Yellen and the FDIC is in a tough spot. This is the important line, "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Thus, on one hand, I'm glad they're doing this, as it should help prevent wider bank runs, and it ensures that banks are the ones that are actually paying for it.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
Banks have lost all excuses to be making money out of other people's deposits. If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd.
Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
>If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
>Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
You are missing something crucial here - treasury bonds are a loan to the government - this is all by design.
Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
> because the Treasury needs banks to purchase government bonds
Does it? Or is this just how the system is currently designed?
50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
>Does it? Or is this just how the system is currently designed?
Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.
The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.
>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.
You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.
That does not address the second question at all? The bonds need to be bought by someone, but you gave no argument why this someone has to be banks and why banks need tax money for bailouts on top of that.
It was explained, maybe you didn't connect the reasoning.
First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.
It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)
As to why do banks need tax money for bailouts?
The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.
But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.
It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.
The banks need to buy treasuries, because they treat bonds as a risk free financial instrument. Everyone else would have to recognize the risks inherent in those bonds and thus demand higher interest. The federal government can't afford that.
The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.
So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.
But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.
I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.
Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation of the actual present value of that capital at that time).
Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.
But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.
That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.
My open question is whether the current system is the only way, yet alone the best way, to practically achieve this goal?
you think inflation is a problem now, wait until Congress has the literal power to order the Fed the print money which is effectively what you are proposing.
I do not trust the Fed, but I Sure as shit do not trust the US Congress.
Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury
The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill
Of course it is the fed who prints the money in the US and has dual inflation/unemployment targeting mandate. In other countries this role is typically performed by the central bank.
The debt ceiling doesn’t control spending because it is a misnomer. The money has already been spent. The debt ceiling controls whether the government will honor the obligations it has already made.
And that is cheaper? How much more expensive would a "correct" interest rate be compared to bailouts+economic fallout+loss of public trust you get from the current "risk-free" fantasy?
Trying to keep up the growth half a century ago was the last thing that (at least the West) needed to do - and it was already aware of that at that point.
I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.
People can learn how to use Treasurydirect.gov instead of using their bank as a lousy bond broker. Inflation protected bonds, that you can buy only $10k a year of are some of the highest yielding risk free investments that exist. Banks should just make money off fees and hold short duration Treasury bills only.
Other institutions that have LPs should lend to businesses, students and home owners.
But then you don't have the convenience and liquidity of a bank account. The system works because the bank can invest the aggregate deposits of all depositors and still be ready to cash people out as needed (of course, barring a situation like this one, which is what the deposit insurance is for).
The majority of people don't need daily bank accounts. The only reason why we are using them is because to dollar notes have not kept up with inflation. A $500 bill from 1900 would be a $17,500 note today. Two of those notes provide more liquidity than the majority of bank accounts in the US.
>Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
War bonds were bought by people directly. I see no reason why we can't have the same today. God knows the US needs a WWII sized investment in repairing infrastructure.
Individuals purchasing war bonds helped, but didn't pay for WWII.
The war cost a little over $300 billion. $50 billion of that was through individual purchases of War Bonds, the rest came from banks and taxes.
Bankers and merchants have always funded the United States. A representation of Robert Morris, the "financier of the American Revolution" is painted in The Apotheosis of Washington, the fresco decorating the ceiling of the rotunda in the Capitol building where he is shown receiving a bag of gold from the god Mercury. Soldiers and supplies were paid for with "morris notes" which was a proto-currency of the US that was backed by Morris' personal fortune.
Yup. The reasonable UX here is that you as a retail customer get to pick what assets your deposits should go into, and you take the risk. Bank just gets a minor cut for doing the admin work.
And yes, that means if you picked “10y treasuries at 1.56% interest rate” back in 2021, then 80% of your deposit would now be gone. You should have picked “3m treasuries at 0.1% interest rate”.
This whole idea that a bank deposit is some magical asset that you can never lose anything on (other than through inflation) is a leaky abstraction. Like with all leaky abstractions the happy path is great, but when it starts leaking it can get real bad.
So people rather than banks would now be sitting on hundereds of billions of losses. Instead of depressing bank profits those losses would be depressing consumption or home purchases.
Depressing home purchases might well be a good idea. Right now people treat them as investments rather than mere housing, and as a result that market is thrown entirely out of whack.
Indeed, home prices increasing at more than a modest rate is a bad thing for everyone in the long term.
Homes should be investments in the same way that a factory or warehouse is an investment. You buy instead of renting in order to fix the cost of doing business over time, not to speculate on potential future values.
Yes, with "Land Bank" being a big thing now, with people just buying up land and holding it to simply fight inflation, things are just going to spiral out of control one way or another.
The US government already sells billions of dollars worth of various types of bonds to consumers every year. How is what you're proposing any different, and how would you entice more people to buy them than are currently buying T-bills, T-bonds, I-bonds, etc.?
Who is going to buy them? Most US citizens have less than a month's worth of income in their savings account. I'd be surprised if they enough confidence in their own income to tie even half of that up in war bonds.
Many (most?) Americans have no savings account. Not because they are poor but because a savings account is largely an obsolete anachronism. The common tactic of conflating "savings" with "having a savings account" is intentionally misleading.
Per the US government, the median US household has $1000/month they could invest after all ordinary expenses.
Perhaps we'll be forced to accept that we cannot continue to have "endless growth" with a declining workforce. The cost of Labor is going to go up at all levels, and that will mean smaller profits and more inflation until things stabilize and enough of us are incentivized to do productive work.
> Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?
That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business).
The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
> If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers.
More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
You're not supposed to talk about that! "If something we don't like happens we'll have to raise prices!" seems to be taken at face value all the time. It's true that in an idealised perfectly competitive market a measure which increases the costs of all producers equally will raise prices across the board, but this is absolutely not realistic.
As you say, the what really matters is (perceived) elasticity. If a company thought they could increase profit by increasing prices then they'd just do it. Conversely if they get fined or regulated or whatever but, as expected, it doesn't affect their elasticity curve then they'll leave prices where they are. If they were acting rationally it was already at the ideal point.
Normal/poor people don't put enough money into banks for it to represent much of their earnings. IIRC, from that image that was circulating around, much less than half of the deposits of even BofA are from accounts <$250k. So I don't think accounts like your grandma's are going to bear any percentage of the brunt of this.
> Normal/poor people don't put enough money into banks for it to represent much of their earnings.
This is hurtful in more ways than one.
Banks routinely charge all kinds of fees from account maintenance to whatever Wells Fargo did for years.
Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Either what you say is true and the retail customers are insignificant, and banks must offer no fee accounts. If not, they can't block federal reserve from creating default USD accounts for everyone.
Or they are an important part of the bank's marketing strategy or whatever. In this case, banks must lose the ability to gamble customer funds.
> Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Actually the FED is opposed to this themselves. A company called the narrow bank was going to try this. The FED refused them a banking license, all the way to court.
The FED wants deposits reinvested into the economy.
> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee.
> Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.
It feels like they were offloading their cost to a service that the government maybe offers at a loss.
It's not so much about the loss, its about the fact that banks lose their depositors. It is great for an economy that the 'savings' of people are used to safely invest in good ideas. This is the function of banks, and incidentally a function that really benefits from a profit motive.
Hence I believe the Fed was against this to keep the economy running by 'keeping money rolling'.
I am not convinced by this argument* because banks can already do that. I don't think that bank are "required" to invest client's deposits, so they can already just stash paper cash in a big vault. It is clearly a dumb strategy for a retail bank.
This proposal for narrow banking seems to employ the government as this vault, sort of like treasury bonds that can be freely withdrawn, which seems a more significant difference.
* I am not denying that this is what the feds claimed and/or believed
It’s deposit volume rather than number of accounts that are over $250k. I’m sure that most of the accounts are <$250k, but a single $1m account accounts weighs the same as 100 $10k accounts.
> Yeah, the fees and lower interest rates from this will be pretty brutal for the poor.
I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
It's not only the earned interest on savings being discussed here, the OP was also including higher interest rates on the variable rate loans that most poorer borrowers qualify for.
They only need to cover 20 billion or so for SVB? In the grand scheme of all banks, that's not a ton. SVB wasn't some FTX oops it's all gone level fraud.
Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
An assessment on banks costs shareholders of the bank, not accountholders. (Maybe it indirectly costs accountholders if banks lower interest rates on customer deposits, but these rates are generally not affected by a small short term shock).
It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented.
Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers.
If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
4) Banks get their privileges revoked and they are no longer an oligopoly with privileges of being the only way to store dollars legally, and the only investment institutions who get to gamble their customers money while the government is insuring their loses but does nothing about their gains.
The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money.
Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
They got to play with 10x leverage with their client funds for free. You can't barely get 2x leverage at broker, you pay interest rates much higher and they actually enforce strict margins.
Minewhile these people out of their privilege as bankers got to play with much bigger leverage, while paying zero interest rates to their counterparty which turned out to be fully paid for by the government in the end.
100% investment loss in this case is hardly enough, with the leverage levels banks can access they can literally collect pennies in front of a train and have positive expectation values for shareholders, while investing in negative expectation value investments.
And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows. They paid their customers nothing for it.
VC investment strategy for VC bank. They took the zero or hero attitude until the end. Again, we're taking about people with already VC mentality of "worst case 100% loss, best case 1000%".
No wonder that once VCs recognized their own shadow they fled so fast.
And now they are pretending as if it's the fate of the banking system on the line.
VC bank, managed like VC venture for VC firms. They deserve to lose VC money.
Their loans are probably also worthless than they claim, but they managed to successfully swindle the Fed in the most VC way ever with the shortest deadline. I'm betting FDIC is going to pay twice as much as expected in the end.
> And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows.
> worst case 100% loss, best case 1000%
See I don't understand how you can have 1000% return by buying treasuries, at any time. It was a stupid decision in hind sight, but the best case is order of magnitudes below 1000% return.
And you've put these two things right next to each other, what am I missing?
They would be perfectly safe have they dumped their deposits into T-Bills.
They didn't went for the 1000%, they went for the 5-10% extra and ended up losing everything.
Had they used T-Bills or even straight up depositing it against the Federal Reserve for NO return, they would remain liquid and could now reinvest into higher yield bonds as the rates have risen. Instead they now hold 1.5% 10 year HTM bonds that are now valued at 70% original today because the prevailing rate is 4.5%.
To clarify I don't know the actual strategy they took. I am responding to how they can have risk in "make safe loans" or "buy safe bonds" scenario.
> They would be perfectly safe have they dumped their deposits into T-Bills.
How is this different than what you described? If the rate increases beyond the coupon of a 10 year treasury, its value drops. Are you referring to extremely short term treasuries?
Thanks for explaining it so well. I was thinking that simply losing the bank was enough in this case, but you make a very good point, and this kind of insight is what's good about this site.
You seem to be conflating the bankers with the bank owners here. The former have done well, the latter have lost everything (total SVB dividends are less than the value of the bank).
Do you really think the owners and senior management of SVB ended up with nothing? What about the stock sales they made right before the FDIC took over, or the bonuses given out, or even their compensation during the years in which this high-risk interest rate scheme was going on?
They have orders of magnitude more money than most people, and will get away with no liability.
> What about the stock sales they made right before the FDIC took over
Is there a more clear cut case of insider trading? SEC should already been working on that now.
Anyhow, you're arguing that they SHOULD end up with nothing, that is an entirely different subject of its own. Because you're talking about punishment, while I'm talking about deterrence.
Punishment must be enacted from outside after the fact, while deterrence can be innate before it happens. These senior management could have years of cushy job and more equity, and now they have to rely on savings and have the SEC up their ass. It's clear which is more preferable.
Just wondering, if they know for sure that they will be sued afterwards, why would they sale their stocks? Why not do nothing and live with what they already have? Is there a possibility that they can get away with it?
> Is there a more clear cut case of insider trading?
Genuine question, is there any evidence that these trades were out of the norm, rather than a regular portfolio rebalancing that’s common with any employee who receives part of their comp in RSUs?
Honestly I'd like for there to be a decent look-back period to recover the funds from any stock sold ahead of time, as appears to have happened in this instance. Use the proceeds to help make depositors whole.
No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
I would guess that these executives entered their sales months in advance as is relatively typical to avoid insider trading. You can look this up on the SEC website
And in the case of company failure, perhaps the lookback period should be extended beyond several months. I don't have nearly the financial or legal knowledge to suggest viable policy, but from what we know of how SVB failed it would have likely been visible well in advance of the failure to someone with access to the requisite information.
I don't know why people keep calling out the CEO stock sales, unless we find out something new this was almost guaranteed to have been done pursuant to a publicly filed 10b5-1 plan which has a 30 or 90 day cooling off period and must be filed when they have no material non-public information. So if the CEO could see this coming, anyone else could have too on the basis of the same information.
These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading.
Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.
I don’t know if your are just ignorant or if your are intentionally misleading people but this system is widely abused. A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time. The CEO used exactly this type of sham plan to unload his shares. Look at the plan he filed this year and the plan he filed every year for the last three years.
> A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time.
Canceling a 10b5-1 is not in and of itself a violation, correct, but it can kill your affirmative defense as it jeopardizes the good faith element.
However, they would have had to have entered into the 10b5-1 prior to them coming into material nonpublic information in the first place for it to have been valid at all. My point is they made the decision to sell before they knew what was happening and filed a compliant trading plan.
> I think that's a good enough deterrence against bad things.
Nah. They should liquidate the owner's private property as well to cover uninsured depositor losses. Better than making them whole by printing money and having everyone else pay for it indirectly through inflation.
Do realize that the SVB bankers and shareholders remain completely screwed. This bailout does not save them. Nor will any FDIC bailout.
So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.
Well that's far from the complete picture. It's not that the gov't is backstopping all bank stupidity -- the new facility simply says that for redemptions, US government bonds and MBS can be valued at face value not market value. Only for the purpose of ensuring liquidity for redemptions
Yes, they keep on inventing all kinds of new rules that effectively transform the assets that banks happen to be holding onto assets that are worth more. It's just printing money in an obscure way.
The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else.
It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government.
They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk.
All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk.
The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash.
If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money.
It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.
They must pay salaries - about 2% of deposits. They must pay interest on deposits - now people are demanding 4%. They must pay some dividends too. So they must invest in something.
What's the point of cake if you can't eat it? You'd have to start charging for having the cake.
The current practice of limited investment is reasonable and helps keep the system self funded without much in the way of account fees. It's not as if banks are investing the funds in the equity market. Appreciate I'm commenting from afar and without emotion but these failures are normal. This kind of chaos makes the system stronger. And I think most commentators can agree that this is largely a symptom of a swift increase in the repo rate shortly after significant bond purchases by SVB. There are lessons to be learnt but I don't think if you were sitting on the SVB board and were part of the decision to purchase these low risk bonds did you in any way think it would lead to this outcome.
They didn't have risk officer for months. They lobbied to repeal regulations. And I don't blame them, that's their incentives.
At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders.
even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%!
This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment.
You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse.
It's just a matter of time before they blow it beyond repair.
Why would customers being made whole (at the cost of wiping out all equity and possibly at some cost to other banks) affect the incentives of banks in this kind of situation? What would banks do differently if account holders could lose everything over $250k? If they are happy to “gamble with 10x leverage” then presumably they don’t care about impact to their customers. If bank management risked jail time that might change incentives but doing that doesn’t seem to require a cost to account holders.
Customers should be diversifying in these situations. It’s easy enough to set up a sweep. Those that don’t for whatever reason shouldn’t get bailed out for their poor decision making. That’s de facto subsidizing any future banks that want to make risky investments.
This strikes me as more a perspective of someone whose lived so long in a stable system that they consider it a fundamental immoral failing when something does occasionally go wrong. The loaning of your clients money is the fundemental idea that banking works on, if you weren't able to grow your clients money through lending it you would have no reason to accept clients money in the first place.
Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.
Define “invest.” Banks invest. That’s literally what they do.
People deposit their money rather than put it under their mattress, and the banks reward them by giving extra money to them.
Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors.
The point is, why doesn't the government just capture that revenue? Instead we are letting private companies keep those earnings, without taking on any risk.
Let's deposit at the bank of USA and cut out the middle man.
I see this issue in so many areas. Government orgs and companies have different organizational incentives and tradeoffs. When we substitute a government function with a wallet for contractors, we lose those tradeoff. But it's even worse because now the company has moral hazard.
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I think everyone knew that already. Since 2008 at least.
It's very possible that if this is not done, the only banks left at the end of the week will be the "too big to fail" ones. A domino effect is very hard to prevent when it's based entirely on consumer confidence and those consumers can very easily create a bank run on literally anything if they freak out.
Not sure I follow the logic. SVB is done right? Saving the companies that banked there is very different than saving the bank. Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least). I like that the gov is acting more like a scrappy company here and getting some shit done when the stakes are high. I dunno, just spitballing here, curious about the counterpoint.
From the perspective of just the people working at SVB, I guess so? But from the perspective of people putting lots of money in one place, it's a reinforcing signal that the most important part of picking a bank is that it be big enough to get bailed out in case of poor planning.
> From the perspective of just the people working at SVB
Who had the former CFO of Lehman Brothers just before it collapsed on their executive team? These people will continue to fail upwards with taxpayer support as they always do.
See you in ten years when he's involved in the next one.
What is the advantage of encouraging people/companies to spread their deposits among multiple banks? Say people were really worried about losing anything over the FDIC limit and so kept multiple separate accounts. Then a bank fails and the government still has to cover the deposits, so what's the benefit? Is the idea that if people are worried about their deposits they won't put more than the limit in banks that are making particularly risky investments? Isn't it more likely though that anyone who would do that would just spread their money out regardless, and therefore there's no disincentive to the banks.
The bank isn't being bailed out though. The depositors are being covered by FDIC in the short term, while FDIC will sell assets seized from the bank. The bondholders and shareholders will take the haircuts. If that's not enough to cover the depositors, banks will be given a special assessment.
The banks left standing will be made to cover the deposits, insured or not, of other banks. It is rather remarkable and I'm not entirely certain it'll work - at what point the special assessment could be unsustainable. Presumably this special assessment isn't instant, and FDIC could just use accounting to make it politically and legally valid to consider it as a non-public and industry financed private bailout.
shrug will it work? I don't know. It really better.
>_shrug_ will it work? I don't know. It really better
The need to be able to field questions like these is why I feel we need open-source economic simultion packages. Does anyone think that people in the individual Fed reserve banks are running anything other than flat spreadsheets to model the financial system? Theyneed to develop economic modeling scripts (at minimum!) a field which is in its infancy. The datascience & modeling capability in HN would eclipse the forecasting power of an econometrics-focused Fed statistical modeling group.
I'd like to see a python library devoted to economic modeling w/ classes for central banks, investent & retail banks, applied into umpteen think tanks' different competing models.
"Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least)."
* As the gp said, it's done. The guarantee isn't new, it's how thing are done now. The Fed is not changing things by doing this, the Fed is doing things as they are expected to be done. Anything else would be changing things, anything else would panic people. Is the Fed "scrappy"? IDK, the "scrappy" efforts to stop crises began with the "plunge prevention team" in the 1990s and have continued more systematically since then, if you want to call that scrappy.
* As to whether there are black marks on people - only the companies who can whether to hire these people later can decide that. Financial companies hire people who've done time for financial fraud so it's questionable what sort of "black marks" the Fed could give if it wanted to (People mention the Lehman guy but was Lehman really worse than the others in 2008 or just a scapegoat - like fricken Martha Stewart. Was that guy involved in excess or just a random manager? I recall he was now managing a stock subsidiary that's being spun-off whole. But still).
> It's very possible that if this is not done, the only banks left at the end of the week will be the "too big to fail" ones.
I don't get it. Doesn't the unlimited FDIC insurance encourage mega-banks? If funds were only insured up to 250k, wouldn't that just mean we would have to spread money across multiple banks. And sure some banks would be wiped out but new better banks would take their place. It's not a closed system
Banks used to fail and be smaller failures. Now we removed almost all failures except when we have a failure its huge:
It's like forest fires, we shouldn't build fragility into the system by removing all risk and then rely on regulations to mitigate it. Hasn't worked in the past and will lead to more consolidation and bigger fires in the future. Remember in 08 the answer was to combine a bunch of banks and since then we've had no new banks created (besides Ally which was a spin off of an auto workers pension fund if i remember)
That estimate is misleading as SV failed after people pulled 45 billion out. It wasn’t a 200 billion dollar bank when it failed and people didn’t lose 200 billion dollars.
