More bailouts now, lead to riskier behaviour in the future.

One with deposits in the bank is a creditor. One with a loan from the bank is a debtor/debitor.

It's better to have more people watching out for danger.

I think about that money again when I want to invest it or when I need it to buy something big. Everything else is ATM and credit card, or equivalent stuff. But getting money from a customer or an employer and automatically adding it to a bank account should not become the same thing as investing in the stocks of that bank. Keeping at least a weekly eye on my bank is too much of a burden. The only thing I do is make sure that my balance is well below the limit the state will pay back to account holders is the bank blows up. That's not difficult.

It would be preferable if the regulatory environment would make sure that you as a depositor have an incentive to hold the bank to account.

Yes, you shouldn't have to keep a weekly look on your bank's soundness. You should be able to outsource that burden easily.

Eg with FDIC gone, private deposit insurance would still be allowed. And of course, journalists would also still be allowed to report on banks. Those stories might have a wider audience than now.

But even your counter can be addressed. Future risk is something that can be addressed once SVB is stablized and contagion contained. On the other hand, unrest following multiple startup blowup is a lot less predictable.

The question becomes: which risk is worse ( potential risky behavior later vs contagion now ). Immediate risk seems worse to Yellen and her friends. I personally disagree, but I have no power over those decisions so I can relatively easily rely on principle. I wish I could claim I would do differently were I in her shoes.

We had exactly the same arguments during the last bailouts. The future of back then is today.

Well.. in this specific case I don't think tax payers (I assume this is what you mean by "peasant") actually do share any of the risk/cost. The bank failed due to a liquidity problem. It actually has a pretty solid financial situation except for that! This isn't a "bail out" per se.

Then why couldn't they find a buyer in the auction today? If Silicon Valley Bank had positive equity, someone would have bought them out for an easy profit.

The bank made mistakes, and their startup assets are a big ? of unrealized losses. But they do have assets, just not liquid.

This would be a problem of liquidity though, which was my original statement.

That's whats need to be changed, not a bail out of which more will follow

Banks that buy SVBs branches will be making money off that deal I think. Not short term obviously, but long term.

Sometimes those risks are bad, and banks cannot fulfill their obligations to their customers, so the FDIC, which is funded by banks (its deposit insurance) steps in and fixes a bank so that customers of that bank do not get screwed by picking a bad bank.

I dont see how any peasants are 'sharing any risk' here.

Everybody who held stock in SVB, just lost literally all of that. They invested in a bank that failed. Just like if they invested in a company that failed. Nobody is bailing those people out.

there is a centralized bank that is the Federal reserve

and there is a decentralized bank which is Bitcoin

That's an interesting proposition, that was simply unfeasible from a practical perspective until very recently.

A consumer bank needed branches, and tills, and vaults, and all sorts of things to serve customers, so it was just unfeasible for most nation-states to eat the costs of all that - while private entities were incentivised to set all of that up so that they could raise money to invest for their own profit.

Now that money is increasingly a purely digital construct, a true National Bank could actually be feasible at low cost, providing a 100% safe deposit system for consumers that will never pay any interest. Private banks would likely still exist, they'd just provide more incentives to depositors (i.e. higher returns). This would make private banks a bit less central to the whole system, and make society a bit more fault-tolerant in this area.

It's an interesting policy proposition, and maybe talking about it would be a bit more productive than the average thread on banks.

They could put the onus of control of the funds/account into the hands of the depositor and use a CBDC but trust in government is an issue here.

> Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

That sounds a lot like some type of bailout to me. What does "make funding available" mean? Where does that funding come from? It's going directly to banks, not to depositors. How does that work?

The SVB depositors are going to turn around and put their money in a new bank.

Money isn’t erased during a bank run. It’s given back to the owners who always had a right to have it. Fractional reserve banking is what erases money.

I never said inflation was detrimental or harmful (my personal belief is that it is harmful, however), just that adding money to the supply is by definition monetary inflation (the origin of the concept of cost inflation which is what we’re being asked to accept as the true definition). Putting air into a balloon doesn’t mean it will pop; it’s still being inflated. Hey, it’s even more fun for a while ;-)

I was responding to a parent who said printing money isn’t inflation, when it’s the literal definition of, and the origin of the term in monetary theory. It’s not very constructive to conversation to attempt to change meaning of words to make one point or another.

My apologies for reading incorrectly. My comment is true only for price inflation.

M3 is erased during a bank run, because the multiplier from M1 to M3 caused by fractional reserves goes away.

And also we probably don’t want to say “haha silly SVB customers, they can wait ten years to get their money back” because none of us want to live in a world where most Americans, most of whom don’t understand all these complexities, start runs on ALL the banks because they think this is the start of a collapse. It becomes self-fulfilling at that point.

Man, it's probably time to jump ship from the US economy all together.

long term treasuries are extremely risky assets, by definition and move a lot on interest rates. whereas short term treasuries like less than three momths barely move on fed rates, hence much safer.

Svb bank made the wrong choice of holding super long duration treasuries. They knew what they were getting into, and did it anyway for higher yield at that time. they could have put the money in 3 month expirations and wouldnt have been in this situation.

I don't see how the US economy is to blame for the actions of a greedy monoculture based on "tech line go up". They made a long term bet on bonds with historically low interest rates, doubling down that the party would continue indefinitely. They didn't have a chief risk officer for 9 months! How is that the US economy's fault?

There's a reason they lobbied congress to weaken risk regulations.

I'm hoping people go to jail over this.

You’re correct in highlighting that if they fronted the cash now the bonds would be less, but it is simultaneously true that they will be worth less “2023 dollars” in 10 years.

We are currently working with 2023 dollars.

E.g: Fiat over $500k in a single institution is likely not earning as much as it could and runs the risk of loss of access to funds for X amount of time if the bank fails, until reimbursement happens. But $100k each in 2 different banks leaves you with $300k to invest however you see fit and still have enough liquidity to move quickly on opportunities.

Somehow, the bank definitely needs to be punished, but I'm not sure how or if that can happen in this current system.

(/s)

Umm, any and every bank deposit in excess of the deposit insurance limit has a risk associated with it.

If that means we get less interest on savings accounts then so be it.

Errm ... there are an awful lot of people who will never, ever, in their entire lives, have anywhere close to $250,000 on deposit at one bank.

