As I said on another post this weekend, I’ll remember the comments I’m reading here for the rest of my life.
It's hard to dredge up deep, deep wells of sympathy for folks who were already playing the salary game at double the value of half the players. One can't escape the sense that if they've done the kind of budgeting that a regular American does, they will be fine.
Should we have a strong safety net, so that people who lose their jobs due to market disruptions or executive mismanagement do not suffer? Absolutely. And if it's currently inadequate, by all means let's improve it.
But I think it's wrong to try to protect jobs through government subsidies to industries where execs made bad choices. Which is exactly what a lot of people are apparently asking for when they're asking for depositors to get retroactive free deposit insurance here.
I'm not exactly sure off the top of my head what the similar defense necessity story is for Silicon Valley.
The svb ceo asked congress to weaken Dodd-Frank. If that's a bad idea, then congress should say no; that's their job.
Apparently banking over trivial amounts of money ($250k isn't even one month's cash use -- ie payroll and health insurance -- for a 15-ish person sfbay company) requiring significant work to make that cash unlikely to just disappear is no way to run a country.
If doing decent treasury management is too darned hard for rich people to do, I don't think that's a problem for the government to manage. Beyond the obvious expedient of using two or three banks, which would have solved most problems for most companies here, there are a number of obvious market-driven solutions. E.g., https://www.difxs.com/ or https://www.g2.com/categories/treasury-management
Yeah, this is some ideologically driven smearing of people who are literally like I want to stick my seed round in a checking account and not have that disappear. For what it's worth, I'm not rich; I'm like a hundred-thousandaire. (And not affected, though friends are.)
Disappointing to see someone like you gloating that a bank screwed a bunch of small business customers. From reading your writing, I doubt you'd cosign "basic economic services like a checking account are use at your own risk" in almost any other area.
I get that you want to be able to be handed millions of dollars and have somebody else take care of that for you. Who doesn't want that? I just don't understand why you think it's the job of poorer people to subsidize you if you take a risk with those millions and it doesn't pan out.
> "basic economic services like a checking account are use at your own risk"
I in fact don't cosign that; I've been very clear that I support mandatory FDIC insurance with its current very generous limit. I also support the FDIC's resolution process where they immediately pay out the $250k and then work hard to quickly pay a large portion of the remainder. That's a giant level of risk reduction.
But if somebody is rich enough that they have millions in cash and haven't bothered to take basic precautions like "use two banks", I don't think that's a problem such that (much poorer) taxpayers should be obliged to make it all better. If it happened to a friend I would feel bad for them personally, of course. But not so much that I would be calling for a government bailout. Capitalism works because risks yield both gains and losses. People who don't like that should manage their risks.
Does this mean that rich people have to be more careful managing gobs of cash? Yes, but that has always been the case. Treasury management is a thing that exists both as a thing people do professionally and as a service you can buy.
I understand that some people are young enough that they have either not heard about bank failures or did not feel like it applied to them due to being in a period that was very good for banks. But they are and they do: https://www.fdic.gov/bank/historical/bank/
Young people hear plenty about bank failures - specifically as a success story for big government, a problem we solved, such that depositors are secure these days.
I recognize that startups are in a bit of a weird place where they might have a lot of money to manage before they are sophisticated enough to have a big finance team. If only there were some sort of entity specialized in dealing with their unique needs… oh wait.
But the economy's also going to be fine here. Most businesses with a lot of money understand that bank failure risk is just one of the many financial risks to manage. To the extent a startup wants to have millions of dollars but not hire somebody competent to manage that money, them's the breaks.
The same thing would be true for startups that don't take security seriously, for example. I feel bad for the founders here, but no worse than I would for one who experienced hackers getting in and stealing the data. Even if they had hired "sort of entity specialized in dealing with their" security needs. Picking a bad vendor happens, and if you bet your company on a vendor choice in a vital area, well, sometimes those bets don't come out like you hoped.
This is a poorer world than the one where it’s not, is my point.
What are you even supposed to do here, open accounts at 40 different banks when you get a $10 million check? That’s pointless silliness. Is this really what we want entrepreneurs to be spending their time on?
I understand that some see startup founders as delicate smol beans who are too uwu soft to have to actually do some work. But I have been told repeatedly that these people are genius future titans of industry, backed by the most financially savvy people on the planet. So I think maybe they can handle it?
If somebody is in the incredibly privileged position of being handed $10m in one go, but is also uninterested in managing the money, then I would expect them to hire a part-time CFO. Or at the very least to split the money up and put it into two different banks, which in this case would have resulted in no payroll disruption and the safety of 90-100% of their money.
>which in this case would have resulted in no payroll disruption and the safety of 90-100% of their money.
Why would it have resulted in that? We've already established that any amount above $250k in one bank may as as well be vaporized already, you just don't know it yet.
> Why would it have resulted in that?
Because our modern regulatory regime is pretty good.
If you have your money in two bank accounts and have reasonable capital reserves, you'll be able to make payroll from one of them. So the short-term problem is solved. In your example, you've got $5m to work with.
For the failed bank, the FDIC will give you $250k right away, and in short order a large percentage gets paid out as they liquidate assets. For SVB, that starts within a week: https://www.fdic.gov/resources/resolutions/bank-failures/fai...