We are at ~1.3 bank failures per month in 2023 which is much closer to 2020’s 0.3/month than 2009’s 11.7 banks failing per month. That IMO says more about the rest of the year than the size of the banks that failed.
The parent comment just made the point that you need to normalize for the size of the bank, not for the number of banks per year.
Your comment takes the annual frequency and divides it by 12 to get an average monthly frequency, adding nothing to the argument of the grandparent comment.
They suggested you should normalize for the size of the bank but didn’t support it. They even used non inflation adjusted numbers.
Maximum assets under control don’t correlate with actual losses especially when people pulled money out before the collapse. It’s a completely meaningless number on it’s own.
Certainly very valid criticisms. To be fair, I specifically was trying to ballpark it and this graph does not contain the Signature failure yet so I think it is a fair representation of this particular metric.
I also think it's a good point that a dollar is not necessarily equal to another dollar in this context. But the same can be said for individual banks as well.
I put the majority of my cash in one of the smaller banks. The news that has transpired in the past few days had me mulling moving those funds to a larger bank, likely Chase (one of the too big to fail ones).
Even with the FDIC guarantees, I was not at all confident that :
1. they actually had the funds to cover _many_ bank runs; and
2. it won’t take weeks if not months for me to recover my funds, if my bank fails.
It’s entirely possibly that these lines of thoughts will motivate many more people to consider this exact move, putting even more stress in the system.
The FDIC is backed by the full faith and credit of the US government. If a bank fails, your insured deposits will be made while, usually the next business day.
The US government has a debt limit. The government is going to run out of options for not exceeding that limit in a few months unless it is raised. There are people in congress suggesting that they should let the limit get hit. If the debt limit is hit, do you e pectin the government to be able to pay out FDIC money in a timely manner?
Not just FDIC though, in 2008 and again today the Fed is making clear that their backstop is bigger than just FDIC. it can’t be any bigger than the debt limit so I find it sobering to have this discussion while we’re heading towards that cliff.
With the Bank Term Funding Program, people who moved or previously kept monies in large banks have less incentive to do so, until 2024 when this program is scheduled to end. That is, if they think 25 billion is enough to prevent more runs, and the FED/treasury/FDIC will not greatly expand that in the event of another run.
IMO you should probably do business with multiple banks with somewhat separate market segments to try and diversify risks. You shouldn't have all your cash under one mattress ;)
Imagine you’re a business owner. Would you rather bank with Local Community Bank, the failure of which will essentially kill your business, due to haircuts on uninsured deposits that’ll annihilate your working capital, or will you bank with Chase, the failure of which forces government action to cover depositors because the economy is a goner otherwise?
But isn’t your CFO planning for financial risk? Do you have hazard insurance on your leased offices, what happens if one of your key employees is unavailable, a large customer is late on payment, you get hit by supply chain issues, etc.
You can’t seriously tell me that the CFO who is responsible for corporate finance at these SVB customers didn’t realize a business checking or savings account is not fully guaranteed? It’s in every single bank brochure and statement. If that’s that case, they need to suffer the consequences of poor contingency planning.
Isnt then the whole thing fault of VCs who included those covenant? The same VCs that now cry hardest?
Moreover, both startups and VCs are literally the groups that celebrate risk taking and disruption. This is it, this is the flip side of risk, the definition of risk is that you might loose. But somehow, when they loose, due to risk taking, then suddenly they want extra bail outs and help.
According to the AP, there was a second bank failure today (Sunday) and there was a risk of a third:
> In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history.
> Also Sunday, another beleaguered bank, First Republic Bank, announced that it had bolstered its financial health by gaining access to funding from the Fed and JPMorgan Chase.
That article is already out of date. Signature Bank also failed today.
I suspect that Signature Bank's failure is tied to their crypto activity. But the sight of 2 banks failing while there was an ongoing run on at least one more bank does seem like the kind of thing that could start a panic.
The entire regulatory system encourages mega-banks. The entire “too big to fail” concept encourages it. Complex regulations benefit those who can afford the legal costs of compliance. Dodd-Frank probably made this outcome more likely.
The role of the government in letting this happen has been under-covered so far. Weren’t they supposed to be overseeing things, stress-testing banks, etc? Regulators either were not looking, or were looking but did not notice. Regardless, there is not much sense to the argument that the government is “stepping in” tonight, because it was always involved.
Has nothing to do with flooding the world with cheap money which chased unrealistic yields. Systemic excess liquidity when deposited needs excess assets to balance. Assets which were bought at inflated prices. The question now is only how much will this house of cards collapse.
That didn't prevent multiple runs against Washington Mutual in 2008, and it won't prevent runs now. People are worried that they won't be able to get to their money even if it is insured.
Plus, even if the "typical" consumers don't freak out, businesses might. There are a lot of businesses with accounts over the FDIC limit. Only about 60% of bank deposits in the US are insured.
If I thought the US government was going to fail I'd simply try to be the first to convert my dollars to a dense and valuable commodity, like gold, and then find another government to live under. It's not like people pulling out dollars have to keep their wealth in dollars.
How would they even do that? Bitcoin handles ~350k transactions per day. VTI (Vanguard's Total Stock Index), a large size fund is on average traded 3,670k per day. That's one fund. There is no reasonable way for small customers to pull out of index funds to bitcoin unless there is a fundamental change to how bitcoin operates.
Small customers get BTC from an exchange, which keeps their accounting internally. No transaction volume limits.
Later the small customer may move that BTC to self-custody, which could be an on-chain transaction or LN or other side chain with more transaction capacity.
And perhaps there's no other way? The Japanese did the same with their overpriced real estate provlem, Europe did the same with their almost defaulting countries.
Think about who gets hurt if the banking system collapses. It ripples out into the rest of the economy, because in fact the economy runs on debt. It would be harder to maintain existing businesses and start new ones if there was a credit crunch -- we lived through a credit crunch after 2008 and it was very bad for everyone.
Even if you want certain people to get hurt by this (and there is definitely a baying mob that seems to want to cause as much suffering as possible because they just don't like certain classes of people), keep in mind that this could cause a 2008-style recession that hurts everyone.
Who do you think gets hurt more by an economic downturn? The billionaires who lose millions and end up still being rich, or the working people who lose their jobs and can't afford housing? This isn't a theoretical question, we know the answer because it happened before.
I have some off-the-grid and expat friends who I suspect are rooting for a collapse primarily to justify all the shit they did and said. These types seem to thrive on doom and I have no doubt they've always existed throughout history.
Eventually I suppose they'll be right, but primarily as a result of one of those broken clock coincidences ...
The desire to let it all burn comes from those who played by the rules.
The government's intervention creates moral hazard: those that played with fire got burnt, and those who didn't didn't, but those who didn't get burnt were positioning themselves to take advantage of the opportunities that the crispy bodies would have generated.
But the government swooped in and saved the crispies, without penalty to them, at the cost of those who had proper risk-adjusted positioning.
We see this time and time again. The government is changing the rules after the game is over to change the losers to winners. It's nonsense.
Sounds similar to when people were rooting for airlines and auto manufactures to just die in 2008 to say "fuck the rich". I'm glad they were all saved.
In human psychology, fairness is a big driving force in society. I think studies have regularly shown that people will tolerate outcomes that are objectively worse for themselves if the alternative seems unfair but objectively better.
People are not rational. Homo economicus is a myth.
Isn't spite just wanting that version of karma or justice but hurting yourself in the process. If we let these banks collapse it's definitely going to hurt lower income people more than wealthy people so to me that is 100% spite
No. Spite is hurting yourself to hurt someone else. A desire for karma is willing to hurt yourself for justice. They look very similar, but are different.
That is incorrect, spite is seeking the deliberate harm of another. It’s possible for spite to include hurting yourself to inflict it, but that’s not in any way necessary.
Sure, and karma doesn't require hurting yourself either. I meant in the specific case we were discussing, in which harming yourself was already baked into the situation. I admit I could have been clearer initially and am sorry I spoke clumsily.
Justice is the idea that people are treated equally, impartially, and fairly under a set of standards. If someone breaks the rules justice is them getting the same punishment anyone else would get, concerns about externalities don’t come into it.
Is everyone getting hurt ideal? No. But that’s a different question than is it justice.
IMO this is what happened during 2008. The government tried to minimize harm at the expense of justice, and people are angry because they don’t realize how bad it could have been.
If the two options are a) everybody except the rich get hurt and b) everybody including the rich get hurt, then I think the majority of Americans would go with b.
B is definitely where we're at. Many Americans are tired of watching the rich get bailed out with socialism-for-the-rich-not-for-the-poor. Meanwhile the not-rich continue to struggle in every aspect of life, from food to housing. And blame is placed squarely on the rich, who have a greater voice in the elected government.
No. That is called crony capitalism. True capitalism would let these banks burn and allow those who saved or have capital buy them up. No gov intervention allowed.
No, it's just called "capitalism". The thing you call cronyism is a core feature, not a bug: under capitalism, the capitalist class advances its own interests.
Please stop trying to redefine basic terminology to suit your agenda.
Yes, but we're disagreeing about the specific meaning of words. Capitalism describes an economy where capital is the mechanism through which goods and services are allocated. It is not the partnership of public and private entities, as you suggest. That would be crony capitalism.
That page describes how "crony capitalism" is used colloquially. Dictionaries are not a great source for determining canonical meaning of complex political terminology.
I argue that usage of the term "crony capitalism" is itself a form of capitalist ideology.
The socio-economic system where social relations are based on commodities for exchange, in particular private ownership of the means of production and on the exploitation of wage labour.
Wage labour is the labour process in capitalist society: the owners of the means of production (the bourgeoisie) buy the labour power of those who do not own the means of production (the proletariat), and use it to increase the value of their property (capital). In pre-capitalist societies, the labour of the producers was rendered to the ruling class by traditional obligations or sheer force, rather than as a “free” act of purchase and sale as in capitalist society.
Value is increased through the appropriation of surplus value from wage labour. In societies which produce beyond the necessary level of subsistence, there is a social surplus, i.e. people produce more than they need for immediate reproduction. In capitalism, surplus value is appropriated by the capitalist class by extending the working day beyond necessary labour time. That extra labour is used by the capitalist for profit; used in whatever ways they choose.
The main classes under capitalism are the proletariat (the sellers of labour power) and the bourgeoisie (the buyers of labour power). The value of every product is divided between wages and profit, and there is an irreconcilable class struggle over the division of this product.
It probably doesn't need to be said, but it's pretty obvious the bias in that definition.
There is no singular definition of capitalism, but many others would differ on the distinction you've drawn from earlier posts. E.g., a system based on the reinvestment of excess profits does not necessarily equate to crony-capitalism. It seems your issue is with the person using the word "socialism" to describe a social ill of crony capitalism. But there is a distinction there that is being muddled in the conversation.
Can you coherently define "crony capitalism" and explain how it's not a fallacious no-true-Scotsman defense of "real capitalism" (or whatever term you prefer)?
Capitalism disallows private and public collusion beyond what is necessary to ensure public goods, defined by those gods which are nonexcludable and nonrivalous.
How does capitalism "disallow" any of that? Where is your evidence that disallowing this is a stated goal under capitalism?
I think you're confusing "free market" USAmerican right-Libertarian ideology with capitalism itself.
Capitalism, simply put, is defined as private ownership over the means of production, and the people who have that ownership are called the capitalist class. None of that precludes any sort of collusion.
Such collusion (and other things, such as child labor) was commonplace in the Western world recently and is still commonplace elsewhere — capitalists still wail and cry foul when legislation, no matter how toothless or perfunctory, is introduced to curtail such behavior.
You’re confusing what is a central tenet and what may occur as an outcome of a poorly executed version of the principle. By that same logic, tyrannical despots could be argued as a stated goal of socialism.
I don't think those are the only two options though. b) The rich now have less billions but still billions and everyone else now has to budget even harder.
There was no guarantee that the govt will make money but there is a guarantee it creates a moral hazard. If you are a banker take excessive risks and enjoy the profits, if things go wrong, the govt will bail you out.
Heads I win, Tails I dont lose.
You also ignored that govt/Fed keeps printing more money, so the taxpayer ultimately loses with inflation.
>At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
No, there are systemic risk exceptions within the rules. If a bank is large enough, then the systemic risk to the economy as a whole is large enough to warrant this step. "Too big to fail" is typically a derisive comment, but it is not without practical reason. Governments are supposed to act in the best interest of the governed. I hope it is clear to all of us that avoiding the economic disruption of a cascade of bank failures is in our interest.
Smaller bank failures do not pose systemic risk and so they will not be backstopped in the same way. Might seem like unfair treatment, but practical concerns often outweigh the theoretical. By the way, SVB is still a failure and as a company is now gone. Some other entity will take over its assets, debts, and customer services. All senior management has been removed.
>I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
We did. That is why we have the FDIC, the Federal Reserve, and the Treasury department. They did their job and did it quickly and effectively. SVB did not get bailed out, the depositors did.
Is it though? I think there's a proportion of readers who might feel grifted by regulatory capture (eg: unable to get on the housing ladder due to draconian zoning policy) and reasonably feel that some of the moral hazard has to be addressed to stop what has been unstoppable growth to give them a chance to establish financial security. It's a fallacy to see it as zero sum, but a temporary crisis in confidence might produce the only opportunity in a lifetime to create the conditions needed for affordable housing to be available for purchase for folks who can keep their jobs during the crisis. Many feel economically abandoned.
You can't just snap your figures and have the housing market drop by 60% and keep everything else the same.
Those same people are going to lose their jobs and burn through all their savings and be unable to secure loans to buy houses.
Even if you bank at a supposed safe and secure credit union, a systemic crisis will affect them as well. You won't be able to get a loan. There goes your opportunity.
The whole financial and economic system is intertwined and you're part of it, if it blows up and crashes into the rocks, you're going down with the ship as well. Get over your Main Character Syndrome where you think you're going to be the one immune to the catastrophe.
I know many good, hardworking people who secured their position on the housing ladder in the aftermath of the global financial crisis. In conversation, they were bewildered by how much their homes appreciated even by 2018, well before the pandemic bump in valuations.
But is anything being done about it? It is both unequality and bananism at its best. You give money to the "rich" (though this time indirectly), you encourage recklessness and you also change the rules when you see fit.
All of these described above are "disrupting" the economy. And none of them is in our interest.
The really rough part about HN is the low level of knowledge about how governments and politics work. It's ok to judge these outcomes harshly but many commenters here intermingle their judgements with their mental models that seem to have not evolved beyond what they were taught in secondary school.
It's really quite concerning because some of these people have tremendous power. I suppose the only positive is that a number of titans of Silicon Valley are not savvy enough to challenge increasingly assertive governments.
While what you say is true, maybe we shouldn't allow mergers and other avenues to allow these banks (and other verticals) to be too big to fail. We've made that a target for all companies. Just get too big to fail and you get all the upside and none of the downside for free. That is my main complaint. By allowing deposits to be invested without risk, these too big to fail banks are encouraged to chase the highest yield, highest risk re-investments possible. If it works, another yacht for everyone! If it fails, we must be made whole!
I think at least a part of the solution is to increase regulation as banks get larger. Since it is clear that the fate of very large banks is tied in to the the fate of the economy itself, they should be appropriately regulated. In particular, short term asset/deposit ratio requirements should be modified as a bank gets larger. That could reduce the need for the FDIC to step in when depositors get nervous and provide disincentives to getting too large.
I think something like this could make large banks more of an asset for the economy rather than a liability. I wouldn't want to just set a maximum size. If a bank wants to get huge and maintain conservative and safe asset/deposit ratios, good for them.
The problem is that guaranteeing a bank and regulating it's investments still changes the incentives for the bankers. The banker has an incentive make an investment that can presented as "prudent" but which actually has a large up and down side. The banker keeps the upside, the bank's depositors are protected from the downside and the worst the investors face is losing their existing capital.
I would argue no. The issue is that the FDIC has deposit insurance limits already. The depositors are free-rolling on the amount they are getting made whole on above the limit. Then you are just encouraging some new kind of "bank" with limited access to become a customer (e.g. > $50M deposit) and then you can just put all "shareholders" in the role as customers. You are still giving free upside outside the rules that all other depositors are stuck with. Every investment comes with the statement: "Investment contains risk". If the bank wasn't leveraging these deposit as investment cash, there would have been no collapse.
You're right this produces risk but you're wrong about exactly how.
Any bank call pull in deposit and use them as capital. But being a customer also doesn't give one any particular upside - you just get interest on the money you deposit. And if you have a special bank with only large deposits and paying extra high interest, then regulators look at you and quite likely see something not to be protected in the same way.
The way you get risk is basically the way SVB did it. Share holders can lose at most their entire capital but they can get to play with all the money the depositors give them. If they bet on something that pays off big, they get that payoff minus the modest interest they pay depositors and if they lose, they lose at most their capital.
If you can use just a bit of capital to borrow a whole lot of capital, with the only risk to you being your original capital, then you can engage in very risky ventures, getting a huge payoff if you succeed and at worst losing your original capital if you lose.
Come to think of it, that seems a bit like what SVB did. Buying long term bonds when interest rates were likely rise seems like a recipe for disaster - and in fact the logical outcome was this bankruptcy. But there was a chance that interest rates wouldn't have risen, at which point the shareholder get a big payoff, pocket it and go on to the next risky maneuver.
> > Governments are supposed to act in the best interest of the governed
Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
> > They did their job and did it quickly and effectively
Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up? Or a small family owned boat builder in Maine? Nowhere to be found. Their fault? Not being systemically important enough. Whatever the fuck that means.
> Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
I'm curious if you have a citation to support that the wealthy in the US are descendants of wealthy land owners from the times of the Crusades at a substantially greater rate than the general population.
> Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up?
How much of their going belly up was due to Fed policy? Particularly driving and holding interest rates to near zero through market actions then pushing interest rates to nearly 5%?
Read over the history of the US settlement. While they came from the UK and Germany, the vast majority are not descendants of the Normans.
One of the major draws to the US has always been the opportunity to do a little crusading of ones own and find whatever opportunity your courage and lack of scruples allowed you to get away with.
In cases where you can't predict the future appropriately, sometimes it's better to make prudent decisions that help everyone instead of attempting to punish the sinful.
Keep in mind that bank shareholders and senior management are going to get wiped out and fired.
I mostly agree with this, but I feel like the past 25 years or so, ever since "the Greenspan put", has just gone more and more in the direction of telling people that they don't need to worry about doing adequate risk assessments, because if you have powerful people that yell loud enough, and you can cause enough damage, that Washington will come to the rescue. Eventually, I just don't see this ending well.
As someone who is naturally risk averse, I feel like a sucker. I was having a conversation in a separate thread where someone remarked "How can you expect startup companies to spread their deposits across multiple banks?" Besides the fact that there are tons of account structures specifically set up to do that, as an individual, I know what these insurance limits are and have moved assets around accordingly (for me, FDIC limits weren't relevant but SIPC limits were).
How much time I wasted. I should have just gone with a powerful enough institution that I knew would get bailed out if they ever failed. I certainly won't waste my time doing this again, which is probably not the follow-on effect that the feds want.
The decisions about "is this bank adequately capitalized to serve its depositors" should be made by the regulators, not by the market. We know what it takes to run a bank safely, and its really easy to both quantify and test. This is how the "too big to fail" banks are run today. No one talks about the moral hazard of elevators (make sure you inspect it before you get on) or airplanes (make sure you do your own pre flight check) we trust that the regulators have set up processes that make this infrastructure safe for the public to use. Even with a deposit guarantee, a poorly run bank can still be closed by regulators, a bank run doesn't need to happen for a bank to be shut down, just like an elevator accident doesn't need to happen to decertify an elevator in a building.
It doesn't take a CPA to know that depositing above 250k comes with increased risk. And I think you're kind of conflating types of consumers here. People depositing above that limit are generally not working from the same limitations and lack of information that regular people are.
Companies need to run payroll twice a month. $250k is about one months payroll to 25 people. Many companies are a lot larger than that. You also have planned and unexpected expenses and other payments. Many payroll and providers also require you to set up one account where the funds are pulled.
You don’t want to move money around every week, so you keep heathy balance.
It’s also never adjusted for inflation, despite this mess in theory being triggered by raising of interest rates due to super high inflation. 250K when it was set in 2010 is the equivalent of almost $350K now. If we ignore that, then we’re just admitting the number is totally arbitrary and we shouldn’t even bother arguing whether it’s a lot or a little.
