Silicon Valley Bank, COLIs, and some lessons in corporate cash management

 So, today's big news was the dramatic implosion of Silicon Valley Bank. Just to recap, they had a $46BN run on deposits on Thursday, dumped a pile of mortgage-backed securities to try to raise cash, lost $1.5BN doing that,  and...it wasn't enough. This morning the FDIC shuttered the bank.

So what does this have to do with the topic up top? First, you should understand that quite a few Silicon Valley startups banked with SVB- both on a company level (cash repository), and on a personal level for their executives and staff. Lots of interconnections between SVB and the various regional VC firms. They were, in short, a go-to bank for VC-backed startups, and that drove a lot of their business.  

Second, you should also realize that virtually all of that money (and SVB had $176 billion or so in deposits a week ago) was not insured under the FDIC, for one of two reasons: 
(1) There was more than the $250K ceiling involved. One startup I know of had $39 million in cash at SVB.   Think about that uninsured exposure.

(2) Equally bad, not all of it was in FDIC-insurable accounts. Roku, as an example, had $487 million - 26% of their total cash - parked at SVB. The problem is that they were in money market funds. Great for liquidity, earn a little interest...and zero protection. 

Oh, and what was SVB doing with all those deposits? Well, they couldn't expand their loan portfolio. So they parked all that cash in 10-year fixed term mortgage backed securities. Securities that are currently showing a growth rate of about 1.56%.  In an 8% inflationary environment. BTW - note that that goes back to 2020, when they got flooded with deposits courtesy of Covid.

EDIT: Francis Turner has some excellent analysis on this at Sarah Hoyt's blog.

Those are just two examples. There's a page-long list of companies, with their dollar exposure, floating around, and I'll add it in when I find it.

EDIT:  Substantial exposure problems for both biotechs (note the comment about "every company in our portfolio is affected" from a VC firm) and Indian onshored SaaS companies.

The fundamental problem is... banks are a really bad place to park medium-term cash, which just got demonstrated in dramatic fashion. Why? Well, here's some high points:

	Bank	Life Insurance
	Banks are required to have an 8% capital asset ratio	Life Insurance companies generally target a 350% capital asset ratio
	FDIC insured to $250,000 per customer	Mutually-insured to 100% of customer account value
	Deposit accounts are fully liquid	Funds can be accessed via withdrawal or by internal loan

I'll add some more benefits later, so come back. So...where did life insurance come from in this discussion? Well, there's a thing called Company Owned Life Insurance (COLI) - permanent life insurance policies owned by a business as an asset, and used as part of their cashflow management strategy. And that's what we're going to talk about.

You've already got a basic definition of a COLI. Here's a good starter on what COLI's are.  For cashflow management purposes, you can view them as a kind of private "bank", controlled by the business, that it can put money into and take money out of, using the cash value management features, while providing better protective capabilities vs. a traditional bank, and also superior asset performance.

I'm going to use SVB's mortgage-backed securities here to demonstrate the point.  We already know that their MBS's were showing a weighted average yield of 1.56%.    Here is an example of crediting rates from one of the life insurers I work with (note - each account is credited on a 12-month rolling period. So an account that credits in February of 2023 started in March of 2022). 

So, how did they do? Well, if you use the far-right, uncapped S&P 500 account (what I would have recommended), and you calculate out the average performance, you get an average annual yield across the last 3 years of 11.36% - including the last year yielding 0%, and the first three months of that period also yielding 0%.  11,36% vs. 1.56%.  Says something, doesn't it?

Note - I'm not saying "use life insurance for all your banking needs". It doesn't work that way. But... using SOME BOLI strategies in your business cashflow management just seems to be a prudent thing, eh? The fact that you also get protection money on your key staff and executives - pure bonus.