Q: Why should all those people backstop your investment?

Given that, is it perhaps possible that you should take responsibility for your investments which exceeed $250k?

I had zero dollars in SVB, and I would probably be less affected than the average person if there was a full on banking collapse.

I'm still not stupid or capricious enough to oppose this 'bailout' though.

Depositors can pick the banks whose risk profile they prefer.

More seriously, you don't need to do extra due diligence. Just buy insurance for your funds above $250K. Or use standard treasury methods like using institutional insured liquid deposits or sweep accounts.

In any case, you don't need to be a sophisticated investor as a depositor. Ordinary market participants manage 'flights to quality' just fine, even if they are not sophisticated investors. See https://en.wikipedia.org/wiki/Flight-to-quality

If you want to have a stable financial system, you shouldn't suppress the incentives for people, including depositors, to look for safety. Just the opposite, you should have them sensitive so that they make moves (on the margin) long before danger is serious. Have people move their deposits _before_ it's too late.

Second, what does that really mean? How to evaluate the quality of your bank isn't typically discussed by personal finance teachers, beyond looking at the interest rates and fees.

Deposits <$250k are FDIC insured. One could say those accounts didn't evaluate the institution that held their funds and didn't really need to. But were they aware of FDIC limits? IMHO, they should have been and likely were.

Depositors >$250k are well aware of FDIC and the risk associated with money in their bank. They really should think about the banks they work with and understand their risk profiles.

Subjective, but I understood how FDIC worked when I opened my first bank account that was no where close to 250k. If it was greater, I would optimize my holdings across different institutions and instruments.

That way small time depositors are also drawn into the ranks of the watchmen of the financial system.

[study on financial literacy from 2022](https://gflec.org/wp-content/uploads/2022/04/TIAA-Institute-...)

The only risk is trying operate in a broken banking system.

https://www.cnn.com/2023/03/12/investing/stocks-week-ahead/i...

> No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

> As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

when you compare it to the alternative people are proposing of doing nothing, that means thousands of layoffs and shuttered companies, and the American tax payer paying these people's salaries in the form of unemployment/welfare. this is a remarkably more expensive strain on the economy.

there is a reasonable argument to be made about the precedent it sets for banks in the future with regard to their risk tolerance; I don't have an answer to that.

anyone upset about this for any other reason just wants to be upset.

Isn't it great that groups of people can step in and help those that got the short end of the stick?

I do hope that such recuperation schemes continue to get funded by mandatory insurance and other contributions during the good times. This way, the privatization of profits is a little smaller, and the safety cushion gets built for when things get bad.

If the "socialization of losses is the hallmark of a functioning society" THEN WE DO NOT HAVE A FUNCTIONAL SOCIETY because in EVERY city of this country there are people who are homeless because of their "losses" and NO ONE GIVES A FCK.

I am one of those homeless. What was my crime? I became ill with an undiagnosable neurological disease.

This is about WHO gets the socialism. What is happening with SVB is socialism for the rich.

Are you seriously comparing the greed at SVB is reay like breaking an arm or a hail storm? Some unforeseen natural disaster or just a whoopsie????

This along with the bilions to Ukraine, while people are being forced into homelessness because of housing costs and inflation, you are all asking for some fascist groups to gain power in the U.S.

I would also like to add that the vast majority of people losing their money were not betting on a risky asset. They merely had bank accounts with an institution that was mismanaged. We are not bailing out risk-takers like we did in 2008.

Perhaps I'm missing something, but I would suggest that one key aspect of a company being able to call itself healthy is that its finances are diversified.

Being insured for $250k is payroll for about 10 people for a month. If your other funds were in a line of credit that abruptly closed or in equities that may not be worth as much when everyone shows up on Monday, what options are there?

(The trick is, get one of those companies to pay you Bay Area rates while you live in a much lower cost of living area working remotely!)

Never mind engineering, how much are SV startups paying their corporate finance and corporate treasury officers?

Not enough, perhaps.

It's fairly simple:

When things are going well, entrepreneurs want the state and its oh-so-tiresome regulation to get out of their way.

Then, when things don't go well, it's those very same entrepreneurs who claim it's necessary for the state to step in and save everyone.

https://twitter.com/BillAckman/ is quite the read at the moment.

Newsflash: there are plenty of places, and plenty of sectors, where a 10-person company hasn't got anywhere near enough cash on deposit to reach the local deposit guarantee limit.

I just consider that my zero yielding no interest deposits (not investments) are safe and in a competent banking system this should be a fair assumption, should it not? especially for a bank that wasnt investing in subprime mortgage loans or car loans, they literally got punished for investing in long-term US treasuries!

a fair financial system should be afforded for everybody, and the idea that they should only be presented for the poor seems baffling

The FDIC deposit insurance limit isn't hidden away in disclosures or in any fine print.

It makes no sense for every business owner (and a business doesn't have to be very big to have more than $250K in the bank) to have to spread their funds across multiple banks and do ongoing due diligence across each bank's investment activities.

We're talking about farmers, used car dealerships, builders, and countless other kinds of businesses who would suddenly be expected to develop an aptitude for financial hedging and risk assessment. It would be incredibly inefficient and make it not worthwhile for many people to be in business at all.

The whole point of a regulated financial system is that regular depositors can expect that if the regulations are being met and the regulators are verifying that the banks are in good shape, you can trust that your funds will be safe.

The right response to this situation is to change the guaranteed limit for corporate bank accounts, and, sure, increase the fees that banks (and indirectly, corporate banking customers) pay for that. The wrong response would be to tank the entire banking system to stick it to the tech bros.

"We demand more regulation", not something you'd typically hear from the US tech sector.

I can't help think about the moral hazard aspect of this mess.

The regulation of SVB doesn’t seem to have been particularly lacking. The shortfall is not very large and should be covered by asset sales and some fairly small industry levies.

What exactly is the moral hazard here?

The executives and investors should lose everything. That will send the right signal to other bank execs and investors. And regulators should make some minor changes to balance sheet requirements and perhaps insurance thresholds/charges.

What do we expect corporate depositors to learn, aside from that their deposits are never safe, which would crash the whole banking system?

If regulation wasn't lacking, the shortfall isn't large, and (I paraphase) SVB and the sector can sort itself out, why would Yellen and POTUS need to hold press conferences?