Separately, it’s weird that a joint account is insured to 500K but a business account stays at 250K. It actually does weirdly favor wealthy individuals vs. working capital accounts for businesses that might represent many employees.
The sentence clearly means that it was never adjusted from inflation from when it was adjusted to 250K, 12 years ago. You can tell that this is far from being adjusted for inflation since it is now 100K off from what it was in 2010, or 40%. This should be a "neutral" issue with respect to the SVB thing, pegging it to inflation helps everyone in the system.
Obviously people have different salaries but also are payroll taxes and other taxes or fees that also need to be paid like unemployment insurance and whatever else the local government has decided. Sometimes these are collected city/county as well as at state level.
Benefits also cost $500-2500/mo (if you cover 100% employee and 70% dependents).
Not complaining but just saying there are costs that are not always apparent to employees.
also rent, servers, the cost of anything else you have to run your businesses. For broadly generic tech companies, take everyones top line salaries, double them, that is your rule of thumb monthly expense line item that wraps everything up (rent, taxes, the cost of doing business, marketing spend, etc)
Yes, that is a lot of cash for an individual. I don't really know why anyone would sit on a lot more cash than that without at least putting a healthy portion into Treasuries or other durable assets.
For businesses, it is a trickier proposition but there are reasons that companies roll cash into assets and operate largely from credit.
Consider financially responsible people in their 50’s and 60’s that have had decades to save. There are plenty of “regular”, middle class people with this type of savings in their account.
If you have that much in liquid cash, you meet virtually no definition of the term "middle class". You are upper middle class at leadt and you probably have a financial advisor who is telling you that you shouldn't locate all your money in one account unless it is yielding in a way that justifies such a risk. At least I hope you do.
Yeah, that's actually about what I make but let's be real, this is a very small number of people. I have a financial planner.
Are there people in this asset class who aren't getting financial advice? Yes. But it's not like ma and pa kettle are getting wrung out by the savings and loan here.
At this point we should just nationalize the whole banking system. Currently we have the worst of both worlds: privatised profits and socialised losses; strict regulations but limited oversight or appeal; no real market competition but no real voter influence either.
we don't have "socialized losses". Tax payers aren't paying for anything here. The FDIC is run an funded by an interbank consortium. Its essential a union of banks that run a collective risk pool and decide the rules of the risk pool. It works and has worked for nearly 100 years.
> we don't have "socialized losses". Tax payers aren't paying for anything here. The FDIC is run an funded by an interbank consortium. Its essential a union of banks that run a collective risk pool and decide the rules of the risk pool.
What meaningful distinction are you drawing here? It's not practical to opt out of banking, and FDIC has no real competition (the NCUA offers exactly the same terms, and in the credit union thread fans were at pains to emphasise how equivalent to the FDIC it is). Not all taxes are collected by governments from individuals.
Consider: “Reserve requirements are a tool used by the central bank to increase or decrease the money supply in the economy and influence interest rates. Reserve requirements are currently set at ZERO as a response to the COVID-19 pandemic.”
ref: https://www.investopedia.com/terms/r/requiredreserves.asp
I don't think it necessarily is adjusted for risk that specific banks take on as operators. It's likely set at some requirement to help the fed achieve its goal while also adjusting for median or 2 std dev risk.
I prefer to minimise banking's influence over everything, because banking is itself a form of political regulation - but not a democratically accountable one.
at the end of the day, everything in life is political.
Did you also consider that the political incentive for a regulator are at odds with the ones running the bussiness. (mainly, not getting people killed).
I've been a student of housing bubbles for a long time. I remember back in 2003 I was participating in an online forum covering the bubble. The conventional wisdom back then was that when the bubble popped not even the Fed or Alan Greenspan and his helicopters could cover the losses. The hundreds of billions if not trillions of dollars that would be needed would cause runaway inflation.
Then, they did it. The bastards managed to somehow buy tens of billions of mortgage backed securities every month for years. They bailed out automakers and banks with backdoor 0% loans while claiming the "investments" were profitable for the average citizen. Zombie Fannie and Freddie are still out there gobbling up mortgages. It's insane.
None of this is surprising to people who know how bank money actually works. The US congress literally has unlimited nominal credit and practically unlimited useful credit, and it can grant same to any of its creatures.
Of course they could, money is a fiction after all. As long as we all keep walking around believing that fiction, there's no real problem with just inventing more money out of thin air.
The fiction has certain properties when it encounters the real world though, so there are sometimes downstream consequences, but none that could ever totally dissolve the fiction. Only enough people starting to disbelieve in the fiction itself could do that, and people mostly won't do that because money is too useful.
Well if I don't produce that fiction on demand for something called "taxes" I get put in a cage or even killed by men with guns. So I'm pretty motivated to go along with the fiction until the men with guns stop making me.
Why isn't it. Pragmatically it's pretty silly to insure the first 250k and then expect people to go through the trouble of spreading their cash over a multitude of accounts. Punishing people for not having accounted for black swan events in their risk assessment is also not scalable. Do we want people to do useful stuff, or to spend their time digging the rule book to ensure they've accounted for every eventuality?
Also it's not like once you have 250k in the bank, you're suddenly a finance wizz, omniscient of all the tricks and tips with regard to treasury management. Even as you get into the low millions of net worth, it's not like you suddenly became a HBS graduate. A lot of regular hard working people end up hitting those limits and wouldn't reasonably be expected to learn about treasury-foo. A lot of young or small businesses are in the same lot. Being somewhat wealthy doesn't turn you into a fine financier. And even if you think those folks should hire advisors, it's not like they can afford to hire the right ones with this relatively small amount of wealth.
I think resentment of having gone through the pain of spreading your cash, in vein, isn't a good reason to screw up hundreds of thousands of salaried employees, and a bunch of regional banks.
>punishing people for not having accounted for black swan events in their risk assessment is also not scalable
For a country that seems hellbent on abandoning individuals of lesser means to the vagaries of fate, to frequently swoop in to save those already of better standing when misfortune strikes seems pretty hypocritical.
Sickness is still the most frequent cause of bankruptcy in our country. What social programs we have prickle with difficulties in gaining or maintaining access, seemingly designed to make life harder for those already forced through misfortune to require them.
Half our political establishment regularly suggests the destruction of even these, intending to leave individuals with nowhere to turn at all.
>Why isn't it. Pragmatically it's pretty silly to insure the first 250k and then expect people to go through the trouble of spreading their cash over a multitude of accounts
How is it silly? From the perspective of the FDIC, if you have two seperate accounts (at 2 seperate banks) that represents a drop in risk. It's unlikely 2 banks with fail and now FDIC only has to replenish 250K instead of 500k.
I'm not following your logic here. If there's 10 people each with a $2.5m deposit at a separate bank each and they all spread their accounts to $250k in each of the 10 banks, the FDIC still has a risk of $2.5m per bank right?
10 people can go a few days without access to 10% of their money much easier than 1 person can go a few days without access to 100% of their money. And hopefully more customers means more scrutiny for each bank.
Think about this with some numbers: if there are 100 banks, and every business puts 1% of their cash into each bank, the overall risk is the same as if 1% of businesses put 100% of their cash into a random bank out of the 100.
The cost to FDIC if an individual bank fails is the same in both the above scenarios, even though in the first businesses put a lot more effort into spreading out their funds. It looks less like it could have less risk to the FDIC, but really isn’t making any difference.
The odds that 100% of businesses each decide to pull their money out of the same bank at the same time is less than 1% of businesses who invested at the same bank pulling out their money. Especially if they are in the same industry and know the same people urging a sudden withdrawal. Maybe even mostly located in the same geographic region.
But if the FDIC insures all deposits anyway, then there would never be a bank run to begin with because nobody would panic that they wouldn't get their money out, so spreading risk among multiple banks is a "solution" to an artificial problem.
It's a solution to a bank run because of fear of the banks going under. It's not a solution to a bank run because an industry needs cash quickly. For instance, Silvergate had a lot of crypto firms as clients, and in late 2022/early 2023 all those clients needed cash. You can imagine something similar happening in other industries.
I don't see a problem with a rule or regulation that limits individual daily withdrawal limits. That would solve that specific issue as well, and anybody who needs to withdraw more than that per day clearly has enough funds to have accountants that can coordinate across multiple banks.
> Punishing people for not having accounted for black swan events in their risk assessment is also not scalable. Do we want people to do useful stuff, or to spend their time digging the rule book to ensure they've accounted for every eventuality?
So you want government to provide complete health insurance, after all. we want people to spend their time doing usefull stuff not studying the very complex intersection of all known diseases and medical beurocracy?
>So you want government to provide complete health insurance, after all. we want people to spend their time doing usefull stuff not studying the very complex intersection of all known diseases and medical beurocracy?
Yes, obviously. That we have the bulk of our population in precarious wage slavery under threat of medical bankruptcy at best, and a slow painful agonizing death of preventable causes at worse, is a crime against humanity given this is the richest country in human history.
I've never run a large company but I feel like it wouldn't be feasible when you have transactions routinely over 250k, like how I'd imagine most of these companies would be with their payroll.
I think the solution to that is placing predence on the bank selection mechanism. You could audit banks' lending positions and make risk adjusted based decisions.
I just don’t understand this attitude. It’s 250k. We’re not talking about all that much money. Why do you think people with 250k should have extra knowledge or access to special advisers?
Lots of people have way more than that due to retirement accounts (which sometimes need more liquidity or people want to get out of the market so they have more cash on hand). Or even if you have a down payment on a house in most of the coastal states. 250k in the bank is not much money these days.
I think you are wrong to not keep doing this (and I also don’t believe you’ll stop doing it unless it’s actually hard to continue doing, vs. the initial setup being difficult). I can tell you that after this I will start doing it. I don’t see these events as proving anything for the future. I have no idea what the political climate will be next time around, or any other factors. It’s like being down 9-0 in a soccer game and saying “hey, remember that one epic game we were also down 9-0 but then came back 9-10? Everything is fine.” What? No way. I don’t want my team down 9-0 at the half, ever.
BTW, in my experience many many people are risk averse in specific things they see that others don’t. It’s super hard to be an expert on everything. Talk to someone that knows about construction and they’ll have similar laments about home maintenance. Is it bad to “bail out” people that have their homes washed away in a hurricane? I honestly don’t know. But what I do know is that I’m definitely not jealous of them for making a silly location choice and “not paying the price”. That experience is not fun. I promise this episode was fairly disruptive even with this outcome. It is much better to look on from the outside than wonder whether a bunch of people you don’t know will save you. You’ll feel really bad if the next one isn’t bailed out because something is different and it gets you because you stopped doing something that aligned with your values just because of this thing this time.
Sorry you had to spend like an hour opening a second account. But yes, not wasting people's time (not requiring small and medium businesses to hire CPAs to evaluate banks' books) is exactly the outcome the feds want.
"Punishing the sinful" isn't about morals, it's about incentives, and ensuring a level playing field where sinning doesn't improve your long-term competitiveness.
Will senior management have to return their 2021 performance bonuses? If not, successful sinning is just a matter of ensuring you cash out early.
Who are you trying to disincentivize? How would it dissuade the bank's management if depositors took a haircut? What behavior do you think punishing depositors would prevent? Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
This is a simplification, but: the bank should have to offer depositors an interest rate (or other value-add, such as competitive services) that makes it worth their while to trust the bank with their deposits. A bank that makes very conservative investments/loans can only offer a low interest rate to depositors, because they earn less profit on the spread, but their depositors will accept it because of the safety of the institution. A bank that makes speculative investments/loans can offer a high interest rate to depositors, because they earn enough to offer it, and they'll need to, to attract depositors away from the safer conservative institutions.
A bank that can offer a government-backed guarantee to depositors can offer a low interest rate while making big profits, and pay big dividends to their shareholders and executives, steal market share from their conservative competitors while making themselves more systemically essential in the process, and leave the public on the hook if they fail.
If you allow banks to make extremely speculative investments with depositor money, you end up with Ponzi-like behavior that ultimately hurts unsophisticated retail folks. Just like all the crypto "banks" offering 20% staking that are collapsing now.
All you've described is a way to build a pitfall for naive investors so they can lose the first $20k they've ever saved.
> Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
Basically, yes, but without the hyperbole - an accountant yes, an economist no. This is not that hard. Treasury management is a specific function of any company.
I definitely don't blame these startups for not being financial experts, but VCs absolutely should have been coaching their client companies how to manage their cash safely.
Imagine what the world would look like if you got what you're asking for. Tens of thousands of extra dollars of overhead to open a bank account? To save literally nothing directly for taxpayers, and a few dollars per account for banks? I would strongly prefer to he socialized insurance and safety net in this case, and I'm a die hard capitalist.
You seem to think that the world doesn't already work like this. There are tons [1] of [2] products [3] that are offered specifically to make it easy to spread cash around at multiple institutions. And that in and of it self is beneficial, because it is essentially diversifying the risk of those deposits. Now, with what the fed has done, why would anyone bother spreading their risk around?
I think this is exactly it. More and more this arrangement is starting to sound like the baseless justification used for US healthcare: a bunch of middle men milking value for little actual benefit.
Addressing risk can be more efficient and we can make the system far more efficient by cutting out all of this overhead and red tape. As long as the banks are properly disincentivized in other ways from being over-leveraged and taking too much risk, this arrangement would just be much better overall.
It very quickly devolves to socialism, however. Without the incentive to make money, you lose market competition. Eventually it collapses to a handful of big players, but they are all extremely constrained by the government insofar as they are really one government run operation with different names. Suddenly all market efficiencies are lost and you end up in a worse position than the market originally presented.
A bank makes money from deposits by making available a % of them for loan originations. If all deposits are assured, then either the bank cannot take on any risk, or they can take on risk with the knowledge that the gov will foot the bill for any loss scenarios.
If the gov removes the potential for risk, banks will be free to make wildly speculative loans/investments, which will of course fail in time, causing the gov to tighten regulations even more until all profit is driven out of the game. Thus the gov would be the sole regulator of loans centralizing banking.
Sure,maybe you get some banks that pop up and offer assured deposits by only floating operating costs from risk-free assets like treasuries, but then you're looking at pay-to-bank for economic times with unusually low treasury rates.
Maybe I'm being hyperbolic, but it seems like a potential evolution when moral hazard isn't controlled.
So the government regulates how much risk they're allowed to take. They already do that with leverage ratios, for instance. I'm just not sure I see the problem with changing the status quo, but I do see the benefits of assuring all deposits.
Right now every single business of even moderate size has to have dedicated treasurers distribute payroll and other cash across multiple banks to ensure they fall under the FDIC insurance level cutoff. This is a totally unnecessary waste of time and capital, and so reduces market efficiency. If companies could just deal with one bank and offload risk management to people who should be better informed about doing it properly, backstopped by the government who ensures they stick to sane rules, how is this not a net win?
I agree moral hazard is an issue, and much stricter penalties for malfeasance of over risk, both for banks and for credit rating agencies are needed IMO. Moral hazard is already an issue though as 2008 and SVB have shown.
If they have more than $250K in the one institution: yes, they should.
Better yet would be spreading their deposits around, but if they don't want to do that, they should take the necessary steps to evaluate the risk appropriately.
Ok but that's a bad policy that makes no sense and I'm glad the fed, Treasury, and FDIC are stepping in to change it. Sad that congress hasn't done anything over the past few years, but better the problem be solved than letting faith in our financial system collapse.
It does seem like a weird loophole and charade to have to split money among many banks. Just give businesses a way to store their money without earning interest and with no risk. As far as I know that’s not an option under our banking system
It's neither a loophole nor a charade: it's diversification to reduce exposure to risk. Bank failures are somewhat coordinated, sure. Still, it's much more likely that one bank fails than N>1 banks. Since you are exposed to less risk, your insurer (FDIC) is also exposed to less risk. It makes complete sense for the insurer to incentivize this sort of behavior.
But what it really incentivizes is putting all your money in a too-big-to-fail bank. That's much easier and just as safe as opening a dozen, or hundreds of accounts. And it results in there being 3 banks in the whole country.
There is, in truth, only one “bank” in this country. The Federal Reserve Banks that hold the master ledger for the official US Dollar market. Everything else downstream is basically redundant legacy infrastructure from a time before pervasive broadband network infrastructure.
I think it gives a great explanation why what you are saying in good faith is not quite right. Not punishing the sinful both pushes the problem into the future and makes it bigger.
We tried it your way many times, and it failed in every case (civil war reconstruction, Treaty of Versailles, Iraq provisional authority, response to the great depression, etc).
When we do the other thing and focus on protecting the innocent instead of punishing the guilty, things have worked out far better (Marshall Plan, Covid response, this).
The context is wildly different. For one, war is chosen by a countries aristocracy while the lower classes have little agency in the matter. It is not the lower classes of these countries that are guilty, but the upper class, and therefore plans to help the lower class victims despite their complicity are pragmatic and sound. It is not pragmatic to punish slaves that attacked you, you would seek to arm them so they are not enslaved...
Punishment must be proportional to a person's power.
The COVID response against China is still pending, both of our countries are gearing up for war. Rhetoric around Taiwan has increased, and there is active work to reduce dependency on China.
There's a bit of irony in mentioning the COVID response, considering the knock-on effects of that are partially/largely to blame here.
If we ignore the fact that there may very well be some who are 'guilty' in the COVID saga, that certainly didn't have the same story as a bank that made poor bets, and the (relatively) wealthy depositors of said bank that made poor risk calculations and got burned by the black swan.
Have you considered the covid response openly violated the Constitution's 5th Ammendment? The gov shut down businesses for the public good (took private property) without just compensation. And what marginal compensation was offered was done so through PPP and was corruptly incentivized.
I would describe the covid response as anything but working out well.
I'm talking specifically about fiscal and monetary response, and whether or not we punished people, addressing the comment I was replying to.
For example it was good that we gave out PPP loans fairly literally even though it causes major fraud. If we had moved slower and endured that bad actors couldn't get away with abuse, the response would have been worse.
> For example it was good that we gave out PPP loans fairly literally even though it causes major fraud.
My point was addressing the incentive scheme for PPP: banks got paid a percentage of the origination amount so processed the largest loans first, and by the time they got to the smaller applications, they ran out of money.
https://www.forbes.com/sites/jasonbfreeman/2020/04/23/ppp-la...
The 5th Ammendment doesn't say the government can provide just compensation to some people. It says they must provide just compensation to all that their seizure of private property directly impacts.
Fraud is of course another issue, but my main concern is the corrupt incentive structure and glaring 5A violation.
> Point is that a system of such asymmetries rewards so many at public cost - and that includes the other stakeholders who are today “wiped out” (but still get to keep their gains from the good years). /end
Yep, and that is exactly the point. They must not get to keep their gains and they must lose an additional amount proportional to their chance of success.
The expected value of corruption must be negative.
Probably not, but it is rather exhausting to see this happen again and again and seeing them get bailed out without consequences every time. At least something would be different.
Maybe it's just hearsay but it feels like every person on wallstreetbets who got lucky with options then got the IRS knocking on their door accusing them of everything in the book. They've said it themselves that with the cost cutting in last decades they don't have the resources to build cases against large players anymore. They go after people they can reliably force to pay up without having to fight them too much. Al Capone would've gotten off scot free in today's world, just like most of congress does despite singlehandedly outperforming the best index funds out there.
I can’t believe anyone would put any stock in such “evidence”. No one is going to say “yeah, I pushed the limits of tax filing and got busted, nice catch IRS”. They’re going to say “I was just minding my own business when the IRS robbed me with their machine guns”.
Punishing Depositors no but punishing them yes. There should be personal finanacial Clawback and potentially even legal conseguences for this type of mismangement. When Their personal wealth is at risk they will be more careful. As it is right now, they don't risk anything and will try the same thing again. The worst thing that can happen to them is to loose "unrealiasied profits" not loosing anything already realised.
There should be personal finanacial Clawback and potentially even legal conseguences for this type of mismangement.
There is. That’s what derivative actions are - a mechanism for shareholders to sue the board and management for breaching their fiduciary duties. My guess is that one will be filled Monday.
This is … quite the misrepresentation though? No one sold their entire stake, one executive’s (albeit, sure, the CEO) pre-planned sale of a small portion of his holding executed two weeks ago.
Not a great look, but quite from what you’re insinuating.
