The Worst Thing You Can Do Is Nothing

The Worst Thing You Can Do Is Nothing

The problems/resolutions of both Silicon Valley Bank and Signature Bank bring to mind a Theodore Roosevelt quote: 
“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” 

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We at City Different Investments have been debating whether the government did the right or wrong thing — thank goodness they did something. 

Here’s what we know so far

First Citizens BancShares, Inc. pays $16.5B to purchase $72B worth of SVB’s assets. By our math, that’s approximately 23 cents on the dollar.  

That leaves about $90B in securities and other SVB assets in the hands of the FDIC (i.e., receivership). The estimated cost of failure to the deposit insurance fund is $20B.  

First Citizens will assume $56B in deposits, $72B in loans, and 17 branches.  

SVB was forced to abandon its plan to raise capital as funds.       

On top of the loss-sharing agreement, the FDIC will help finance the deal with a 5-year $35B loan. The agency is also providing a $70B line of credit to cover potential depositor flights. 

So, in conclusion, First Citizens bought the deposits and the loans at a significant discount. They have an upside agreement with the FDIC, the FDIC is financing it, and the FDIC is giving them a line of credit. From where we’re sitting, that’s a sweetheart deal with potentially dour systemic implications.

Going back to Chris’s debate with Connor from last week (in which he makes the case that this is a huge nanny-state solution), we think this could lead to a moral hazard. That being said, it was better than nothing. 

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