If you hold cash in a bank and your balance exceeds the FDIC insurance limit, it's at some risk. This isn't new, yet seems to have come as a complete surprise to a whole bunch of people, many of whom really should have known better.

They've been loudly demanding a bailout for having been on the wrong end of their risky decision. Isn't that pretty much the definition of moral hazard?

That’s an inaccurate paraphrase.

It makes all the difference for the government to clearly indicate that they will intervene quickly and decisively to keep the system functioning rather than stand back and let the bank fail and potentially trigger wider fallout. By doing that they can minimise further costs/failures.

> If you hold cash in a bank and your balance exceeds the FDIC insurance limit, it's at some risk. This isn't new, yet seems to have come as a complete surprise to a whole bunch of people, many of whom really should have known better.

It’s just not a norm - something that people in startups or small businesses generally think about or talk about, as it’s antithetical to focusing all your efforts on building a product and pleasing customers.

I understand you’re saying it should be.

Ok, sure, maybe it should be. That’s a valid topic of discussion. It just raises a whole lot of new trade offs and costs, if suddenly every early stage startup founder now has to also be an expert in bank risk.

That seems like a simple and effective way for companies to manage their deposit risk.

If the government/president came out and said “we’re going to protect the system now but we may not/will not in the future and all companies should put their funds in sweep network accounts to be safe in the future”, then it would be reasonable next time to say “should have known better”.

[1] https://twitter.com/immad/status/1635302598831112192

Maybe ... or it might indicate that US tech workers with their generous salaries, and tech startups with their decade of access to cheap money, have no actual idea what a small business in the rest of the world actually looks like.

"The median small business holds an average daily cash balance of $12,100, with wide variation across and within industries" (from 2016) [0]

[0] https://www.jpmorganchase.com/institute/research/small-busin...

Language like this suggests your primary concern is punishing tech bros for having too much money.

I’m happy to have a conversation about the excesses to tech industry funding rounds and salaries. I’d probably mostly agree with you.

The solution is not to evaporate their bank accounts for reasons that have nothing to do with the merits of their work and are almost entirely due to the economic instability continuing to play out since the pandemic started.

For a start, there’d be nothing moral about it whatsoever, and more importantly, it would affect countless low-income people, just as much or more than rich tech bros.

It really isn't.

My hypothesis is that when things go bad, the poorer in society get thrown under the bus, yet the weathier get bailed out. What's happened in the last few days appears to be yet another data point in support of that hypothesis.

> The solution is not to evaporate their bank accounts for reasons that have nothing to do with the merits of their work and are almost entirely due to the economic instability continuing to play out since the pandemic started.

Millions lost their homes during the 2007/08 financial crisis[0][1], did that have anything to do with merit, or was it (to use your phrase) "almost entirely due to the economic instability" caused by excesses on Wall Street?

[0] https://www.marketplace.org/2018/12/17/what-we-learned-housi... [1] https://www.investopedia.com/articles/economics/09/financial...

I share the sense of injustice when that happens, and I know it has been the case plenty of times in the past and will be again in the future, but that doesn’t seem to be what’s happening here.

This action from the government is about shoring up the system to prevent a widespread collapse, which would hurt poor people and cost taxpayers much more than any direct costs relating to this action. It’s also worth considering that a huge driver of the economic turmoil that’s playing out now has been the government spending to support people - including/especially low-income people - through the pandemic, so it’s really not a case of poor people being thrown under a bus; it’s just a case of keeping the whole system functioning through very unstable and challenging times for everyone.

> Millions lost their homes during the 2007/08 financial crisis[0][1], did that have anything to do with merit, or was it (to use your phrase) "almost entirely due to the economic instability" caused by excesses on Wall Street?

There was plenty that was wrong about the way the 07/08 crisis was handled but it was a very different situation. I think it was terrible that people lost their homes, as well as jobs and businesses, through no fault of their own. It was mostly due to government regulations and bank lending practices that enabled people to buy houses they couldn’t afford. It was very wrong that the bank execs who oversaw it kept their jobs and wealth.

The SVB scenario is nothing like this. Depositors have not caused an economic crisis that will hurt poor people. SVB execs caused it and regulators contributed. And so SVB execs are losing everything and regulators are fixing it at little/no cost to taxpayers, but to the benefit of everyone who will keep their job, many of whom are low-income workers.

But keeping all your money in one bank is surely a huge, obvious risk?

Good question and of course, that's not likely. But then 50B in reserves isn't something you keep in a bank account, it's something you have rolled into several different financial instruments with varying levels of available liquidity.

Like… SVB

For what it's worth, TARP ended up turning a profit for the government, so in my mind there's some track record of stiff-nosed decision making at Treasury. I'd feel differently if SVB stockholders were getting something out of this.

Why are some businesses more equal than others?

This is why FDIC exists in the first place.

> perpetuating the behavior that caused the failure.

A detail post-mortem is going to be needed to be done to see what cause this whole mess.

So far it seems their mistake is buying "risk free" bonds when they shouldn't have - but then again who could have expected interest rates to rise so quickly - and not having a diverse enough depositor base - SVB served mainly tech and Silvergate is heavily exposed to crypto; both sectors took hits recently resulting in people redrawing lots of money for a variety of reasons and it ultimately caused a run.

That's what I figured out watching various YouTube videos anyway.

Over a period of 10 years which is the duration of the bonds they bought, I would say that the chances are pretty fair.

Point being, some businesses _are_ more equal than others because they have the money to lobby lawmakers. In an actual free market, the banks should fail.

However, it seems to me that the situation with SVB is a Democratic Socialist move. Again, my opinion, but it seems rather progressive. In history, Democratic Socialist programs have produced, arguably, valuable programs for the US. Unfortunately, mentioning "Socialist" is usually the point in which many will stop listening.

[wiki](https://en.wikipedia.org/wiki/Democratic_socialism#:~:text=D....)

But even if the only option was to use taxpayer money, clearly it would be need to be done. If depositors weren't made whole, this week would've been a disaster with multiple bank runs that could cause a huge systemic issue. Eventually the fallout from such an event would bite the economy and the average taxpayer very badly.