Well the notes I've seen is the CEO selling 11%, General Counsel selling 19%, CFO selling 32%, and CMO 25%, and that's just in February. I would call that notable at the very least, and assume they sold the rest in March if they had any sense.
None of those people could sell anything (never mind everything) in March without violating law, unless that selling aligned with preexisting 10b5 plans to sell. You can look at the insider action[0] yourself, everything but the Becker sale looks like routine sale / disposition of options/equity comp, and even that isn’t that aberrational compared to his sales in ‘22 and ‘21.
I think you’re right about the proportional sizes, but it looks like the other officers only held a few thousand shares each, so routine grant/sale transactions were a much larger share of their individual holdings.
Senior management is going to have their recent sales of millions of dollars and significant percentages of their stock and the bonuses they received hours before the FDIC took over reversed? Because otherwise they weren't really "wiped out" or even close to it.
> sometimes it's better to make prudent decisions that help everyone instead of attempting to punish the sinful
I'm conflicted about this. In the last seventy-two hours, I made a ridiculous amount of money standing still because risks that shouldn't have paid are being done so by people who shouldn't have to pay them. I personally benefit. But we've given tech companies a visible privilege American farms, factories and municipalities don't enjoy. T
I think that's fine as long as you are willing to then help anyone in that situation in the future. Not just people who are big enough to be "important".
They should claw back SVB CEO pay and televise the moment the funds move. Show the CEOs number going down and some other public number going up. Bonus points if his face is televised at that moment at well
That's all that's really necessary in terms of handling moral hazard and public perception that this is yet another bailout. Let ppl see the CEO suffer and they will be fine with having taxes foot the bailout bill. It's sad but a spectacle is necessary here.
Do you think software engineers who write bugs should also be publicly humiliated? Should your bonus be clawed back if you tech lead a project that ends up failing because of bugs?
If your bug ends up risking the economy of the country definitly yes.
But Public Humiliation is not the solution because if it worked we ould not have the same executives who failed LB fail yet another Bank. There should be Legal conseguences for this type of mismanagement.
Potentially, yes. Something with real-world catastrophic consequences should require you to prove you weren’t being negligent. In this case, it feels like the equivalent of running for a while knowing that your QA team was empty and ignoring failing tests for a year.
For criminal charges, yes, but that doesn’t mean there aren’t other consequences. For example, a professional engineer can lose their license if they are found to be negligent or deceitful even if it doesn’t rise to the level of criminal charges. This is one of the reasons why most other fields using the term “engineer” don’t think software meets the same level, and having known a couple of people who completed PE qualifications I can understand why.
I don’t think that would make sense for all software development but it certainly doesn’t seem unreasonable to think that, say, the FSD team at Tesla or the accounting team at a bank should be held to a higher level of expectations (and presumably pay) than the ad click optimization team at some retailer.
Whether or not he committed fraud, I think most people are tired of seeing bank (and tech) executives cause real-world harm and make out like bandits. Civil forfeiture is used against poor people all the time for far, far less obvious issues than this one.
As someone who has been on the other side of many of these controversies, I know from experience that the popular narrative is generally wrong and fueled by anger and vengeance rather than sense or justice. I don't have any insider knowledge in this case but the discourse reminds me a lot of times I've seen well intentioned people make good decisions that anyone else would have made in the same position, then the mob viciously demands blood when something goes wrong.
Civil forfeiture isn't a means to punish people for wrongdoing, and neither should we try to retroactively change the rules to try to punish people who you believe wronged you.
> Civil forfeiture isn't a means to punish people for wrongdoing
Could have fooled me.
Thing is, when you are the CEO and you make the big paycheck, being a target for the mob is part of the job. 1,000 years ago if the crops failed, and the peasants started going hungry, either the priest or the lord was blamed. They can't control the weather, but it was someone's responsibility to make sure there was enough food stored.
The common sentiment is that the people who caused the failure should not be allowed to keep the money they made driving the ship ashore. Nobody is forced to be a CEO with million-dollar comp. It isn't some travesty of justice when they are held accountable.
Well I'm hopeful we can move beyond medieval practice and that the presumption of innocence will prevail. Fortunately things seem to be going well for team rule-of-law.
Again, what presumption of innocence? The bank failed, they should have to give up the bonuses and stock gains. It should be statutory to prevent a moral hazard.
> medieval practice
Calm down, no one said we should hang, draw and quarter them, exile them, or do anything untoward. It's a capitalist system, and this is a capitalist penalty.
You said "1,000 years ago if the crops failed, and the peasants started going hungry, either the priest or the lord was blamed."
I'm saying we should not look to the distant past for guidance on how to handle situations like this.
The presumption of innocence applies here because we shouldn't punish individual bank employees unless we demonstrate to a jury of their peers that they broke a law that existed at the time they broke the law. The default should be they keep their bonus and if they broke the law, they pay a fine. Fortunately they are protected by the constitution, there is no possible way the government can take their money without a trial.
It's an analogy about leadership? I didn't suggest a medieval punishment and I obviously recognize we don't do bills of attainder in America. I'm speaking for what the average person is feeling. Literally started off with saying "the average person is sick of seeing rich people get away with it".
But again, what presumption of innocence? I'm saying that if you are a bank CEO and your bank fails, it doesn't actually matter whether a reasonable choice was made or not. Bank failures affect all Americans, so there should be a penalty for causing that disruption. Most people would call that fair.
Executives are shameless. They'll lie to your face, backstab you to get more funds for their department over yours, and whatever else to get ahead for themselves. And they'll do it smiling all the way because they know they still win with their bags of cash payouts despite being "humiliated".
The only way people like that will learn is by sending them to prison. Their actions were so egregious, so completely in disregard for our financial system, that it's impossible to not have done any of that without intent. I'm sure if they turned over all electronic and paper documentation, there's gonna be a written strategy somewhere directing all this.
I think that there are two types of trust at stake here:
1. Trust that bank deposits won't disappear.
2. Trust that the financial system is fair.
A bailout sacrifices 2 for 1.
Letting SVB fail sacrifices 1 for 2.
My proposal is for a bailout, while doing the bare minimum necessary to prevent a backlash. Remember that the death penalty still gets the thumbs-up from voters in many places in America. It's foolish to think that the people who distrust Silicon Valley will be able to "move past this" in a mature, dispassionate way, given the namesake of the bank.
> We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority.
Two closures in three days is a sign that you have to take this very seriously.
> > We are also announcing a similar systemic risk exception for Signature Bank, New York, New York
Signature was another bank whose business was primarily in a volatile and risky market:
"Signature is one of the main banks to the cryptocurrency industry, the biggest one next to Silvergate, which announced its impending liquidation last week. It had a market value of $4.4 billion as of Friday after a 40% sell-off this year..."
This is going to put every regional bank on the map for short sellers as equity holders are being wiped out in these cases without depositors being affected. Why would anyone invest in any regional bank with the risk of a equity wipeout day to day?
They're also taking action to prevent this kind of thing from happening again-
> The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasurys, agency debt and mortgage-backed securities.
> “This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”
What kind of moral hazard? Let’s be specific about who did something wrong. Do you think that businesses should worry about whether their bank has hedged enough against rising interest rates? Or maybe they should subscribe to news alerts telling them sooner when to get out?
The shareholders getting wiped out and bank management replaced seems like pretty strong incentive for the bank itself not to screw up.
I think that's dubious. If management can make off with enough money prior to being wiped out, and it won't be clawed back, then there's still potentially a moral hazard at hand. So what if we lose the bank! We'll make off with millions anyhow, by investing other people's money imprudently.
Okay, but how does punishing the depositors for management mistakes fix that? It definitely increases the damage, though.
The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?
Fine, but let's talk about the other side of the equation: who should pay to make the depositors whole? Did the depositors do everything in their power to insure against their risk? Is there something in place already to help depositors get some of their money back immediately, and likely more as legal proceedings complete?
It's certainly not clear to me why the depositors, as crappy a deal as they got, should be bailed out by unaffected banks that are financially healthy or, as is the case no matter what, the rest of the citizenry should pay.
The short-term case for other banks bailing out depositors is that any systemic risk affects all banks and the rest of the citizenry, albeit indirectly.
But I think it's probably economically sound in the long-term as well. That is, asking every depositor with $250K+ to assess the financial health of each bank they use and maybe buy insurance is collectively more expensive than just having the FDIC implicitly insure all deposits.
That's different than asking if it's "fair". But I would wager it's probably more efficient.
Insurance always has a cap in the payout at some dollar amount, usually directly related to the amount one is willing to pay for the insurance. It's usually up to the insured to balance those two factors to get adequate, but not excessive, insurance for the risks they are exposed to.
Most of the arguments I've seen are effectively arguing that 250K is too low an amount. While that may be true, that was the well-established 'rule of the game'. The FDIC limit was no doubt chosen, as most insured amounts are, to cover the majority of damaged parties, for an acceptable cost.
This isn't grandma or Joe/Jane Public losing their life savings; the FDIC insurance easily covers the vast majority of individuals depositing cash. These are businesses that have, or should have, the financial wherewithal and resources to mitigate their risk beyond the FDIC baseline.
The way insurance works is that you pay a premium so you don’t need to worry about a risk, whether or not disaster happens to you personally. The timing is a bit irregular, but morally it seems similar?
If paying for deposit insurance were available for large accounts, I expect many businesses would choose it. Might as well make it the default?
I think it is also necessary to consider that many of the regional banks have more diverse clients - individuals, small business and some mid/larger business dealings.
Perhaps I'm wrong but I suspect a much higher share of deposits are under $250K than the 3% at SVIB. The larger deposits are likely from companies doing a much better job of spreading counterparty risk around, ie traditionally managed companies.
Absolutely a business should be worried. I'll give two examples, one old one recent.
As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
More recently, I was president of an HOA. Over a span of 5 years we built up a reserve account to just over $1M for a planned capital improvement. Every 250K we opened a new bank account. Had there been a delay in starting the project we would have opened a 5th.
So yeah, the Treasuer and staff of all of these companies should be taken to the woodshed and most likely fired for incompetency.
> As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
Wouldn't it have been more useful if that job simply didn't have to exist, and they could just deal with one bank, and then that extra capital could have gone to something more useful?
Change the game so the risk is being managed in a way that doesn't require every single company to wastefully play financial hopscotch so they can instead focus on doing what they do best.
Do you think that was a good use of your time? Maybe it would be better if depositors didn’t have to worry about such things. What would be lost if all that busywork just went away?
Did you explicitly open the new account at a new bank? Because if you just opened a new bank account at the same bank you don't actually get any extra protection.
Absolutely, businesses should worry about bank failures taking down their uninsured assets. If a business's assets are not insured, they should not expect to be made whole by an insurance policy in case of tail risk failures.
Doesnt this just push the can down the road? Interest rates will likely be higher not lower in 1 year so their bond portfolio will be even more underwater.
No, so long as the average maturity is not too long.
The long-term bonds would have paid back enough money for SVB to pay back every depositor if there had not been a run that forced them to pay them all back at the same time. Knowing that everyone can get 12 months of runway will do much to allay fears and so reduce risk of further runs.
Weren't these 10-year bonds and negative-convexity MBS? 12 months doesn't improve the position at all, but maybe you can keep applying for these loans in which case it's just another QE.
What interest rate does that assume for depositors? Sure, the face value of the bonds in 2032 dollars might have been enough to pay back the 2022 obligations to their depositors, but banks are routinely offering 2-4% interest in high interest savings accounts now. So either depositors will leave for better options, or SVB would have had to offer competitive rates (digging the insolvency hole deeper).
Reminds me of a knee-jerk post someone made here promoting credit unions. They didn't intend for this reaction, but credit unions actually have the same risks as SVB because their member pools aren't diversified. The ironic lesson was that you should bank with JP Morgan, Citi, or BofA.
> This is going to put every regional bank on the map for short sellers as equity holders are being wiped out in these cases without depositors being affected. Why would anyone invest in any regional bank with the risk of a equity wipeout day to day?
Why would anyone invest in any business when the risk of bankruptcy exists (FDIC bank takeovers and their resolutions, with or without application of systemic risk exception, are in effect a specialized form of bankruptcy, with a different set of priorities for who gets a haircut, but equity holders are always low on the list for either these or conventional bankruptcies.)
Every business has the risk of an equity wipeout if it goes bankrupt. SVB was always going to have its equity zeroed, the only question was whether depositors were also going to lose out.
At the same time, why would the bank runs continue? AFAIK, this was sparked by Silvergate’s slow motion collapse climaxing on Wednesday, and the infinite FDIC threshold makes more bank runs pointless and self defeating
It was sparked by Founders Fund telling everyone to get money out of SVB, which didn't have any crypto exposure. They're invested in another startup bank (Mercury) so I think prosecuting a few VCs would encourage the others.
I'm pretty sure there would have been a run some other large banks had they not taken these measures. I've gotten several emails from a major regional bank basically saying "WERE FINE TRUST US" over the last few days and I don't even have an account which means they're spamming all their email lists. I did apply for a position at them a while ago so that's my best guess why they are spamming me their unreassuring message. The several banks I actually use have not done that.
Well, apparently they are too big to fail, given that the FDIC is covering them. So they should've been subject to the extra capital requirements that too big to fail banks have.
Should have had more regulation - more stringent reporting and capital requirements (easy to say in retrospect, but they were covered by laws repealed in 2018). It should not be possible for a consumer bank to get into this sort of state so that they are so far from being able to return customer funds.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
No, that's been the implicit rule since 2008 at least (arguably earlier). If anything, not supporting all depositors would have been changing the rules mid game and so would have lead to massive disruption.
The thing a lot of people aren't getting is that the rules of the game haven't been the law but what the Fed does for a while.
Certainly, the game as it's played favors the wealthy, yes. That should be changed. Knocking everything over by suddenly changing expectation wouldn't change things, just disrupt everything. But also, it wouldn't happen anyway 'cause the game is too important.
> No, that’s been the implicit rule since 2008 at least (arguably earlier).
No, depositors have lost money in failures since 2008. Its true that, for a long time, the FDIC has tried to resolve failures in a way which protects as much of the uninsured deposits as possible, but it has very much not been a guarantee.
The systemic risk exception invoked here is an exception.
"The systemic risk exception invoked here is an exception."
Yes but it's not a new exception.
The OP claims Yellen implicitly announced something new. She didn't. She's following the playbook from 2008+. The policy isn't new, it's not unexpected, it's kind of like ... a rule.
And whether a new rule is being created matters for moral hazard purposes and all.
Edit: My above quote could have been read as talking about all depositors in all banks but I meant all depositors in the SVB.
Because a major component of this is human nature causing bank runs they are betting that by doing this upfront it will be cheaper than not doing it and risking a high number of similar bank runs in the coming month as word spreads it isn't safe to keep money over the insurance limit in banks because of the unrealized loses on bonds.
At the same time, they've essentially raised the insurance limit to infinity. Depositors will be made whole, and if they aren't the next time something happens, they'll need some very good arguments for why the 9th largest bank is now also too big too fail but e.g. the 11th largest isn't.
It is already substantially higher than $250k because you can spread your funds between multiple banks. There are even cash management accounts from Fidelity and others that automatically place your funds with multiple banks to get higher insurance levels for larger amounts of cash. Their Fidelity cash management account allows you to spread cash among 26 different banks so you could have 6.5 million FDIC insured. Fidelity isn't the only financial institution to offer this service.
> At the same time, they’ve essentially raised the insurance limit to infinity.
No, they haven’t. The systemic risk exception was used during the last financial crisis for some banks and not others, so using it now doesn’t raise the insurance limit, actually or “essentially”. There is (still) no guarantee that it will be used for any particular failure in the future, just like there wasn’t after the last financial crisis, and people have lost funds in excess of the $250K insurance limit since the last use of the systemic risk exception.
One could argue that SVB depositors would not be expecting the be made whole if it weren't for the bailouts of 2008. The precedent has been set and reinforced. It's hard to argue that this will not encourage more risk taking and moral hazard.
That precedent was set at least as far back in the early 90's when they made depositors of Bank of New England Bank whole after it failed in 1991. This isn't something that started with the financial crisis of '08
> At the same time, this is yet another example of changing the rules in the middle of the game.
No, its not.
The “rules” of the “game” authorize systemic risk exceptions, so applying them is not a change to the rules of the game. Moreover, civilization is one continuous game, changing the rules in the middle is the only way to ever change the rules.
My read is that they see the shortage at SVB as relatively small and that they may be closing some marginal banks like Signature ahead of true insolvency/illiquidity to both protect depositors and minimize reactionary withdrawals across the broader market.
And it sounds like they have the authority to just do this on a Sunday, so it doesn’t sound like any rules being changed.
If I was a banker with a marginal portfolio, I wouldn’t be encouraged by this. Depositors are making it out, but banks are being aggressively shuttered to make that happen.
The government can't generally arbitrarily seize an operating business. (Indeed, in the recent Johnson & Johnson court case we saw the opposite: they asked to undertake bankruptcy proceedings early because they're facing a large liability, the government said no, not until you're proven to be actually bankrupt)
Sounds like a bit of a hazard: the difference between insolvent or not for many entities is just accounting conventions. Lock in some non-MTM losses-- wham!-- insolvent.
Why should bankruptcy protection be denied to any entity that would be unquestionably qualified if they simply took an additional legitimate action that would make their creditors worse off?
I don't get it. The FDIC insurance threshold is the bare minimum provided by law. SVB's assets are being sold off or restructured to protect depositors. This is literally the whole point of the receivership process. This appears at this point to be a fairly pedestrian FDIC bank take-over, save for all the culture war B.S. that's cropped up around it.
So, at least two banks failed this week, 16th largest and a smaller one. Then Fed panics and effectively institutes an “unlimited” insurance/backstop policy, as a direct result.
I don’t know if I would call those events “pedestrian”.
Not much of a choice. Guarantee of the system takes highest precedence.
Although this problem was caused by bank malfeasance and yes this does imply de facto unlimited insurance, unlimited depositor insurance is kinda the whole point and is not itself a bad thing.
Yes, moral hazard is a huge consideration, but I don’t see depositor protection as encouraging future failures of this type, by encouraging bad risk taking by mgmt.
Rather, if banks bet their customers money unhedged on endless zero rate policy, as SVB did, there should be regulations that prevent it. Trace back to lobbying to exclude SVB from dodd frank regulations also at the heart of the crisis.
Part of the rules are that the regulators are supposed to shut down a bank before the run happens. They're not supposed to let the run happen and let the poor saps that were too slow moving their money bear the brunt of the losses.
Yes, and had SVB (among others) not successfully lobbied Congress in 2018 to get big regional banks excluded from more stringent "stress test" requirements, perhaps the regulators could've detected faults in SVB's capital before it was too late.
Worse, it is also a lie that the cost will not be paid by taxpayer. Of course it will be - the remaining banks are going to pass the cost on via fees, higher loan rates and lower deposit rates?
Yellen is not clueless. She knows exactly how this will play out but as it will be spread over time and to many counterparts she simply does not care.
This is terrible moral hazard. Uninsured depositors should have taken whatever haircut would result after the auction. That is, after all, the meaning of uninsured.
Since SVB's deposits were solvent, there isn't an actual loss here as long as it encourages people to not withdraw money early. They collapsed because everyone asked for it too fast.
What would be expensive would be paying for everyone getting laid off after SVB depositors can't make payroll.
SVB failed because all their customers are in group chats with each other and think it would be funny to withdraw all their money at once and then buy stock in the bank.
Any depositors expecting to receive their deposits in due course could take our commercial loans to cover themselves in the meantime. They are being bailed out by the taxpayer to the tune of what those costs would be.
SVB had more asset than liability, at least on paper. They were not able to be solvent selling on open market in the time it had, but perhaps that can be done by a bigger bank over longer period of time?
The “ahead of time” component is partially addressed by the Office of the Comptroller of the Currency which conducts period stress tests of banks. The people doing the testing know their stuff. These bank evaluations have likely caught and mitigated many issues like SVB ahead of time, and we will never know how many more failures would’ve occurred if it weren’t for their efforts and those of other auditors.
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
You are almost certainly misreading that signal. Probably since Friday they have assessed that the depositors can be covered once the assets can be liquidated, and that they may even be able to make money doing it.
If they can’t, they can assess the rest of the losses to the system, and those losses once divided up are likely to be inconsequential, even if not considered in relation to a broader run on the banking system.
> Probably since Friday they have assessed that the depositors can be covered once the assets can be liquidated, and that they may even be able to make money doing it.
