the adoption of new companies, but shifting the value away from real estate, which created an imbalance. The CMBS position began to deteriorate, but it was locked into the B&M shorts, the tech longs, and the VC cash.

The tech longs began to deteriorate too, as the interest rate rose. Increasing interest rates reduced availability of VC cash too, as the VC portfolio companies continued to consume cash but the LP side of investors became more scarce as long term bonds became more attractive.

Silvergate is a related bank that processed transactions for crypto companies. In the last year it has lost significant depositories and deposits as crypto values have decreased significantly, and multiple notable crypto hedge funds, funds, companies, and exchanges have been wiped out. FTX’s recent collapse, from the rehypothecation of depositor funds into speculative, high-risk, high-return investments that had to be liquidated at a loss after the cost of capital rose almost exactly represents the same situation that Silicon Valley Bank found itself in, except that FTX was a member of the “new financial system”.

As part of that new financial system, FTX issued security tokens that represented shares of exchange-traded corporations. Each token was “backed” at some proportional value to an actual share that was traded on an exchange. These fractionally backed tokens could be any fraction that the issuer chose, from one-to-one to one-million-to-one. FTX facilitated the issuance of, and held in its own reserves, trillions of these “backed” tokens.

Each backed token was supposed to have an actual share available to exchange with, in the representative proportion. With trillions issued and trillions traded, these represent millions to billions of actual shares of corporate equity that were supposed to be committed to back the tokens in the FTX market.

When FTX collapsed, these funds became illiquid, including the tokens that were owned as shares, and the shares that supposedly backed them. Yet in the “old financial system”, any of the buyers of these backed tokens, or parties that hold the shares supposedly in reserve to back the tokens, can’t access any of the shares or money that the tokens were supposed to represent.

When firms would sell securities not yet purchased, they would purchase locates, which are percentage-cost services that promise to provide you a share at the specified price upon demand. When the shorter purchases a locate, they can claim to be able to service their security sold but not yet purchased at the required price at any time. If the locate were issued from a broker-dealer with a share registered in the DTCC, that may be true. But if the locate were issued from a broker-dealer who held a security token that represented a fractional share of that stock, and the exchange that facilitated the security tokens was insolvent and liquidated countless fractional shares at a loss, it becomes impossible to settle trades that had a security token intermediary in the chain of custody for the locate.

This results in a significant and recurring failure to deliver, and inability to settle trades sold but not yet purchased without incurring significant losses. The failures to deliver can be rolled over through a new trade that requires new locates, but the chain of custody of those locates through the failed intermediary exchange ends up stymying the settlement, meaning that the trade must again be re-traded, further increasing its cost.

As the CMBS value deteriorated, and the properties stopped generating sufficient revenue to fund their obligations, they could no longer qualify as a solvent security for bank overnight liquidity testing. As issuances of CMBS deteriorated, the banks began using the reverse repurchase order window, or reverse repo, at the Fed to swap their deteriorating CMBS overnight with treasury bonds. With the treasury bonds on their balance sheet, the banks pass the overnight liquidity test. They then return the T-bills in the morning by repurchasing the CMBS.

When the interest rates rose, the amount of CMBS required to maintain the same RRP value for T-bills increased. Eventually the CMBS became so low-value that the banks began to struggle to possess sufficient CMBS to trade overnight for T-bills to pass the liquidity testing, testing their cash positions and forcing them to sell their low-value bonds, reducing their overall balance sheet so that their current liquidity is sufficient, while continuing to swap the CMBS that have lost value to avoid having to realize the loss. The overall reduction in the overnight lending from the RRP is not because the program is successful and winding down, but because the value of the CMBS are deteriorating so severely that not even increasing amounts can continue to sustain the cash-equivalent value for the T-bills in the swap. The overall amount of RRP is going down not because it’s getting better, but because the collateral is so increasingly worthless.

This loss in book value of the CMBS reduces the liquidity of the balance sheets of the major issuers of CMBS, like Blackrock and Brookfield. On one side, their securities are deteriorating due to a reduced cash flow from their properties, and on the other side, their properties are producing reduced cash flow, resulting in the loss of ability to service the issuer liabilities for the instruments, i.e. repay the debts incurred to build the assets represented by the CMBS.

Simultaneously, the reason these CMBS are losing value is because the office space is not being populated, which means the retail space is not being frequented. This decreases daily cash revenue from restaurants and retail businesses, while decreasing monthly rent values and cash flows for commercial and office space. The business is losing cash in each direction, which results in its issuer, the property management firms, to miss their payments on CMBS obligations. This results in a decrease in value of the CMBS as the reduced cash flow modifies its waterfalls, and thus its trading value, but also reduces the value of the companies that are issuing the CMBS.