The amount of money required to make depositors in SVB whole is negligible compared to the potential damage not doing so would cause, so it doesn't really matter where that money comes from.

Why do we let companies grow that large then? Or maybe the FDIC protection should be increased for everyone?

I don't disagree that what you say is right when the argument doesn't go beyond the short term. But I expect to see protest against this from tax payers who's wealth is lower than the FDIC limit. Again.

In the cases of SVB you have a totally different kind of bank with 90%+ of the capital in accounts well above $250K. And the size of the bank was right below where regulations kick in, so the issue here is not that the bank in itself was too big, if anything it was too small, it's that if this previously top notch regional bank failed in a way that hurt depositors, a slew of other regional bank runs would follow.

Not sure what the long term solution is, but there will probably be additional regulation to patch up this kind of issue and at the least any VC will ask startups to prove that their capital is diversified as a condition for investment.

[1] https://www.vox.com/policy-and-politics/2018/3/6/17081508/se...

It is reasonable, you are not wrong! But this slope is getting slippier. Something needs fixing, even if this bailout is the right thing to do.

I don't want to argue against this bailout, I want to argue against a system that forces everyone's hands into bailouts every so often.

Also, how do I make it hard for my customers to understand the risks they are taking on so that I can use compassion to ensure such bailouts?

> If these statements are true, can someone explain how it's possible that despositors are fully protected, far beyond what FDIC insures, without the taxpayer bearing any of the burden?

"The FDIC is not supported by public funds; member banks' insurance dues are its primary source of funding. When dues and the proceeds of bank liquidations are insufficient, it can borrow from the federal government, or issue debt through the Federal Financing Bank on terms that the bank decides."

https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...

On top of that, SVB has the money to pay back almost all of the depositors. They just don't have it liquid right now because it's in bonds that won't mature for a while and would need to be sold for a loss. So the obvious and sensible thing to do is have the government lend money to cover the time until the bonds mature, in addition to using the FDIC's money which did not come from public funds.

> And please inform him the recourse he has should he disagree with sharing your loss.

You can vote for people who are dumb enough to let the entire banking system collapse because they want to hurt rich people. But of course that would probably put "peasants" out of work and living the street while the rich get slightly less rich.

There seems to be this myth floating around that bond losses aren’t real. They are very real.

An 80 cent on the dollar (purchase price) bond is a loss of 20 cents. And it doesn’t matter if the holder holds to maturity.

Welcome to interest rates.

This is why the bond price falls - an outside party will not buy the SVB bonds because they can get a better return on a different bond. The bond price falls to make them equivalent.

What you are talking about is opportunity cost, not investment losses. If SVB could have held their bonds to maturity they would have gotten back every cent of the principal.

Interest rates rising means products with a fixed rate yield are worth less today. That value isn't gotten back by waiting until maturity. The nominal value is retrieved, yes, but the money in the future is literally worth less.

SVB was very poorly run. We can see that easily now in retrospect.

If you owe someone $1000 you owe them one thousand dollars. Not the value or purchasing power of one thousand dollars -- literally one thousand things called dollars.

So if you take $1000 in deposits, you buy $1000 in bonds, you wait until the bonds mature, and then your depositor withdraws $1000, you will be fine no matter if that happens in one year or a hundred years, no matter what the rate of inflation is. Your assets and liabilities will cancel out.

If your depositor tries to get their $1000 back before the bonds mature, you are screwed. That is what happened to SVB. If all of SVB's bonds had been mature by last Friday it would have been fine. Pretty much every article in the financial press about this fiasco has made that point.

It is amazing to see people twist themselves up in knots about opportunity cost and inflation when this is so basic. If liquid assets equal liabilities in the literal number of dollars, you are even, you are solvent, and your depositors get their money back.

> A loan today would need to be at below market rate interest in order to match up with the value of the bonds held to maturity.

Well, it's a government loan, so they can do that if they want to.

However, it also proves that holding bonds to maturity is different from selling them at market rates. It demonstrates the distinction between solvency and liquidity. Every financial publication has made this point when discussing SVB in order to educate their readership about the problems of duration risk and explain how a bank with enough assets to cover liabilities can still fail.

Now, the nice thing is, the government has time to wait for the bonds to mature. So the government can take the bonds, pay off the depositors, and get the money back when the bonds mature. The government won't lose money if they do it right -- just like they didn't lose money with TARP in 2008.

Also, at some point the difference between opportunity cost and investment loss becomes rather semantic. In a liquid market, you should be able to sell and rebuy your positions every day, which you generally don't do of course, but it does mean that the decision not to sell is similar to the decision to buy: if you wouldn't buy under these circumstances, you should sell.

With these bonds, their low interest makes them less attractive than newer bonds with higher interest, so nobody will want to buy these lower interest bonds at face value when higher interest bonds are available. They'll only buy these at a discount that would make their profit comparable to those of higher interest bonds. So the value drops, so that's a loss.

Personally I've never seen the point in buying low-interest bonds. But then I'm not a banker.

If I can claim inflation as a loss I need to go redo my taxes…

What matters is that principal is returned in full when bonds mature, but if you can’t wait until maturity you might have to sell them for less than the principal. That is exactly what happened to SVB.

What's stopping my Local Bank from crashing this week?

Enough consumer confidence to prevent a bank run is the only thing that prevents a run on any bank, including the largest banks in the world.

1. Give 80 cents on the dollar to each depositor and say tough-luck. 2. Give $1 dollar to each depositor upon bond maturity [for sake of example let's say 10 years].

Option 1: Depositor takes the cash, buys a new bond with the same maturity [but it would have higher yield, say closer to 4%] at current market price. At maturity they have $1 dollar

Options 1 and 2 are equivalent, minus the bid-ask spreads which are very tight for treasuries. This is time value of money.

Not anymore. Now the question is, how does the government make depositors whole? I doubt they will go flog the bonds on the open market or get loans at market rate like idiots. The point of this intervention is to bypass the market mechanisms that caused this and put the government as a backstop.

Thank you, great concise explanation, lightbulb moment for me. I understood it but couldn't clearly communicate it.

So to make depositors whole today, you need to borrow money today, and the extra interest paid to borrow the money is more than the interest you get when the long-term bonds finally mature. The difference is the loss.

