Keep in mind that bank shareholders and senior management are going to get wiped out and fired.
Wasn’t one of executives working at Lehman Brothers or some such before? This is just failing upwards and doing same thing.
Will senior management have to return their 2021 performance bonuses? If not, successful sinning is just a matter of ensuring you cash out early.
A bank that can offer government-backed guarantee to depositors can offer a low interest rate while making big profits, and pay big dividends to their shareholders and executives, steal market share from their conservative competitors while making themselves more systemically essential in the process, and leave the public on the hook if they fail.
All you've described is a way to build a pitfall for naive investors so they can lose the first $20k they've ever saved.
Basically, yes, but without the hyperbole - an accountant yes, an economist no. This is not that hard. Treasury management is a specific function of any company.
I definitely don't blame these startups for not being financial experts, but VCs absolutely should have been coaching their client companies how to manage their cash safely.
1. https://www.intrafinetworkdeposits.com/
Addressing risk can be more efficient and we can make the system far more efficient by cutting out all of this overhead and red tape. As long as the banks are properly disincentivized in other ways from being over-leveraged and taking too much risk, this arrangement would just be much better overall.
If the gov removes the potential for risk, banks will be free to make wildly speculative loans/investments, which will of course fail in time, causing the gov to tighten regulations even more until all profit is driven out of the game. Thus the gov would be the sole regulator of loans centralizing banking.
Sure,maybe you get some banks that pop up and offer assured deposits by only floating operating costs from risk-free assets like treasuries, but then you're looking at pay-to-bank for economic times with unusually low treasury rates.
Maybe I'm being hyperbolic, but it seems like a potential evolution when moral hazard isn't controlled.
Right now every single business of even moderate size has to have dedicated treasurers distribute payroll and other cash across multiple banks to ensure they fall under the FDIC insurance level cutoff. This is a totally unnecessary waste of time and capital, and so reduces market efficiency. If companies could just deal with one bank and offload risk management to people who should be better informed about doing it properly, backstopped by the government who ensures they stick to sane rules, how is this not a net win?
I agree moral hazard is an issue, and much stricter penalties for malfeasance of over risk, both for banks and for credit rating agencies are needed IMO. Moral hazard is already an issue though as 2008 and SVB have shown.
Better yet would be spreading their deposits around, but if they don't want to do that, they should take the necessary steps to evaluate the risk appropriately.
[0] https://mobile.twitter.com/POTUS/status/1635080376572956672
So, clawing back every penny they took for doing sound risk management while not actually doing it is totally fair.
Yeah I kinda doubt they'll get what's coming to them unfortunately. Insider trading's only a crime when it's poor people doing it.
Not a great look, but quite from what you’re insinuating.
I think you’re right about the proportional sizes, but it looks like the other officers only held a few thousand shares each, so routine grant/sale transactions were a much larger share of their individual holdings.
[0] https://www.nasdaq.com/market-activity/stocks/sivb/insider-a...
And do you have any examples of poor people being charged with insider trading? Every case I have seen is rich people trading.
There is. That’s what derivative actions are - a mechanism for shareholders to sure the board and management for breaching their fiduciary duties. My guess is that one will be filled Monday.
Maybe it's just hearsay but it feels like every person on wallstreetbets who got lucky with options then got the IRS knocking on their door accusing them of everything in the book. They've said it themselves that with the cost cutting in last decades they don't have the resources to build cases against large players anymore. They go after people they can reliably force to pay up without having to fight them too much. Al Capone would've gotten off scot free in today's world, just like most of congress does despite singlehandedly outperforming the best index funds out there.
As someone who is naturally risk averse, I feel like a sucker. I was having a conversation in a separate thread where someone remarked "How can you expect startup companies to spread their deposits across multiple banks?" Besides the fact that there are tons of account structures specifically set up to do that, as an individual, I know what these insurance limits are and have moved assets around accordingly (for me, FDIC limits weren't relevant but SIPC limits were).
How much time I wasted. I should have just gone with a powerful enough institution that I knew would get bailed out if they ever failed. I certainly won't waste my time doing this again, which is probably not the follow-on effect that the feds want.
250k is not that much money. What a weird statement.
Benefits also cost $500-2500/mo (if you cover 100% employee and 70% dependents).
Not complaining but just saying there are costs that are not always apparent to employees.
Separately, it’s weird that a joint account is insured to 500K but a business account stays at 250K. It actually does weirdly favor wealthy individuals vs. working capital accounts for businesses that might represent many employees.
For businesses, it is a trickier proposition but there are reasons that companies roll cash into assets and operate largely from credit.
Are there people in this asset class who aren't getting financial advice? Yes. But it's not like ma and pa kettle are getting wrung out by the savings and loan here.
I prefer to minimize regulators' control over decisions.
Perhaps you have noticed that regulators are at bottom politicians?
Did you also consider that the political incentive for a regulator are at odds with the ones running the bussiness. (mainly, not getting people killed).
What meaningful distinction are you drawing here? It's not practical to opt out of banking, and FDIC has no real competition (the NCUA offers exactly the same terms, and in the credit union thread fans were at pains to emphasise how equivalent to the FDIC it is). Not all taxes are collected by governments from individuals.
I haven't looked into the details for how this will be paid, but that would be my initial guess.
Also it's not like once you have 250k in the bank, you're suddenly a finance wizz, omniscient of all the tricks and tips with regard to treasury management. Even as you get into the low millions of net worth, it's not like you suddenly became a HBS graduate. A lot of regular hard working people end up hitting those limits and wouldn't reasonably be expected to learn about treasury-foo. A lot of young or small businesses are in the same lot. Being somewhat wealthy doesn't turn you into a fine financier. And even if you think those folks should hire advisors, it's not like they can afford to hire the right ones with this relatively small amount of wealth.
I think resentment of having gone through the pain of spreading your cash, in vein, isn't a good reason to screw up hundreds of thousands of salaried employees, and a bunch of regional banks.
For a country that seems hellbent on abandoning individuals of lesser means to the vagaries of fate, to frequently swoop in to save those already of better standing when misfortune strikes seems pretty hypocritical.
Sickness is still the most frequent cause of bankruptcy in our country. What social programs we have prickle with difficulties in gaining or maintaining access, seemingly designed to make life harder for those already forced through misfortune to require them.
Half our political establishment regularly suggests the destruction of even these, intending to leave individuals with nowhere to turn at all.
Vs say, 1k in savings or 10k in savings, somebody with >250k in savings certainly can pay some form of fiduciary
So you want government to provide complete health insurance, after all. we want people to spend their time doing usefull stuff not studying the very complex intersection of all known diseases and medical beurocracy?
Yes, obviously. That we have the bulk of our population in precarious wage slavery under threat of medical bankruptcy at best, and a slow painful agonizing death of preventable causes at worse, is a crime against humanity given this is the richest country in human history.
Will I have to pay more if I'm obese? Can I get cut off the system for not taking a vaccine?
I'm hesitant to make the government a partner in my personal choices regarding diet, recreational fun like hang gliding, lifestyle choices, etc.
Yes. This would be the single biggest boon to small business the US had ever enacted.
How is it silly? From the perspective of the FDIC, if you have two seperate accounts (at 2 seperate banks) that represents a drop in risk. It's unlikely 2 banks with fail and now FDIC only has to replenish 250K instead of 500k.
The cost to FDIC if an individual bank fails is the same in both the above scenarios, even though in the first businesses put a lot more effort into spreading out their funds. It looks less like it could have less risk to the FDIC, but really isn’t making any difference.
But one year CDs from many banks and T-bills.
Then, they did it. The bastards managed to somehow buy tens of billions of mortgage backed securities every month for years. They bailed out automakers and banks with backdoor 0% loans while claiming the "investments" were profitable for the average citizen. Zombie Fannie and Freddie are still out there gobbling up mortgages. It's insane.
None of this is surprising to people who know how bank money actually works. The US congress literally has unlimited nominal credit and practically unlimited useful credit, and it can grant same to any of its creatures.
The fiction has certain properties when it encounters the real world though, so there are sometimes downstream consequences, but none that could ever totally dissolve the fiction. Only enough people starting to disbelieve in the fiction itself could do that, and people mostly won't do that because money is too useful.
BTW, in my experience many many people are risk averse in specific things they see that others don’t. It’s super hard to be an expert on everything. Talk to someone that knows about construction and they’ll have similar laments about home maintenance. Is it bad to “bail out” people that have their homes washed away in a hurricane? I honestly don’t know. But what I do know is that I’m definitely not jealous of them for making a silly location choice and “not paying the price”. That experience is not fun. I promise this episode was fairly disruptive even with this outcome. It is much better to look on from the outside than wonder whether a bunch of people you don’t know will save you. You’ll feel really bad if the next one isn’t bailed out because something is different and it gets you because you stopped doing something that aligned with your values just because of this thing this time.
That's all that's really necessary in terms of handling moral hazard and public perception that this is yet another bailout. Let ppl see the CEO suffer and they will be fine with having taxes foot the bailout bill. It's sad but a spectacle is necessary here.
What of they killed the patient out of negligence, and they were drunk on the job?
These people can be high, drunk and negligent simultaneouslyHl, and they are still untouchable.
Civil forfeiture isn't a means to punish people for wrongdoing, and neither should we try to retroactively change the rules to try to punish people who you believe wronged you.
Could have fooled me.
Thing is, when you are the CEO and you make the big paycheck, being a target for the mob is part of the job. 1,000 years ago if the crops failed, and the peasants started going hungry, either the priest or the lord was blamed. They can't control the weather, but it was someone's responsibility to make sure there was enough food stored.
The common sentiment is that the people who caused the failure should not be allowed to keep the money they made driving the ship ashore. Nobody is forced to be a CEO with million-dollar comp. It isn't some travesty of justice when they are held accountable.
> medieval practice
Calm down, no one said we should hang, draw and quarter them, exile them, or do anything untoward. It's a capitalist system, and this is a capitalist penalty.
I'm saying we should not look to the distant past for guidance on how to handle situations like this.
The presumption of innocence applies here because we shouldn't punish individual bank employees unless we demonstrate to a jury of their peers that they broke a law that existed at the time they broke the law. The default should be they keep their bonus and if they broke the law, they pay a fine. Fortunately they are protected by the constitution, there is no possible way the government can take their money without a trial.
But again, what presumption of innocence? I'm saying that if you are a bank CEO and your bank fails, it doesn't actually matter whether a reasonable choice was made or not. Bank failures affect all Americans, so there should be a penalty for causing that disruption. Most people would call that fair.
I don’t think that would make sense for all software development but it certainly doesn’t seem unreasonable to think that, say, the FSD team at Tesla or the accounting team at a bank should be held to a higher level of expectations (and presumably pay) than the ad click optimization team at some retailer.
The only way people like that will learn is by sending them to prison. Their actions were so egregious, so completely in disregard for our financial system, that it's impossible to not have done any of that without intent. I'm sure if they turned over all electronic and paper documentation, there's gonna be a written strategy somewhere directing all this.
1. Trust that bank deposits won't disappear.
2. Trust that the financial system is fair.
A bailout sacrifices 2 for 1.
Letting SVB fail sacrifices 1 for 2.
My proposal is for a bailout, while doing the bare minimum necessary to prevent a backlash. Remember that the death penalty still gets the thumbs-up from voters in many places in America. It's foolish to think that the people who distrust Silicon Valley will be able to "move past this" in a mature, dispassionate way, given the namesake of the bank.
Yeah, let's punish the management like we did in 2008...
"SVB executive was Lehman Brothers CFO prior to 2008 collapse"
https://m.economictimes.com/news/international/business/svb-...
https://www.bloomberg.com/news/articles/2023-03-11/svb-ceo-b...
But not before we let him cash in $3.6M in stock. https://www.forbes.com/sites/brianbushard/2023/03/10/svb-fin...
Let this be a lesson to all of you other banks.
https://www.cnbc.com/2023/03/11/silicon-valley-bank-employee...
That misses the point that it is possible to both help everyone and punish the sinners.
Here is a game I recommend that you play: https://ncase.me/trust/
I think it gives a great explanation why what you are saying in good faith is not quite right. Not punishing the sinful both pushes the problem into the future and makes it bigger.
When we do the other thing and focus on protecting the innocent instead of punishing the guilty, things have worked out far better (Marshall Plan, Covid response, this).
The context is wildly different. For one, war is chosen by a countries aristocracy while the lower classes have little agency in the matter. It is not the lower classes of these countries that are guilty, but the upper class, and therefore plans to help the lower class victims despite their complicity are pragmatic and sound. It is not pragmatic to punish slaves that attacked you, you would seek to arm them so they are not enslaved...
Punishment must be proportional to a person's power.
The COVID response against China is still pending, both of our countries are gearing up for war. Rhetoric around Taiwan has increased, and there is active work to reduce dependency on China.
The Marshall plan had nuremburg trials.
If we ignore the fact that there may very well be some who are 'guilty' in the COVID saga, that certainly didn't have the same story as a bank that made poor bets, and the (relatively) wealthy depositors of said bank that made poor risk calculations and got burned by the black swan.
I would describe the covid response as anything but working out well.
For example it was good that we gave out PPP loans fairly literally even though it causes major fraud. If we had moved slower and endured that bad actors couldn't get away with abuse, the response would have been worse.