The expectations I'm seeing for that are on the order of 50%. So a week later, you're back up to $7.75 million to work with, with more to come in as assets are sold. Maybe you get everything back, maybe you take a haircut. The estimates I'm seeing are in the 0-20% range, so you end up with $9-10 million back over time.
And that's just the FDIC. Functioning businesses have income that they can use to pay salaries or as justification for loans or selling equity. They can also pursue acquisition by somebody who was lucky or smart enough not to have high egg/basket ratios.
So in the end, maybe we end up with a few failed companies, but it's not a systemic risk, and it's the sort of object lesson that helps people understand why they need to take cash management seriously beyond a certain level. That surely will suck for some people, but that's how capitalism works.
It really isn't. The republican party has spent the last 50 years dismantling regulation. Thats why shit like this happens.
Having said that, as I've been reading about this for the first time over the past couple days, I have become a bit less sympathetic to companies with very large deposits at a single bank. It does seem that there are mechanisms, like "insured cash sweep", that good financial officers should have been taking advantage of. But I still have uncertainty about this and want to read more about it.
But I think the general point of the other commenter in this thread is a good one: a company with, say $2M to $10M in cash deposits should ideally be able to access banking services easily and with negligible risk. This is not an enormous business size! It's better for society for it to be possible to run businesses like that without having to fear big surprises in the financial system killing you on a random Friday.
> should ideally
Sure. Ideally, we should all live in the Big Rock Candy Mountains. [1] But back here in reality, companies have to manage all sorts of risks. If they don't want to hire a professional finance person and don't want to avail themselves of services that solve their problems, then that is a choice they can make. It's just not the taxpayer's job to kiss their boo-boos and make it all better when their gamble doesn't turn out so well.
[1] https://en.wikipedia.org/wiki/The_Big_Rock_Candy_Mountains
By lighting large piles of nearly-free Saudi money on fire to undercut sustainable businesses on price.
Q: How much cash do small farmers / wineries have on deposit at their bank?
"Show your working" ... https://www.bls.gov/oes/current/oes452099.htm
> Holding three months of payroll [..]
Three months of payroll ... in cash?
I have two good friends who own and run wineries in France. Both of them are relatively successful, but neither of them have anywhere near 20 employees, for the simple reason that they can't afford to. The majority of the work is done by family members.
Average is above one bank a year.
This allows them to keep those employees at arm's length and not have to pay the kind of salary and benefits that their "real" employees enjoy. It has also great bonuses in that if the "real" employees want to abuse the snot out of those contractors (including really vile stuff, obvious violations of the equal employment act), the tech company and the contracting company are heavily incentivized to "solve" the problem by removing the contracted employee from the position. Employees in that position, should they want to take action, have to go through multiple layers of red tape and ambiguous responsibility and risk upsetting the apple cart for all of their peers, because the tech company is always at Liberty to cancel the entire contract to avoid a "problem" contractor.
The whole system is a little bit rotten.
And yeah, it sure does suck for folks who are going to get bit as clients of Etsy because Etsy didn't hedge bets. Maybe Etsy learned a lesson.
The majority of your argument revolves around the idea that only rich people in this “rotten system” will be affected, or that this is an important lesson. When it’s pointed out that there are many types of employees who aren’t rich, you say they don’t count because they’re contractors, ignoring that even if true, which I’m not necessarily granting, it still doesn’t matter since that contracting job will still probably disappear and there is a high likelihood that they can’t just be immediately positioned somewhere new. The rich developer may have an easier time landing a new position than the cook getting a new shift from the contracting company somewhere new. But I suppose that’s irrelevant, because the point about cooks being contractors actually had nothing to do with the topic at hand of whether they deserve to be colateral damage. Rather, it was meant to derail the conversation into a long digression about how these contracting agreements further prove how “rotten” these startups are… and thus deserve to learn a lesson about treasury performance.
I hope so. I don't expect the sellers to have done anything different. Corporations, however, have a responsibility to manage their finances effectively. "We weren't smart enough in that space" is no more an excuse than it would be if sellers were having problems because at seas web infrastructure broke down due to lack of proper planning for redundancy and fault tolerance.
And I never said nor implied that only rich people will be affected. But they're basically the only ones with power to do anything different here. The rest of us are long for the ride.
Here's the question. Now that this happened, do the rest of us just accept that this is how it works? Because if we do, nothing changes, and we just get to sit back and wait for the whole system to unspool again. Or, we could stop treating the machine in California like it's better than a Vegas slot machine for most players and start building something better.
Just so I understand correctly, if the seller has an LLC they made through legalzoom.com for their Etsy bowl business (which is very common and highly recommended), then does your sympathy for them immediately evaporate since they now have a “responsibility to manage their finances effectively”? Why exactly is the Etsy seller off the hook in this scenario? Is it a headcount requirement? If the Etsy seller LLC is 3 people (two sisters and their mom), now are they irresponsible for using Etsy? Are all those 3 person startups in YC different somehow? Only in that they make “useless” things and the Etsy people make “useful” things, and that translates to whether a corporation needs to be responsible?