Which is why they had to take a loss on selling the bonds, as it's essentially the same loss. They are out money whether they sell the long-term bonds today, or if they borrow money today. Bonds are discounted appropriately by whomever buys them.

Question is, why didn't SVB do anything when they saw this coming? I've seen articles saying the board was aware of the risk issues for the past year. [1]

[1] https://www.forbes.com/sites/noahbarsky/2023/03/12/silicon-v...

If I buy $1000 worth of bonds at 2% interest rate for 10 years, my expected return is 1000 * .02 * 10 or $200, making the bond worth at maturity $1200. This bond is worth $1000 today and will return $200. If the bond price falls to $.80 on the dollar or $800 and I am forced to sell today to make my depositors whole, now there is a realized loss - $200 from the original price and $200 from the eventual returns.

If I can wait I have $400 more. If I can't and have to sell then I lose $400.

The distinction between insolvency and illiquidity is a red herring. People who have to sell their house in foreclosure will be discovering the exact thing you are describing here.

What's happening here is SVB is big enough that the authorities go "aaaaah, wait a second, this could blow up a bunch of other businesses and we wouldn't want that". And so they are taking the illiquidity interpretation and helping out the depositors, but at least they are not helping the shareholders.

One thing that may be a bit different in the case of a bank is that the general public does not know or consider deposits to be a loan to a bank. Which is what it is, but people don't think of it this way, and the aren't encouraged to either thanks to FDIC and other state level guarantees. If we change that by letting the depositors lose money, there's going to be chaos.

The problem SVB had is that there was no market buyer for their bonds at a price they needed today. They deserve to fail for that but that's not the part of the discussion I am responding to.

What I am responding to is the idea that there is a myth about the value of the bond. Here is what might happen, in a very simplified way:

- Depositors need their cash today - SVB can't sell their assets to meet this need, and so the bank is fails and is dissolved (already happened). Let's make this simple and say SVB owes the depositor $1000, can sell for bonds for $800 today. If they can have wait the bonds will return $1200 later. - The FDIC steps in with all their capital. They say ok - depositor here is your $1000 today and you are now whole. But we will not sell the SVB bond today to cover that $1000, instead we will hold the bond and wait for it to mature at $1200. Thus the depositor is whole, and over the long term no money is lost.

No regular market participant step in to provide the $1000 because they can get a better return on their money in other ways. But the government can do this because their goal is not maximizing return on capital, but instead stabilizing the system.

Of course, you can still argue that stabilising the system is worth it.

The US 10 year treasury interest rate is 3.7% right now. That means you can get $1200 in 10 years with $835 today at 3.7% compounding; 1200 / 1.037^10 = 834.44 and change.

So your $1000 worth of bonds is actually only worth about $835, at best, because that's the market price for a (close as possible to) risk-free investment which matches the return at maturity.

Inflation is the flip-side of this. You can reasonably expect $1200 in 10 years to be worth about what $835 is today. It might be less, it might be more, but it's an estimation with money behind it.

That's what I don't get. Why are bonds considered risk free if their value can drop when interest rates go up? Sure, they may be worth $1200 in 10 years, but they're only worth $835 now, when they were worth $1000 yesterday.

Risk may be lower than buying shares in a company at risk of bankruptcy, but it's hardly risk free. These things can go up and down just like normal share prices.

The important concept here is the time value of money.

But the govt. doesn't have this problem. They don't care about maximizing return - they care about containing contagion. So they can pay $1000 for a 2% return and not still not lose money over the long term.

It might then need more regulation as to what can be done with deposits, how much can be paid on them etc.

What really worries me is that the regulators might have seen these investments and not understood they were risky. Government bonds are pretty safe, right? Duration risk is sneaky and even though it’s obvious now, SVB was locked in back when rates were super low. Realizing the risk anytime after they got locked in is too late!

Applying the same stress tests to all banks regardless of the amount of deposits they have would be a good start.

Also, the FDIC insurance limit would be a lot higher than $250k if it followed inflation, but even if it did, a lot of businesses need to keep a lot of cash around to make payroll and float expenses. It doesn’t make sense for them to have the same type of insurance, and the same limits, as an individual person’s checking account.

Did you mean almost certainly not the only bank that invested money like this?

Note also although TARP was as derided as it was, the govt and the public made a fantastic return on their investment

If they believe they are helping, why does the response always emerge suddenly on the day of the crisis with no debate or well explained contingency plan being activated?

The whole system seems to be built on one group revealing a sudden crisis that have obviously been building for a while. Then another group of people explaining that they have a plan, there is no time to explain, no need to explain and the objections are all mean-spirited fools who don't understand the plan. The plan which will be clearly explained sooner or later.

They're acting like people running a scam. None of these crisises are that surprising. Raising interest rates were likely to lead to this sort of fireworks display at some point in the short term. If the panic is genuine they should all be removed on the basis that they can't spot a tree in a forest. This has to be a long-planned contingency.

> You can't let the banking system collapse and expect it will only hurt the people you don't like.

The hurt happened a while ago now; banking collapses are the market recognising that it was mistaken about actions that it thought were wealth-creating but turned out not to be. This isn't a question of trying to "hurt" rich people, whatever that means. This is about concentrating the pain on people with skin in the game.

If people with skin in the game eat the losses, losses will happen less often. If the losses are diffuse, then losses happen more often. They're trying to cover up for incompetents because they meet them at parties, go to the same schools and have the same friends. And invest in similar assets, one suspects.

Because that is what a crisis is, and it’s how crisis response works!

> This has to be a long-planned contingency.

You can believe that this was a long-running conspiracy or you can believe that the people involved are incompetent screwups, but how can you believe both? Someone would have talked.

Do you honestly believe that people with “skin in the game” aren’t being hurt by this? SVB shareholders lost everything.

Do you also honestly believe that you can restrict the fallout of a banking system failure only to those who caused it?

That isn't how regulators deal with crises. Governments either execute long-agreed plans or flounder for months before organising to do something half-useful. The financial regulators are unusual in that they seem to struggle with the idea of publicising their plans ahead of the event.

> how can you believe both?

It is pretty normal. One of the reasons a democracy usually does so well is it turns out that the ruling classes in non-democratic nations are both incompetent screw-ups and busy conspiring to keep themselves in power. Then the competition from more evidence-based leadership in a democracy outmanoeuvres them.