My point was addressing the incentive scheme for PPP: banks got paid a percentage of the origination amount so processed the largest loans first, and by the time they got to the smaller applications, they ran out of money. https://www.forbes.com/sites/jasonbfreeman/2020/04/23/ppp-la...
The 5th Ammendment doesn't say the government can provide just compensation to some people. It says they must provide just compensation to all that their seizure of private property directly impacts.
Fraud is of course another issue, but my main concern is the corrupt incentive structure and glaring 5A violation.
Yep, and that is exactly the point. They must not get to keep their gains and they must lose an additional amount proportional to their chance of success.
The expected value of corruption must be negative.
I'm conflicted about this. In the last seventy-two hours, I made a ridiculous amount of money standing still because risks that shouldn't have paid are being done so by people who shouldn't have to pay them. I personally benefit. But we've given tech companies a visible privilege American farms, factories and municipalities don't enjoy. T
And do the same thing again. Wasn't the CEO ex-Lehman?
"Greenspan - I was wrong about the economy. Sort of" - https://www.theguardian.com/business/2008/oct/24/economics-c...
Now expect a contagion effect next week, if SVB liabilities are shown worst than currently known, and made to bare on other banks capital requirements...
"US banks sitting on unrealized losses of $620 billion" - https://edition.cnn.com/2023/03/12/investing/stocks-week-ahe...
This is not some conspiratorial secret. Banks pay premiums to the FDIC for their insurance, and it's a requirement of all chartered banks. The FDIC has the right to backstop deposits in excess of the deposit limit by invoking a "systemic risk" clause (I'm not sure exactly which law this comes under, whether it's some of the original laws that created the FDIC, or more recent post-financial crisis updates). When the FDIC fund gets depleted, they have the right to invoke a special assessment against banks.
> Now expect a contagion effect it next week
The whole point of doing this is to prevent a contagion. The reason there was a bank run against SVB was a mix not just that their asset values had deteriorated (that was well known for some time), it's that their non-diversified deposit base of VC-funded start ups have gradually needed to up their withdrawals since early 2022. SVB would have survived if there wasn't a run on the bank, and the whole purpose of this action was to prevent further runs by saying that deposits will be protected.
Do they have special rules for when the FDIC decides to retroactively insure some bank's deposits for more than $250k per account holder? Because now everyone's insurance premiums will go up to cover this, won't they?
> Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
So even those that were not insured will now be retroactively insured, and the better-run banks will have to pay for it, won't they?
(5)Emergency special assessments
In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary—
(A)to provide sufficient assessment income to repay amounts borrowed from the Secretary of the Treasury under section 1824(a) of this title in accordance with the repayment schedule in effect under section 1824(c) of this title during the period with respect to which such assessment is imposed;
(B)to provide sufficient assessment income to repay obligations issued to and other amounts borrowed from insured depository institutions under section 1824(d) of this title; or
(C)for any other purpose that the Corporation may deem necessary.
https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rollin...
Suppose I'm a Utah bank that is mostly lending money to diverse local businesses and home owners, and mostly taking deposits from other businesses, some local and some not, and would-be future home owners. Last week I probably didn't care that SVB wasn't required to be as risk-averse as I was, if they failed what do I care?
Today, seeing this news, I care a great deal, and I don't want to see other banks allowed to take risks I wouldn't have been permitted unless they're paying a lot more than I am for the privilege, because when they fail - and they will fail - I don't want to pay for that.
At least treasuries and MBS are relatively liquid securities that can be quickly sold at prices that don't deviate much from their marks as long as you're marking to market.
Those loans to local businesses and home owners sound much, much scarier.
The fees are assessed quarterly. And they change. They go up and down depending on the fund’s needs, credit cycles, etc.
" I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... "
"Greenspan: I was wrong about the economy" - https://youtu.be/XQFq97ljy3k
That periodically the profits associated with that abstraction are distributed to you is a function of that, not a disproof of it.
yes, consumers pay all of the taxes and fees that are charged to companies but it does not change the supply/demand equation in the open market for the services the banks offer. the price elasticity of the things you mention is not affected by a new tax on banks
If it's not a loss to the tax payers, then it seems like good governance to me.
What would be expensive would be paying for everyone getting laid off after SVB depositors can't make payroll.
This is like saying you loaning me 50B for ten years is zero cost as long as you get it back at the end.
It ignores the fact that you have to come up with the money, and once you have it, you could put it somewhere with an actual return.
This is the exact reason SVB failed. Their 10 year investments were worth 70 cents on the dollar because there are better returns elsewhere.
https://twitter.com/torrenegra/status/1634573234187407369
Even their bad investment decisions wouldn't have killed them if there hadn't been a bank run.
Im pushing back on the specific idea that paying full price for an asset that is locked up for 10 years isn't a loss.
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
with this quote from the Treasury Dept statement?
> "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
As said above: would you prefer to see hundreds or thousands of small companies fail, their employees go on unemployment insurance, etc.?
Wouldn't SVB have been sold at auction by the FDIC if that were likely to happen?
I don't want to see startups fail or people lose their jobs, but this all feels like a cloaked way of passing the cost of the bailout onto the taxpayers (via raised FDIC fees that will trickle down).
The fungibility of money aside, my personal taxes will not pay for this.
Could you expand? My first thought was that the bank who is in verge of crisis could tip over with additional burden.
No, they haven’t. The systemic risk exception was used during the last financial crisis for some banks and not others, so using it now doesn’t raise the insurance limit, actually or “essentially”. There is (still) no guarantee that it will be used for any particular failure in the future, just like there wasn’t after the last financial crisis, and people have lost funds in excess of the $250K insurance limit since the last use of the systemic risk exception.
https://www.nytimes.com/1991/01/07/business/us-is-taking-ove...
And it sounds like they have the authority to just do this on a Sunday, so it doesn’t sound like any rules being changed.
If I was a banker with a marginal portfolio, I wouldn’t be encouraged by this. Depositors are making it out, but banks are being aggressively shuttered to make that happen.
That seems unjust and probably illegal. What makes you think Signature isn’t actually insolvent?
Why should bankruptcy protection be denied to any entity that would be unquestionably qualified if they simply took an additional legitimate action that would make their creditors worse off?
> We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority.
Two closures in three days is a sign that you have to take this very seriously.
> The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasurys, agency debt and mortgage-backed securities.
> “This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”
https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-st...
Not sure a new $25 billion facility matters when outflows can hit that much in a couple of hours.
The long-term bonds would have paid back enough money for SVB to pay back every depositor if there had not been a run that forced them to pay them all back at the same time. Knowing that everyone can get 12 months of runway will do much to allay fears and so reduce risk of further runs.
https://www.usbank.com/bank-accounts/savings-accounts/elite-...
Compare that to a money market fund from a stock broker at 4.5%:
https://www.schwab.com/money-market-funds
The question is, how quickly do simple folks figure out they're being slowly bled, and start moving their cash to some place where it's appreciated?
If 2008 did not do it, 2023 has institutionalized moral hazard in the financial system. Never, fear the Fed is here! We will absorb all!
The shareholders getting wiped out and bank management replaced seems like pretty strong incentive for the bank itself not to screw up.
It's certainly not clear to me why the depositors, as crappy a deal as they got, should be bailed out by unaffected banks that are financially healthy or, as is the case no matter what, the rest of the citizenry should pay.
But I think it's probably economically sound in the long-term as well. That is, asking every depositor with $250K+ to assess the financial health of each bank they use and maybe buy insurance is collectively more expensive than just having the FDIC implicitly insure all deposits.
That's different than asking if it's "fair". But I would wager it's probably more efficient.
Most of the arguments I've seen are effectively arguing that 250K is too low an amount. While that may be true, that was the well-established 'rule of the game'. The FDIC limit was no doubt chosen, as most insured amounts are, to cover the majority of damaged parties, for an acceptable cost.
This isn't grandma or Joe/Jane Public losing their life savings; the FDIC insurance easily covers the vast majority of individuals depositing cash. These are businesses that have, or should have, the financial wherewithal and resources to mitigate their risk beyond the FDIC baseline.
Perhaps I'm wrong but I suspect a much higher share of deposits are under $250K than the 3% at SVIB. The larger deposits are likely from companies doing a much better job of spreading counterparty risk around, ie traditionally managed companies.
The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?
As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
More recently, I was president of an HOA. Over a span of 5 years we built up a reserve account to just over $1M for a planned capital improvement. Every 250K we opened a new bank account. Had there been a delay in starting the project we would have opened a 5th.
So yeah, the Treasuer and staff of all of these companies should be taken to the woodshed and most likely fired for incompetency.
Wouldn't it have been more useful if that job simply didn't have to exist, and they could just deal with one bank, and then that extra capital could have gone to something more useful?
Change the game so the risk is being managed in a way that doesn't require every single company to wastefully play financial hopscotch so they can instead focus on doing what they do best.
The ability to feel superior to anyone who didn't do that busywork?
Because some have better books and management than others and will be underpriced because of reactionary selloffs like you describe?
Why would anyone invest in any business when the risk of bankruptcy exists (FDIC bank takeovers and their resolutions, with or without application of systemic risk exception, are in effect a specialized form of bankruptcy, with a different set of priorities for who gets a haircut, but equity holders are always low on the list for either these or conventional bankruptcies.)
List of investors here:
Signature was another bank whose business was primarily in a volatile and risky market:
"Signature is one of the main banks to the cryptocurrency industry, the biggest one next to Silvergate, which announced its impending liquidation last week. It had a market value of $4.4 billion as of Friday after a 40% sell-off this year..."
https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-s...
Haven’t depositors always been first on the list to get paid, even their uninsured deposits? I don’t know if charging a special assessment to member banks is standard operating procedure, but that doesn’t sound like government intervention. It just sounds like reasonable operation of the FDIC.
It’s a decision of how to apply existing policy to a specific situation, not a policy change. Existing policy is nonspecific enough that reasonable people could disagree on how best to apply it here without changing it.
> Haven’t depositors always been first on the list to get paid, even their uninsured deposits?
Yes.
> I don’t know if charging a special assessment to member banks is standard operating procedure
It isn’t routine, which is why it requires invoking the systemic risk exception.
> but that doesn’t sound like government intervention.
It’s a government decision to intervene in a particular way, so…
> It just sounds like reasonable operation of the FDIC.
It’s not just “reasonable operation of the FDIC”, since both Fed and Treasury actions are involved. And, even if it was, FDIC is a government corporation, so its actions are government intervention. Its reasonable operation is reasonable government intervention, but its still government intervention.
(And yes, it's taxing the depositors. Because even if it's "officially" a fee to the other banks, it will be trickled down to their customers through lower interest rates and higher fees rather than absorbed.)
If this was necessary to recover insured deposits, that would be reasonable. But instead, the people who made poor decisions aren't going to lose anything, because the extra money is coming out of the pockets of everybody else with money in banks.
And people wonder why turnout is low. There’s no way to vote for non captured politicians.
Wells Fargo/BoA are "too big to fail" institutions in the United States.
They got significant back hand, handshake deals, from Washington institutions to not only stay afloat, but for hundreds of little issues.
In essence, the FDIC is a well crafted "redistribution," of all the under the table benefits Wells/BoA get from lobbying the Feds, to the smaller banks.
The US has a deep interest in keeping its smaller banks alive.
I can say, in Australia, the small business lending market is hugely overvalued due to monopolist price gouging by a handful of large institutions.
In Canada, I'm told the situation is similar. Costs to small business are immensely higher than the United States.
Banks similar to Silicon Valley Bank are essential because they undercut BoA, and prevent the "Canada" situation.
Unfortunately, SVB blew its top off. But the system itself is good.
Yes, they were, that's why the systemic risk exception was invoked for them.
> but they didn't need TARP
They needed the systemic risk exception and their own specific, $20 billion capital injection and government loss protection bailout plan very similar to Citigroup's to be announced (the announcement itself stabilized things enough that they ended up not needing the bailout, which also happened with Wachovia’s before Citigroup.)
If it fails, you can restart and recreate a bank, but you, your partners and your friends keep all the profit and privileges that you collected before the failure.
All that at the expenses of the government.
Your main task is to not fail too early, so you can recoup your initial investment (and if it can last forever if you are lucky / well-managing the risk, then better for you!)
Better to just ban such executives from the banking industry and set up better monitoring of banks to catch those that are trying to pull a SVB.
That would not be what I would argue for, but at 10% haircut for all depositors would create a nice incentive for reverse KYC.
* I don't really know if we should blame them for that. Who could have expected interest rates to rise so sharply, much less anticipate all the consequences from it doing so?
You invest $1.
Other people deposit $50.
You take $51 to a Las Vegas roulette table and bet it all on black.
50-50 chance there's $102 afterwards and shareholders and employees get to share most of the $51 gain; 50-50 chance there's $0.
Taking outsized risks with other peoples' money is a great gig for both stockholders and executives. We normally prohibit financial services firm from engaging in this kind of behavior, because the economic incentives favor outsized risk.
Even if depositors lose 5%. 5% that they shouldn't have earned because of the ultra high-risk position taken, maybe it's from them it should be taken...
There are plenty of small banks that didn’t ignore when Powell/the Fed were repeatedly saying “inflation ain’t over, interest rate hikes are coming.” We talked about this in another thread. What SVB did wasn’t essential, smart, innovative, etc. There is a reason they are crumbling so catastrophically. And I’ll give you a hint: it wasn’t due to a bold vision or new ideas or being disruptive or whatever.
Simply put: SVB was reckless and went against known information.