The same assets that are yielding <4% interest against a market rate of 5%+ or 7%+ or whatever it is? Seems like it's going to take a long while before those papers are trading at or above cost when you account for inflationary devaluation and their yield horizon.
There is certainly a cost here. The insolvency of the paper is the entire reason the bank failed in the first place.
How does this "special assessment on banks" work? Does the FDIC charge all US banks to cover the missing amount? How are the charges distributed? And what law is this?
Also if this option was available, why did they just bring it up now?
> "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
This has happened before in 2008. Secretary Yellen's announcement is important to secure depositor confidence, so the contagion doesn't spread to more banks. If depositors are confident that the government has their back, there's no reason to pull money out.
> > If depositors are confident that the government has their back, there's no reason to pull money out.
There is also no reason to put the money in.
You go through the trouble of protecting your money because you deem them scarce and irreplaceable.
If tomorrow a commercial bank insured with the FDIC starts offering a product promising 20% interest, then by all means people should get together and apply in mass, get a couple of big political donors on board and all of a sudden there is no downside.
If the wacky bank keeps its promise then it's a 20% gain, if not then the FDIC will have depositors backs anyway to the full amount
Well, paying for it by a special assessment on banks means the banks aren't going to get a free ride. They, as a group, have to get their shit together otherwise they will pay dearly
I think (but am honestly not 100% sure here) that the argument is if other banks are going to have to pay for SVB being greedy, it is in some sense punishing banks for not being greedy enough; as while, sure, the SVB investors are getting hit: 1) a lot of them already made a lot of money years ago (and potentially exited), 2) many of the executives apparently literally sold out last month, and 3) they were hoarding a lot of deposits that other banks couldn't get because they weren't being risky enough. But so like, saying banks are paying dearly for this is strange, as it is the wrong banks... and, by extension, the customers at those banks, who are in turn making decisions about what bank to use in the future.
You probably can't hope for better under the US system. Maybe other banks will push hard to not allow more SVBs in the future after seeing this.
Suppose I'm a Utah bank that is mostly lending money to diverse local businesses and home owners, and mostly taking deposits from other businesses, some local and some not, and would-be future home owners. Last week I probably didn't care that SVB wasn't required to be as risk-averse as I was, if they failed what do I care?
Today, seeing this news, I care a great deal, and I don't want to see other banks allowed to take risks I wouldn't have been permitted unless they're paying a lot more than I am for the privilege, because when they fail - and they will fail - I don't want to pay for that.
I'm no expert, but that Utah bank sounds pretty risky to me.
At least treasuries and MBS are relatively liquid securities that can be quickly sold at prices that don't deviate much from their marks as long as you're marking to market.
Those loans to local businesses and home owners sound much, much scarier.
Sure, as far as I understand from that table the maximum fee FDIC charges is $1 for every $200 on deposit, which if we're expecting it to act like full insurance means they're expecting that these riskiest banks won't fail more often than every 200 years on average, which doesn't come anywhere close to how risky these banks actually are.
“Banks” are legal fictions, abstraction that serve as tools for shareholders, “Banks won’t pay, but…shareholders…will” is a fundamental misunderstanding of what banks are.
the economics of the market still prevail. if they lower salaries, people will find jobs elsewhere. if they overcharge for their services, customers will go elsewhere (and there are alternatives--credit unions)
yes, consumers pay all of the taxes and fees that are charged to companies but it does not change the supply/demand equation in the open market for the services the banks offer. the price elasticity of the things you mention is not affected by a new tax on banks
This. “Backstop” thing is to prevent systemic collapse, but otherwise it will spread the losses to other people who “did nothing wrong”. This is really shaping up as bad lesson here for wrongdoers.
" I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... "
EXACTLY! This will be born by the taxpayer. What were all the VCs f*cking thinking concentrating all their portfolio companies in one financial institution? This was terrible decision making on their part (and by the portfolio companies). Why does this all of a sudden become a taxpayer liability? Because All-In bros got on Twitter and started spamming people?
Where do banks get their revenue and profits from? It’s really immaterial; if depositors weren’t taking a haircut, all of us do in some form or another, it’s simply the optics that change (banks, the Treasury, the Fed, whatever).
No one knows that taxpayers will have to pay anything for any of this. It's possible they'll end up ahead. The assets were/are there to cover depositors. The timing of the asset liquidation/redemption is the problem, and only the "bank of last resort" can help avert contagion from skittish depositors, mass layoffs, and pointless disruption.
As said above: would you prefer to see hundreds or thousands of small companies fail, their employees go on unemployment insurance, etc.?
> No one knows that taxpayers will have to pay anything for any of this. It's possible they'll end up ahead.
Wouldn't SVB have been sold at auction by the FDIC if that were likely to happen?
I don't want to see startups fail or people lose their jobs, but this all feels like a cloaked way of passing the cost of the bailout onto the taxpayers (via raised FDIC fees that will trickle down).
Yellen is an incompetent ideologue. I studied applied economics in university, and the first code I wrote for a real application were inflation simulations. When she and the Fed made the claim a few years ago that "inflation was transitory" I ended up calling several of my smartest classmates. It was a nice excuse to reconnect, and universally all of us were asking what she was smoking.
It wasn't just us. Larry Summers was prominently and publicly stating that the inflation was definitely not transitory. But the banks believed her, and continued in 2021 to buy these securities as if interest rates were going to be going low again in the near future.
> But the banks believed her, and continued in 2021 to buy these securities as if interest rates were going to be going low again in the near future.
The banks most certainly didn't believe her. The banks rightfully took it as a signal that the US gov would step in to cut losses if banks continued to loan. The Fed wanted banks to continue to loan so they didn't grind the overall economy to a halt instantly and send us into stagflation.
But everyone knew it would happen. The Fed knew they were playing a losing strategy. And they still know it. But they refuse to play the strategy that would win the inflation game because it would bankrupt the country.
The only way out now is through severe tax hikes + gov spending cuts OR war with China in the hope to reset debt at its conclusion. The political elite seem to be signaling the latter.
Have you considered the hypothesis that she is competent and was lying and/or bullshitting?
Hypothetically, if I ran a government that was engaged in geopolitical competition, I wouldn't want people to tell the truth to my detriment when alternatives could be gotten away with.
It's too depressing for me to take that hypothesis.
It's far easier for me to believe that Yellen is a deeply intelligent and talented economist who lacked the ability to protect her cognitive processes from optimism bias. People think that when you say incompetent you are saying they aren't intelligent enough for the job. I think she was temperamentally unfit. I want people in the Federal reserve that don't care at all if they get invited to cocktail parties or get job offers. I want them to be people who don't mind being hated by everyone.
I want Paul fucking Volcker level of tolerance to everybody hating you.
All that being said, the thing that undermines my desire to not believe your theory is that she made the terrible mistake of going straight to work for the Biden administration from the Fed. Even if this was done for noble reasons it just makes the Federal Reserve look partisan which is a really bad place for it to be.
> Yellen is an incompetent ideologue. I studied applied economics in university, and the first code I wrote for a real application were inflation simulations.
Damn if only the US government could find someone with credentials as strong as yours
That's the point. I don't think I'm qualified for the job, and yet it was obvious inflation wasn't transitory. The fundamental drivers with money supply and in particular, velocity, pointed this out clearly. A quick look at travel statistics in summer 2021 made it clear that a majority of the public was returning to pre-pandemic spending habits. She clearly isn't qualified, and simply failed upward into working for the administration. You don't have to look hard, far, or even outside of Democratic affiliated economists to find those who were far more accurate than the Fed, including the aforementioned Larry Summers, or Steven Rattner.
Your welcome to be critical of my statement, but where's your criticism of the people being paid high salaries in positions of power who utterly failed to react in a timely manner (when many many economists with tons of credentials were telling them to) and have now forced us into a worse situation?
I think your statement is dumb. Inflation was exacerbated by a large war in 2022 that sparked an energy crisis. Failing to acknowledge that is just naive.
You don't win any points for saying X is inevitable when X is occurs for reasons completely outside your expected scope. That's just luck.
Those were definitely drivers for the inflationary spiral in consumer goods, but we've had massive inflation for a long time; ever since QE started. It's just that the inflation has been relatively hidden in speculative assets (homes, equities, crypto).
The parent is correct in their assessments of the market and the transitory inflation. TBT and TTT were no brainers at the start of the transitory dialogue because everyone knew it wasn't.
You're on point here. Your analysis will be wasted on the dunning-kruger comment you're replying to.
Apparently Larry Summers, probably the greatest living former treasury secretary and architect of the only balanced budget in my lifetime, was "lucky".
It's absolutely not luck and you are betraying an ideological point of view. It's obvious you never studied economics and you're just sitting here parroting partisan talking points. Anyone with common sense is aware of the Ukraine invasion being inflationary on European energy supplies, and knock down effects on things such as grains and fertilizers and other commodities. But those of us with a background who understand the dynamics of inflation knew this in 2021 long before Putin invaded. It's simple math:
Inflation is a product of money supply and monetary velocity. Money supply was already grossly inflated and monetary velocity was quickly gaining steam as the vaccine was rolled out.
You should ask yourself if you have any idea what you're talking about before adopting a negative tone in the future. Frankly it personifies Dunning Kruger arrogance to attribute a simple mathematical prediction shared widely by experts to luck. Projecting your utter lack of expertise on this topic on to everyone else is ridiculous.
Ok, and I think you're "betraying an ideological point of view" when you agree there was a major inflationary force so large that "anyone with common sense" is aware of it, but fail to do the elementary math that if you had inflation X with a major inflationary event; then in the absence of the major inflationary event, inflation would almost certainly have been a lot lower. Imo, to the point of being negligible.
The price of energy is a fundamental input to the global economy. When the price of energy goes up, the price of everything goes up as a supply shock. I don't think you're a dumbass for thinking otherwise. I do think you're a dumbass for asserting whatever this mess of a post is.
Citing "a simple mathematical prediction shared widely by experts to luck" is pretty dumb as well. Economists are hardly a uniform entity. Do you truly believe I could not find an equal army of qualified experts with differing mathematical predictions?
Circling back to you think you're more qualified than Yellen, mr kroog. Look out. Bachelor of Science in economics over here. this guy wrote code!
I just posted this on mastodon but I think maybe the community here knows better:
If you ran a bank that required insurance on all deposits over the $250k FDIC coverage, and then offered 3rd-party insurance as a convenience for those who wanted it... your bank would be much less likely to suffer a blow up due to a bank run and therefore that insurance should be relatively cheap.
Furthermore, people should prefer to bank someplace where all of the depositors are covered. Why is this not commonplace? Simply because the additional fee discourages it?
I think if Yellen announced this as a requirement it would remove that incentive to treat FDIC like free unlimited insurance.
Which apartment block do you thing a most people would rather live in, the one that charges you an extra 10 percent a year but promises to replace all your belongings if it ever burns down, or one that tells you it will never burn down?
>At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
If this wasn't done... nobody in the world is going to trust their bank within a few days (possibly faster than that thanks to twitter, et al), which would trigger Global Depression II
If someone in 1930 overheard a time traveler referring to World War 2.... the shock would have been overwhelming.
In the same way, seeing the start of World Depression II isn't something I could bear.
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Yeah, all corporate customers that have seen an FDIC charge on their statement, based on Q-end balances will have a "special" laugh at this. It's going to be passed through and not be bourn by the surviving banks - that benefit from this 'bailout' of their customers....
Changing the rules is good if evidence emerges that the rules are bad. In this case, the $250k guarantee was thought to be enough to prevent this kind of thing from occurring. We now know it was insufficient. The world has changed since that was implemented. Namely, social contagion, which is one of the causes of bank runs, can act harder and faster in the age of social media.
No, all credible ones work by updating "rules" on the fly. That's literally how most laws are made in general. Something bad happens and appointed agencies and legislators rule and/or pass laws to cover that bad thing from happening again. Ex post facto only deals with retroactive aspects. Which isn't happening here. Just because the government acted one way in the past and not the same way in this instance does not equate to the retroactive definition of ex facto law.
> Yellen has just broadcast that FDIC insurance is essentially unlimited
Although I agree with the Treasury's actions here so far, this is a potential issue. They should instantiate more stringent rules for banks that who cater to business accounts and then raise the cap for insurance on those accounts to a number that makes sense for small businesses across the country.
Too many CEOs and CFOs were allowing their business checking accounts to sit in dangerously uninsured positions. Headliner being Roku with nearly a half a billion dollars sitting in a single checking account with SVB. But plenty of smaller businesses leave ten million plus dollars in their accounts as a course of business as well.
The actual amount those accounts can be insured for needs to be formalized and it should probably be higher than the standard quarter million for consumer accounts as this is way too low for business larger than a half dozen employees.
Haven’t depositors always been first on the list to get paid, even their uninsured deposits? I don’t know if charging a special assessment to member banks is standard operating procedure, but that doesn’t sound like government intervention. It just sounds like reasonable operation of the FDIC.
> Does this statement reflect any shift in policy?
It’s a decision of how to apply existing policy to a specific situation, not a policy change. Existing policy is nonspecific enough that reasonable people could disagree on how best to apply it here without changing it.
> Haven’t depositors always been first on the list to get paid, even their uninsured deposits?
Yes.
> I don’t know if charging a special assessment to member banks is standard operating procedure
It isn’t routine, which is why it requires invoking the systemic risk exception.
> but that doesn’t sound like government intervention.
It’s a government decision to intervene in a particular way, so…
> It just sounds like reasonable operation of the FDIC.
It’s not just “reasonable operation of the FDIC”, since both Fed and Treasury actions are involved. And, even if it was, FDIC is a government corporation, so its actions are government intervention. Its reasonable operation is reasonable government intervention, but its still government intervention.
Not sure how "taxing depositors at other banks to pay for uninsured deposits" is "reasonable operation of the FDIC".
(And yes, it's taxing the depositors. Because even if it's "officially" a fee to the other banks, it will be trickled down to their customers through lower interest rates and higher fees rather than absorbed.)
If this was necessary to recover insured deposits, that would be reasonable. But instead, the people who made poor decisions aren't going to lose anything, because the extra money is coming out of the pockets of everybody else with money in banks.
How can they change the rules? Surely it’s already written into law… right? Are they actually able to unilaterally decide to tax banks to fill up their rainy day fund?
My guess is that they’re not changing the rules, they’re utilizing them. Either that, or they have far too much executive power over banks. Which would be shocking.
If this were a middle America community bank failure with deposits from a bunch of farmers and factory workers that is a 0% chance they would have changed the rules. This happened because the tech industry has massive lobbying power.
> At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy
And it doesn’t have to be that wide a threat. The threat here was pretty localized. Aside from blue chips that everyone has their pensions invested in (which don’t seem to be at risk) the rest of the country doesn’t have much exposure to this.
Maybe I’m wrong but that seems like a significant shift in policy, where the government will change the rules to respond to a localized crisis.
> I really wish we could plan for these entirely foreseeable events ahead of time.
This is unlikely TBH. When a system this complex and a global clear visibility if offered to no one on the planet, foreseeing ALL risks isn't a possibility.
> I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
That’s an unrealistic utopian fantasy. The real world doesn’t even remotely lend itself to that kind of planning.
Even calling it “selective justice” involves an unrealistic bias. What is happening is that the particular circumstances are being weighed an a suitable response is being formulated.
The rulebook for planning for all such events ahead of time would not be that much shorter than the future history of human civilization.
> Every time the FDIC has stepped in like this they have made all depositors whole.
This is a false assertion. Usually depositors end up losing some of their money above the insurance limits-- only not doing so if the amount of remaining assets proves sufficient to pay the liabilities.
I thought the old $100k limit was statutory. Then in 2008 it was changed by the executive w/o Congress approving it (or has it, since?). Now it's being changed no limit and fees are being raised. These are fees charged by a government entity, so one would expect Congress to have to be involved. Can a depositor sue to have the old fees restored? Can a bank sue to have the old fees restored?
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. Paul Getty
(Or as I heard it more aptly paraphrased, "if you owe the bank a million dollars, the bank owns you. If you owe the bank a billion dollars, you own the bank.")
They know (and it is obvious) that all deposits are going to be fine without any extra funds, wacko VC's and nutjob politicians are stoking the sort of flames that might cause a contagion so they are forced to make statements like this.
The fact that the statement is so milquetoast is certainly on them, but being uber-conservative in your promises is generally a failing/asset for bank regulators.
… which is why Signature Bank was also placed in receivership this weekend. The contagion was spreading, if they did nothing there would be runs on a number of banks tomorrow. There still may be runs tomorrow.
Looking at other banks that maybe be in a similar position and taking prompt action is competence to be celebrated, I view it as more evidence that despite weaknesses in the regulatory framework they are not in a tough spot at all. They know they can act decisively without fear.
A tough spot would be an environment where they let the SVB situation drag out and didn't act on Signature until a run was in motion and had both to deal with at once.. then they would be fighting to restore confidence.
If you look at the numbers from 2007-08 and this stuff, plus the much tougher regulatory environment (despite SVB's ability to fall under a lot of thresholds) there just isn't the sort of systemic risk at play here that folks seem to be implying. Also this isn't a replay of the S&L Crisis of the 1980's because those lessons were actually learned but some institutions are still going to screw up because a rising interest rate environment is still challenging in the current regulatory regime.
>"At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy."
Rules exist to serve a purpose. If one risks fucking up the economy with the only goal that the rules are preserved - it could end up with pitchforks.
This is going to be the beginning of the end of the banking system. I foresee a huge dollar collapse, the US banking system has just lost its final shred of credibility. It's only a facade of a bank at this point. It's just privileged people with a government mandate to leverage on everyone else's money with no consequences.
It's more immune to moral hazards. But I'm not really into crypto, I'm just purely frustrated by the current system. It's an absolute joke at this point.
It's not though, SVB equity holders are getting zeroed out. Raiding the DIF to pay out depositors in extraordinary circumstances and then recovering it through a special assessment is basically the whole point of having an FDIC. The justice is that SVB equity went to $0.
> broadcast that FDIC insurance is essentially unlimited
Shouldn’t it be? The government is in the best position to regulate and manage the risk of these institutions. We cannot expect average depositors to be financial analysts with the capacity to assess financial institutions.
Because that's not how modern banking works. This isn't George Bailey lending out deposits; retail banks don't use deposited money at all it just kind of disappears.
> I really wish we could plan for these entirely foreseeable events ahead of time
That's exactly what Dodd-Frank did. The audit and stress testing requirements got rolled back in the Trump administration. "Planning" is not the problem here.
I can't pinpoint anything specific they did wrong, compared to peers. Their operating expenses were not that large, for example. So what happened to them, can happen to any bank now. That's why FED are worried.
> At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
The criteria isn't threatening a "wider disruption to the economy", it's threatening the quality of life of a certain class of people. When unions threaten a wider disruption to the economy for maintaining their quality of life, they'll do their damnedest to not give in. They'll pass laws outlawing strikes. Or send in "law-enforcement". As the saying goes, laws are for the poor.
> The criteria isn't threatening a "wider disruption to the economy", it's threatening the quality of life of a certain class of people.
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. If SVB is well capitalized as the Fed claims it is and there is "no cost for the taxpayers", then this shortfall should be relatively small if any.
Another, even more radical option would be to quickly set-up a secondary market for the debt issued by these banks and let the market provide liquity and discover the value of the assets. This is one of the few innovations form the crypto world I wish we could see in traditional finance, we can't keep bailing out rich mofos like it's 2008 when we have all these wonderful new technologies which can stop contagion and bank runs, protect depositors and zero in on those responsible.
> In support of this view, they could have easily extended FDIC on a dynamic metric, for example 20k for each employee.
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.
They can make those rules and preparations beforehand, for the next SVB, Signature etc. Banks would definitely want to optin under such a protective regime and have their systems ready since it alleviates customer panic in an event of a liquidity crisis.
> it's threatening the quality of life of a certain class of people.
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.
The money isnt going directly to the workers. It goes to the companies who employ them to make sure the employers are ok. I think the point being made is that when workers ask for protections or concessions it's this massive struggle but when Etsy needs help the money somehow appears literally overnight.
What you're glossing over is that when the employers suddenly lose most or all of their liquid assets and don't have perfect positive cash flow, then they cannot pay their employees.
As long as the Fed is making up rules on the spot, they could make up a fund to pay employees of the depositors directly in the short term, and start liquidating any assets of Silicon Valley Bank to pay for those. Call it, say, the Silicon Valley Bank Victims Fund.