The system is supposed to purge itself when there is evidence that the powerful are making big mistakes. Instead we get people who believe "protecting the system" is a good in itself being given a printing press and being told that they can do whatever they need to do. Nobody is talking about printing money yet, but it is the US's response to almost literally every crisis these days so I assume it is coming.

> Do you also honestly believe that you can restrict the fallout of a banking system failure only to those who caused it?

No. Which is why it should have been allowed to fail 10-20 years ago when the damage would have been smaller. Low interest rates and easy money is building up bad habits and large points of failure.

Printing money is how the US finances everything. If USD wasn't the reserve currency backed by US war machine, the entire country would have imploded some decades ago.

Responses, by literal definition, occur after the fact and in response to a stimuli. Do you accuse ambulance personnel of being unhelpful because they weren’t there to prevent an emergency from occurring?

I'm not sure what you mean. The FDIC is the contingency plan to bank failure. The response involves the FDIC taking banks in receivership and then paying back depositors.

The debate was hashed out in 1933 when the FDIC was created and has continued since. See here,

https://www.fdic.gov/about/history/

It's like other emergency government responses: there is autonomy built into the agencies because it's understood that being able to act swiftly is required, and that democracy can happen after the fact. FEMA doesn't hold votes on whether relief somewhere is required, the president can command military force without acts of congress in some cases etc.

I personally think it's debatable whether the gigantic nation states with representative democracies that we have now are the best possible system. But in this particular case the FDIC is pretty much acting as it was chartered to.

>> it will only hurt the people you don't like.

>> people who are dumb enough to let the entire banking system collapse

when did gp expresses his dislike for people who banked with svb :D

The cost of the loans should be in the same ballpark as the losses on the long term bonds.

That’s great, that means it’s zero, because there is no loss of principal on bonds held to maturity!

Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes.

The MtM losses are real.

If your bond 10y bond you bought two years ago pays 1.5% and you need to take on a loan at 3.5% for 8 years to be liquid, then you are still around 16% in the red. You will find that this is also roughly what the market will discount the bonds.

So if the taxpayers are paying interest to the fed, who then feeds those profits back to the trasury, and the treasury uses that money for scenarios such as this - doesnt that automatically mean the treasury/FDIC is using BOTH public taxpayer money (laundered through the fed back to the treasury) AND the bank payments to the FDIC in order to cover that?

Are these two separate piles of money - and they will not take from the "profits" the Fed made on taxpayer debt on money printed by the Fed to the USG, but only from the FDIC fund that the banks pay fees to?

Something always feels 'fishy' when you dont have a deep grasp of the structure... so, please ELI5?

So if the taxpayers are paying interest to the fed, who then feeds those profits back to the trasury, and the treasury uses that money for scenarios such as this - doesnt that automatically mean the treasury/FDIC is using BOTH public taxpayer money (laundered through the fed back to the treasury) AND the bank payments to the FDIC in order to cover that?

Are these two separate piles of money - and they will not take from the "profits" the Fed made on taxpayer debt on money printed by the Fed to the USG, but only from the FDIC fund that the banks pay fees to?

Something always feels 'fishy' when you dont have a deep grasp of the structure... so, please ELI5?

If SVB was paying 4.50% (as they claim on their website), then even if the customer takes a 5% loss, it would be only a 0.50% realised loss.

I genuinely don't understand why the regulator doesn't push for that unless there is some "lobbying" involved.

Correct. This is literally why bond prices move inversely to changes in interest rates.

The people criticizing you here are ignoring carrying costs (which are fundamental to finance math) and assuming that default risk is the only form of risk (which is obviously false).

From where do you think this money will, or has come from?

From Yellen's backside?

Depositors are the absolute last group to lose money in a bankrupt bank. When a bank collapses its assets don't just disappear, and depositors (and paychecks) get first scoop from the pot.

It would be nice if everyone didn't have such hostility towards personal responsibility. You never put all your eggs in one basket. You diversify where you keep your money.

The government can best help by doing what it does best. Let it invest in making bankruptcy courts super efficient. Set up automated systems to drip feed payouts to depositors as assets are sold.

The "heads you win tails we lose" deal we give to bankers, which we don't give to anyone else, is fundamentally evil, and we have to stop bowing to their terroristic threats that if you don't give us this deal you're all doomed.

If the banking system collapses most businesses will fail.

So much of this is built on trust, it’s literally the government’s job to step in and fix this before this explodes. Luckily, it sounds like SVB has the assets to cover the losses but not liquid so it will take time. Also, nobody is getting a bail out. SVB is dead, period. Depositors money belongs to them and they should be made whole. This could have been so much worse.

They mean the risky, overleveraged and marginally valuable businesses fail, and the conservative, careful, and valuable businesses survive and buy up their assets.

It's precisely the interference with this process that's exacerbating economic booms and busts in the first place.

Let those who played it safe now have their reward, and those who played it risky have their comeuppance - not the other way around.

Equity holders of three banks just lost all of it - that is exactly what you're asking for.

In fact nobody recommends holding one bank account, under any circumstances. Banks can and do freeze accounts for any reason. You always have some backups standing by.

You also don't keep all your assets that way. Businesses can hold reserves in stocks or bonds or gold or cash in a safe just like everyone else.

The VCs didn’t concentrate their money like this for no reason. They got some benefit out of it, surely (easier access to loans for their portfolio companies, I suspect). And VCs are, or should be, sophisticated enough to be accountable for concentrating their capital without purchasing insurance.

There’s no clear way for VCs to pay the price they should pay without some startups being collateral damage. I think that’s the crux of the disagreement about what should have been done.

Founders used SVB because regular banks, if they see you have a failed startup in your history, won't give you a home loan.

Almost like some scam? Why should banks have such priviledge? Who gave them that?

I keep some of my money at the bank because I have to and because my employer is paying my salary through a bank account. The most of it is at some safer place.

Liquid deposits at low interest rates are useful. Home loans are useful. And banks can bridge the two successfully almost all the time. And even when banks can't, the biggest problem is probably panic.

In many countries, the solution has been to transfer the tail risk from bank depositors (not owners) to the state. The state then reduces this risk by regulating banks heavily, and by requiring them to pay into an insurance fund.