>Unfortunately, SVB blew its top off. But the system itself is good.
Yes. Canadians who brag about how none of their banks had to be bailed out in the 2008 crisis are a) wrong (they received tens of billions from Ottawa, and US TARP money), and b) don't realize that the Big Five Canadian banks have far, far, far more market share than the US's Big Four. As you said, there is no equivalent of a Silicon Valley Bank in Canada. There are no regional banks whatsoever; no smaller player that may be more friendly to startups, or otherwise more flexible, than the Big Five.
Let me repeat: Canada lacks the equivalent of regional banks, and that's a problem for entrepreneurs looking for banking (let alone loans) for new ventures.
Canada also had its own duration mis-match crisis with Asset-Backed Commercial Paper where debtors expected to just roll over the paper every 30-45 days... until they couldn't and it froze up. Took a decade to unwind.
https://www.advisor.ca/news/industry-news/lesson-to-learn-fr...
> There are no regional banks whatsoever
Sure there are. Laurentian Bank is almost entirely based in Quebec. National Bank of Canada has almost all of its branches in Ontario, Quebec and NB.
Then there are the credit unions which are almost entirely provincial (with a riskier backstop than that of US credit unions).
Source: https://www.canada.ca/en/financial-consumer-agency/services/... (and the marketing campaigns of the credit unions)
That's inaccurate. They don't the market share small US banks do collectively, and none of them are particularly focussed on tech startup, but they do exist, alongside credit unions - https://en.wikipedia.org/wiki/List_of_banks_and_credit_union....
The ATB seems particularly of note - directly owned and backstopped by the Alberta Provincial government, has ~15% of banking in the province.
It seems the risk was not choosing a top 3 bank since no one can survive a Bank Run and the largest banks are too big to fail. Which is terrible for competition if everyone’s essentially forced to use a top 3 bank just to have confidence for your money in a US Bank to be safe.
But depositors trusting a highly rated bank with a 40-year history shouldn’t be a “big bet” or gamble. For the risks startups take, this is about the lowest of the bunch.
They couldn’t cover a third of the previous mandatory fractional reserve without realizing losses. That’s insane. Anyone banking with a bank that doesn’t do liquidity testing is bonkers imo.
No, people are just going to move to a top 3 bank that's too big to fail to hold their business and personal life savings.
https://www.mcmurrayhatchery.com/history.html
I was joking, but I didn't realize the tie between bank failures and one of the biggest names in poultry.
Every US person with more than $250k in the bank, perhaps. That is a tiny percentage.
What percentage of Americans have $250,000 in cash?
Is 250k the threshold where you need become a financial bank analyst and independently validate US Banks liquidity tolerance to withstand variable economic conditions? If that's the case everyone's just going to consolidate to using a top 3 bank when exceeding that limit.
As of today the rules were changed in the middle of the game and there is no limit. Must be great to have powerful friends.
If that's the case everyone's just going to consolidate to using a top 3 bank when exceeding that limit.
So what? How is this worse than the status quo?
Right, so you are saying every person or business that reaches that limit needs to become an independent financial analyst on a bank's liquidity.
> As of today the rules were changed in the middle of the game and there is no limit. Must be great to have powerful friends.
What a condescending toxic tone, you're blaming the people and business that maintain their savings in failed banks for their failure? and accusing them of being apart of some interconnected powerful network of friends that's somehow instructed the FDIC to step in to strengthen public confidence in the US banking system?
> So what? How is this worse than the status quo?
If you can't see the problem with all but the 3 top US banks failing and forming an impenetrable oligopoly free from competition, nothing else needs to be said.
Sure which is why they crashed 60% in 1 day and their entire 40 years existence wiped out within the week.
Isn't that the whole point of this decision -- giving depositors at non-top banks confidence in the system?
If the FDIC et al. had done the opposite here (let SVB depositors take losses) then the takeaway would have been "bank only with a top-3".
In fact, I'd say that CEOs would be heavily incentivized to follow this strategy. Their compensation is tied to stock. Stock price is tied to growth (not risk management). You have all the reason to pursue growth, show great performance, watch the stock go up and keep cashing out before the eventual collapse.
1) form a bank
2) make imprudent investments, and offer better terms than other banks
3) watch the deposits roll in
4) collect fat bonuses every year
5) fifteen years later, get taken over by the FDIC
6) no need to return bonuses
7) other banks want to hire executives from failed banks, go do it again somewhere else
> 7) other banks want to hire executives from failed banks, go do it again somewhere else
As a shareholder of another bank, why the hell would you want to hire someone who took stupid risks, and lost everything owned by their previous set of shareholders?
OK, so you can only rip everyone else off massively once.
ING, before they bailed on US retail operations, only offered adjustable rate mortgages. They were also the only financial institution I ever dealt with that required the use of separate credentials for external banking integration (e.g. tax prep, quicken, whatever shiny new app).
I remember reading about something called principal agent problem here in HN… I think almost ten years ago. It changed my life. I spend a lot of time thinking about it. Once you look it up, it is difficult to not see everything in life with this lens.
Basically, the shareholders are not in control. Management is. And the management class has a special interest to protect “their own”.
A summary of the problem:
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal"). The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".
From: https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...
See also: https://www.investopedia.com/terms/p/principal-agent-problem...
Guys, I’m starting to think the economy is sick…
You can apply the same thing to people management. Who cares if you're a shit manager, if you've managed 100 people that's still going to be looked upon more favourably than someone who's managed 20 people really well for a 100 person management position.
Applying it to execs is probably a simpler comparison. Shit exec means you were still an exec, so you can probably get hired somewhere else as an exec.
https://finance.yahoo.com/news/silicon-valley-bank-exec-lehm...
I think in the World War Z novel they hired the best administrator from the Apartheid era to enforce Zones of containment.
Selling your equity compensation for even bigger returns.
Compensation packages for CEOs are structured such that most of the money is at risk equity grants.
They’d be nuts to lose tens of millions of equity in exchange for their base + bonus.
Why not just be prudent and keep making money rather than gambling it all on red?
Which strategy has a higher expected value?
2) with part of the proceeds from #1 pay more interest than other banks
2b) optionally use part of the money from #1 to give free ski trips to “influencers” like VCs in a position to recommend banks
3) watch the deposits roll in
Even before this week I already knew I didn't understand how banks worked, or finance in general. Which is why I keep what little cash I have in an insured account.
Still my point stands, having depositors drown won’t stop others from pulling another SVB.
They suddenly needed cash in 2023, but the deposit train had run dry due to the general slowdown among their customer base, at which point they were forced into selling the assets they acquired in 2020-2021 and locking those losses.
Had they attracted enough new deposits, they could've let their long-dated portfolio run its course. Maybe even sell parts of it a few years from now if the rates went back to 0% territory, making those long-term bonds attractive again.
They weren't buying toxic assets or anything. Chase, BofA and Wells Fargo own long-term debt as well, just not to the extent SVB did.
They take your deposits, use a bit to pay other people's withdrawals, promise an unrealized gain to money held in your account that they might not be able to pay if everyone pulls out their cash at the same time...
Most banks make sound underlying investments, but even in SVB’s case there were investments, they were just bad.
If JPM and Citi et al receive a large special assessment as a result of this, where do you think the money comes from?
The last 3 years have proven that people who still want a shot at winning in the roulette of wealth , they'd have to move to a developing country.
The Western World obsession with prioritizing stability over everything else is just making sure that the rich will stay rich forever and every roulette spin which doesn't end up in double zero gets void in the name of stability.
Nobody will feel sorry for them, the rank has no meaning whatsoever when you are aboard a golden ship.
Everybody in the wooden and plastic fiber small boats around are cheering for the gold ship to go down with no particular attention given to the ranks.
It's the same sentiment that has people cheering for the electric and fracking revolution to make countries like Qatar, UAE, Saudi irrelevant and poor.
This was a very boring system. You deposited your money, the bank held your money, you payed X for the account. You got some interested during the time this system was alive, but is far less then with other banks.
But yes, I'll sign for a Full-reserve banking if I had a choice. I've already invested in my own company. I have no desire for a bank sending my money elsewhere. Especially since the interest rate they pay to a person is laughable.
Contemporary debates are over *who* gets free money from the government. I’m sure this is going to end well.
Jason Calacanis, specifically, was against help for anybody, especially banks (except his buddies's bank when it was their turn to be in trouble). If your position was that no one is to be helped out, asking then, for help when it's your turn is should cause some self-reflection, or as least a bit of cognitive dissonance. Whether he is capable of even that much remains to be seen.
"Quiet quitting" was concocted in a board room to get people to do their jobs and stop complaining. If you're an employer, you want a team of "quiet quitters" who will do their job and nothing else. It's infinitely easier to manage...
Like I said, it remains to be seen. The results of the loss of free extra labor (via quiet quitting), loss of employer power over wages (via a small replacement birth wage) and loss of profits (via less spending) take time to work their way through the system.
The ultimate goal in my opinion is to allow workers barely enough to make ends meet and for them to not have any lasting wealth. Once they reach retirement age they are someone else's problem then(probably just go off and die somewhere).
>"Quiet quitting" was concocted in a board room to get people to do their jobs and stop complaining.
Im really just using the definition to describe the behavior of workers no longer bothering to over work themselves.
>If you're an employer, you want a team of "quiet quitters" who will do their job and nothing else. It's infinitely easier to manage...
Many employers would disagree and say you are leaving extra value on the table.
There is no loss of power, there is no dynamic shift, there is no loss of profits whatsoever.
Many, many, many more employers would say that "quiet quitting" is great, like 100:1 outnumber those who are upset by it.
I think you got your definitions wrong. The definition im thinking of is skating by on the barest of minimums as to not arouse suspicion. Whether that is doing your job depends on who you ask.
>There is no loss of power, there is no dynamic shift, there is no loss of profits whatsoever.
You are essentially arguing that all the extra effort that employees expended to show that they are "go getters" amounted to no value creation at all. That is absurd just on the face of it.
But lets say you are totally right...then good, its one thing that employees and employers can agree on then. Employees do that absolute bare minimum to not arouse suspicion and employers pay them.
I'm looking forward to the multitude of innovations that employees will come up with to do the absolute bare minimum. Its like the area under a curve. We need to get closer and closer to the bottom of that curve. Thats where my favorite category of American innovation lies. Things such as the mouse jiggler are amateur hour.
We definitely have a situation now where employer pays as shit as possible and workers provides the shittiest effort as possible.
Flashpoint events that trigger social destabilizion imo. You never saw protests in the PRC until a bank screwed up, suddenly videos are coming out where a whole lot of citizens with good social credit scores are discovering the revolutionary spirit is absolutely dead in their country (watch the videos, their surprise at being hauled away by whiteshirts is genuine).
So next is maybe a major bank failure, or a disease killing a crop or other food that skyrockets prices, or a constitutional crisis following an executive branch election, or a cop killing just the wrong person in the wrong place at the wrong moment. Then, the protests, then, someone somewhere, probably the PRC, seeing an opportunity for severe destabilizion, funding and prodding extremists groups like the proud boys, then lots of blood, maybe a worker's revolution, maybe a reactionary power grab, idk, just bouncing ideas based on how it's gone before.
Fwiw I think direct action is still a valid option in the usa. The cops murdered a protestor at the cop city protests yes but the direct action is still getting tons of attention and by many measures, working. So, page out of extinction rebellion book, continue putting obstacles in front of the people destroying the environment or implementing fascism. At the very least it'll slow things down.
Hasn't the US experienced and weathered all these events?
>Fwiw I think direct action is still a valid option in the usa. The cops murdered a protestor at the cop city protests yes but the direct action is still getting tons of attention and by many measures, working.
You referring to George Floyd protests? Your english seems a bit off so its unclear. If thats the case, the police responded nationwide by refusing to do their jobs. Crime skyrocketed and now progressive DAs are being recalled, people moving to conservatives states and everybody is worse off than before. The many layers of bureaucracy allowed the police to be "reformed" and not actually have to change anything at the same time. Its a serious failure of the US system.
>So, page out of extinction rebellion book, continue putting obstacles in front of the people destroying the environment or implementing fascism. At the very least it'll slow things down.
Please help me understand what if any obstacles have been placed in front of them in recent years? I can't think of any at all. This next election is looking to be a free ride for Biden to be re-elected and at the very worse it'll be Trump again or Desantis. Trump was supposed to be the outsider candidate but it was business as usual(but worse because we also got his loud mouth and racism). (this is coming from a Bernie guy).
The Black Lives Matter protests weren't only in response to George Floyd's murder. I was referring to the murder of Manuel Esteban Paez Terán at the Stop Cop City protests https://en.wikipedia.org/wiki/Killing_of_Manuel_Esteban_Paez...
> Crime skyrocketed
This seems to be less to do with cops "refusing to do their jobs," and probably more to do with general economic unrest? I say this because when cops refuse to do their jobs, crime and violence usually go down. https://arstechnica.com/science/2017/09/nyc-cops-did-a-work-...
> Please help me understand what if any obstacles have been placed in front of them in recent years? I can't think of any at all.
Not many, that's my point, Americans should take a page from the book of Extinction Rebellion protestors in the UK and begin disrupting operations, or of German environmentalist protestors who actively disrupt for example coal mining operations. Or perhaps the French, experts in civil disobedience. I think the American zeitgeist is generally extremely conservative which is a large hindrance to mass movements, but also it lacks a strong leftist movement, any form of progressivism seems to have been effectively captured by liberals.