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".
> By Monday morning? With protections in place against fraud or double-dipping? It wouldn’t be as easy as you think.
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!
Sure, but why is it any more absurd than creating a fund out of thin air to guarantee SVB deposits?
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!
Creating a system to work with one entity, especially a bank, is far easier than creating one to work with 10s of thousands of individuals, not to mention that you can do this work all abstracted behind the bank without any existing systems (payroll) having to consider anything.
You can spin "what this is about" whatever way you want, but it's simply a fact that for the kind of businesses that typically had deposits at SVB, the overwhelming part of those deposits existed to pay employee's salaries.
Yep. And when other business can not pay salaries because of events they could not control, neither them nor their employees get any extra help. They get mockery from very same people that call for help now. This is about who got it.
The startups did not had all of their money in this particular bank randomly. It was by design.
A corrupt program that incentivized banks to finance the largest sums first, which of course were only demanded by the largest companies, and ended up running out of funds by the time the small players got their turn in line.
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.
> And when other business can not pay salaries because of events they could not control
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?
Every depositor is getting $250k back immediately, surely that's enough to make payroll a few times over, factoring in other revenue they must have if their payroll is that large.
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.
> $250k back immediately, surely that's enough to make payroll a few times over
I'm not sure I follow. A US 60k/Y job means the company has to pay 5k p/m (to employee and taxman). So a company-depositor getting 250k would be enough to serve 50 employees. "A few times over" would only be true for less than 25 employees. If we go Silicon-Valley level, where salaries seem to be twice as high (or more), those numbers would halve again. They seem very small numbers, most SMEs would not fit them.
> They seem very small numbers, most SMEs would not fit them.
In the USA 78% of businesses have fewer than 10 employees. 89% percent have fewer than 20. The typical SMB has only a couple of employees.
When you include sole proprietors (like the typical etsy store) "the share of U.S. businesses with fewer than 20 workers increases to 98.0% and the share with fewer than 10 employees registers 96.0%".
Yeah that is probably wrong but I think a notion of "omg all my money is gone" is also wrong. As long as the bank run is stopped in time, people with uninsured deposits would lose who didn't make it out of the bank in time will only a minority share instead of everything. That's what a bank run basically is, if you have 102$ in liabilities and 100$ in assets, and the FDIC steps in, everyone who holds 1$ at the bank gets 0.98$ out. Not bad. If 99$ exit the bank then the owners of the remaining 3$ only get 1$ out, a 66% loss.
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.
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.
Rather than prop up a bank that support x number of businesses that support y number employees, you'd had the government prop up xy employees? For how long? And if another z number of banks fail? Support xyz employees?
This! Exactly this, because the government is also doing a backstop for a second bank, Signature Bank of New York. Silicon Valley Bank is the 2nd largest bank failure in U.S. history, and one day later, Signature Bank was also closed and its uninsured deposits guaranteed by the FDIC.
All of Europe is regularly dismissed as socialist whenever the EU enacts regulations that a certain part of the HN population does not like. I would consider the label "socialist" an epitheton ornans here.
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.
That happened before the fdic got involved. If it turns out he was hiding something, the SEC might get involved but otherwise he was fully allowed to sell his own stock based compensation. That's how stock based compensation works.
... and that trade will certainly be investigated. If the trade was not part of an existing trading plan, it's highly likely the CEO will have some very uncomfortable conversations.
How is selling stock tantamount to a government bailout?
The "uncomfortable conversation" can mean a conversation about breaking insider trading regulations, the penalties for which include huge fines and potentially jail time.
> the CEO will have some very uncomfortable conversations.
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" isn't an "eat the rich" statement. The OPs point is that an "uncomfortable conversation" isn't a punishment for wrongdoing, such as insider trading.
>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!
We don’t live in a socialist society. These companies chose not to diversify their risk. If they didn’t know their accounts had a max insurance rating of $250k, then they deserve to fold.
FDIC insurance is intended for consumers not to be instantly without. If you are a corporation, you are responsible for you own financial risk.
9 banks have failed in the last 5 years. The fed is treating this special and that’s why it’s an issue. Essentially they are telling the public “as long as you are with a large bank that holds large assets, we will protect you”.
The problem is that that shoring up comes at the cost of enabling bad behaviour. Banking right now seems to run on the assumption that you’re allowed to erode the stability of the system for your personal gain, because governments world-wide will shore it up from the other side.
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 bad behaviour is being enabled here? The people who stand to gain from taking risks here (bank owners) have lost everything and are not being bailed out.
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.
> 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.
This policy could also encourage deposit flight at the slightest notion of risk - if everyone is made whole anyway the stability of a bank isn't any consideration for any of the depositors anymore. There is no game theory to moving deposits then.
That's what you are told. A bad bank went down due to risky investments and no hedging against obvious interest rate hikes. Yes, more will fail as a result and they should and the losses should not be socialized to the rest of us.
How fair is that? You aren't suggesting that it is fair, I realize.
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...
My understanding is it's not yet known whether a special assessment will need to be levied. The FDIC is making all deposits available before they find out, and if it turns out they cannot sell SVB assets to cover deposits, they will levy a special assessment to make up the difference.
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.
You're absolutely right. It's entirely possible for SVB to sell their assets and cover the entirety of the deposits above FDIC limits.
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.
It's possible the bank is only a "little bit" insolvent. Is it not possible that the difference can be made up by wiping out shareholders and giving unsecured bondholders a haircut?
> Is it not possible that the difference can be made up by wiping out shareholders
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.
> SVB's assets could've been sold for their full cost they would've been
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.
If this is so prudent, how come nobody was suggesting it before it happened?
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?
> If this is so prudent, how come nobody was suggesting it before it happened?
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 sheet 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?
> SVB deposits are being paid for with an assessment on FDIC members.
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 stock isn’t being bailed out, but a certain class of society/account-holder is (again), which seems to be just as bad in terms of perpetuating the moral hazard.
What moral hazard being created though? Most SVB customers, unless they are finance experts, are not in any position to do due diligence on how their bank invests its loans and are pretty blameless in my opinion. They weren’t capturing any real risk premium by banking with this bank.
Especially considering the government disallows people that aren't "qualified investors" from investing in specific asset classes entirely because people that don't meet that threshold are just too stupid to participate.
But they were by, for smaller but over 250k depositors, not spreading their deposits between multiple banks. Which can be done manually or through a sweeping account very very easily. Or, for larger depositors, having other safety mechanisms in place. Really depositors over 250k do need to take some moral responsibility, even though I think it is better that they be made whole to stave off a 2008 style financial crisis.
So what is the risk premium they were collecting? The time savings of not managing multiple accounts? Is it really desirable for larger depositors to carry the inefficiency of spreading their deposits across multiple banks, if the net liabilities of the banks end up being the same?
Net doesn't matter to the individual firm. And who should carry it? Everyone else who had the gumption to spend, what, a few man hours, to guarantee that they won't end up not being g able to make pay roll?
No, VCs who literally demanded they put their money there did. Guess who cries the most about bail out - VCs. The same people who wanted regulations to ease up, the same people that actually indirectly profited from bank taking higher risk.
It is ridiculous that the supposedly smartest groups whose literally did this to themselves gets bailed out.
They don't need to do extra due diligence. Just buy insurance for the excess amount above the FDIC limit. After all, they do benefit from the upside like cheaper mortgages for execs.
One way this could create moral hazard is that large depositors are happy to lend to quite risky banks at high rates because they know they will be made whole in case of a bank failure. Btw., this could also make deposits less sticky as moving for opportunity has no downside in such a scenario.
> Most SVB customers, unless they are finance experts, are not in any position to do due diligence
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
> SVB is a 40 year old bank that's been doing business in the valley since the VC era started.
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.
> 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.
Nope.
"The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system."
You don't know that a "certain class of society/account-holder is" being bailed out. Maybe you think it's likely, but the only people who really know the deal is the FDIC, and they seem confident that everything will wrap up cleanly.
FDIC typically insures up to $250k. The government is now doing a one-off (well, two-off) to make ALL depositors whole.
"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.
The FDIC limit comes into play when there are no underlying assets to distribute to depositors. If the bank has no assets, it's likely all you'll see is $250k.
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.
First, since we’re comparing numbers to each other, you should go back before Wednesday to get a real number for pre-run market cap, it’s about 2.5x that. Not that it really matters.
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.
No, the point is that shareholders of the bank are investors in the bank, and investment comes with the risk of loss. Depositors in a bank are not investors in that bank.
> Depositors in a bank are not investors in that bank.
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.
Was it? I think I read somewhere that this bank had an unusually large share of depositors over the deposit insurance limit, or in other words a high share of uninsured deposits.
Yes but that doesn't mean they would lose everything over the insured limit. If I owe you 1M but only have 950k to give you that's a lot better than having only 100k, in which case you'd end up with 250k.
Ok, but assuming the numbers above are correct, 150B in uninsured deposits - 5B in market cap firesale = 145B that SVB apparently didn’t have the cash on hand to repay.
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.
No, GP is just foolishly conflating liabilities and assets and bank deposits and enterprise value among other issues if you read this and their other comments.
tl;dr - GP doesn’t have a clue what they are saying.
With the number of ELI5 guides all over the internet on the SVB situation, this level of willful ignorance you displayed here is just sad. Seriously, stop talking out your arse and go educate yourself, even a little, first.
What is the shortfall once all the assets of the bank are sold though? It's not like anyone is putting $150B into this to make sure those deposits are made whole.
You can't say that right now, I'm not sure anyone can. The government is literally writing a blank check because they don't yet know how much it's going to cost to fix.
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.
> the underlying assets were and are strong-- if that were true they would have found a private sector solution early in the weekend
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.
Bigger bank with more cash could have bought them, fixing liquidity issue. This didn't happen, suggesting that there's problems with bank's assets, not just liquidity.
Yes and no. There were 4 stages in this drama. 1. Build up where books became imbalanced 2. Imbalanced maturities draining liquidity 3. Liquidity issues being prominently voiced causing bank run 4. Aftermath.
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.
As far as coverage has stated so far, the underlying assets ARE solid...
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'm sorry, I don't follow the logic here. Do you mind elaborating?
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?
Nobody has to put in anything other than confidence. Given enough time the bank already has plenty of assets--the whole point of the feds saying "all deposits will be made whole" is to stop the panic withdrawals and thus obviate the need to sell those assets.
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.
Or perhaps the experts at Treasury, FDIC, etc, actually made this decision because they think it's true in their expert opinion, not just because VCs said so?
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?
I think the issue is that 15 years after the GFC, again 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.
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!)
Depositors are lending to banks - the bank is not just storing the money!
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?
Whereas IMHO pollyannaism is a product of some combination of denial, naivete, and privilege, and mumbling about cynicism instead of engaging with the point made is nothing more than an expression of cognitive dissonance or worse simple childishness.
> mumbling about cynicism instead of engaging with the point made
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.
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.
I view it kind of like parenting. Depending on what kind of kid you’ve raised you may not want to signal to them that no matter what you’ll financially bail them out. Hoping they’ll make the right choices.
Who are the kids in this analogy? It seems like what's at issue is whether or not depositors are protected (executives, shareholders, and creditors are all getting the shaft). Do you think depositors should have made different choices, and if so, which?
I wouldn't take the analogy too literally. But the 'kids' are all market participants in the system the government is trying to regulate. My point being is there is a reason certain entities don't communicate with full transparency and sometimes they find ambiguity a tool. Now whether this is the right or wrong thing to do in this case in the short and long terms...I'll have to leave that judgement to the history books.
Depositors shouldn't have piled all their assets into one bank because it was paying slightly more interest. Not saying every depositor did that here, but many did.
Nobody used SVB because it paid more interest. (It didn't pay interest at all in fact.)
They did it because the name was cool or because other banks wouldn't give you an account for your startup at all. It's normal to go for a regional bank when regular ones don't understand your business.
> At the same time, this is yet another example of changing the rules in the middle of the game.
Not exactly. Or rather yes, but the rules changed in 2008, not this week. Specifically after IndyMac failed in 2008, there was significant blowback on the FDIC from Congress, and an unoficial, unnounced policy was put in place to ignore the $250k limit and ensure uninsured depositors took no losses in (almost) all cases.
> Of the 127 banks and thrifts that failed from Jan. 1, 1993, to the last bank that failed before IndyMac was closed [...] 71% of the total deposits of the 127 failures were in institutions where uninsured depositors suffered a loss, while 29% of the deposits were in institutions resolved through a P&A that fully protected uninsured depositors from any loss whatsoever.
Whereas:
> Since IndyMac, there have been 522 failures, excluding Washington Mutual [...] Of the 522 failures, just 31, or 5.9%, were resolved in a manner that only protected insured deposits — uninsured depositors were therefore put at risk of a loss. Those 31 banks and thrifts held just 4.9% of the deposits of the post-IndyMac failures.
(Washington Mutual is excluded because it was enormous compared to the other failed banks - although since uninsured depositors were protected, including it just skews the stats even further.)
So for the past 15 years, we've had a system where the overwhelming majority (well over 95%) of uninsured deposits were protected, and thus, it would have been legitimately very surprising if recovery for uninsured deposits in SVB wasn't 100%, because it's very clear that unstated FDIC policy is to aim for that, and they've got a strong track record of achieving it. (I will state that I find the hidden nature of this policy problematic, however.)
The only thing surprising about events so far is that there's been enough noise that some new policies had to be announced, instead of it all just being quietly resolved like normal.
> this is yet another example of changing the rules in the middle of the game.
welcome to democracy bro. also, economies are literally black magic. if anyone claims to know how to make them work right, they are either lying or a witch.
Edit: oh shit I'm getting downvoted to hell. Was it my suggestion that economists are full of shit, or denigrating witches? Because I have nothing against witches.
Its incredible incompetence that the fed doesn't fully guarantee all deposits at FDIC member banks. The liability side of banking is not the place for disciple. MMT founders and Bill Black have been saying this since 2008. Insure depositors and blow out shareholders and management for making bad investments.
Error is the easiest and most common government excuse for inexcusable malice. Which means that people shouldn't allow for that excuse in the context of grand scale failures like 2008, 2003, etc.
I was reading this and came across "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
What does this "special assessment on banks" mean in practice? Do they just go to all the bulge bracket banks and demand that they buy the outdated Treasuries at a loss? How does this work?
IIRC banks pay a fee to the FDIC in exchange for providing insurance, and because the FDIC is not funded by taxpayer money, the fee simply goes up when needed.
In other words...it's funded by anyone who uses a bank. A quick Google shows that only 6% of Americans are unbanked. If 94% of Americans are going to see higher fees, lower interest rates on accounts, higher interest rates on loans, reduced services in order to make up for increased insurance fees, it's practically paid by tax payers.
Everyone being a taxpayer and everyone having a bank account is a coincidence. This does not equate to bank fees being taxes. I’m not saying you’re wrong, but this argument isn’t strong. It’s the same as saying we’re being taxed for smart phones or cars on the basis that most people buy them. A tax is something the government collects and it’s mandatory. The other massive difference here is that the fees are distributed according to certain kinds of savings and investments, not according to income nor according to any and every bank account. I don’t have bank fees, for example, for my checking account.
To continue your cell phone analogy, this could easily be like the 'number portability' regulation that was simply passed on to consumers as a fee that vastly overpaid for the cost and now represents almost pure profit for carriers.
Banks are too smart to make it that obvious, however. They'll wind those fees in silently.
These days, banks need to be competitive with Treasury rates to get large deposits from informed investors. Anyone with a brokerage account can get a 5% interest rate today on short-term Treasury securities (risk-free if held to maturity, and exempt from state/local income tax).
So if banks start lowering rates on deposits, they may have a shortage of money for lending.
It seems likely that it'd be proportional to your holdings in banks, though? So it's a bit of a wealth tax? Seems like people can put down their populist pitchforks. This is a pretty good application of an insurance scheme.
Not really...it depends on how it's implemented. I don't pay a minimum account fee because I have enough money. Who does? The poor. If they decide to increase credit card rates, I don't pay credit card interest. Who does? The poor. If they decide to reduce savings interest...I utilize a service called "Max My Interest" where my savings account money is rotated every month to a different bank depending on who has the high interest rate. If the bank tries to reduce interest payments...doesn't impact me. It impacts those who aren't financially savvy.
It could be borne by the tax payers who have bank accounts. But it is also possible the banks could bear some or all of the "tax" by lowering their margins.
I don’t know about clawbacks on bonuses, but part of their comp is equity and shareholders are getting wiped, so you’re pretty much getting your wish anyway.
So there is SVB and Signature bank that have both collapsed in terms of $300 billion. If what you are saying is correct, does that mean that the banks are required to pay hire fees across the industry upwards of $300 amortized over a certain amount of years? If that's the case then the taxpayer will most definitely be on the hook. I don't know if spread across all taxpayers this fee would be negligible, and I also don't know how this would affect the CD rate that banks would offer to clients.
Presumably it would force them to lower it, which would be counter to the anti-inflationary moves of the Federal Reserve, but that might not matter given that this is a current issue. It's possible this might also affect banks willingness to raise rates in the future in response to Fed tightening if they thought there was a risk to the banking sector.
Given the size and how quickly the banks are failing I'd hazard a guess (this is not financial advice) that in order for the FDIC to maintain it's own portfolio it would have to raise rates enough to be noticeable to consumers, even given the number of FDIC accounts.
Can someone comment on if this is the case and how much this might affect forward guidance for banks and consumers?
I believe that SVB and Signature have total depositor liabilities of 300B. They also have assets that are worth a significant portion of that. Only the difference needs to be covered by the FDIC assessment. Depending on what happens in between now and when that assets are sold, it is possible that the assets end up being worth more than liabilities, and no FDIC assessment is needed.
SVB and Signature bank that have both collapsed in terms of $300 billion
This is not correct. SVB, for example, owes depositors ~$150B but they also have assets of almost $150B. The hole that FDIC needs to fill in may be less than $10B; it may even be zero.
It’s a true solvency issue. They could have announced this before the bank collapsed and it still would have collapsed eventually because assets were less than liabilities
A bailout usually means "company kept afloat via direct cash infusion from the government". In this case, the company and its assets are being liquidated to pay its depositors. The special assessment is to replenish any money spent by the FDIC's insurance fund, and as the press release says, that is required by law.
You can have your own private definition if you like, but people talking about financial failures having using the term "bailout" in connection with all sorts of stakeholders for decades.
The word games being played around this are just embarrassing.
Then let's call it what it is specifically instead of using such imprecise language: It's the sale of the assets of a bank in order to guarantee depositors' funds. It's not like the way zombie banks were given money to continue to exist in 2008, or the way the GM and Chrysler were given money to continue operating at the same time.
The use of broad-to-the-point-of-meaningless but emotionally charged terms like "bailout" results in stories that distort what's actually going on to fit a particular narrative.
Because SVB is not actually bailed out. The company is dead, this just means the depositors don't lose their holdings and we don't watch a whole economic sector melt down while we debate the definition of words.
wmf - I can't reply to you. So I'm writing here - you should take a look at this. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/ins.... The fifth chart has that while SVB has 12% of Tier 1 Capital Ratio, their fire sale price is effectively 0. I haven't looked at the numbers in-depth, but you're right. It's not 150 billion, but on the other hand it's not known who would be willing to buy their assets. It sounds like the government is going to take back the Treasury bonds and then raise FDIC rates. But if that's the case then, given that the current treasury bonds are selling at above the rates of previously sold 10 year bonds, who would buy these bonds? I don't know precisely how much of their assets on hand are treasury bonds, but I doubt any of these would be saleable except at current market rates. So it would be closer to $150 billion * percentage treasuries * (current yield value - past yield value). I still think it would be high.
Yellen and the FDIC have just made a disastrous long term mistake for the country.
1. By next month banks and companies will realize there is no limit to the printer at all. After 2008, we've seen the banks and financial sector misbehave constantly, so expect massive deliberate tanking of entire sectors of the economy because why work when infinity bail money exists.
2. People in the country are already agitated by many social and economic grievances. The average American savings account balance is $4,500. This will one million percent cause a social backlash that will make the Trump movement seem like a child's party. Both the left and right radicals view silicon valley as the center of fascism/wokism, and the average person is barely scrapping by in a time of rampant grocery store inflation. Twitter/Reddit/Etc are full of people taking pictures of their grocery store carts and comparing costs.