I am not a libertarian. I support the idea of government as a regulator and an insurer of last resort. I am 100% aware that banks can only exist because the government holds the tail risk.

I think that wiping out SVB's shareholders and unsecured creditors was the right move. If we can claw back some executive bonuses or recent insider stock sales, all the better. However, I also think that making depositors whole is the right move in this case, because lots of banks own long term T bills and mortgages locked in at low rates, making them vulnerable to bank runs. Our best chance of fixing the situation is to prevent short-term contagion and then to change the regulations on banks to eliminate this risk in the future.

But yeah, I think banks are a useful fiction created by state regulation and state-mandated insurance. If we no longer want to provide that particular economic fiction, then I would prefer voters to elect people who figure out an orderly plan to wind down banks, rather than just letting the system implode.

(Full disclosure: Neither me nor my employer has money in SVB. But my paycheck is handled by Rippling, which passed funds through SVB in the process. Had my paycheck been paid last Friday, it would have been held to at least Monday.)

No explanation other than "this is the way things are done".

They're saving customers to a large extent, who could have done more diligence when choosing a bank, you could argue. But they still feel pain going through this process. And not saving them would have worse consequences for the entire system.

No, they use taxpayer's money to save taxpayers.

I'm fine with that as soon as we save taxpayer's money and punish those who triggered the accident and replace them by people who are paid by taxpayers money, under direct control of the state.

There is no sensible reason to want the state to own every bank; that means you're accepting a silly amount of risk and not diversifying your investments. What you want is a social wealth fund, not owning a random industry you don't like.

SVB’s CFO was previously the CFO at Lehman, so whether he still has his job today seems to have no impact on whether the revolving door will continue to open for him or anyone else there.

Although in this case he did do it again.

Insiders file 10b5-1 plans with their brokers well in advance to automate the sale of their stock. It's very unlikely that the sales had anything to do with recent events.

The bankers sold most of the shares before it happened, because they knew it was coming.

Just shows that they knew even early SVB was fucked. I meant it was clear SVB was fucked since JPOW raised rates and SVB had dog shit assets on their HTM.

But instead of doing something they kept it afloat until they sold their shares which took about month to let it fail after they cashed out.

Right, that is the only reason why an insider would ever sell stock.

Here's the CEO's latest Form 4: https://www.sec.gov/Archives/edgar/data/719739/0001562180230...

He exercised stock options to keep his ownership roughly the same at about 26 Million USD. Wonder why he didn't cash that out.

> But instead of doing something they kept it afloat until they sold their shares which took about month to let it fail after they cashed

What should they have done? How did they manage to keep aflot? Why did they stop?

That’s not what’s happening here. The bankers — investors in SVB — are getting wiped out. The FDIC is protecting people and companies with accounts at the bank, not the bank itself.

Imagine another bank BVS of similar size that didn’t quite have the money. It has lost part of it in monkey NFTs or whatever. They have a loss similar to the mark-to-market loss of SVB.

Can they buy the same bonds that SVB has to patch the hole in their balance sheet? Can they then say “we have the money, we just don’t have it liquid right now because it's in bonds that won't mature for a while ”?

If not, why not? Both banks would have the same assets.

Unfortunately, in related news, the answer is 'yes', from the new BTFP.[1] I wouldn't say this is wrong but it does seem like the kind of bazooka-brandishing that makes financial-folk panic still more.

[1] https://twitter.com/BenEisen/status/1635061019629289472

Unlike NFTs or whatever, the bonds held to maturity will pay out the full amount.

There is no difference at all between the assets of liabilities and the two banks in this example. I don’t mean just that the amounts are the same: every asset is identical.

Can both use the “I have the money but just not right now” excuse or not?

You lost me there.

> Can both use the “I have the money but just not right now” excuse or not?

No.

The bonds lose 20% (for simplicity the t-bills gain 0%)

Bank 1 ends with $1000 in t-bills and $800 in t-bonds (face value $1000)

According to some people Bank 1 can say “I have $2000 it’s just that I don’t have them right now”

Bank 2 starts with $1800 in t-bills and $200 in NFTs

In the same period the NFTs lose 100%

Bank 2 still has $1800 in t-bills, sells $800 and buys $800 of those t-bonds which are trading at a 20% discount to par

Bank 2 ends with $1000 in t-bills and $800 in t-bonds (face value $1000)

Bank 1 and Bank 2 are in the same exact situation

Bank 1 can say “I have $2000 it’s just that I don’t have them right now” but Bank 2 cannot do the same?

If you're trying to say "look, 'taxpayer' isn't mentioned, all good", you're either in self-delusion or you're playing dumb. It doesn't matter how you dress it - "taxpayer money", QE, Sammy's piggybank - the inflationary repercussions will affect everyone.

> On top of that, SVB has the money to pay back almost all of the depositors. They just don't have it liquid right now because it's in bonds that won't mature for a while and would need to be sold for a loss.

This is a self-contradiction, yet it's written as an explanation. Bravo.

> You can vote for people who are dumb enough to let the entire banking system collapse because they want to hurt rich people. But of course that would probably put "peasants" out of work while the rich get slightly less rich.

This isn't about "hurting rich people", you can throw away that straw man (along with the twitter favorite "it's not a bailout, the bank equity goes to zero!"). It's about the response to a complex system's failure. Most would agree injecting liquidity ASAP is mandatory in the short-term, but that does not mandate insuring 100% of deposits. Any sort of response has negative repercussions, but it isn't a matter of fact that the banking system would collapse otherwise.

Nobody has "the answers", it's a complex system. The VC tech bro take draws a line in the sand and cries wolf for any approach that doesn't cover them 100%, and it's done under the guise of looking out for others; "the workers", "the banking system", "the economy", "a generation of technological progress evaporated".

Is it possible that the best thing to do for the long-term is to allow a worse short-term outcome (affecting a small part of the economy more drastically), so that the system is altered in a way that actually fixes/improves it? Even if we grant that hypothetical, should it be done? It's a complex question with no right answer.

The VC tech bro take on technological advancements that have negative short-term side effects, wiping industries and causing people to lose jobs usually falls in the range of "learn to code" to "that sucks, but we must march forward". There is a poignant sense of hypocrisy when grandstanding holier-than-thou "technologists" who claim in abstract that progress and efficiency trump all, find themselves on the other side and act oh so predictably.