I highly doubt any further progress will be seen from attempting to elect progressive candidates in the USA - the bloodletting I've seen between Bernie Sanders supporters and the rest of the country is a great example of why, he's perhaps one of the most milquetoast socialists on earth and yet even the american "progressive" party viciously turned on him. Considering the captured election system, it seems like Americans that are interested in progress and leftist values should instead seek direct remedies.
I didn't say the bank was getting bailed out.
I was observing that ultrarich depositors with billion-dollar uninsured balances who would have lost money due to a reduction in the value of bonds are being made whole by socializing their losses.
While I, someone who is not ultrarich, who is just trying to save for my family, will have to eat 100% of the losses due to a reduction in the value of bonds, and have zero opportunity to have someone else cover my losses.
As for student debt relief, there's a huge difference between someone depositing money in a regulated major bank and expecting that Federal regulators were doing their job and that their money would be safe, vs. someone taking out a $100,000 loan for their own benefit and expecting the government to essentially pay it off for them.
But obviously there's a difference between fixing things so someone receiving what they signed up vs someone not paying what they signed up for
So the 0.2% scenario is turning out different.
Student loan forgiveness seems to be one way to do that. I don't know why they don't just nip at the bud of the problem and subsidize education from the get go though.
This is also why it is so nuts to suspend payments for three years “because Covid.” Anyone that suffered financially already had their loan payments adjusted down and if you didn’t suffer financially why can’t you pay your loans?
The fact that an 18 year old can get any amount of money, no questions asked, means that institutions have all the incentive to charge whatever they want - their customers will pay almost any price.
Biden’s forgiveness notably does not come with any such legal change that would plausibly make the problem better in the future. It’s purely a one time sop to constituents.
I've made a couple posts about this already but I don't see how people don't see the optics of the situation look incredibly bad. First off student debt is a special kind of debt, you can't bankrupt it and this has led to several adverse affects, namely skyhigh tuition prices and zero due diligence. You can't say in one breath that CEOs of tech businesses are completely helpless to audit whether their bank is trustworthy, and in another say 18 year olds should have understood the risk they were getting into.
To you it's "disingenuous" but to everyone else it just looks like the haves play by a different system; rig the system against the have-nots, and then tell the have-nots they should been "more responsible".
Regulators set a framework that an industry should follow. It is incumbent on industry players to act in good faith and not operate on edge case regulatory compliance. It is not on the regulators that an agent lobbying against the very regulations for stress testing their balance sheet then turns around and does something dumb. Analogously the USDA and FDA aren't not doing their job if a food or pharma manufacturer intentionally labels dog food for human consumption and ships it.
This type of accounting is criminal and needs investigation. So what if your cash isn't performing to make target yields. Its on you to responsibly manage it if that is your stated mandate. And fed rates didn't balloon overnight. J Powell forecasts weeks in advance.
This is not on the regulators. The bank should have operated with a better risk profile. And all these disruptive companies need better financial sense than to be storing their >250K assets in a savings and checking account. I don't know what that answer is I haven't had the privilege.
So what if Stripe recommends this bank to all their clients. Seems like their incentives need investigated. What did they have to gain by funneling a clientele to their bank.
This isn't on the Fed or Treasury or SEC. Though their response may create future problems arising from this assurance.
We weren’t getting any interest % on our deposit balance, the only reason we chose SVB was because it was recommended for Startups.
Sure it’s very easy to identify poor choices after the fact.
It seems to me, your financial advisor should've had a plan for rolling this cash through CDs or short term bonds and distributing it across multiple institution to decrease your exposure or at the very least increase your FDIC insurability.
But sure after knowing this event is possible and that effectively all small US Banks are at risk of a Bank run we'll be moving to a top 3 bank that's too big to fail, then go back to focusing all our efforts on improving our products as usual.
No accounting firm??
Who do we hire to plan and manage this process to ensure we have adequate cash flow? Why would any small or medium size business take on this overhead? When some other part of the financial system endangers whatever mechanism we were using here, will you be back asking why we didn't just keep money in a bank somewhere?
I'll be blunt: You're not that smart. You're not that experienced. You're not an expert on managing "FDIC risk" even if you read about it this weekend.
No. The point is that a bank is better than a safe but that diverse assets are better than a bank.
> You're not an expert on managing "FDIC risk" even if you read about it this weekend.
Exactly. And this is why, if you have a critical business dependency you should hire an expert and not ask my advice which the parent poster did.
Sorry, who has asked for your financial advice exactly?
> What financial advice was that? That SVB was a good bank for Startups to use? It was the recommended bank by our Merchant Provider Stripe.
> Sure it’s easy to identify poor choices after the fact.
My reply was purely in the context of that question. You yourself asked further advise here.
> Who do we hire to plan and manage this process to ensure we have adequate cash flow?
I did not, you had just assumed we followed some poor financial advice for having chosen SVB in the first place:
> I think you were following some very poor financial advice.
Which I asked you to clarify as we never sought any financial advice. SVB was chosen because it was recommended to use for Startups.
> You yourself asked further advise here. > Who do we hire to plan and manage this process to ensure we have adequate cash flow?
I never asked this, nor would I ever dutifully seek the financial advice from random internet commentators who's become experts at predicting bank failures after the fact.
> Which I asked you to clarify as we never sought any financial advice. SVB was chosen because it was recommended to use for Startups.
Right. And what I'm saying is not that the bad advice was using SVB. Of course you can't predict which bank is going to fail. That's kinda my whole point.
When I said I thought you got some poor financial advice, I was assuming you had a financial person who put your money in this vulnerable position. Which I guess wasn't the product of poor advice but of getting no advice at all.
Did you short SVB? You must have known it was coming right?
Just depositing all your money to one account seems like a neutral activity but it is not. It is in fact an implicit bet. It is a statement of faith in the institution who holds it, whether you realize it or not.
The average american now has to cover the loss, either through eventual taxes, or through passthrough costs from their bank (who will not give them a free meal or ski trip).
A disgraceful bailout, if entirely unsurprising.
Shades of "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".
Presumably there was a reason so many people choose them. They could have said "hey in order to make sure your money is safe we are actually going to offer a slate of services on par with our competitors" but instead they said "we are going to offer a slate of services equal or better than our competitors in every category"
That's exactly what Dodd-Frank did. The audit and stress testing requirements got rolled back in the Trump administration. "Planning" is not the problem here.
No offense, but I thought we all learned the principle underlying this in 2008.
What does this "special assessment on banks" mean in practice? Do they just go to all the bulge bracket banks and demand that they buy the outdated Treasuries at a loss? How does this work?
Presumably it would force them to lower it, which would be counter to the anti-inflationary moves of the Federal Reserve, but that might not matter given that this is a current issue. It's possible this might also affect banks willingness to raise rates in the future in response to Fed tightening if they thought there was a risk to the banking sector.
Given the size and how quickly the banks are failing I'd hazard a guess (this is not financial advice) that in order for the FDIC to maintain it's own portfolio it would have to raise rates enough to be noticeable to consumers, even given the number of FDIC accounts.
Can someone comment on if this is the case and how much this might affect forward guidance for banks and consumers?
That's why it's a bailout.
The word games being played around this are just embarrassing.
This is not correct. SVB, for example, owes depositors ~$150B but they also have assets of almost $150B. The hole that FDIC needs to fill in may be less than $10B; it may even be zero.
(But sure, there is a huge overlap between taxpaxers and banking clients/shareholders.)
The only outcome I'd like to see better are bonus clawbacks for the "removed" senior management.
These days, banks need to be competitive with Treasury rates to get large deposits from informed investors. Anyone with a brokerage account can get a 5% interest rate today on short-term Treasury securities (risk-free if held to maturity, and exempt from state/local income tax).
So if banks start lowering rates on deposits, they may have a shortage of money for lending.
Banks are too smart to make it that obvious, however. They'll wind those fees in silently.
They know (and it is obvious) that all deposits are going to be fine without any extra funds, wacko VC's and nutjob politicians are stoking the sort of flames that might cause a contagion so they are forced to make statements like this.
The fact that the statement is so milquetoast is certainly on them, but being uber-conservative in your promises is generally a failing/asset for bank regulators.
A tough spot would be an environment where they let the SVB situation drag out and didn't act on Signature until a run was in motion and had both to deal with at once.. then they would be fighting to restore confidence.
If you look at the numbers from 2007-08 and this stuff, plus the much tougher regulatory environment (despite SVB's ability to fall under a lot of thresholds) there just isn't the sort of systemic risk at play here that folks seem to be implying. Also this isn't a replay of the S&L Crisis of the 1980's because those lessons were actually learned but some institutions are still going to screw up because a rising interest rate environment is still challenging in the current regulatory regime.
No, its not.
The “rules” of the “game” authorize systemic risk exceptions, so applying them is not a change to the rules of the game. Moreover, civilization is one continuous game, changing the rules in the middle is the only way to ever change the rules.
That's literally how legal systems work.
My guess is that they’re not changing the rules, they’re utilizing them. Either that, or they have far too much executive power over banks. Which would be shocking.
She came into power and the first thing she did was suggest a global minimum tax rate, as if that would have fixed the accounting tricks that companies use to reduce the actual tax they pay.
Disconnecting the Russian central bank from swift and an oil and gas price cap have been immensely damaging for the western financial system and the international standing of the dollar(and the euro).
We now have countries increasingly integrating with alternative bank messaging systems and an accelerating of US reserve sell offs, along with what seems like the initial steps of the creation of something like an OPEC alternative for gas.
Not only that, it seems that because they never coordinated the sanctions with the banks it seems like only ~30 billion of the supposed 300 billion of frozen Russian assets can be accounted for, meaning they got to pull their money out and meanwhile the Russian on the other just from 150 billion in return.
Get this incompetent person out the door before she destroys more of the USs financial system.
“We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas.” - Milton Friedman
Although this problem was caused by bank malfeasance and yes this does imply de facto unlimited insurance, unlimited depositor insurance is kinda the whole point and is not itself a bad thing.
Yes, moral hazard is a huge consideration, but I don’t see depositor protection as encouraging future failures of this type, by encouraging bad risk taking by mgmt.
Rather, if banks bet their customers money unhedged on endless zero rate policy, as SVB did, there should be regulations that prevent it. Trace back to lobbying to exclude SVB from dodd frank regulations also at the heart of the crisis.
This is unlikely TBH. When a system this complex and a global clear visibility if offered to no one on the planet, foreseeing ALL risks isn't a possibility.
I think you misunderstand. Unlike bailout, FDIC insurance means that
1. Shareholders owners are wiped out,
2. Senior management is removed.
3. Unsecured debtholders *will not be protected*. They are made whole only when it's possible using banks assets.
No, there are systemic risk exceptions within the rules. If a bank is large enough, then the systemic risk to the economy as a whole is large enough to warrant this step. "Too big to fail" is typically a derisive comment, but it is not without practical reason. Governments are supposed to act in the best interest of the governed. I hope it is clear to all of us that avoiding the economic disruption of a cascade of bank failures is in our interest.
Smaller bank failures do not pose systemic risk and so they will not be backstopped in the same way. Might seem like unfair treatment, but practical concerns often outweigh the theoretical. By the way, SVB is still a failure and as a company is now gone. Some other entity will take over its assets, debts, and customer services. All senior management has been removed.
>I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
We did. That is why we have the FDIC, the Federal Reserve, and the Treasury department. They did their job and did it quickly and effectively. SVB did not get bailed out, the depositors did.
Very clearly there is a large chuck of this forum that doesn't understand that.
Those same people are going to lose their jobs and burn through all their savings and be unable to secure loans to buy houses.
Even if you bank at a supposed safe and secure credit union, a systemic crisis will affect them as well. You won't be able to get a loan. There goes your opportunity.
The whole financial and economic system is intertwined and you're part of it, if it blows up and crashes into the rocks, you're going down with the ship as well. Get over your Main Character Syndrome where you think you're going to be the one immune to the catastrophe.
We're fucked if those people win, and I'm seeing that sentiment come from liberals and conservatives alike.
All of these described above are "disrupting" the economy. And none of them is in our interest.
It's really quite concerning because some of these people have tremendous power. I suppose the only positive is that a number of titans of Silicon Valley are not savvy enough to challenge increasingly assertive governments.
Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
> > They did their job and did it quickly and effectively
Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up? Or a small family owned boat builder in Maine? Nowhere to be found. Their fault? Not being systemically important enough. Whatever the fuck that means.
I'm curious if you have a citation to support that the wealthy in the US are descendants of wealthy land owners from the times of the Crusades at a substantially greater rate than the general population.
> Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up?
How much of their going belly up was due to Fed policy? Particularly driving and holding interest rates to near zero through market actions then pushing interest rates to nearly 5%?
One of the major draws to the US has always been the opportunity to do a little crusading of ones own and find whatever opportunity your courage and lack of scruples allowed you to get away with.
I think something like this could make large banks more of an asset for the economy rather than a liability. I wouldn't want to just set a maximum size. If a bank wants to get huge and maintain conservative and safe asset/deposit ratios, good for them.
Any bank call pull in deposit and use them as capital. But being a customer also doesn't give one any particular upside - you just get interest on the money you deposit. And if you have a special bank with only large deposits and paying extra high interest, then regulators look at you and quite likely see something not to be protected in the same way.
