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.
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.