> Here's the question. Now that this happened, do the rest of us just accept that this is how it works? Because if we do, nothing changes, and we just get to sit back and wait for the whole system to unspool again.
Accept that what is how it works? It depends on the solution. If the solution is providing temporary backstops to depositors so that a sale to another private bank can be more attractive, then I don’t think that’s anything earth shattering to accept? Especially considering it would probably result in a private solution happening faster at little to no cost to the taxpayer. If congress empowers the FDIC to claw back SVB share sales to help make depositors whole, I think that’s also not anything that people would have a problem accepting? Like part of the problem here is that completely different parties are lumped together and in this fury the only acceptable answer is “no help!” No one is arguing for SVB to be bailed out. Those shares are going to zero. That is a sufficient market result. Enabling a bunch of assets that still have value to be maximized to avoid the philosophical dilemma of our Etsy seller doesn’t seem to be the “end all” nightmare scenario it’s being chalked up to be here. If anything, maybe the focus should be on plummeting interest rates to zero making precisely the kinds of “full liquidity paid for checking accounts” become an endangered species in the first place. Or maybe then raising rates at break neck speed despite having questionable results on the inflation they’re targeting, while clearly affecting random pieces of the economy.
> Or, we could stop treating the machine in California like it's better than a Vegas slot machine for most players and start building something better.
It seems like choosing a random 30% of Silicon Valley companies to put in hard mode is a close approximation to the Vegas slot machine than fad imitating zero interest checking accounts that were in no way high risk irresponsible investments that had the chance to wildly benefit the depositors if the bet would have “paid off” vs. if it crashed to zero. Especially given the high likelihood that there are sufficient assets to make depositors either whole or almost whole, it seems even more the case that those disproportionately affected will be workers, and not companies. Not to even mention the fact that those most responsible (Thiel) aren’t going to suffer, nor are the mega tech companies that can easily survive this, and may even end up just absorbing some of these companies and consolidating even more.
I am super curious as to what “something better” looks like though. Because right now, the world 6 months from now where a random subsection of tech and wine workers had their year ruined, while big tech companies and VCs are still doing just fine, doesn’t exactly seem like fertile ground for whatever amazing new system you have dreamed up.
Headcount and age. Etsy is a +1,000 employee company that's been around over a decade. Practically bedrock by Valley standards. I personally draw the line between "small" and "big enough to know better" at 100+ employees (around where the EEOC draws the line for mandatory reporting). I acknowledge people may disagree on this topic; that's where my line happens to be.
FWIW, I don't disagree on the mechanics of your suggestion for back-stopping SVB enough for most folks to be made whole. I'm more concerned about the mechanisms that led to one bank becoming such a linchpin for the whole system. We should have learned about "too big to fail" already.
> It seems like choosing a random 30% of Silicon Valley companies to put in hard mode is a close approximation to the Vegas slot machine.
Yes... That's what SV just did to its ecosystem due to over-reliance on one bad bank because "optimization is king" is the mantra of the whole machine. For us to not find ourselves in this boat again in 20 years, the people with money power in SV need to un-learn the lesson that's been driving SV for decades. Someone needs to be less-than-optimal for the system to not be so fragile.
To be clear, Etsy is not my concern here. They will probably survive just fine regardless of whether we deem them to be responsible or not. That's part of the point. The sole question was the sellers, and trying to examine why they inspire more sympathy to similar-sized companies that may be directly banking with SVB. Hence my question of whether the mere existence of a legal entity is the difference, given that in fact many Etsy sellers do of course have simple LLCs set up. I would fine "Hey, Etsy sellers need to look into Etsy's bank to be responsible too" consistent with "3 person YC companies need to be responsible about the bank they choose", or acknowledging that's a tall order for both. But not one and not the other, was my only point here.
> Yes... That's what SV just did to its ecosystem due to over-reliance on one bad bank because "optimization is king" is the mantra of the whole machine.
If it puts your mind at ease, I think the result is going to be the same regardless of what happens to depositors: everyone now will try to spread out their money and sweeps will become part of startups 101, etc. In that sense, the system has worked: the irresponsible bankers are being punished, they and their investors lost their bank. I promise no one is going to wake up and say "well, glad that got magically solved" and not be super paranoid going forward. If anything, if depositors aren't made whole, this particular demographic is more likely to, to your point, over-optimize in that direction (perhaps create investment vehicles to short regional banks or something, who knows).
I think the main issue is that the status quo is that more often than not such classes never learn any lessons, so people are cheering on any hurt they receive, no matter who else gets in the way. Discontent is such a state that people are becoming, as they say, Jokerfied.
Without derailing the discussion into whether Etsy "should have known better" (which to be clear is an argument that would be made in a simplified vacuum given the complexity of them probably just being an intermediary between a credit card processor and the sellers and thus it being fairly logistically complicated to set up that intermediary as some sort of multi-bank-account system or whatever), but regardless, even if that is the worst way to do it in the world, the point is that that's not the individual sellers' fault, and they shouldn't be punished for it. Again, as I mentioned in my comment, the position that "Well individual Etsy sellers should really do a financial analysis on the host platform's bank, quarterly, to account for interest rate changes, and if they independently conclude that that bank is unhealthy, they should pull their store off Etsy and... ???" is a bit hard to swallow, and I'm not sure if a world we really want to create.