The way you get risk is basically the way SVB did it. Share holders can lose at most their entire capital but they can get to play with all the money the depositors give them. If they bet on something that pays off big, they get that payoff minus the modest interest they pay depositors and if they lose, they lose at most their capital.
Come to think of it, that seems a bit like what SVB did. Buying long term bonds when interest rates were likely rise seems like a recipe for disaster - and in fact the logical outcome was this bankruptcy. But there was a chance that interest rates wouldn't have risen, at which point the shareholder get a big payoff, pocket it and go on to the next risky maneuver.
1. By next month banks and companies will realize there is no limit to the printer at all. After 2008, we've seen the banks and financial sector misbehave constantly, so expect massive deliberate tanking of entire sectors of the economy because why work when infinity bail money exists.
2. People in the country are already agitated by many social and economic grievances. The average American savings account balance is $4,500. This will one million percent cause a social backlash that will make the Trump movement seem like a child's party. Both the left and right radicals view silicon valley as the center of fascism/wokism, and the average person is barely scrapping by in a time of rampant grocery store inflation. Twitter/Reddit/Etc are full of people taking pictures of their grocery store carts and comparing costs.
Examples need to be made to restore faith in the system, Yellen and the Biden could have used this moment to restore faith by punishing the banking executives.
Political instability and extremism will now increase dramatically.
This has happened before in 2008. Secretary Yellen's announcement is important to secure depositor confidence, so the contagion doesn't spread to more banks. If depositors are confident that the government has their back, there's no reason to pull money out.
There is also no reason to put the money in.
You go through the trouble of protecting your money because you deem them scarce and irreplaceable.
If tomorrow a commercial bank insured with the FDIC starts offering a product promising 20% interest, then by all means people should get together and apply in mass, get a couple of big political donors on board and all of a sudden there is no downside.
If the wacky bank keeps its promise then it's a 20% gain, if not then the FDIC will have depositors backs anyway to the full amount
No, that's been the implicit rule since 2008 at least (arguably earlier). If anything, not supporting all depositors would have been changing the rules mid game and so would have lead to massive disruption.
The thing a lot of people aren't getting is that the rules of the game haven't been the law but what the Fed does for a while.
Certainly, the game as it's played favors the wealthy, yes. That should be changed. Knocking everything over by suddenly changing expectation wouldn't change things, just disrupt everything. But also, it wouldn't happen anyway 'cause the game is too important.
No, depositors have lost money in failures since 2008. Its true that, for a long time, the FDIC has tried to resolve failures in a way which protects as much of the uninsured deposits as possible, but it has very much not been a guarantee.
The systemic risk exception invoked here is an exception.
Yes but it's not a new exception.
The OP claims Yellen implicitly announced something new. She didn't. She's following the playbook from 2008+. The policy isn't new, it's not unexpected, it's kind of like ... a rule.
And whether a new rule is being created matters for moral hazard purposes and all.
Edit: My above quote could have been read as talking about all depositors in all banks but I meant all depositors in the SVB.
Yellen is not clueless. She knows exactly how this will play out but as it will be spread over time and to many counterparts she simply does not care.
This is terrible moral hazard. Uninsured depositors should have taken whatever haircut would result after the auction. That is, after all, the meaning of uninsured.
Feds are averting national crisis here.
Every time the FDIC has stepped in like this they have made all depositors whole. This is not new behavior.
This is a false assertion. Usually depositors end up losing some of their money above the insurance limits-- only not doing so if the amount of remaining assets proves sufficient to pay the liabilities.
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. Paul Getty
(Or as I heard it more aptly paraphrased, "if you owe the bank a thousand dollars, the bank owns you. If you owe the bank a billion dollars, you own the bank.")
It was at $50B for a reason since 2008. But Trump administration lifted to $250B in 2018.
yup. it doesn't matter how big you fuck up if you are too big a risk to US economy. the US govrt (American tax payers) will bail you out.
The only people being bailed out are the depositors, who were not being irresponsibly risky.
Rules exist to serve a purpose. If one risks fucking up the economy with the only goal that the rules are preserved - it could end up with pitchforks.
Part of the rules are that the regulators are supposed to shut down a bank before the run happens. They're not supposed to let the run happen and let the poor saps that were too slow moving their money bear the brunt of the losses.
This is like a hotfix.
I don't think that the pile of money is unlimited - all bets are off if something happens to a big bank.
Or they stop raising interest rates, and then inflation goes up. Don't know how the banks will cope (or anyone else for that matter...)
I guess the banks know that, so they may be afraid to take up new risks in the near future.
Might as well go crypto. The old system is so clearly busted. Anything but this shell game really. It's just waiting to blow up spectacularly one last time as all these greedy bastards will bet everyone's money on some absolute crap again.
I think everyone knew that already. Since 2008 at least.
It's very possible that if this is not done, the only banks left at the end of the week will be the "too big to fail" ones. A domino effect is very hard to prevent when it's based entirely on consumer confidence and those consumers can very easily create a bank run on literally anything if they freak out.
Even if you want certain people to get hurt by this (and there is definitely a baying mob that seems to want to cause as much suffering as possible because they just don't like certain classes of people), keep in mind that this could cause a 2008-style recession that hurts everyone.
Who do you think gets hurt more by an economic downturn? The billionaires who lose millions and end up still being rich, or the working people who lose their jobs and can't afford housing? This isn't a theoretical question, we know the answer because it happened before.
Eventually I suppose they'll be right, but primarily as a result of one of those broken clock coincidences ...
People are not rational. Homo economicus is a myth.
That is incorrect, spite is seeking the deliberate harm of another. It’s possible for spite to include hurting yourself to inflict it, but that’s not in any way necessary.
Is everyone getting hurt ideal? No. But that’s a different question than is it justice.
IMO this is what happened during 2008. The government tried to minimize harm at the expense of justice, and people are angry because they don’t realize how bad it could have been.
That's called "capitalism". Socialism has nothing to do with it.
Please try not to muddle basic terminology like this. It makes discourse harder for everyone.
Please stop trying to redefine basic terminology to suit your agenda.
https://www.merriam-webster.com/dictionary/crony%20capitalis...
I argue that usage of the term "crony capitalism" is itself a form of capitalist ideology.
Yet a Marxist site is used as an unbiased source. Oh, the irony.
You're welcome to present a capitalist site as a source for the definition you prefer, and I'd be happy to discuss that.
Just don't use a dictionary, please! It's the wrong tool for the job here, regardless of political leanings.
The socio-economic system where social relations are based on commodities for exchange, in particular private ownership of the means of production and on the exploitation of wage labour.
Wage labour is the labour process in capitalist society: the owners of the means of production (the bourgeoisie) buy the labour power of those who do not own the means of production (the proletariat), and use it to increase the value of their property (capital). In pre-capitalist societies, the labour of the producers was rendered to the ruling class by traditional obligations or sheer force, rather than as a “free” act of purchase and sale as in capitalist society.
Value is increased through the appropriation of surplus value from wage labour. In societies which produce beyond the necessary level of subsistence, there is a social surplus, i.e. people produce more than they need for immediate reproduction. In capitalism, surplus value is appropriated by the capitalist class by extending the working day beyond necessary labour time. That extra labour is used by the capitalist for profit; used in whatever ways they choose.
The main classes under capitalism are the proletariat (the sellers of labour power) and the bourgeoisie (the buyers of labour power). The value of every product is divided between wages and profit, and there is an irreconcilable class struggle over the division of this product.
There is no singular definition of capitalism, but many others would differ on the distinction you've drawn from earlier posts. E.g., a system based on the reinvestment of excess profits does not necessarily equate to crony-capitalism. It seems your issue is with the person using the word "socialism" to describe a social ill of crony capitalism. But there is a distinction there that is being muddled in the conversation.
I think you're confusing "free market" USAmerican right-Libertarian ideology with capitalism itself.
Capitalism, simply put, is defined as private ownership over the means of production, and the people who have that ownership are called the capitalist class. None of that precludes any sort of collusion.
Where does capitalism define "non cronyism" as a central tenet? Can you point to a working example of "non-crony" capitalism?
>By that same logic, tyrannical despots could be argued as a stated goal of socialism.
A central tenet of socialism is that is rejects despotism and tyranny. Supporters of socialism explicitly reject tyrannical behavior and seek to root it out if it appears.
On the other hand, capitalists cheer every time they wield state power to enrich themselves and excuse it as "just business".
It’s no different than saying “dictatorial socialism”. The fact that a rather simple distinction has to be explained multiple times by multiple people becomes a chore and a Sisyphean task when it is clear someone doesn’t want to acknowledge the difference.
It's possible to be a rational maximiser of something other than profit.
You are glad that rich execs play Heads they win and Tails they dont lose game at the expense of the taxpayer?
Heads I win, Tails I dont lose.
You also ignored that govt/Fed keeps printing more money, so the taxpayer ultimately loses with inflation.
The government's intervention creates moral hazard: those that played with fire got burnt, and those who didn't didn't, but those who didn't get burnt were positioning themselves to take advantage of the opportunities that the crispy bodies would have generated.
But the government swooped in and saved the crispies, without penalty to them, at the cost of those who had proper risk-adjusted positioning.
We see this time and time again. The government is changing the rules after the game is over to change the losers to winners. It's nonsense.
The banks left standing will be made to cover the deposits, insured or not, of other banks. It is rather remarkable and I'm not entirely certain it'll work - at what point the special assessment could be unsustainable. Presumably this special assessment isn't instant, and FDIC could just use accounting to make it politically and legally valid to consider it as a non-public and industry financed private bailout.
shrug will it work? I don't know. It really better.
The need to be able to field questions like these is why I feel we need open-source economic simultion packages. Does anyone think that people in the individual Fed reserve banks are running anything other than flat spreadsheets to model the financial system? Theyneed to develop economic modeling scripts (at minimum!) a field which is in its infancy. The datascience & modeling capability in HN would eclipse the forecasting power of an econometrics-focused Fed statistical modeling group.
I briefly collaborated with a talented individual behind the Threadneedle economic simulation package. I'd like to see a python library devoted to economic modeling w/ classes for central banks, investent & retail banks, applied into umpteen think tanks' different competing models.
Who had the former CFO of Lehman Brothers just before it collapsed on their executive team? These people will continue to fail upwards with taxpayer support as they always do.
See you in ten years when he's involved in the next one.
USA doesn't have laws like this, do you?
* As the gp said, it's done. The guarantee isn't new, it's how thing are done now. The Fed is not changing things by doing this, the Fed is doing things as they are expected to be done. Anything else would be changing things, anything else would panic people. Is the Fed "scrappy"? IDK, the "scrappy" efforts to stop crises began with the "plunge prevention team" in the 1990s and have continued more systematically since then, if you want to call that scrappy.
* As to whether there are black marks on people - only the companies who can whether to hire these people later can decide that. Financial companies hire people who've done time for financial fraud so it's questionable what sort of "black marks" the Fed could give if it wanted to (People mention the Lehman guy but was Lehman really worse than the others in 2008 or just a scapegoat - like fricken Martha Stewart. Was that guy involved in excess or just a random manager? I recall he was now managing a stock subsidiary that's being spun-off whole. But still).
I don't get it. Doesn't the unlimited FDIC insurance encourage mega-banks? If funds were only insured up to 250k, wouldn't that just mean we would have to spread money across multiple banks. And sure some banks would be wiped out but new better banks would take their place. It's not a closed system
Banks used to fail and be smaller failures. Now we removed almost all failures except when we have a failure its huge:
Total number of bank failures: 512
2023 1
2022 0
2021 0
2020 4
2019 4
2018 0
2017 8
2016 5
2015 8
2014 18
2013 24
2012 51
2011 92
2010 157
2009 140
I put the majority of my cash in one of the smaller banks. The news that has transpired in the past few days had me mulling moving those funds to a larger bank, likely Chase (one of the too big to fail ones).
Even with the FDIC guarantees, I was not at all confident that :
1. they actually had the funds to cover _many_ bank runs; and
2. it won’t take weeks if not months for me to recover my funds, if my bank fails.
It’s entirely possibly that these lines of thoughts will motivate many more people to consider this exact move, putting even more stress in the system.
So far this year we are looking a lot closer to 2009 than 2020[0].
[0] https://static01.nyt.com/images/2023/03/10/business/bank-fai...
Edit: wrong image linked
It's like forest fires, we shouldn't build fragility into the system by removing all risk and then rely on regulations to mitigate it. Hasn't worked in the past and will lead to more consolidation and bigger fires in the future. Remember in 08 the answer was to combine a bunch of banks and since then we've had no new banks created (besides Ally which was a spin off of an auto workers pension fund if i remember)
https://en.m.wikipedia.org/wiki/List_of_largest_U.S._bank_fa...
https://old.reddit.com/r/dataisbeautiful/comments/11p3555/oc...
QE3 QE4, increase M1 even more! 𝅘𝅥𝅯 »
We are at ~1.3 bank failures per month in 2023 which is much closer to 2020’s 0.3/month than 2009’s 11.7 banks failing per month.
Your comment takes the annual frequency and divides it by 12 to get an average monthly frequency, adding nothing to the argument of the grandparent comment.
Maximum assets under control don’t correlate with actual losses especially when people pulled money out before the collapse. It’s a completely meaningless number.
I also think it's a good point that a dollar is not necessarily equal to another dollar in this context. But the same can be said for individual banks as well.