Examples need to be made to restore faith in the system, Yellen and the Biden could have used this moment to restore faith by punishing the banking executives.
Political instability and extremism will now increase dramatically.
"...recovered by a special assessment on banks, as required by law..." - Would love to know what law/regulatory framework she is referring to. Janet Yellen is ready to become a US based Liz Truss...
Now expect a contagion effect next week, if SVB liabilities are shown worst than currently known, and made to bare on other banks capital requirements...
> Would love to know what law/regulatory framework she is referring to.
This is not some conspiratorial secret. Banks pay premiums to the FDIC for their insurance, and it's a requirement of all chartered banks. The FDIC has the right to backstop deposits in excess of the deposit limit by invoking a "systemic risk" clause (I'm not sure exactly which law this comes under, whether it's some of the original laws that created the FDIC, or more recent post-financial crisis updates). When the FDIC fund gets depleted, they have the right to invoke a special assessment against banks.
> Now expect a contagion effect it next week
The whole point of doing this is to prevent a contagion. The reason there was a bank run against SVB was a mix not just that their asset values had deteriorated (that was well known for some time), it's that their non-diversified deposit base of VC-funded start ups have gradually needed to up their withdrawals since early 2022. SVB would have survived if there wasn't a run on the bank, and the whole purpose of this action was to prevent further runs by saying that deposits will be protected.
Ok. Lets say next week a larger bank, is shown to have made some other risky bets...Are you still in to make all depositors whole? Let's say JP Morgan or Goldman Sachs?
> Banks pay premiums to the FDIC for their insurance, and it's a requirement of all chartered banks.
Do they have special rules for when the FDIC decides to retroactively insure some bank's deposits for more than $250k per account holder? Because now everyone's insurance premiums will go up to cover this, won't they?
What? The FDIC controls the premiums, because the FDIC is the insurer. Moreover, the FDIC is not actually paying out any insurance claims here! SVB is being acquired, and the acquirer is providing access to funds on Monday, not the FDIC. There is no cost to the taxpayer here, and the FDIC is not raising premiums as a result of this either. It didn't pay out any claims (and wouldn't likely raise premiums even if it did).
12 U.S.C. 1817(b)(5) is the “regulatory framework” you’re looking for. The FDIC can levy a special assessment for literally any purpose it seems necessary.
Thanks for being more precise than the FED statement :-) Yes it's there, but not for the purpose used here. Contracts have clauses, but there is also the so called spirit of the law and it can be made to work in legal cases.
(5)Emergency special assessments
In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary—
(A)to provide sufficient assessment income to repay amounts borrowed from the Secretary of the Treasury under section 1824(a) of this title in accordance with the repayment schedule in effect under section 1824(c) of this title during the period with respect to which such assessment is imposed;
(B)to provide sufficient assessment income to repay obligations issued to and other amounts borrowed from insured depository institutions under section 1824(d) of this title; or
(C)for any other purpose that the Corporation may deem necessary.
I never thought Mnuchin was the most competent of all people but regardless of how this particular SVB saga plays out, Yellen has to be one of, if not, the most incompetent treasury Secretary of the recent past.
She came into power and the first thing she did was suggest a global minimum tax rate, as if that would have fixed the accounting tricks that companies use to reduce the actual tax they pay.
Disconnecting the Russian central bank from swift and an oil and gas price cap have been immensely damaging for the western financial system and the international standing of the dollar(and the euro).
We now have countries increasingly integrating with alternative bank messaging systems and an accelerating of US reserve sell offs, along with what seems like the initial steps of the creation of something like an OPEC alternative for gas.
Not only that, it seems that because they never coordinated the sanctions with the banks it seems like only ~30 billion of the supposed 300 billion of frozen Russian assets can be accounted for, meaning they got to pull their money out and meanwhile the Russian on the other just from 150 billion in return.
Get this incompetent person out the door before she destroys more of the USs financial system.
“We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas.” - Milton Friedman
Agreed 100% Yellen sucks. She would be bad in "good" financial times, but in our current times, its even worse. Mismanaged inflation (or at least perception of it) and is offering the US as a personal bank to Ukraine (among 100x other things).
I have never seen such cognitive dissonance here at HN -- which I feel is really saying something! As an SVB customer who had to wire payroll on Tuesday, our perspective is naturally sharpened, but I found the lack of empathy here over the weekend galling. On the one hand, this is understandable, and Silicon Valley has done much to earn collective distrust. On the other hand, this is emphatically not all of us: many of us have been outspoken about our disagreements with the techbro culture, and have endeavored to create companies that are exemplars of what we want to see in the world. Speaking personally, I spent a lot of time DM'ing people privately who were saying absolutely outrageous things online, and almost uniformly hearing back: "No no, not you -- I love what you're doing." Well, if you want to see startups solving hard technical problems we need to have some real talk about how that has to be structured financially -- and maybe stop tweeting images of guillotines when our employees are anxious about their next paycheck?
I understand what you mean here. I don't think it's people having no empathy for employees (or even founders) who did not act in bad faith.
We are (or were) in a situation where the entire ecosystem blew up because VCs and funds inadvertently incited a bank run.
Backstopping capital so payroll can be made obvoiusly helps out employees, founders, and companies alot, but the ones that benefit the most financially on an absolute basis are these investors.
It just feels a bit disingenous to hear an argument that "this small company out of the Midwest needs to make payroll" (which is an example I just made up, any relation to real companies are entire coincidental), while ignoring the argument that "If the government doesn't backstop this my $3B fund goes to $0".
In summary I have a lot of sympathy for employees, and even founders who were held to terms that were completed standard and seemed reasonable at the time.
I have less empathy for the group that are (were) vocally calling for bail-outs and trying to incite further panic in an effort to protect their own investments.
Edit: switch the example to avoid inadvertently matching a real life example way too closely.
Banking shouldn’t be an investment. The entire economy runs on the idea that banks are fundamentally secure. This is why banks are regulated, and why deposit insurance exists. The extension of it past $250,000 is very good
> This is why banks are regulated, and why deposit insurance exists. The extension of it past $250,000 is very good
It is not good. The insurance limits goes hand in hand with regulations. Different higher insurance limit needs to imply higher regulations and more control. This particular bank and these particular VCs lobbied heavily to have the regulations eased up. They won. These particular VCs forced their startups to have money in this bank, because it was good for them.
That is literally structural reason to not bail it all out. It is the "we are risk takers, we take profits from higher risk, but when it fails and cause damages someone else must protect our investments" strategy of VCs.
Yeah but the problem is that nobody wrote that down beforehand. It's not good to make it up as we go during emergencies. It's good to have clear rules written down ahead of time.
> It's not good to make it up as we go during emergencies
Complicated, fragile emergencies are precisely the time to consider exceptions to hard rules. After all, if all our rules were perfect, we wouldn’t have an emergency to begin with.
No, because those exceptions become the new rule, and fragile emergencies are a bad time to think through what the new rule should be. "Hard cases make bad law."
I feel the need to say this in every comment because I don't expect people to read my other comments, but I do support what was done here, assuming the private buyer solution was tried and it failed, I just also think it's bad that things are run this way.
> No, because those exceptions become the new rule
I disagree that this necessarily sets the new rule. Sure, sometimes it creates new precedents, but the necessity for an exception should go on to inform new hard set rules to prevent the necessity for exceptions in the first place. In this case, a return to a more regulated banking sector, hopefully.
This is not dissimilar from highly agile work environments that require frequent process changes to achieve the ultimate goal.
It is entirely dissimilar from highly agile work environments, because neither the federal government nor the financial system are highly agile. And even in far more agile systems, path dependency and status quo bias are very powerful.
I would make a very large wager with you that in a decade it will be unquestioned that last night was the night US bank deposits of any size became fully government backed. Maybe that's even a good thing! I dunno, I have no idea what all the downstream effects will be. But the banking system now works a different way than it did on Thursday morning, and I think it's reasonable to question the wisdom of a change this huge being made over one random weekend.
I think you may have missed the news last night. They just invented three brand new facilities within 72 hours of SVB collapsing. That is making it up as you go.
Yes, people make mistakes and then learn from them. Sometimes not every scenario can be anticipated. In this instance a bunch of startups got caught in this mess and 250k won't be enough for them to survive/meet their employees' payroll. I appreciate the govt stepping in and hopefully rewriting the rules based on the learnings.
you say that in jest, but this event did expose that we (especially geriatric legislators) are not prepared to tackle a "social media" climate. 10 years ago neither could this Prisoners dilemma have taken place, nor could so much money have been physically drained in cash minus online banking.
Other banks don't have a tight nit group of customers so bank runs don't spread as quick.
Most, maybe all, banks don't have enough funds to cover a full on bank run because almost all treasuries bought over a year ago are worth less than their original value.
It would have to be negative, as in an up front cost to the consumer.
Banks need to make money to cover operating costs at the very least. It's not that people don't accept 0% interest on deposits, it's that consumers would have to pay money to a bank to keep it operating with no risk.
Take that situation and then introduce a new bank that makes loans and therefore can pay depositors x% in interest on their deposits. If enough people decide that's a better deal than paying for total security, they'll take it.
The entire point of a low FDIC policy is to keep the small players safe while forcing the large players to make prudent decisions with their capital. Bailouts introduce moral hazard that says no big players need to scrutinize the risk adjusted returns they're getting. It's free money to those with money whole everyone else pays for it.
I mean, my Chase checking account is still only paying 0.01% interest. Many many people seem to be ok with ~0% interest on their day-to-day cash needs.
Credit unions are not public services. They are essentially banks where deposits are shares. A credit union could blunder on long term loans just as well as a commercial bank.
"By all measures, credit unions fail less often than similarly sized banks. During 1980–2018, asset-weighted credit union failure rates were far lower than those of banks: 0.10% vs. 0.22%"
I wondered the same thing. I think it's another veiled call for socialism. It would be weird (not the right word) to have government banks buying government and corporate bonds to pay a common interest rate and have no liability at all for bad investments.
As an employee of an otherwise decent company who happened to bank with SVB, I was mainly resentful of being stuck in the same boat as the latter group
Ugh yeah, I honestly find it really demotivating that I share an industry with these people. Unbelievably, they have managed to be even more insufferably disgusting than the bankers during the GFC. I would have never believed it possible.
I looked into her company. It seems to be some sort of personal assistant service for $600/mo, $1500/quarter, or $5,900/year. And there's a page trying to convince employers to get the service for their employees so that they can be more productive at work.
Small company from Ohio? Sure. But their target demographic is definitely not small town Ohioans.
There has been so many great reply to this comment already about how the lack of empathy is directed at the financial system itself rather than the small businesses and individuals directly impacted. The other thing that make it hard for me to have sympathy for a government backed solution is what makes these small companies and individuals anymore worthy of being 'bailed out' than any other small business that finds themselves unable to operate because of situations outside of their control or factored risk.
I don't see VC's and tech workers screaming for the government to step in when it's blue collar or service businesses failing. Thousands of small business with 5-20 people on payroll fail every year because of things outside of their direct control. I know small businesses that had to close doors because they got fucked over by things like landlords going bust and suppliers with half payments and no goods delivered collapsing. It's shitty for any small business to fail because of broader issues outside of their control, how is it fair to label this as anymore worthy of assistance?
you don't see the govt support that kick started all of the inflation and following rate hikes. I agree with the sentiment, however we can't thumb our ears to the facts that the govt HAS taken extraordinary measures to prop up the non-taxed fraction, at the expense of the middle class this decade
The subject is wrong though, SVB isn't getting bailed out, their depositors are. At the end of the day, SVB as a bank would be no more/the ownership would be washed.
The depositor didn't do anything wrong, they had the full right to withdraw at anytime and they didn't make the decision to invest into long term illiquid low interest MBS in 2021.
There are plenty of necessary reasons for business to have money in accounts above $250k. There should be no exposure here, this is the US banking system - bank deposits should be guaranteed by the entire system (not the taxpayer). Let the shareholders burn, fine... but cmon man, what does anyone get by letting depositors lose capital when placed in US banks?
> There are plenty of necessary reasons for business to have money in accounts above $250k
Sure, and they know what's insured and accept those risks.
> There should be no exposure here
Bullshit. There's a gradient here: There are some depositors who have $750k and others who have many millions. What many of them (the latter group) were doing here is simply bad financial practice. I have to do better with my personal finances. Why don't they, too? Because more people depend on them? That's pathetic, they should do better because people depend on them.
And let's not pretend like they don't have options. They do. The individuals (corporate officers) losing money here (hypothetically, since they're going to be made whole) are supposed to be competent leaders. They're showing the world their asses.
Many employees had all their 401k tied up in enron too.. They were heavily encouraged by the employer, and it saw great gains for years. Doesn't mean that they should ignore financial advices and diversify to reduce risk...
The same place that took trillions of dollars in exchange for low-yielding treasury bonds. The same place that effectively devalued said treasury bonds when they decided to rapidly raise interest rates.
The reason employees are anxious about their next pay checks is because of the VC-induced panic which is entirely self-serving and has not one iota to do with making payroll — that’s just a palatable hand-wavey justification for demanding government intervention because their precious points are at risk.
I have a great deal of empathy for the workers anxious about being paid, but that goes without saying, there’s nothing to discuss there. Workers are victims of the VCs who rightly deserve to be derided for their behaviour, both in this incident and more broadly in squeezing every last drop of profit from normal people.
I don’t understand what you’re asking of people on HN. Are you asking us to preface all our comments with “…not all SVB customers are leeches…”?
I also think that people here are missing the game that was played by the VCs. I have a friend working at Insight who told me that they were preparing to issue loans and further funding to portfolio companies. This of course is less ideal than having the government bail their portfolio out, but they would have had no choice. So, having shot themselves in the foot by starting a panic, they decided that the best way to avoid getting in trouble was to push the panic even further to the point that it threatened the entire economic system.
Personally, that is what I find so disgusting and that is the source of my animosity. I believe the fed ultimately chose to maximize the probability of avoiding a crisis over punishing these morons. I think that is wise but still not good.
The analogy I choose is this. Imagine there is a forest that is due for a bit of a natural fire. We should let it burn - but wait it turns out some people built and sold houses in this forest. Instead of evacuating and having these people suffer and need to relocate, we put out the fire. Since we put out this fire, these people living in a hazardous way continue to do so. Eventually a massive fire will start and kill those people and spread to other areas that it otherwise would not have. All because we decided to stop the “maintenance” fire from clearing the brush.
I Do have a lot of empathy for those impacted here, but I think people are also reasonably angry about having the costs foisted onto them. Some people struggle to entertain or express both concepts at once.
It is like having sympathy for your friend that is mugged, but being angry that when the police came, they took money from your pocket to reimburse them.
If you feel shocked by the lack of empathy at "You knew all along that only $250K was insured, riiiggtt??", please consider empathy when you are about to type in " You knew that H-1B isn't an immigrant visa, right?".
I respect your work, but you have to realize that what many companies were doing with their money was the financial equivalent of developing by SSHing into prod and editing a 50kloc index.php.
And when they got into trouble, they did not stop to asses their situation (possible 5-10% haircut, nbd), but went into full blown existential meltdowns. One minute crying and begging, next minute threatening. In fact, after reading too many Twitter posts of founders complaining, they don't even seem remotely aware that they can even do things differently and properly.
And let's not even get into the outrageous behavior of tech leaders like Sacks et all. This episode makes me embarrassed to be part of this industry.
There are some absolute turkeys out there, no question -- but there were/are also a lot of people who have taken pay cuts and betting it all on themselves to try to bring something innovative and important into the world. And when you say "they got into trouble", what you mean is: the bank in which they (we) are depositors was subjected to a bank run (something that no bank can survive). And yes, I believed and believe that depositors should be made whole: we -- as a group -- were not acting with avarice or recklessness. I am proud of my government and our hard-working regulators who were able to ignore the shrill caricature and see the very real lives that would been adversely affected by deposit loss.
I'm sure the whole story will come out eventually, but I think there were some better options that I really hope were seriously entertained and that this was a last resort after those didn't pan out. We probably disagree on this (and I think reasonable people can), but I think one of those better options would have been a private sale with some relatively small haircut - 50% no, 99% definitely, 95% probably, 90% maybe; it's fuzzy - to uninsured deposits. That would have been painful. But it is also painful to make up yet more ad hoc public backstops for a banking sector that reaps large profits. Theoretically they earn those profits in large part through risk management on their customers' behalf. But increasingly it is actually the federal government of the US that is actually taking on that risk.
I have a ton of empathy for everyone with business or paychecks at risk, really I do. But I also don't like continuing our march toward privatizing profits while socializing losses.
We definitely disagree, because anything less than 100% was going to result in the failure of other banks -- probably FRB among them. (It's very hard to argue that there wasn't systemic risk when Signature also failed!)
Isn't this a bit of a narrative switch? It seems like this started with empathy for founders and employees of companies with deposits at SVB, and I feel that very strongly, for all those individuals.
But then there's this whole other narrative about the banking system as a whole, and that side of this I'm much more annoyed by. It really reminds me of the financial crisis bailouts, which I found frustrating, being painted into a corner like that and forced to save the banking industry. And this is frustrating for the same reason. Which is not to say it isn't the right decision! It was the right decision in the financial crisis and I trust that it's the right one now.
But until the FDIC and Fed and Treasury clearly all came to this conclusion, I was more skeptical of this narrative, because most banks don't have such a high concentration of uninsured deposits as SVB did.
But I do trust that the regulators had more information than me about the systemic risk of this, and made the right decision, and like you said, I'm very glad we have that institutional capacity.
Why let depositors in the US banking system lose capital when there's an insurance fund covered by the banking system itself for this purpose? The investors in SVB lost everything, isn't that accountability enough? You really want businesses with payables and payroll that exceed the FDIC limit by millions to be exposed to risk for relying on the US banking system, to what end, why?
Because this isn't the purpose of that insurance fund. Its purpose is to cover insured deposits, and these are uninsured deposits.
I'm very open to ideas about how to change the program to better support businesses on the large side of small or the small side of medium. I think raising the insurance limit, maybe conditioned on payroll size or something, and thus also raising the insurance premiums, seems like an idea that makes a ton of sense.
But that wasn't the rule on Friday, and it wasn't what the premiums historically charged to banks to build up that insurance fund were priced for. And it's especially rich that banks (like SVB!) have long lobbied to keep those premiums low, and now want to benefit from suddenly switching the insurance policy to be unlimited. It's like if I constantly pushed to keep my home insurance premium low with the trade-off that they would only cover part of my losses in a fire, and then after a fire I made a big stink about how my insurance company should cover an unlimited amount of my costs to rebuild.
This is the second time in my life now that I've woken up to find that I'm being held hostage by banks essentially saying to my government "nice society you have there, it would be a shame if something were to happen to it...".
They're right, we do have to bail them out, but it's bad that this is the case.
What losses are being socialized? This is a liquidity issue that is being reconciled with short term loans, not a solvency issue being bailed out with tax dollars.
So I don't know for sure, but my intuition is that if this were a great deal with no losses, there would have been a private solution.
The socialization of the losses is the mechanism where any losses that do happen will be passed on to other banks, who will pass that on in some way. I am certainly glad it isn't taxpayer funds, but it's not a free lunch.
I mean, they spent the weekend trying to find a private buyer and clearly nobody wanted it. Doesn't seem to be a reach to conclude it might not actually be a great deal for the new owners (the US government)...
> [W]e -- as a group -- were not acting with avarice or recklessness.
(First off, unashamed Oxide/Bryan Cantrill fan!)
Perhaps I am misunderstanding you, but some of the depositors obviously were reckless. Circle had $3.3 billion at a single bank. Roku had $487 million.
If you're trying to say that you/Oxide did not act recklessly, maybe not, but some of the depositors obviously did.
Ask yourself, if I was your accountant/CFO/CRO and I approved keeping vast uninsured amounts in a community bank, and that bank went under (as some have), and FDIC chose to uphold the letter of the law (as sometimes it has -- I'm not miles from were one of the most important oil and gas bank failures occurred), ask yourself -- would your board allow me to keep my job? I think not.
This bailout, with a few day's hindsight, is probably an okay policy, but this industry's failure to understand why people feel this way, and to shade the truth around something depositors are not supposed to be doing, is simply terrible politics! (Goes to "Why do people hate us?! We're not the tech bros...")
