Jamie Dimon, chairman and CEO of JP Morgan Chase, has been called the king of Wall Street, while also being seen as America’s “least hated banker.”
He is seen as a level-headed person in banking circles, so his take on the sudden collapse of Silicon Valley Bank (SVB) last month, which sent shockwaves through the global tech and startup community, is worth mentioning.
from Dimon annual shareholder letter Warren Buffett’s vision for Berkshire Hathaway is just as eagerly awaited, and this year’s edition is no exception, devoting significant time to recent bank failures, particularly SVB and Credit Suisse.
The CEO says in his letter that most of the risks that led to last month’s bank failures were “hidden in plain sight”, but there was also an “unknown risk” that directly contributed to the collapse of the SVB, which cannot be addressed by any regulation. – the fact that “a small number of venture capital firms” controlled many of the account holders and caused the bank run by urging them to withdraw money.
Debate over the role of investors in SVB’s collapse is ongoing, with some pointing to billionaire investor Peter Thiel telling his Founders Fund clients to withdraw their funds. A few weeks later, Thiel told the Financial Times that he left $50 million in the bank when it went bankrupt. Several other VC funds, including Coatue Management, Union Square Ventures, and Founder Collective, also told founders to get their money from SVB.
At the time, VCs were sure they wanted the US government to step in, as the existing Deposit Guarantee Scheme only covered $250,000. Ultimately, the US Treasury Department stepped in to guarantee the full value of all SVB deposits in an effort to halt the wider bank runs.
Dimon takes shareholders through what is already known about why the bank went under, but for the other players involved, “for many, this was not the best time”.
“Most of the risks were Hide in plain sight. Interest rate exposure, the fair value of portfolios held to maturity (HTM) and the amount of SVB’s uninsured deposits were always known – both to regulators and the market,” Dimon wrote.
“The unknown risk was that SVB’s more than 35,000 corporate clients – and the businesses within them – were controlled by a small number of venture capital firms and accelerated their deposits.
“It is unlikely that a recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise in interest rates has raised attention to the potential for a rapid deterioration in the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits.
Dimon argues that banks “ironically” gobbled up government paper because it was preferred by regulators.
“This is not to exonerate bank management – it’s just to make it clear that this was not the best hour for many players,” he wrote.
“Risks abound, and managing those risks requires constant and vigilant research as the world evolves.”
Dimon advises that “we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in the opposite of what people intended” when it comes to next steps in regulating the financial industry to avoid a recurrence.