This brings us back to SVB, the eye of the storm. The bank had massive cash reserves – a liability to a bank – that it needed to rehypothecate and reinvest. The bank reinvested those funds long on many illiquid and cash-consuming startups and former-startups that are now publicly traded. It hedged those bets through traditional investments in bonds and treasuries. As the cost of the Fed rate rose, and newly issued treasuries yield more than the ones SVB holds, the market value of those low-interest treasuries decreases. SVB’s VC clients had very large deposits, while its startup clients were very cash-hungry. As a hedge, SVB held middle-term and short-term instruments with firms like Citadel, whose trading strategy promoted SVB’s clients and their investments. Both Citadel and SVB hedged those trades through CMBS portfolios that represented new real estate that tech companies and their employees lived, worked, and shopped in.

The cost of cash increased, and the availability of cash reduced. CMBS were already struggling and are now in default. The companies occupying the CMBS property are no longer using it, and are struggling to obtain cash for operations. The backers of the companies have large cash reserves, but demanding repayment obligations that are in significant deterioration. To solve that, the lent their cash to Citadel and other hedge funds, who used it to buoy the value of the tech companies and the CMBS. This was done by shorting the brick-and-mortar competitors, and facilitated through crypto exchanges providing security tokens backed by locates for shares of traded companies.

The older brick and mortar companies survived COVID, to everyone’s surprise. This caused the locates for the short shares to be exercised, resulting in the security tokens being called for actual shares. As the demand for shares to back the tokens outstripped the issuers ability to fund them, the tokens failed, and lost value. The exchanges that kept reserves in those token denominations then failed. With the exchanges that the tokens were traded on failed, all the derivatives that trace a path through the exchanges become impossible to follow.

The short locates cannot be fulfilled, and have to be retraded at a higher cost. This consumes more cash, even as cash is less available. Banks like SVB rush to provide these instruments against their own deposits for desperate buyers like Citadel, believing they could be paid back in time. Everything was consuming cash at unprecedented levels – the short locates for Citadel, the CMBS for its servicers, the startups, the VCs – and nothing was producing cash, all while the cost of cash was rising dramatically.

CMBS assets are ghost towns, without commercial tenants occupying the offices or buying food and products in the stores, the absence of persons eating away the cash positions of the property managers that are CMBS issuers, while the property managers were starting to default for their holders for lack of cash income to pay the notes. The valuations of the tech companies are decreasing, but their cash demands aren’t decreasing fast enough to keep them healthy. The firms they would normally turn to are now cash-short, having all their flow absorbed by the demand of their current liabilities. And the solution, instruments with high-risk short-term lenders, are now going bad to the extent to that the bank counterparties are not able to liquidate the instruments fast enough, at a high enough price, to service their liabilities.

Once all of the short-term and medium-term instruments were located, but ongoing withdraw requirements were still unable to be met, the banks had to start liquidating long-term assets at a loss. Liquidating the corporate instruments, such as convertible debt, CMBS, and corporate debts and bonds, would only exacerbate the loss in value of the major players in the market, further reducing their liquidity and balance sheet health, but liquidation had to be done. The least threatening assets to liquidate were the long-term low-interest T-bills, but the rate of liquidation required, and the markdown required to find buyers considering the low returns on the bills, caused the sales of the assets to fail at unexpected rates, and when the sales did complete, produced less cash than was required to meet current liabilities.

Tech company investments, VC firm investments, hedge fund investments, commercial and residential real estate investments, and treasury bond investments – all used to counter and hedge each other, but all actually inter-related and inter-dependent. All representing a concentration of risk, a concentration of control, a concentration of power, and the accumulation of the control over the majority of society’s resources in the hands of a tiny minority of parties, all based on promises of yet-to-be-realized future events.

And once that brittle, speculative system experienced a single firm’s withdraws accelerate beyond its ability to liquidate its assets, the threads of contagion that had already been laid throughout the entire financial industry were set aflame. It just so happened that SVB was at the intersection of these forces.

SVB was in a special circumstance due to its inherent relationship to VC deposits and startup withdraws, which historically had been very profitable. However, while SVB may have been particularly exposed due to the unique dynamics of its depositors and their relative amounts on deposit, many other banks are exposed to the same dynamics. These other banks have different relative weightings of depositors, deposit sizes, and the instruments the banks are holding, but they are all deeply intertwined with CMBS, long-term low-interest T-bills, and high-risk, high-return corporate and derivative instruments.

As SVB is liquidated, the decline in prices of these underlying assets, and the shift in capital draws from SVB to alternative depository sources, causing other institutions to liquidate similar instruments under similar circumstances, further accelerating the decline in the relative value of those liquidated instruments, these demands for ongoing cash draws in a higher-capital-cost and less-liquid environment are likely to create an accelerating dynamic of self-catalyzing decreasing liquidity, increasing volatility, increasing risk, and increasing capital exposure in the financial system.