I can't escape the sense that if they've done the kind of budgeting that a "regular American" does, they're in deep trouble[1].
[1] https://www.fool.com/the-ascent/research/average-savings-acc...
But when you have nearly double that salary, what's the excuse for failing to save?
This, by the way, is why ordinary Americans are suffering while the billionaires are winning and laughing at us. They have us fighting with each other for scraps. $120k/yr after taxes doesn't go very far at all for a family of four. Kids eat a lot of food! Sure, it goes roughly twice as far as $60k/yr does, and, saved wisely and not spent on yachts, cocaine, and girls, provides a bit more of a financial cushion in case of a calamity like the one we're in, but SVB's CEO made $4.8 million last year, which, budgeted by a regular American, is enough for several lifetimes. A software dev making $120k/yr, he is not.
Have however much sympathy you can muster for software developers who, yes, have more than you do, but don't lose sight of the bigger picture.
... It won't happen because we don't want it to. But it could.
Startups are going to get most of their deposits back-- perhaps all if there's an acquisition. If SVB is not acquired, I hope the FDIC is able to get a substantial dividend quickly so that they can keep operating and that everyone works to keep disruption low.
But I don't think the federal government needs to make depositors whole beyond the insurance limits. I think that sets its own bad precedent. Maybe some startups are going to lose 5-40% of their cash because of their treasury management choices. That is OK.
The times when I was a founder of a startup with a substantial cash balance--- we hedged the bank risk. There was a cost to it. I don't think those costs should be socialized.
CTO Recourse Technologies; acquired by Symantec in 2002.
CEO, later VP of Engineering TransLattice; acquired by QualComm 2017.
And a couple of other things inbetween. Now I'm a middle school/high school teacher.
Your assumption of bad faith is terrible.
> A big variable here is simply when and how money market sweep funds will be handled and made available, if you had millions without sweeping into a money market fund, that's silly.
You just use IntraFi and they take care of the details for you. Odds are your bank makes the introduction when you ask the question about the exposure.
> This is one of the dumbest views
Make an argument without calling people dumb.
> If the government can protect against huge losses because of their liquidity, why in the world wouldn't we let them? The bonds SVB held are only mark-to-market losses right now because they haven't matured.
Duration risk is real risk.
In a discussion elsewhere, the moment I mentioned my opposition to a bailout, the immediate response was, "Sounds like you haven’t run a startup ¯\_(ツ)_/¯". I've started 4 companies, one of them a classic venture-backed thing.
The immediate assumption of "Oh, you people who are not as me and just can't possibly understand tech, so you don't get to have an opinion," is exactly the sort of arrogant exceptionalism that got a lot of people into this jam. Like, I get that it's awful to realize one's business is possibly doomed. I have been there. But in that moment to flail around and blame others rather than understanding the mistake? That's a great way to keep making the same sort of arrogant mistakes.
> is exactly the sort of arrogant exceptionalism that got a lot of people into this jam
Well, I don't think you start a business if you're being entirely rational, either. You basically need an outsized belief in your own capabilities and need to have the erroneous belief that you entirely control your own destiny.
Black swan events that might entirely wipe you out and that are completely out of your control cause cognitive dissonance.
I do think FDIC should choose to incur some amount of risk of being surprised by additional liabilities by making a quick dividend payment. The benefits of keeping things moving and adding some clarity soon outweigh a small risk of partially bailing out losses.
You hire a financial manager, in-house or a service. Basic delegation task that any one (individual or business) dealing with more than a million dollars should probably be doing anyways. Certainly anyone dealing with the kind of money we're talking about here with SVB's customers.
The FDIC has publicly said there will be an advance dividend and I don't see why it wouldn't be substantial, given that there's going to be a LOT of recovery unless SVB has big non-public problems.
FDIC should pay early (Monday-Tuesday, not anytime "next week" as they've indicated so far) and should pay a big chunk, even though it's not completely safe.
Every day that goes by with uncertainty, the cost of the fear grows.
Not much longer. It's only Thursday's run that tipped SVB into insolvency.
What triggers in their holdings do you think started the run?
The question I have is do some of the proceeds of the liquidation get used for $250,000 insurance payout first? Or do the tax payers get to help?
Yup. FDIC gets the bank, and has to pay the insured amount. Then, the remainder must be managed for the benefit of depositors, other creditors, and shareholders. Any shortfall of the insured amount can be paid from the deposit insurance fund.
> Or do the tax payers get to help?
The FDIC deposit insurance fund is paid for by banks.
Maybe there should be changes made to help protect depositors more, but instead of a collected and rational conversation about how we'll treat deposits going forward we're getting glib "just give these people there money back, they don't deserve this" responses. Of course these things are tragedies, but the degree to which the federal government assists people in these situations is a complex discussion, and we have to come up with a consistent approach.
People are asking about salty response, but this kind of cavalier attitude toward the financial system from supposedly serious thought leaders is a bit alarming.
Seems to me all these "disruptors", "thought leaders", "visionaries" are disrupted and their plan to deal with this is nowhere to be seen.