I suspect that Signature Bank's failure is tied to their crypto activity. But the sight of 2 banks failing while there was an ongoing run on at least one more bank does seem like the kind of thing that could start a panic.
Bank Runs! What's Going On? – Patrick Boyle :
> In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history.
> Also Sunday, another beleaguered bank, First Republic Bank, announced that it had bolstered its financial health by gaining access to funding from the Fed and JPMorgan Chase.
https://apnews.com/article/silicon-valley-bank-bailout-yelle...
The role of the government in letting this happen has been under-covered so far. Weren’t they supposed to be overseeing things, stress-testing banks, etc? Regulators either were not looking, or were looking but did not notice. Regardless, there is not much sense to the argument that the government is “stepping in” tonight, because it was always involved.
Most of the big guys work like this. At a certain wallet size you get a free personal advisor who will help manage your wealth.
They take 1% of the money they manage. And then they invest it in their own funds, taking more fees there. They are not free.
You can’t seriously tell me that the CFO who is responsible for corporate finance at these SVB customers didn’t realize a business checking or savings account is not fully guaranteed? It’s in every single bank brochure and statement. If that’s that case, they need to suffer the consequences of poor contingency planning.
Additionally many startups had covenants in their financing agreements with investors that required keeping funds in SVB so they didn't have a choice.
Moreover, both startups and VCs are literally the groups that celebrate risk taking and disruption. This is it, this is the flip side of risk, the definition of risk is that you might loose. But somehow, when they loose, due to risk taking, then suddenly they want extra bail outs and help.
I'm not sure how 100% accurate that list is considering that it only lists SVB for 2023, but not Signature bank, NY that failed on the same day[1].
Not typical consumers, right? Typical bank consumers have < $250k in their account, and thus there's no reason for them to cause a run.
Plus, even if the "typical" consumers don't freak out, businesses might. There are a lot of businesses with accounts over the FDIC limit. Only about 60% of bank deposits in the US are insured.
If the US government is unable to cover those claims then you have much bigger problems to worry about.
I doubt those VTI transactions are each of a single share, which is the only way the 3.67M number you cite would match VTI's trading history.
But nobody's mind was ever changed about Bitcoin on an HN comment thread, so let's just leave it at that.
Later the small customer may move that BTC to self-custody, which could be an on-chain transaction or LN or other side chain with more transaction capacity.
It'll look not very much unlike Canadian domestic banking which has the "big 5" of banks: TD, CIBC, RBC, BMO, Scotiabank.
But instead, with Wells Fargo, Citibank, BOA, etc.
And everything else is really quite tiny in comparison.
Also if this option was available, why did they just bring it up now?
This is exactly the way I’d expect a good government to respond: protect the people who could not have known better and fuck the rest.
If this wasn't done... nobody in the world is going to trust their bank within a few days (possibly faster than that thanks to twitter, et al), which would trigger Global Depression II
If someone in 1930 overheard a time traveler referring to World War 2.... the shock would have been overwhelming.
In the same way, seeing the start of World Depression II isn't something I could bear.
It must be true that bank deposits are safe.
I don’t know if I would call those events “pedestrian”.
You believe invocation of the systemic risk exception is the norm?
If you ran a bank that required insurance on all deposits over the $250k FDIC coverage, and then offered 3rd-party insurance as a convenience for those who wanted it... your bank would be much less likely to suffer a blow up due to a bank run and therefore that insurance should be relatively cheap.
Furthermore, people should prefer to bank someplace where all of the depositors are covered. Why is this not commonplace? Simply because the additional fee discourages it?
I think if Yellen announced this as a requirement it would remove that incentive to treat FDIC like free unlimited insurance.
You actually answer this question in the second half, because banks have been treating the government as free unlimited insurance.
Source:
https://www.occ.treas.gov/topics/supervision-and-examination...
There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd.
Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders.
even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%!
This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment.
You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse.
It's just a matter of time before they blow it beyond repair.
All owners of the bank will end up with nothing, I think that's a good enough deterrence against bad things.
No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
Edit: Also, the CEO sold stock not even two weeks in advance https://www.bloomberg.com/news/articles/2023-03-10/svb-chief...
These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading.
Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.
Canceling a 10b5-1 is not in and of itself a violation, correct, but it can kill your affirmative defense as it jeopardizes the good faith element.
However, they would have had to have entered into the 10b5-1 prior to them coming into material nonpublic information in the first place for it to have been valid at all. My point is they made the decision to sell before they knew what was happening and filed a compliant trading plan.
Sounds fair, but lucky.
They have orders of magnitude more money than most people, and will get away with no liability.
Is there a more clear cut case of insider trading? SEC should already been working on that now.
Anyhow, you're arguing that they SHOULD end up with nothing, that is an entirely different subject of its own. Because you're talking about punishment, while I'm talking about deterrence.
Punishment must be enacted from outside after the fact, while deterrence can be innate before it happens. These senior management could have years of cushy job and more equity, and now they have to rely on savings and have the SEC up their ass. It's clear which is more preferable.
Genuine question, is there any evidence that these trades were out of the norm, rather than a regular portfolio rebalancing that’s common with any employee who receives part of their comp in RSUs?
Nah. They should liquidate the owner's private property as well to cover uninsured depositor losses. Better than making them whole by printing money and having everyone else pay for it indirectly through inflation.
Minewhile these people out of their privilege as bankers got to play with much bigger leverage, while paying zero interest rates to their counterparty which turned out to be fully paid for by the government in the end.
100% investment loss in this case is hardly enough, with the leverage levels banks can access they can literally collect pennies in front of a train and have positive expectation values for shareholders, while investing in negative expectation value investments.
And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows. They paid their customers nothing for it.
VC investment strategy for VC bank. They took the zero or hero attitude until the end. Again, we're taking about people with already VC mentality of "worst case 100% loss, best case 1000%".
No wonder that once VCs recognized their own shadow they fled so fast.
And now they are pretending as if it's the fate of the banking system on the line.
VC bank, managed like VC venture for VC firms. They deserve to lose VC money.
Their loans are probably also worthless than they claim, but they managed to successfully swindle the Fed in the most VC way ever with the shortest deadline. I'm betting FDIC is going to pay twice as much as expected in the end.
> worst case 100% loss, best case 1000%
See I don't understand how you can have 1000% return by buying treasuries, at any time. It was a stupid decision in hind sight, but the best case is order of magnitudes below 1000% return.
And you've put these two things right next to each other, what am I missing?
by buying with leverage? What percentage returns do you think would maintain their business?
They didn't went for the 1000%, they went for the 5-10% extra and ended up losing everything.
Had they used T-Bills or even straight up depositing it against the Federal Reserve for NO return, they would remain liquid and could now reinvest into higher yield bonds as the rates have risen. Instead they now hold 1.5% 10 year HTM bonds that are now valued at 70% original today because the prevailing rate is 4.5%.
> They would be perfectly safe have they dumped their deposits into T-Bills.
How is this different than what you described? If the rate increases beyond the coupon of a 10 year treasury, its value drops. Are you referring to extremely short term treasuries?
T-Bill: 52 weeks or less duration
T-Note: 2-10 year duration
T-Bond: > 10 year duration
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?
That's not a given since it may just reduce profits. Banking is a very competitive environment.
So the options are:
1. Banks eat the cost.
2. Banks take on more risk to cover the cost (putting the whole system at more risk).
3. Banks increase customer fees, interest rates, etc...
I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented.
Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers.
If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money.
Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
Would you notice a 0.05% increase in fees?
Sounds like word games played by people in charge to have tax payer bailouts using two layers of obfuscation.
This is hurtful in more ways than one. Banks routinely charge all kinds of fees from account maintenance to whatever Wells Fargo did for years.
Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Either what you say is true and the retail customers are insignificant, and banks must offer no fee accounts. If not, they can't block federal reserve from creating default USD accounts for everyone.
Or they are an important part of the bank's marketing strategy or whatever. In this case, banks must lose the ability to gamble customer funds.
Which one is it?
Actually the FED is opposed to this themselves. A company called the narrow bank was going to try this. The FED refused them a banking license, all the way to court.
The FED wants deposits reinvested into the economy.
> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee.
> Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.
It feels like they were offloading their cost to a service that the government maybe offers at a loss.
Hence I believe the Fed was against this to keep the economy running by 'keeping money rolling'.
This proposal for narrow banking seems to employ the government as this vault, sort of like treasury bonds that can be freely withdrawn, which seems a more significant difference.
* I am not denying that this is what the feds claimed and/or believed
Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
It's more the state government budget for about 1/3 of the states in the union
I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
But the end result is the same: a tax on everyone to bail out Peter Thiel and friends.
That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business).
The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers.
More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
Would you notice a 5 basis point change in your savings account?
How many grains of sand do you need to stack before it becomes a pile?
As you say, the what really matters is (perceived) elasticity. If a company thought they could increase profit by increasing prices then they'd just do it. Conversely if they get fined or regulated or whatever but, as expected, it doesn't affect their elasticity curve then they'll leave prices where they are. If they were acting rationally it was already at the ideal point.
To me it felt like the market collectively decided "this is a good time to squeeze our costumer and have them blame somebody else"
Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors.
Basically that’s the foundation of civilization.
Let's deposit at the bank of USA and cut out the middle man.
> Basically that’s the foundation of civilization
I think many of us would disagree.
>Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
You are missing something crucial here - treasury bonds are a loan to the government - this is all by design.
Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
Does it? Or is this just how the system is currently designed?
50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.
The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.
>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.
You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.
The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.
But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.
I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.
Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation at the actual present value of that capital at that time).
Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.
But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.
That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.
My open question is whether the current system is the only way, yet alone the best way, to practically achieve this. goal?
I do not trust the Fed, but I Sure as shit do not trust the US Congress.
Supposedly the debt ceiling prevents runaway spending. That already doesn't work because money is loaned into existence in ever-increasing amounts.
The Treasury makes coins.
Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury
The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill
First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.
It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)
As to why do banks need tax money for bailouts?
The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.
But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.
It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.
It does in the sense that the US Government will default on its financial obligations if banks don’t use deposits to buy government bonds.
Other institutions that have LPs should lend to businesses, students and home owners.
Anyway, how are you expecting to transact digitally with your paper notes?
War bonds were bought by people directly. I see no reason why we can't have the same today. God knows the US needs a WWII sized investment in repairing infrastructure.
Per the US government, the median US household has $1000/month they could invest after all ordinary expenses.
What do they claim the median household income at?
The war cost a little over $300 billion. $50 billion of that was through individual purchases of War Bonds, the rest came from banks and taxes.
Bankers and merchants have always funded the United States. A representation of Robert Morris, the "financier of the American Revolution" is painted in The Apotheosis of Washington, the fresco decorating the ceiling of the rotunda in the Capitol building where he is shown receiving a bag of gold from the god Mercury. Soldiers and supplies were paid for with "morris notes" which was a proto-currency of the US that was backed by Morris' personal fortune.
https://allthingsliberty.com/2019/03/how-robert-morriss-magi...
Just about 30 years later, banker Stephen Girard almost single-handedly funded the War of 1812.
Homes should be investments in the same way that a factory or warehouse is an investment. You buy instead of renting in order to fix the cost of doing business over time, not to speculate on potential future values.
And yes, that means if you picked “10y treasuries at 1.56% interest rate” back in 2021, then 80% of your deposit would now be gone. You should have picked “3m treasuries at 0.1% interest rate”.
This whole idea that a bank deposit is some magical asset that you can never lose anything on (other than through inflation) is a leaky abstraction. Like with all leaky abstractions the happy path is great, but when it starts leaking it can get real bad.
I was biased to assume insolvency rather than illiquidity.
Wait, I have a novel idea...
HOW ABOUT THE FEDERAL GOVERNMENT STOPS BORROWING (and spending) SO MUCH DAMN MONEY!!!!
I know, crazy idea that the government should (outside extreme conditions) have a balanced budget and not run deficits in perpetuity
Why not just give every SSN/TIN a Fed account and be done with it.
No liquidity/solvency/counterparty risk. Ever.
Neobanks would be a UI on top your FedAccount. Perhaps they provide some customer service like onboarding/statements/etc.
Investment banks would be wholly different entities. Let them find business, create loans, whatever. But give them absolutely zero government backstops.
So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.
This is literally the purpose of holding deposits for banks.
The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else.
It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government.
They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk.
All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk.
The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash.
If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money.
It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.
Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.
Yeah, all corporate customers that have seen an FDIC charge on their statement, based on Q-end balances will have a "special" laugh at this. It's going to be passed through and not be bourn by the surviving banks - that benefit from this 'bailout' of their customers....
Shouldn’t it be? The government is in the best position to regulate and manage the risk of these institutions. We cannot expect average depositors to be financial analysts with the capacity to assess financial institutions.
The criteria isn't threatening a "wider disruption to the economy", it's threatening the quality of life of a certain class of people. When unions threaten a wider disruption to the economy for maintaining their quality of life, they'll do their damnedest to not give in. They'll pass laws outlawing strikes. Or send in "law-enforcement". As the saying goes, laws are for the poor.
The amount of uninsured deposits was $150 B
The value of all the stock is 4% of the amount of uninsured deposits
Second, just so we’re clear is your point that the holders of that $6B-$15B of useless paper won’t care because it’s less than $150B? At the end of the day, you don’t care what percent of the bag you’re holding, just that you’re holding it.
IE the equity isn't enough to leverage political capital. The deposits are.
