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"
And people wonder why turnout is low. There’s no way to vote for non captured politicians.