It was Mike Tyson - https://www.sun-sentinel.com/sports/fl-xpm-2012-11-09-sfl-mi...
That 100k difference wouldn't make any difference here though, since the problem is for businesses (startups mostly) who had accounts there.
The 250K insurance limit seems quite reasonable for individual personal accounts per bank. But applying the same limit to a whole company which may well have more than 250K in payroll per month... well there's a problem.
It's pretty ridiculous for people to need to judge whether their bank is fiscally sound.
If you operate in 1% space of wealth there are and should be risks. Making everything the lowest common denominator literally leaves us with Camacho for president.
> It's pretty ridiculous for people to need to judge whether their bank is fiscally sound.
This is a great idea. We should look into this more.
iirc three researchers asked this same question back in 2018.
> A potential policy recommendation was posed in 2018 by three researchers, two of whom worked in the Treasury Department. Under their proposal, the Federal Reserve would offer the option to all individuals and businesses in the United States to open a bank account, termed a “Fed Account,” with the Federal Reserve itself, providing an alternative to private banks or credit unions. Such an option could have significant effects on a wide array of monetary and economic issues.
https://econreview.berkeley.edu/fed-accounts-and-the-right-t...
https://www.fdic.gov/resources/deposit-insurance/brochures/i...
If you had a single-owner account and a joint account, you would have $250K in insurance for each of those accounts.
No Sam, it was people like you who underplayed the magnitude of this, and are now panicking, and looking for a bailout, and are entirely unable to justify why of the several hundred or more banks FDIC has closed (though one of the larger ones), SVB should be special, beyond "well, it's MY money".
Already picked up some great deals and next week is booked dense.
> No other banks have yet popped up with similar risk exposure so its not a systemic issue like 15 years ago and startups are not that big a part of the US economy.
That doesn't matter in the slightest. Companies don't do deep evaluations of the financial risks of their banks (as clearly evidenced by what's happening right now). They'll flee from what they perceive as unsafe into what they perceive as safe, regardless of balance sheet realities.
One of the primary issues being discussed is the insured limits at banks, and the uncertainty on whether depositors can be made "whole" (it's unclear whether people saying that mean 100% or something close to 100%, so I'm putting it in quotes, some people are being really loose with their terms in this thread). Why the fuck would people, given that context, ever move "all of their money" to only the biggest 3 or 4 institutions and increase their risk by consolidating in exactly the same way that caused the current problems? If anything this is a potential boon for the many smaller banks as they can gain additional depositors as people wise up to their risk exposure.
Consolidating increases the risk of a bank run, decreases the risk to the individual depositor.
Until the US lets the largest bank fail this will continue to be the case.
https://banks.data.fdic.gov/bankfind-suite/bankfind
Most banks actually have most of their deposits NOT insured. Most banks are not bofa.
What killed SVB was their mismanagement. Per the CFPI, SVB was insolvent at the time it was taken over, meaning they actually did not have sufficient assets on hand to cover their liabilities, even if their assets had been held to term.
Is that really what you want?
By that rubric, you could perfectly well claim that your accountant, laundromat, and lawn care companies are systematically important, because they'd fire their employees if their checking accounts disappeared.
You're the one claiming there will be contagion here. I don't think that's the case. If a bunch of unprofitable companies with bad treasury management go under, I think the rest of the economy will be fine. Companies go out of business every day.
If you are claiming that tech is somehow special such that contagion will harm the wider economy, as was the case with mortgage-backed securities in 2008, then any taxpayer-funded bailout should be a one-time deal that goes along with enough regulation so that contagion is no longer a risk in the future.
Banks make money through risk. Sometimes those risks work out and people make money. Sometimes those risks don't work out and banks fail. This is capitalism 101, and to the extent banks are capitalist enterprises, there's no way around it. Government's job here is just to limit the damage.
If you want banks to be perfectly safe, then you are arguing for government-chartered, not-for-profit, non-capitalist banks. These are things that exist, but we don't have them here in the US. We could, if you really want people with millions in cash to have someplace perfectly safe to park their money, you can certainly argue for their creation.
In the sense that I never said that, sure.
The only thing I claimed, even implicitly, is firing a bunch of people because their employer's cash disappeared would be bad.
That has a technical meaning in finance: https://en.wikipedia.org/wiki/Financial_contagion
https://news.ycombinator.com/item?id=35122581
I repeat: "In the sense that I never said that, sure."
In which case, since you're not claiming contagion risk, I return to my previous point that there is no reason for taxpayers to bail out rich people who took a gamble and lost.
SVB was undone by a bank run, not because they were doing anything particularly risky. Something like 1/4 or 1/3 of all their deposits tried to exit on Thursday - no bank can survive that given how fractional reserve banking works.
The bank run was the proximate cause of the failure, but they also made some big bets and lost, making them vulnerable to the bank run in the first place.
There's a serious risk of contagion here.
But if there are a ton of regional banks who took advantage of laxer regulation and had balance sheets in as poor a shape as SVB, then I am fine with some of them failing too. It won't be anywhere near the problem that 2008 or the S&L crisis was, and we'll end up with tighter regulation for those banks next time around.
Right now, everyone in the country with uninsured accounts is being incentivized to pull those deposits and pull them fast. We don’t know how things will turn out, but there is obviously a major risk of contagion.