No, they’re not. But until just now depositors in any other bank assumed the risk for any deposit in excess of $250K… and if these depositors weren’t morally different than the depositors that would absolutely have lost their wealth in excess of $250K when their chosen bank did a stupid thing, then they’d have paid the piper just like you and I would have.
These special depositors are getting special treatment and aren’t suffering what countless non-special depositors have suffered… the rules are changing because of who took the risk, that’s the very definition of moral hazard at work.
Everyone seems to be operating under the idea that while their liquidity came into question the underlying assets were and are strong-- if that were true they would have found a private sector solution early in the weekend. Waiting until 6pm on Sunday and a second regional bank collapsing to announce "oops, all bailouts!" seems like an open admission we're in the early stages of another banking crises.
Problem is they're just not even a good investment compared to brand new fed bonds / bills of short / long (might have that backwards) due to the now MUCH HIGHER interest rates. They locked in at historically low rates, and had a bank run on their free reserves.
I see some correlation between SV remote working and COVID, but don't understand how mortgage backed securities play into this. Are you suggesting higher inflation on the way, lower property values, higher rates, and that it was intentional?
One does not follow the other. The triggering problem here were unmatched maturities of assets and liabilities, i.e. liquidity crunch. They have created that liquidity by selling some assets at a loss and tried to recoup that loss from investors.
But that was not the problem. The problem was now-imminent bank run, potentially requiring up to ${total-deposits } liquidity injections and unclear future then. Once VCs told their portfolio companies to pull out svb was effectively toast.
Once the situation evolved from stage 2 to stage 3, the liquidity hole expanded from ${gap-in-maturities} to roughly ${total-deposits} and that is only to contain immediate issue, fixing books would have possibly required additional capital.
You are probably right, a bigger bank with liquidity could have saved SVB at stage 2. However, the situation evolved from stage 2 to stage 3 too quick for any meaningful deal to take place while still in stage 2.
If every depositor walks in first thing Monday morning and withdraws their bad bet in their (apparently single) chosen bank’s management, the customers of all other banks are now on the hook for 145B… which ultimately means everyone on the planet can expect to pay more for their haircuts.
tl;dr - GP doesn’t have a clue what they are saying.
Let’s just sit back and see how this all plays out.
As I see it, market cap/valuation _should_ resemble the price you'd need to pay to buy a company, but it often is not. E.g. a company has marketcap of 10B, but has 30B in liquid cash on hand. It's clear it cannot be bought for 10B. Or the other way around, the company has 30B in liabilities -- the company should pay you 20B to be bought.
[1] https://www.investopedia.com/terms/e/enterprisevalue.asp
So it’s a fairly new bank, by the standard or banks, and the point remains, why did they choose to risk keeping money in excess of the $250K insurance backstop in one bank with no real track record?
Until this event the whole idea of the FDIC insurance fund was to ensure that people (not corporations) with relatively small nest eggs wouldn’t lose the whole thing and therefore starve if their bank made bad bets… once your nest egg grew beyond the backstop it was your right (and privilege) to assume the risk of losing it, if you wanted to.
Now because VCs and CEOs were essentially asleep at the wheels of companies that, for the part that have gotten this absurdly quick action from the government, consider $250K to be a rounding error, the rules have changed. That’s the special class… the kind of people who somehow think 40 years is a substantial track record for a business that’s big enough to underpin an economy.
Nope.
"The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system."
1) repayment of the insured amounts
2) liquidation of assets
3) repayment of the rest (likely with a haircut).
4) (optionally) a legislative reform (if the current system seems not adequate anymore)
But somehow the same doesn't hold true for companies.
It is ridiculous that the supposedly smartest groups whose literally did this to themselves gets bailed out.
I'm just a little smol bean startup with a 9 figure valuation not a finance expert, how could I have any idea about financial markets or risk?
Someone wants to have it both ways - they are sophisticated investors and entreneurs when it suits them. Leaders of our time, telling the rest of us how to live.
Other times, they can't be expected to have basic financial literacy or consult a financial adviusor accessible to a regullar joe
"People with in excess of $250k cash" is most assuredly a "certain class of society". Or, maybe a few classes - rich individuals AND small companies. In either case, both groups should be better diversified OR have insurance against banking losses. The FDIC limit isn't unpublished - it's well known among people with even moderate amounts of cash.
If there are assets, they can be disposed of, and the depositors with over $250k can receive dividends. The fact that the FDIC is confident that the deposits will be available says to me they were able to successfully sell enough assets to ensure liquidity for whoever took over the deposits.
This isn't a "government two-off to make ALL depositors whole". This is how these bank failures happen.
SVB was publicly traded, and it’s not being bailed out.
Sincerely,
A PG&E ratepayer
Certainly open to being corrected if that's wrong. But as far as I know it's a bit premature to talk about this being a "tax on depositors at other banks". It seems like these actions ensuring stability in the banking system may be beneficial to everyone.
If it turned out that all SVB assets were worthless and a HUGE special assessment would need to be levied to cover deposits, I would agree that this could be a moral hazard. But right now I think it just looks like prudent management.
Get real. The issue has never been that SVB's assets were completely worthless, it's that they're not going to cover all of the deposits over the FDIC limits. Ten year bonds were a bad idea and nobody wants them given the current interest rate trajectory. If SVB's assets could've been sold for their full cost they would've been. An assessment will happen, it's just a question of how large it will be.
Per Robert Armstrong of FT: https://www.ft.com/content/9ee5edda-a038-4992-863f-242bd69c8...
https://archive.is/OQdR7/43e461dad99a58217efdfde3878ee6b56cc...
It looks as though SVB may be "only $5 billion" short on its uninsured deposits, with $22 billion in other creditors
In the US it's illegal to do anything that would be "bad" for shareholders. It's quite literally the law that CEOs must return a profit for shareholders (or attempt to). The FDIC however has no such requirements, so while the bank itself can't wipe out shareholders, the FDIC can do it without care.
Publicly traded companies will ALWAYS put shareholders above anyone else. It's the primary reason I'm very much against banks being publicly held. Just as I feel it's immoral for healthcare both insurance, pharma, and hospitals to be publicly traded entities.
Why? No one thinks the FDIC is gonna close their bank until the FDIC padlocks your front door with you inside. This literally surprised almost everyone.
I agree though that it sounds like a reasonable solution, at least superficially.
Wiping out the shareholders at least is something I agree with. They need to eat risk.
I also think that deposits have carved out a space of its own in the mind of the public. You can't think of it as a risk investment like any other debt because people just don't treat it that way, they think of it as a safe place to store their money for convenient access for things like payroll. If you haircut them, everyone will have to re-evaluate where to keep their deposits and chaos ensues.
The big question then is how this levy on the rest of the banking system will work. That may turn out to be a clever solution or a carpet to brush future problems under. We'll see when there's more details.
But the question still remains, why didn't someone think of this earlier?
I guess this is kind of facile, but isn't it because the bank wasn't insolvent yet?
Interestingly, it sounds like systemically important banks may be required to do "resolution planning" for insolvency. If I'm understanding correctly, that sounds similar to what you're talking about.
SVB seems to have successfully lobbied for raising some of the thresholds for increased oversight from $50bn to $250bn. I don't know the specifics of exactly what was involved at this threshold, but it does seem clear that was a mistake.
Scroll down to screenshot of tiny text to find the "one trick" to explain it all. SVB poorly managed their balance and had weak regulations for which they lobbied (oh, the lulz). Nothing more. FDIC wind-down or maybe sale. Plus, tighten up that rule. End of story. Maybe a few billion of special assessment (_in total_) on all other banks -- this is how deposit insurance works _in one form or another_ in all advanced economies.
Why is this darn story getting so much attention? Dunno. Slow news cycle?
I'll read Alphaville next
Because if you tell someone "hey, we're gonna wipe your shit out" they're going to try to rescue as much money as they can.
> The big question then is how this levy on the rest of the banking system will work.
https://www.fdic.gov/news/financial-institution-letters/2009... Here's how it worked in 2009.
> why didn't someone think of this earlier
Like in 2009, the last time they did it?
That chaos is normal functioning of the market.
Nobody has a right to safe placement of large sums of capital.
It is not the government's job to protect your market winni g from the market moving against you.
You're not being totally honest here. If there isn't enough capital to satisfy deposits, the FDIC facilitates an auction of assets owned by the bank. This occurred Sunday night. Not every asset owned by the bank is in the toilet, and ALL the value built up in any asset is given to depositors, not shareholders.
If there is a shortfall between the assets owned by the bank, yes, there may be a special assessment on FDIC members. Special assessments have happened before, and they'll happen again. In 2009 it was 5 basis points, or a whopping 0.05% of deposits after a huge, sprawling economic meltdown.
The alternative to pollyannaism is not cynicism but actual critical thought.
The alternative to cynicism is not pollyannaism but actual critical thought.
I was leaving it in the subtext, but in case it wasn’t clear: I don’t think the “point” made reflected anything resembling analysis, and therefore deserved no engagement.
Like the jerks who chose to work for a company that picked a specific SaaS payroll provider. Or those entitled Etsy sellers that expected to get paid. The absolute nerve.
Technically, your "jerks" don't lose capital (wealth) while the people with deposits in those banks do.
Yes, losing a job is a bad thing but a job is a mere right to a transaction (we exchange labor for money in the future) and not lost capital.
And you are correct! Silicon Valley Bank was the first bank this year for whom the Fed is paying for uninsured deposits. The second bank is Signature Bank of New York, which regulators shut down one day later, on Friday March 10th. They are being protected as well. https://www.nytimes.com/2023/03/12/business/signature-bank-c...
The startups did not had all of their money in this particular bank randomly. It was by design.
It was a sad attempt at preventing a 5th Ammendment violation, and it was done so poorly that it didn't solve the issue. The 5th was still violated.
Can you give an example of such a company? I can’t think of a way in which an otherwise healthy (long term viable) company could suddenly be unable to make payroll in such a way that assistance would not be available (e.g. inexpensive bridge loan), or the company should not have bought relevant insurance.
Literally the only thing I can think of is if smaller banks failed and companies were stuck with 250k + haircuts and didn’t get this same deal. So did that actually happen?
For the rest of it, they might take a 20% haircut at most. Even if they had no revenue, and that was say 10 months runway, then it's down to 8 months. It's not like people aren't going to get paid, there's plenty of notice there.
I'm not sure I follow. A US 60k/Y job means the company has to pay 5k p/m (to employee and taxman). So a company-depositor getting 250k would be enough to serve 50 employees. "A few times over" would only be true for less than 25 employees. If we go Silicon-Valley level, where salaries seem to be twice as high (or more), those numbers would halve again. They seem very small numbers, most SMEs would not fit them.
In the USA 78% of businesses have fewer than 10 employees. 89% percent have fewer than 20. The typical SMB has only a couple of employees.
When you include sole proprietors (like the typical etsy store) "the share of U.S. businesses with fewer than 20 workers increases to 98.0% and the share with fewer than 10 employees registers 96.0%".
The customers of SVB were quickly growing business in an industry where you can quickly obtain immensely high profit margins. A 20% cut is not the end of it.
I believe the big impact of this announcement is not the money itself, in fact it was the lowering in value of government bonds that caused the bankruptcy in the first place, so the govnernment effectively made money from the 10-year bonds deal they struck with SVB. Maybe in the end it might still be a profit for taxpayers/USD users overall. But this announcement still implies something for banks: they can do the dumbest decisions (like this failure for risk management), and the government will bail them out.
Avoids the moral hazard created by propping up SVB while still keeping workers paid. But I bet that would be showcased by the upper class as a "handout".
(And for the nth time, SVB isn’t being propped up. The owners are losing their whole stake.)
But you are somehow convinced that this fund [1] created in 1 day by the Fed to solve "temporary liquidity issues" with vague promises of "loans against securities" and "assessment charged on the banks" will be entirely free of fraud or double-dipping?
Everything involving money has the potential for fraud and double-dipping, and the banking sector has a ton of it. We can figure it out and prosecute people afterwards (or not, it's not like senior management at SVB is going to be prosecuted).
> (And for the nth time, SVB isn’t being propped up. The owners are losing their whole stake.)
Oh sure, three Federal departments make a joint statement on the weekend and create a new liquidity fund every time a company goes bankrupt. Nothing to see here!
----------------------------------------
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
Government official picking losers and winners. Winners will mostly be those who supported government officials party.
Either using money from tax payers. Or creating new money out of thin air. Leading to yet more punishing inflation.
Money provided to individuals is highly trackable; ask anyone with student loans. And this would give the former SVB's employees something to do past the current 45-day window. More employment for the win!
Don't get me wrong, it would suck. But there is a proven way to fix misallocation of capital via the market.
No, it's so that payroll continues...
It’s not to protect the existing depositors of SVB - but to shore up the stability of the entire banking sector.
It’s important to remember that SVB lobbied hard to gain an exemption from banking stress test regulations. Their “inherently low risk” business clearly wasn’t, and they failed to defend against the inevitability that was the fed going up from the anomalously low rates of the 2010s.
What is the bad behaviour of the depositors? Trusting that their deposits were safe in a bank? This isn’t bad behaviour, the government wants people to think that bank deposits are safe. Safety of bank deposits is really important to the economy.
Yes, it is exactly this bad behavior. The gov has only guaranteed safety up to $250k. Any entity exceeding this limit does so at their own risk. By depositing far above the insured limit, you are allowing that bank to transact with your money. The banks loans it out. So by definition those consumers thay ignored the limits incentivized the bad behavior.