The cynical responders aren't partaking in the question of "what is the correct response", but just because they don't gobble up the predictable VC tech bro take as gospel doesn't make them dumb.

The only problem with this line is that a ton of people on here are explicitly against social safety nets. Now that they need one, all kinds of equivocation and hand waving.

Safety nets for all (or none)! FWIW, I prefer the former.

"Hey, the FDIC coould raise the limit to, say, 10 million, and just let the FED reserve print out the moneys to everyone. Not much different than what the US government is already doing. Reached the debt limit? Just raise it again, lol."

Just by saying “we will backstop depositors” the government will likely have calmed things down enough that that’s the end of the story. Nothing else needed.

The bank has or can likely get the money to pay everyone back just not in 48 hours which is unnecessary anyway given normal outflows for the bank.

But it strikes me that there's a second-order "too big to fail" effect at work here.

Not only bank runs. How many businesses who don't have any banking with SVB are operationally dependent on cloud services provided by SVB-banked companies?

What's curious is that this wasn't a risk in the 2000-2001 crash, and barely an emerging one in 2008.

Let's say 20% of cloud service providers can't make payroll and shut down. What does the disruption in the wider, real economy look like? Pretty messy, no?

The shareholders already lost everything and unsecured creditors are about to lose everything. That's still not enough to make all depositors whole though, which is why the statement said the FDIC will be paying for the rest and funding that payment by "a special assessment on banks". Therefore, the simple answer to your question is "all other FDIC insured banks, rather than the taxpayers, are picking up the tab here".

I had read a summary of a Kleiner Perkins analysis recently that said the total assets they hold, some of which are those awful-yielding instruments they’re locked into for 10 years, covers their assets. But since some of those instruments cannot be liquidated anywhere close to quickly, the FDIC will just need to hold onto those for awhile and front money for the bank in the short term.

Of course, who knows if that analysis or the summary of it is correct.

This is one of those cases where the most obvious and mundane answer happens to be correct. The government is attempting to nip an existential threat to the wider banking system in the bud. Everyone who uses said system (read: literally everyone) has an interest in seeing it survive.

An organization with over $250,000 in cash is not an outlandish amount. Employers (obviously), but also municipalities, schools, churches and heck even grocery stores can exceed that limit. While it is reasonable to expect some individuals to have some sense and monitoring of the financial well being of the organizations they are directly affiliated with it is extremely unreasonable to believe that those same individuals are going to be aware of the balance sheet risks of the transitive banking partners of those organizations. People expect that money in the bank today will be there tomorrow.

Who wants to live in a world where everyone is keeping tabs on which organizations are banking where? It's a tremendous waste of time.

People don't want bank failures to be a thing, and if/when they do happen they want the damage limited to the senior leadership and investors of the bank.

If you were responsible for managing over 250,000$ of cash what is an acceptable Treasury operations strategy? Put it in a TBTF bank (still socializing losses). Split it into multiple banking partners - that creates operational risk in addition to extra complexity and overhead.

The other side of lazy private profits from "riding the yield curve" or which-ever else inane business model is recurrent crises and social costs, sometimes overt, sometimes obscure.

Arbitrary and ad-hoc explicit or implicit insurance schemes and put options, obfuscation and complexity, moral hazards and perverse incentives under every carpet.

A fair and democratic society, especially in the hyperconnected digital age must very seriously consider the wiring of the monetary/credit system. The rule should be simplicity, transparency and working hard for the money: return strictly coupled to risk.

Core to a better design will almost certaintly have to be the concept of risk free deposits with the central bank that are not subject to runs. The rest needs to be worked out.

If that were what was asked - then yes the answer is crypto. No central bank needed (or desired). It is a working alternative that has survived for over a decade. It is not perfect but there is a ton to learn from there.

Depositors are made whole. Shareholders are not. There were enough assets sold over the weekend to cover deposits.

Also, there isn't a bailout - protecting unnamed bank depositors is not a useful definition of a bailout.

Also, you spelled "depositors" wrong.

No one can tell you what will happen because to my knowledge the FDIC hasn’t told us yet. They may not have settled on a final outcome yet — there may be multiple options still live — finding a buyer for the assets of the bank, for instance. All this statement is saying is that they’ve verified that even in the worst case, the resources exist to make the depositors. whole.

Meanwhile,’bullshit’ is a strong claim. And I’m not going to fight you on the trustworthiness of government officials in general. But someone who’s been at this as long as Yellen isn't going to blow the Treasury Department’s credibility on a dumb, easily-discovered, get-you-through-the-day-and-then-fall-to-pieces sort of lie.

Dear Peasant,

I empathize with your pain and suffering on a daily basis. I know life isn’t easy being a peasant, you perhaps work as hard as anyone in Silicon Valley. You pay taxes just like everyone else and expect your government to protect you and provide opportunities not just for you but for your children and their’s. Silicon Valley is a major growth engine of our economy, it means lots of jobs for your future grand grandchildren. It means better lives for all of us benefiting from innovations that happen there. You no longer need to farm in freezing weather when your John Deere tractor can drive itself or hail a ride on Uber and know exactly when to go outside on a snowy day. So hope you understand that when a place that people trust with keeping their money collapses it means major disruption to the economy. It means those tech companies have to fold not to a fault of their own, but because of a series of domino effects that would have been not easy to predict. It comes with the territory, not too dissimilar to a famine. We need to do something to save those companies and thousands of people who work there contributing to the prosperity of our country and the world. We need to do what is smart, socially and economically responsible and save those companies by providing the cash reserves they stored in the failed bank. We need to borrow money from the tax payers to do that, just like when we did that in the last couple of years to help another group of citizens. I know you understand this is good not just for our country but it’s good for you and your children. I know many will not understand why a large population of the medium class should benefit as if they live in a vacuum and anything that happens to them will have no effect on the rest of us.

I know you will.

That's not done out of charity, it's done for profit. And when they're good enough they won't need the farmer. Forget about the grand grand children, what opportunities will the government provide for him when when he's no longer needed?

It's all about solidarity when the VCs are hurting, but what about poorly educated in the middle of nowhere?

It should be the same for everyone: you make your own choices, and if that has bad consequences you should suffer them alone. VCs don't share profits when things are good because stocks aren't taxed.