We could be in the eye of a hurricane. Or we could be in any of the non-hurricane locations on the planet. I think the latter is more likely.
Seems like the verdict is in.
What’s the point? Either set a limit that can’t be skirted by maintaining multiple accounts or guarantee the same amount in a single account.
If FDIC wants it to be possible to insure that much, they should cut out the middlemen and financial engineering requirements and just insure deposits of every business to that amount. If they don’t want to insure that much, then IntraFi shouldn’t be legal.
If you'd like to argue that the FDIC should go further so as not to subsidize people with shit-tons of cash, I'm certainly open to that. But the increased regulatory complexity might not be worth the total risk reduction, so I'd want to see some math. I suspect it's mainly a red herring, though, as I couldn't find any sign that Intrafi is a particularly large business.
FDIC doesn’t want to insure that much against a single bank failure. Encouraging diversification of large balances helps the FDIC’s goals, since it reduces the impact of single bank failures and reduces the possibility of single failures turning into broader economic collapses without increasing the cost to the Treasury of a single bank failure, which is an efficient way of promoting the purpose for which the FDIC exists.
It might be efficient for the FDIC to require complex and expensive financial engineering just to keep operating capital safe, but it's hostile to businesses, especially small ones, and is out of reach for many.
The FDIC exists to protect against a general collapse of banking like the one that preceded the Great Depression, not as a generalized subsidy to business.
Why though? The "$250k per bank" rule is clearly a feature of the system, not a bug. If the FDIC wanted to have the insurance limit be across all banks, that's how they would've structured the rule.
But they didn't, because their purpose wasn't to provide unlimited protections to corporations from bank failure, it was to limit the impact of any individual bank's failures and decrease the likelihood of bank runs.
The current rule does this effectively, and encourages larger businesses to diversify their assets while also providing significant downside protection to many individuals and small businesses.
Not to mention doing so when you know that most of your customers' businesses are incredibly sensitive to interest rate hikes, in part because you have explicitly marketed to that market for years.
But those people are just a noisy minority. Most people are quietly somewhere else on the continuum between those extremes.
I would also like to point out that it's perfectly okay to simultaneously take pleasure in an industry being culled of precisely what you described, while also feeling bad for some of those who may lose their jobs as a result. Ain't nuance neat?
Absolutely. What's surprising to me is the absolute lack of that nuance on HN. It's all just BURN IT ALL TO THE GROUND over the last few days.
People love tearing others down. This is the rule.
The true reality of the situation is that these people lent their money to the bank. To bail them out is equivalent to bailing out shareholders.
Not to mention that depositors can get their money back without taxpayer money being used. That’s the whole point of the FDIC stepping in. SVB’s assets have value and can be used to give money back; if another bank buys SVB, odds are depositors will get the vast majority of their money back. It’s not a bailout if the government is not spending money and I don’t know why even a positive, non-bailout outcome seems to be viewed unfavorably.
Absolute bullshit. If that was the goal, banks would be 100% solvent at all times. Every single dollar people ever deposited in the bank would be sitting there in the bank's safe.
That's NOT what happens in practice. Banks simply cannot bear to watch a huge pile of money just sitting there safely doing nothing. So they do fractional reserve banking. People deposit 100 dollars at the bank, the bank stores like 10 dollars only and then loans out 90 dollars to anyone in need of cash. Then the bank literally lies to people's faces when they provide a statement saying they have $100 in their "account" when in fact they only have 10 dollars with $90 being tied up in outstanding liabilities.
Anyone who "deposits" money at a bank without expecting profits in return has been fooled twice. Thrice if they tolerate "administrative fees" for the "service".
> And do you really expect, and want to live in a world where there is such an expectation (due to unreliable financial institutions), the average startup founder to spend time hedging bank risk?
Looks like we live in such a world already.
But perhaps this is a learning opportunity for me. I’m sure you have a stash of money somewhere for paying bills; obviously you need relatively quick access to this stash. You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it). Where are you putting these stashes? (I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.)
And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay. They can either charge a fee to hold your money or try to make money off deposits. The latter is obviously riskier, but the former is on average worse for consumers (they lose money by having money..?). If you would rather not pay money to have someone hold it for you, fractional reserves are a necessary construct.
Edit: > Looks like we live in such a world already
Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
> If you ask someone why they have a bank account, odds are the answer is not “to make money”
> They do it because it’s commonly held financial advice that this is better than putting cash in a box under their mattress (not just for returns, but for safety and ease of access).
Well, that's the problem. People actually believe this "your money is safe at the bank" common sense. Tell them otherwise and they treat you like you're one of those tinfoil hat crazies. Maybe they'll believe otherwise when the banks fail and their money is lost.
> It is not fair to lump these people in with shareholders, in terms of profit expectation, and say they have just as little right to their money back.
Sure it is. They loaned their money to the bank. They exposed themselves to the risk that the loan would not be paid back. That they were ignorant of what they were doing does not somehow excuse them of their culpability.
> I’m sure you have a stash of money somewhere for paying bills
I have exactly $0 in my personal checking account. All expenses are paid with credit. Then I pay the bank off in full the second money enters my account. Any and all remainders are immediately invested until $0 remains.