Had this bank started losing customers because they faced insolvency risks, they may have changed their behavior. The market provides a feedback loop.
Actually I think you'll find out if you look at the bank failure list that most deposits are paid out in full even if above the insured limit.
Socialism doesn't mean "when the government does stuff"
Lots of people are starving and homeless for as trivial a "decision" as that.
I'd much rather give everybody food and a home, including the Etsy seller, instead of: giving the bankers a ski jolly, people still starving and homeless, less this Etsy seller. Why can't we do that?
Some of those entitled Etsy sellers voted against everybody having food and a home; My heart breaks, but not as much for those who have and hate. Maybe now that they are hungry and homeless too they will be a little more sympathetic. Surely that would be best.
>Lots of people are starving and homeless for as trivial a "decision" as that.
Most homeless are either severely mentally ill, drug addicted, usually both.
>I'd much rather give everybody food and a home, including the Etsy seller, instead of: giving the bankers a ski jolly, people still starving and homeless, less this Etsy seller. Why can't we do that?
You could be running a soup kitchen homeless shelter right now instead of posting on HN. It's always someone elses fault!
>Some of those entitled Etsy sellers voted against everybody having food and a home;
Great analysis and input - if we would all vote x, everybody would have food and home, problem sovled!
I live in a socialist European country, but I'm originally from the USA, and I wish it was better there.
When does it stop?
First Republic Bank isn't looking too good.
You are correct.
What banker got a “ski jolly” here? The bankers in this case are in exactly the same position they would have been in if the bank were allowed to fail without supporting depositors.
Well, this guy for one:
https://www.forbes.com/sites/brianbushard/2023/03/10/svb-fin...
How is selling stock tantamount to a government bailout?
Oh no! Not uncomfortable conversations! Anything but that! Maybe it will be followed up with a strongly worded letter with an implied threat of a performative vote by Congress. How will they cope?! They might even have to show up at a gasp House committee hearing! shudders
Wake me when someone is convicted.
By that you're talking about the average citizen right? Suff like railroad strikes would dramatically affect the average citizen.
They're the officials appointed to be the experts at these things by the people elected to run the government, what better mechanism is there for making this kind of decision?
If lending to banks is too risky for most, then perhaps most should not be allowed to lend to banks. Are bank deposits really the right way to fund banks if they come with these systemic risks or should it all be bonds etc. (and then also have very narrow limits for regulated investors)? Maybe a lot more should be direct lending and not bank lending?
The depositors aren't lending to banks. They're putting money in a bank. What's the alternative? Have them stash all their money under a pillow?
This wasn't (to my knowledge) an investment bank like Goldman Sachs etc, where people put in money to get upside. It was a bank like any person uses to store their money, cause it has to be stored somewhere.
> [A]gain the government seems to be needed to prevent a systemic banking crisis. What ever rules where enacted etc. had maybe very little effect if a small bank (and the 16th largest bank isn't a mega-bank) can bring down the system without a government backstop.
I mean, the whole original point of the FDIC deposit insurance was because bank runs happen. We prefer people put their money in a bank, it's better for many reasons, but as long as we allow fractional reserve banking (which we should, IMO,) people will always feel at risk, which either makes them not use banks (bad,) or cause a bank run if they do use a bank (also bad.)
The whole point of deposit insurance is to put a government backstop to all potential bank runs by promising people they will always be able to get their money, which causes the system to keep working.
The only difference here is that it's for money corporations put in a bank instead of people (and of course that the amounts are much bigger.) But the same logic applies - we want companies to put money in a bank, and we don't want companies afraid that their bank will fail and they'll suddenly be out all their cash. That would cause worse effects in the long run.
And I'll emphasize, the people getting "bailed out" are the depositors, not the shareholders. They're the people who just trusted the bank to be a normal bank, and that weren't in a position to affect what the bank does. "Punishing" them doesn't help resolve any systemic risk, because they couldn't have acted differently! (Except for spread money across multiple banks, which is against the point because we want people to trust banks and not have to worry about where to store their money, cause that comes at the cost of doing more important things!)
For me, what isn't clear anymore is, if we really prefer deposits to be in banks or rather in some other more narrow "thing". If people just want to store liquidity very safely, then maybe there is any offering missing in the market (and in some countries things like that existed prior to GFC but got shut down afterwards. In Germany, anyone could directly deposit daily liquidity with the Bundesbank for while, for example).
Yes, it would take some cheap funding away from banks, but if that were to be long-term bad or not we don't know as different funding equilibria with different market participants might not result in worse lending situations for the economy as a whole.
Btw., of course, depositors can affect what a bank does: if they don't give their deposits or pull them away if they deem the business to risky it does matter. At what point is lending then risky? If a corporation buys a bank bond with excess liquidity not needed daily - should they be made whole, too?
Or did I miss your sarcasm?
I don’t think the majority of legislators truly align the best interests of individual citizens to their decisions and actions.
The previous commenters clearly makes a reference to the rail worker's strike from a few months ago, which was the first strike in decades powerful enough to threaten a "wider disruption to the economy", and the fact that government quickly passed special laws to declare that strike illegal.
So, to spell it out for other living under a rock:
- Labor fighting for better work conditions threaten a wider disruption to the economy, government fights and bends rules against labor. - Capital losing bets threaten a wider disruption to the economy, government fights and bends rules in favor of capital.
In support of this view, they could have easily extended FDIC on a dynamic metric, for example 20k for each employee. If you are 5 employee VC fund sitting on 0.5 billion in cash, no bailout for you from taxpayer money (because let's be real, FDIC is all taxpayer money, it's irrelevant if that tax is collected by the govt directly or indirectly via mandatory banking fees).
An alternative path was to provide zero interest loans against your SVB holdings, with the expectation that you are on the hook for the shortfall that would be yielded by the liquidation. These loans would be guaranteed by stock/assets. If SVB is well capitalized as the Fed claims it is, this shortfall should be relatively small.
Implementing any such "dynamic metric" would have taken time, which would mean they would not have been able to restore all deposits by Monday, which means a significant risk of contagion.
With FDIC take over the bank asset, this is not paying from taxpayer's money ..
welcome to democracy bro. also, economies are literally black magic. if anyone claims to know how to make them work right, they are either lying or a witch.
Edit: oh shit I'm getting downvoted to hell. Was it my suggestion that economists are full of shit, or denigrating witches? Because I have nothing against witches.
You are almost certainly misreading that signal. Probably since Friday they have assessed that the depositors can be covered once the assets can be liquidated, and that they may even be able to make money doing it.
If they can’t, they can assess the rest of the losses to the system, and those losses once divided up are likely to be inconsequential, even if not considered in relation to a broader run on the banking system.
The same assets that are yielding <4% interest against a market rate of 5%+ or 7%+ or whatever it is? Seems like it's going to take a long while before those papers are trading at or above cost when you account for inflationary devaluation and their yield horizon.
There is certainly a cost here. The insolvency of the paper is the entire reason the bank failed in the first place.
I'm pretty sure that rules is already established. What makes you say they just changed it?
Not exactly. Or rather yes, but the rules changed in 2008, not this week. Specifically after IndyMac failed in 2008, there was significant blowback on the FDIC from Congress, and an unoficial, unnounced policy was put in place to ignore the $250k limit and ensure uninsured depositors took no losses in (almost) all cases.
From https://www.americanbanker.com/opinion/will-fdic-keep-protec...:
> Of the 127 banks and thrifts that failed from Jan. 1, 1993, to the last bank that failed before IndyMac was closed [...] 71% of the total deposits of the 127 failures were in institutions where uninsured depositors suffered a loss, while 29% of the deposits were in institutions resolved through a P&A that fully protected uninsured depositors from any loss whatsoever.
Whereas:
> Since IndyMac, there have been 522 failures, excluding Washington Mutual [...] Of the 522 failures, just 31, or 5.9%, were resolved in a manner that only protected insured deposits — uninsured depositors were therefore put at risk of a loss. Those 31 banks and thrifts held just 4.9% of the deposits of the post-IndyMac failures.
(Washington Mutual is excluded because it was enormous compared to the other failed banks - although since uninsured depositors were protected, including it just skews the stats even further.)
So for the past 15 years, we've had a system where the overwhelming majority (well over 95%) of uninsured deposits were protected, and thus, it would have been legitimately very surprising if recovery for uninsured deposits in SVB wasn't 100%, because it's very clear that unstated FDIC policy is to aim for that, and they've got a strong track record of achieving it. (I will state that I find the hidden nature of this policy problematic, however.)
The only thing surprising about events so far is that there's been enough noise that some new policies had to be announced, instead of it all just being quietly resolved like normal.
That’s an unrealistic utopian fantasy. The real world doesn’t even remotely lend itself to that kind of planning.
Even calling it “selective justice” involves an unrealistic bias. What is happening is that the particular circumstances are being weighed an a suitable response is being formulated.
The rulebook for planning for all such events ahead of time would not be that much shorter than the future history of human civilization.
SVB takes a dive and wants a bailout, HN is like, think of the workers!
WTF?
And it doesn’t have to be that wide a threat. The threat here was pretty localized. Aside from blue chips that everyone has their pensions invested in (which don’t seem to be at risk) the rest of the country doesn’t have much exposure to this.
Maybe I’m wrong but that seems like a significant shift in policy, where the government will change the rules to respond to a localized crisis.
It wasn't just us. Larry Summers was prominently and publicly stating that the inflation was definitely not transitory. But the banks believed her, and continued in 2021 to buy these securities as if interest rates were going to be going low again in the near future.
Damn if only the US government could find someone with credentials as strong as yours
Your welcome to be critical of my statement, but where's your criticism of the people being paid high salaries in positions of power who utterly failed to react in a timely manner (when many many economists with tons of credentials were telling them to) and have now forced us into a worse situation?
You don't win any points for saying X is inevitable when X is occurs for reasons completely outside your expected scope. That's just luck.
The parent is correct in their assessments of the market and the transitory inflation. TBT and TTT were no brainers at the start of the transitory dialogue because everyone knew it wasn't.
Apparently Larry Summers, probably the greatest living former treasury secretary and architect of the only balanced budget in my lifetime, was "lucky".
You should ask yourself if you have any idea what you're talking about before adopting a negative tone in the future. Frankly it personifies Dunning Kruger arrogance to attribute a simple mathematical prediction shared widely by experts to luck. Projecting your utter lack of expertise on this topic on to everyone else is ridiculous.
The price of energy is a fundamental input to the global economy. When the price of energy goes up, the price of everything goes up as a supply shock. I don't think you're a dumbass for thinking otherwise. I do think you're a dumbass for asserting whatever this mess of a post is.
Citing "a simple mathematical prediction shared widely by experts to luck" is pretty dumb as well. Economists are hardly a uniform entity. Do you truly believe I could not find an equal army of qualified experts with differing mathematical predictions?
Circling back to you think you're more qualified than Yellen, mr kroog. Look out. Bachelor of Science in economics over here. this guy wrote code!
The banks most certainly didn't believe her. The banks rightfully took it as a signal that the US gov would step in to cut losses if banks continued to loan. The Fed wanted banks to continue to loan so they didn't grind the overall economy to a halt instantly and send us into stagflation.
But everyone knew it would happen. The Fed knew they were playing a losing strategy. And they still know it. But they refuse to play the strategy that would win the inflation game because it would bankrupt the country.
The only way out now is through severe tax hikes + gov spending cuts OR war with China in the hope to reset debt at its conclusion. The political elite seem to be signaling the latter.
Hypothetically, if I ran a government that was engaged in geopolitical competition, I wouldn't want people to tell the truth to my detriment when alternatives could be gotten away with.
It's far easier for me to believe that Yellen is a deeply intelligent and talented economist who lacked the ability to protect her cognitive processes from optimism bias. People think that when you say incompetent you are saying they aren't intelligent enough for the job. I think she was temperamentally unfit. I want people in the Federal reserve that don't care at all if they get invited to cocktail parties or get job offers. I want them to be people who don't mind being hated by everyone.
I want Paul fucking Volcker level of tolerance to everybody hating you.
All that being said, the thing that undermines my desire to not believe your theory is that she made the terrible mistake of going straight to work for the Biden administration from the Fed. Even if this was done for noble reasons it just makes the Federal Reserve look partisan which is a really bad place for it to be.
Although I agree with the Treasury's actions here so far, this is a potential issue. They should instantiate more stringent rules for banks that who cater to business accounts and then raise the cap for insurance on those accounts to a number that makes sense for small businesses across the country.
Too many CEOs and CFOs were allowing their business checking accounts to sit in dangerously uninsured positions. Headliner being Roku with nearly a half a billion dollars sitting in a single checking account with SVB. But plenty of smaller businesses leave ten million plus dollars in their accounts as a course of business as well.
The actual amount those accounts can be insured for needs to be formalized and it should probably be higher than the standard quarter million for consumer accounts as this is way too low for business larger than a half dozen employees.
We did with Dodd-Frank after the 2008 housing crisis, signed into law by Obama. Would have stopped over leveraging found at SVB.
Then it was rolled back in 2018, signed by Trump. Wasn't a hard sell to Trump at the time. "Obama did it? Okay, let's undo it!"
Thus, on one hand, I'm glad they're doing this, as it should help prevent wider bank runs, and it ensures that banks are the ones that are actually paying for it.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.