> You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it).
My emergency fund is about the only thing I keep in a bank account long term. In several liquid investment accounts in different banks. With full knowledge these banks could flop at any moment.
> I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.
In my country, bank accounts are insured up to some amount per bank per our social security number equivalent. Therefore, when that amount is exceeded, I spread them over multiple banks. If money accumulates to the point I can buy real property, I immediately do so instead of leaving it at the bank.
It's a pretty simple algorithm.
> And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay.
Or they could charge you for the storage service instead. Maybe if banks were in the storage business it'd actually make sense to pay them a single cent in fees. They're not, so it doesn't.
> Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
Yeah, and everyone just keeps on believing in banks. Positive outcome for them, not for society as a whole.
I think from your POV that banks are horrible, thinking that even depositors should lose their money is in fact a defensible argument. So I concede that your view is one I can respect despite disagreeing.
But in my view, banks are a useful fiction because of the utility they provide (specifically easy storage of and convenient access to money). Even if a person can buy property to reduce bank risk (again, a super inconvenient workaround!), I’m not sure I want _businesses_ to be doing so, especially in light of the likely resulting impact on property values. I acknowledge a system relying on banks indeed has risks, but to me that’s a stronger argument for better regulations and protections to mitigate the risks than it is an argument to dissolve the system and lose its benefits.
Real property solves that problem best. The criminal can't take you to the government office with a gun to your head and force you to sign over the property to him. Property is also what capitalism is all about: actually owning stuff. Engaging in it keeps the fabled "you'll own nothing" dystopia at bay.
And it's not clear to me that other banks would be excited to pay higher insurance premiums to bail out Silicon Valley Bank's customers here. If you see something otherwise, please let me know.
I make it a point not to differentiate between the two. Bailing out a bank's customers is bailing out the bank. By all means, liquidate the bank and distribute that cash. People are already commenting down below that it might not be enough. If it's not enough, tough. They made a bet and they lost. Consider not using a bank next time.
People are reaching their limits.
This one, AFAICT, happened because the government greatly restricted what banks could do with their funds. One of the only options available in large volumes is a government instrument subject to risk from the Fed raising rates rapidly.
> Why are executives not being put in prison for ruining so many lives ?
I hope people only get put in prison for breaking actual laws. And if the SVB execs broke laws then yes, they should go to prison. But I haven't heard it alleged by anyone that they have.
So the solution to just let banks do whatever they want? A bank that is prevented from taking excessively risky action becomes insolvent, and your answer is to allow them to take even more risk? The Fed has been signaling for a year that rates are going to keep rising, it is eminently predicable what that means to professionals in the industry. Hubris at its best. Have you even heard of Glass–Steagall, or have a basic understanding of the last 100 years of economic theory?
> I hope people only get put in prison for breaking actual laws. And if the SVB execs broke laws then yes, they should go to prison. But I haven't heard it alleged by anyone that they have.
A laughably naïve thing to say in more than a few ways.
If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.
But this is their house catching on fire and all of their money just vanishing through no fault of their own.
It doesn’t distinguish between good startups and dumb ones, real businesses and nonsense — how could you root for this beyond pettiness?
You can choose to hold money in multiple banks. There are services that will happily set up laddered CDs across many institutions for you to diversify exposure and maximize insurance.
To use your tortured analogy: if my neighbor's house burned down, and he didn't buy fire insurance... I would be sad, but I don't exactly think it's my problem (or the government's) to pay to make him whole.
> If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.
I know we all like to believe we control our own destiny. Tiny little inconsequential-seeming choices wobble startups between success and failure every single day. Having a good product is such a tiny piece of it all.
Edit: And the people saying the “CFO” should have done better…at that point, one person is probably still founder, CTO, CHRO, CFO, snack buyer, and janitor combined (been there).
You just ask your bank to place the money using IntraFi. You can get a little more interest by locking up some of the money on a 9-12mo ladder, which makes sense if you have 18 mos of runway.
If you have an unanticipated expense or opportunity and need to spend some early, it's a small penalty to get the money out-- usually 6 months of interest, so as long as the probability of having to spend a bunch more is low you're ahead.
If it's so easy to get it right, why so many companies got it wrong?
Could it be because startups don't usually start by hiring people with a lot of expertise in finance?
Venture capitalists provide banking advice to the companies they fund, and this isn't on the list of things most mention. Now we're reminded why it's a best practice.
I think it's hubris to think that you can have tens of millions of dollars and can ignore vital things with it (account security, systemic risk from counterparties, etc).
If you still think the risk is too high, pay the premium for CDARs or insurance.
It is not about removing all risks. It is about making it acceptable. If your primary bank fails, you can manage it like any other strategic business risk.
It would be great if VCs would provide simple cash management services to their fledgling investments, though.
It was dirt simple to just use IntraFi. You just say you want it, and sign the form. If you want a little more interest income, you do some cash flow planning and check the box for laddering.
Thus, an easy prudent solution is to have a second bank, likely a "too big to fail bank", with emergency funds to cover the day-to-day until you can roll over to money locked into time-based investments or the system has worked its course on the first bank.
In my personal finances, I have done that in housing deals going above the insured limit by immediately moving money into government-based financial instruments. Then as appropriate, I transferred that to my preferred investments and risk profile. If I, as a layman doing a once-in-a-decade housing deal, can manage it, then a startup can.
Its small, but also easy to at least partially mitigate.
Your first priority should be to assure the safety of wherever you put it. Whether that is diversification to the point where all the funds are insured or inquiry into the finances of the institution where you plan on putting all the eggs, or a mixture of lesser diversification and diligence, it should be done.
> my job is to spend that money in the next 18-24 months, not save it.
Well, your first job is to make sure that money is still there when you need to spend it, otherwise, you aren’t going to be spending it.
And it's OK even to incur a little bit of risk/uncertainty when doing so.
But this is different from bailing out all the depositors 100%.
The prudent thing to do right now is to pull your money out of your regional bank and move it to a GSIB and call it a day. This endangers regional banks and concentrates deposits into the large players.
If you use multiple banks, you have a higher risk of experiencing a bank failure, but it has less of a consequence on your operations, liquidity, and viability if it should happen.
So if you use IntraFi to place across 10 banks, and you have $10M, maybe you lose $300k.
It is a risk... but there's plenty of ways to lose a few percent of your working capital that are out of your control.
If you want to further reduce the risk, you could do additional things (e.g. buy some T-bills).
And there are many others in the same boat.
Maybe building an entire society on a drastically slanted gap between the wealthiest and the least wealthy is actually super unstable and prone to failure?
Making bad treasury management decisions is not "no fault of their own". If people want to make the case for a taxpayer bailout, they should start with something like, "Look, we know we fucked up by [not paying attention to something important|taking a risk we thought we could get away with|getting high on our own supply], but we're humbly asking for help."
If somebody's house catches fire because they cheaped out on the furnace and the didn't get homeowner's insurance, I'm going to feel bad for them. They have some Kubler-Ross time ahead for sure. But unless they're family, I'm not taking them in.
Inquiry into bank finances, diversification across banks, etc., are all available options. Maintaining large uninsured balances at a single bank without doing those things (or doing the first, but not taking appropriate actions thereafter) is a choice.
I am not opposed to reasonable government action to mitigate ripple-effect harms given the externalities, but the idea that the startups involved have no responsibility here is misguided.
If only we could centralize the investigation of bank finances and judgement of whether they are healthy enough to use into some sort of agency, staffed by domain experts, with the power to demand relevant documents and shut down unhealthy banks. Nah, that would never work, let's just make it the depositors' responsibility.
There was a time when tech did seem like a better business movement. Certainly better than the financial sectors, or heavy industry, or pharma. But then we let Thiel and Musk become the face, with Sachs and Calacsnais (or however you spell his name) become their media toadies, and we got fucked on the PR front.
We need to reject these guys a bit harder. Thiel's bank run was unnecessary. He should have picked up the phone and got the numbers from SVB instead of destroying an institution that's so helpful for small founders. Founders are now more dependent on Thiel and his ilk, and less independent.
But what do I know, I'm just a nobody in the space! Others who have more power, wealth, and wisdom will be able to handle this better. (And I should point out that I don't absolve SVB of their errors here either, it's just that I think their errors are more about miscommunication about a bad situation of their own doing that had a clear solution ).
The difference is that some of the libertarians are very noisy about their politics, whereas most people in tech don't make that much public noise about politics.
When you combine that dynamic with The NY Times deciding that it has to denigrate tech as an industry and take it down a few pegs (a literal mandate from their editors!), the jerks gain prominence, and tech looks the worse for it. And I would say that the PayPal mafia's sins aren't so much being libertarian as just being awful people that are super easy to hate. For example, musk calling that one guy a pedo, or taking pleasure in firing people.
This assholery has now become synonymous with tech, but it is completely counter to my experiences in tech, but maybe I've just been lucky.
> Silicon Valley law firms are now making lists of individuals who resigned from boards last week, because they didn’t want to get stuck with the liability, and VCs who catalyzed SVB’s bank run, so they can advise clients to never do business with those people/firms again
https://twitter.com/nicoleperlroth/status/163513968622949171...
Sacks is spelled with a CK.
The media is literally competitor in the attention economy, of course they will attack their biggest foes.
They're just trying to help you overcome your shackles of dependence on the sweet teat of Uncle Sam. Get some bootstraps and climb out of this hole on your own merit!
And most Americans have no conception of being able to have 250k in a checking account.
The vengeance attitude can be taken too far however but as depositors are ultimately made 80-100% whole seems a reasonable outcome.
Bottom line uninsured means uninsured. Read your contracts. Although shouldn’t be angry if they can be made whole.
Maybe they wasted investor money on salaries. Oh no! And certainly no reason to steal the money they didn't waste.
“Sustainable” businesses are not how American economy differentiates itself in the world, what you’re asking for is to crush the way of life yourself used to in America, to make your own life substantially worse.
It’s nonsensical, bitter, and petty. If that’s the argument you want to make, grow up.
It turns out, you can experience the downside of risk.
I remember when people used to go build something useful themselves instead of complaining about the success of others. Why don't we try to get back to that kind of culture?