How would I get this industry on the road to being likable again? Be humble -- say we (as an industry, as a company) made a mistake, thank the feds and the people of the US for helping your industry get back on its feet, and you personally, out, and the put your head down and get back to work. Don't you dare imply people shouldn't be resentful when you've been given a special break/bailout. Be thankful, no one was entitled to this bailout.
It's not a bailout, it's a backstop -- it's making depositors whole. There is no doubt in our mind that there would have been contagion from anything less, but even if you assume the absolute bleakest scenarios, we would have been returned 80 cents on the dollar of our deposits -- and we likely would have made up the gap in the debt that we owed the bank. (We'll go into this in a bit more detail in our Oxide and Friends on Friday.[0])
In terms of "this industry", do you mean venture-backed startups? I'm not sure what mistake you're looking for people to acknowledge; taking on venture debt? Agreeing to a (non-negotiable) covenant that required us to bank with the provider of that debt? I think it's too reductive to think of this as one mistake, but if you must: the mistake wasn't made by depositors, it was made by Congress when they rolled back key provisions of Dodd-Frank.[1] (Part of Trump's "doing a number" on Dodd-Frank.) Without that SVB would have needed to be stress tested much more than they were -- and depositors would not have been exposed at all.
>>> [W]e -- as a group -- were not acting with avarice or recklessness.
>> this industry's failure to understand why people feel this way
> In terms of "this industry", do you mean venture-backed startups? I'm not sure what mistake you're looking for people to acknowledge; taking on venture debt?
Let's not be coy. I think we all know the VCs who tried to talk this country into more bank runs this weekend (which you may have appreciated, but which the rest of the country found disgustingly selfish). You couldn't miss their pod or their constant posting in our Twitter feeds. And you, in particular, would seem to be well-adjusted enough to understand to whom I'm referring, you're talking about the same industry in this video: https://vimeo.com/190937358
> I think it's too reductive to think of this as one mistake, but if you must: the mistake wasn't made by depositors
You will not get any argument from me that deregulation had a part to play in this bank's failure. And no one is pointing fingers at Oxide for taking venture debt and/or agreeing to that covenant. Yet, most industries also don't destroy their bank out of "out of boredom and a desire for Twitter clout"[0].
I simply do understand the unwillingness to recognize that Circle and Roku were playing with fire, because sometimes community banks fail. You perhaps didn't deserve this, and you were perhaps subject to a term that was bargained for, but I thought you had chosen to discuss this issue re: the entire industry (if not here, then on Friday). The entire industry was given a break and you got lucky too, right?
I can see that the venture-backed start-up industry is feeling very embattled right now, which is unsurprising given 1) it all almost went down the tubes, and 2) you are taking shots from both the left and the right. However, this isn't as complex as you and others make it out to be -- many companies left vast sums (88% [1]) uninsured for very little reason, and were saved because FDIC went above and beyond what was required by law. Note -- which was probably a good thing for America!
The issue, political or otherwise, is acting entitled to it, and remember -- the pleas for a backstop/bailout were dripping with entitlement. At this moment, you don't have to act like you deserved a bailout/backstop, so why should you? Because the smart political/comms/marketing move is to be the first to say, "These events were almost tragic because it is tragic when any dream dies. Far too often, some in this industry have set themselves apart from the rest of America. Not today. Our government took action to stop a cataclysm for us. We will be forever thankful. We are so proud to live in a country, and among a people, who cared enough to not let the dream die. We won't forget." That may sound cheesy to you, but the alternative is "of course, it's the Rs and deregulation" and "no small business pays attention to insurance limits". Technical reasons that make a super majority of Americans want to barf up their lunch.
If you want to know why the country wants to kick you while you're down -- it's because you don't sound grateful and you should be grateful. I can hear you right now say "My company is all about heart" but you need to start sounding like it.
I think our perspectives on this are just really different. To me, this is much closer to a natural disaster -- which honestly prompts a question that has been troubling me: we in the Bay Area are in a seismically active region, with fault lines running through much of our urban areas. In a seismic event, am I going to have to first apologize for "the mistake" for where I live? Is FEMA aid going to be couched as a "bailout"? Is this going to be dubbed a "broquake" whereby innocents are made to pay a price because some unsavory people are as affected as they are? If this seems far-fetched to you, it doesn't to me, which may highlight how divergent our perspectives are...
> I think our perspectives on this are just really different.
Appreciate the opportunity to converse, and I hear your perspective. I was trying let you understand why others feel very differently, if you're going to ask yourself why some may not love your industry.
> To me, this is much closer to a natural disaster
It's interesting to analyze it in this way, but this analogy runs into its some difficulties. Natural disasters are one reason why we have insurance, and subsidizing/bolstering insurance in the wrong ways often leads to moral hazard (insurance is where I believe we get the phrase). It's plainly fair to ask whether we should subsidize flood insurance in a flood plain. The benefits of FEMA disaster relief are widely shared, and are not unlimited. Private insurance pays for plenty of the costs associated with hurricanes, etc. So, this analogy is imperfect for lots of reasons, but the most salient of which is, this bank failure was in no way natural. Bank failures are simply a fact of financial life.
This isn't to say your bailout/backstop is not now a fine policy. I bet you and your employees have been through what seems like hell the last few days. And you've done amazing things at your new company over a few short years. I can fully understand how you feel this way because I might feel this way too.
But IMHO what people are desirous for in public life is less entitlement, less division, and more fellowship and public spiritedness. Values which I am almost certain you share.
Disliking the industry does not mean you can't find a space where you're contributing to something you believe in.
In my opinion, the industry has been downhill since FB blew up and started abusing its power, though I wasn't around for the dotcom/Microsoft era so that's just my experience.
I absolutely loathe the vast majority of large tech companies, and that's only gotten worse (especially in the last 5 years). I outright refuse to work for companies (that I percieve) that are primarily involved in data collection/privacy violations, as I'm sure a lot of developers would refuse to work on weapons systems.
That said, I'm growing more and more jaded, and wondering how best to focus my efforts. This has lead me to take jobs at smaller and smaller companies, heavily impacting my income, but at least I'm not actively working on projects I despise. I've also found myself spending a lot more time on personal or contributing to open source projects that push back on said projects I despise (largely privacy related).
Not to say everyone is in a position to do that, but I do think we should be more conscious of what we're helping to build. Focus your efforts on projects you believe in, and be willing to push back on those you do not. This is not going to solve anything, but as the crowd grows larger we'll hopefully create enough noise for others to take note.
(this is all very subjective, take my comment with a grain of salt)
Thank you for saying this. It's the perfect encapsulation of how I feel.
For most of my career (I'm 48 now), I have loved my work. But the last 10 years have been really revealing in a bad way. I don't want to build information weapons, and that's how I'm starting to feel all the time.
It's unfortunate, and I only see it getting worse, though I'm hoping there's enough of us to influence the velocity. The sentiment seems to be growing, so I'm trying to be optimistic, but it's going to be difficult when up against the resources of "big tech" (for lack of a better term).
For me it ultimately boils down to my personal morals . I am not comfortable supporting these types of companies, even if my contribution makes minimal difference (on either side). I refuse to contribute because I wouldn't be comfortable with _myself_. I hope this decision will be beneficial to more than just myself, but if it isn't I'll at least be happy knowing I did what I could to support what I believe in.
(side note, I didn't mean this to be so subjectively idealistic, but even if you completely disagree with my opinion on tech, I think the introspection and focus of attention would benefit all)
It’s really hard to participate in a system that’s so interconnected without contributing to the bad parts. Chances are, you’re using a cloud provider that belongs to one of the big cos, etc etc.
I work for a company whose product/mission I believe is positive, but with the externalities I’m beginning to doubt whether there’s really any place to contribute positively in for-profit tech.
You also have to remember, that tech isn't an "industry". You can work at Kahn Academy which is an education non profit that is heavily enabled by technology and still really feel good about yourself.
I've seen this argument made a few times, and it's nonsense. SVB didn't fail because they paid out 4.5% APY on their money market accounts; that's pretty safe for them because they can easily earn that much from low-risk bonds and Treasuries and as I understand it that doesn't have the duration mismatch problems that affected their normal, boring, no-or-minimal-interest demand deposit accounts. (Also, I'm pretty sure people weren't earning that kind of interest for the past few years - the interest rate increases that made it possible are really recent.) It's related to the cause of their failure, but only in the sense that the fact interest rates increased so much that it was viable to offer that kind of money market account caused outflows from other accounts - it didn't particularly matter whether it was SVB or any other bank, or even potentially corporations just buying bonds directly.
It's not on their money market accounts, but regular deposits. If they didn't pay that big of an interest, they won't have been in this position now. Maybe half as bad. But, depositors did profit for this.
The account I've seen people pointing to that paid that was definitely a money market account. Also, there's an interesting chart doing the rounds on Twitter showing that during the time period they dug themselves into this mess most of the deposits held there weren't being paid interest at all: https://twitter.com/mattyglesias/status/1635431225945890816 Once again, the problem isn't that they were paying unreasonably high interest by taking risks and the customers were benefitting from this - this isn't Icesave in 2008 - it's that due to global interest rate rises people and businesses were no longer as willing to hold large amounts of money there at zero interest and they couldn't afford to pay market interest rates to everyone to keep deposits at the bank.
Huh? It says right there on the page you linked: "A startup money market account with a competitive APY of 4.50%". Yes, that is on the marketing page for their business checking account, but it's not the checking account that has the 4.5% interest rate.
I think the concern is: this time they covered every cent of deposits to prevent systemic risk from spreading.
Now, what if, I, as a senior banker, start to abuse this policy. I'm not sure how senior bankers can abuse this policy but this is the concern here. So basically, if the FED can guarantee 100% of deposits, it encourages riskier moves. Worst case my equity gets wiped out, i.e. most of my unsold compensation vaporizes but that's it.
I personally don't think the thing holding banker-bros back from risky investment strategy is fear that their depositors won't get back 100% of their deposits.
The depositors reward banker-bros for risky behavior when they bank with them. SVB paid an unusually high interest rate and part of the reason is because they were more aggressive about investing.
> I have never seen such cognitive dissonance here at HN
> ...
> maybe stop tweeting images of guillotines
You're seeing randos on Twitter tweeting shit and somehow twisting it to suggest that HN commenters are doing this? Lumping together these edgy tweets in with the HN comments, which are by and large pretty inoffensive and civil, is a bit of a reach.
I am sure it is a bit of a stressful time to be an SVB customer and maybe it's a bit jarring to see people discussing its demise in such an open and matter-of-fact way. But I'm sorry, if you don't want to see people discussing the pros and cons of bailing out your bank, do not read the comments of a submission where your bank is being bailed out.
>I have never seen such cognitive dissonance here at HN
The cognitive dissonance is that most sv startups and SVB clients are run by people with very strong right wing economic beliefs. Suddenly when they're affected they're asking for bailouts of the parent institution so that they're not affected because of "too big to fail". This is quite simply capitalism for the poor and socialism for the rich.
Yes, this is exactly my issue. Libertarianism only lasts as long as it's not your $3bil at risk. Then it becomes "oh but the government can't let ME fail."
>>many of us have been outspoken about our disagreements with the techbro culture,
If this is what you have identified as the core issue people have with Silicon Valley, then you have really really missed the mark and do not understand at all what many people, particularly in the so-called "Fly out Country" have a problem with
>>Well, if you want to see startups solving hard technical problems we need to have some real talk about how that has to be structured financially
I want to see startups build sustainable business models built around solving complex problems. Not chasing quick adoption, with the goal to be bought out by a Google, Amazon, or Atlassian
I want startups to be driven by something other than Quarterly results that the MBA's at the VC firm's demand
There are a lot of vicious and blood thirsty people on the internet. It isn't specific to you or this event. Hardly any big event goes by without calls for executions.
Asking for equal treatment of the law as it is written is hardly a blood thirsty call for execution. It’s a call for fair treatment for all. Not special handouts to favored entities.
The actions of the Fed plainly stated that the rules don’t matter. Take risks, fuck up, and no big deal. We’ll just magically save everybody.
Fair or unfair doesn't matter; it's an allocation decision and the tech industry and its workers are strategically important to the U.S. That's always the axis on which these decisions will be made.
> It’s a call for fair treatment for all.
This will definitely be the rallying cry in the upcoming political shitstorm/reenactment of "The Merchant of Venice". But it's easy to make arguments about fairness and justice when your words don't become policy and your vote is 1/435.
> ...so the U.S. banking system continues to perform its vital roles...in a manner that promotes strong and sustainable economic growth.
As Yellen and Powell insinuate, crippling a bunch of startups and making a bunch of pension funds etc. have zero returns -- all because of a monetary system failure -- is not a strategically good decision if they want stability and people to continue investing in tech.
<< As Yellen and Powell insinuate, crippling a bunch of startups and making a bunch of pension funds etc. have zero returns -- all because of a monetary system failure -- is not a strategically good decision if they want stability and people to continue investing in tech.
So it is not payroll/depositor bailout. It is wall street owner shareholders of those startups bailout. This is the reason some are mildly miffed. That and the mid-game rule change.
> tech industry and its workers are strategically important to the U.S.
I think there are a lot of people who don’t feel that this is true to the extent that you (and possibly the fed) do. When I see Calendly being valued at 3 billion dollars, I think that somewhere down the line, someone has mis-valued something. I don’t just accept whatever the market-value is as it’s true importance.
There’s a lot of tech that’s overvalued, or valued for reasons that don’t contribute to real economic growth or wellbeing. Part of the point of people’s protests here is to get people in charge to realize/admit this. Tech isn’t actually that important.
> Technology is central to today’s geopolitical competition and to the future of our national
security, economy and democracy. U.S. and allied leadership in technology and innovation has
long underpinned our economic prosperity and military strength. In the next decade, critical and
emerging technologies are poised to retool economies, transform militaries, and reshape the world... our technology strategy will enable the United States and like-minded democracies to work together to pioneer
new medicines that can cure diseases, increase the production of healthy foods that are
sustainably grown, diversify and strengthen our manufacturing supply chains, and secure energy
without reliance on fossil fuels, all while delivering new jobs and security for the American
people and our allies and partners. With bipartisan support, we have launched a modern
industrial strategy and already secured historic investments in clean energy, microelectronics
manufacturing, research, and development, and biotechnology, and we will work with Congress
to fully fund ...
> We also are doubling
down on our longstanding and asymmetric strategic advantage: attracting and retaining the
world’s best talent. Attracting a higher volume of global STEM talent is a priority for our
national security and supply chain security, so we will aggressively implement recent visa
actions and work with Congress to do more.
> These investments will enable the United States to anchor an allied techno-industrial base that
will safeguard our shared security, prosperity and values.
I'm not sure Calendly is necessarily central to the articulated strategy. And I agree that most tech companies don't produce much of value at all.
But the administration seems to think the future direction for the U.S. is tech, especially energy and military tech. And it begs the question: if not tech, what else could give the U.S. an advantage over China?
> if not tech, what else could give the U.S. an advantage over China?
I think in order to have this conversation, we must distinguish tech from the silicon-valley-branded, vc-funded, risky, socially-disconnected tech that’s largely being bailed out here.
Tech as in technology can be funded by non-profit research institutions, or arms of the government, or more traditional companies that don’t make slashing regulations, anticompetitive behavior, and socializing losses their business model.
If Silicon Valley goes under, there will still be plenty of innovation.
Innovation does not equate to social good. But if you recontextualize the software coming out of SV away from social wrongdoings, you have
Uber -- a model for work orchestration
Netflix/YouTube/Twitch -- video streaming technology
Datadog/etc. -- software monitoring technology
No established company (besides Apple) would ever put in the investment to develop these kinds of things.
I personally dislike SV, and every new DTC marketing startup that raises $50M makes me cringe. The model imposes high social costs as you indicated. But find me another model besides venture capital that has produced similar levels of innovation without the same waste and social cost.
> Where exactly, though? Ask any big tech worker; they will assure you it's not coming from there.
Like I said, non-profit research organizations, branches of government, traditional, sustainably-run companies. The fact that Silicon Valley is boxing all of these things out of the market doesn’t prove they won’t exist. They did before anticompetitive behavior became the business model du jour and they will again.
> non-profit research organizations, branches of government, traditional, sustainably-run companies
The same problem plagues all of these models: they're hierarchical and top-heavy. Having worked at traditional companies and having considered a career in academia; there's a reason these organizations get outboxed.
Innovation requires risk and investment. How are any of these three an effective model of risk? Big companies will invest without taking risk, research organizations and academia will take risks without investing, and branches of government and political entities (in the U.S.) are famously bad at both (ex: healthcare.gov).
> The fact that Silicon Valley is boxing all of these things out of the market doesn’t prove they won’t exist. They did before anticompetitive behavior became the business model du jour
Blame anticompetitive behavior all you want, but there are widely-known systemic issues with all of these alternative structures that makes them ineffective.
> and will again
Only if you create a walled garden where they are the only competitor. Obviously the current internet model favors VCs because R+D is cheap and quick. For rocketry, semiconductors, etc. (i.e., fields which require large upfront capital investment) these alternative investment models fare better.
Why do we think this is? Might it be because big companies would actually have to face consequences when big, dumb risks fail?
> research organizations and academia will take risks without investing
Not sure where you get this idea
> branches of government and political entities (in the U.S.) are famously bad at both (ex: healthcare.gov)
I'm not sure if healthcare.gov is a great example, since IT for the site was almost entirely run by private contractors. Before corporate lobbying was able to handcuff essentially any public innovation effort, the government routinely funded massively successful innovation projects (civilian aviation, the internet, microchips, satellites, AI, barcodes, touch screens - including the company bought by apple, nearly all devices and drugs/vaccines used in modern medicine, list could go on forever basically).
> Blame anticompetitive behavior all you want
I will, since once again, we've seen all of the alternatives be successful without nearly as many downsides.
> the current internet model favors VCs because R+D is cheap and quick
I'm not convinced. Largely the current model wins because it sidesteps regulations and gets away with anticompetitive, antisocial behavior and risky financialization under the guise of innovation. If it was true innovation, the world wouldn't be becoming a worse place every day that SV was essentially handed the keys. Our kids wouldn't be more depressed, climate change would be addressed, public health crises would be solved. What we have is a bunch of people scrambling trying to impress upon people that they have all the answers, when they do not.
I'm also not convinced that the answer to everything lies in the internet. Nearly all of our savings has gone to funding companies that do a thing that existed, but on the internet, rather than funding real innovation.
> Nearly all of our savings has gone to funding companies that do a thing that existed, but on the internet, rather than funding real innovation.
Man, if my money was forcibly tied up in some bullshit pension fund that mainly invests in VCs, I would be pissed, too.
Investment should be controlled by the people whose money it is. Corporate 401k plans are much more flexible which is probably why we have such a difference of opinion here.
I am a public market investor only. If I had the capital and the time to diversify maybe only then would I consider private markets.
> If it was true innovation, the world wouldn't be becoming a worse place every day that SV was essentially handed the keys. Our kids wouldn't be more depressed, climate change would be addressed, public health crises would be solved
I disagree here. The world sucked in these same ways before the internet and it will continue to suck after. True innovation from the government's perspective is increasing its control of citizens and the efficiency of their labor by any means necessary.
> True innovation from the government's perspective is increasing its control of citizens and the efficiency of their labor by any means necessary.
I'd be curious how you justify this when the U.S. (largely agreed-upon to be the most corporate-friendly first-world country over the past 50 years or so) has the largest police-state, prison population, military, etc etc etc. Other economies where the government isn't essentially an arm of the corporate world are much freer. It's almost as if when governments are actually democratically elected (rather than representatives being filtered through the money primary), governments tend to represent the interests of the people.
> I'd be curious how you justify this when the U.S. (largely agreed-upon to be the most corporate-friendly first-world country over the past 50 years or so) has the largest police-state, prison population, military, etc etc etc
The U.S. has been the leader in all those lovely statistics long before tech became the biggest thing in the economy.
I think you missed my point. I simply don't believe in fetishizing "true" (and therefore "untrue") innovation. We live in a messy world. Innovation is just a culturally-loaded way to describe people optimizing things. I miss the 90s and 00s too, man.
> I simply don't believe in fetishizing "true" (and therefore "untrue") innovation.
I don’t think there’s a hard obvious line, but if I invent a machine that can take $1 from every other American’s wallet and put it into mine I am quite comfortable calling that “untrue” innovation.
When thousands of companies have opaque versions of this business model, you notice it on a macro level
No some businesses do things like create value. You can take a dollar or you can sell something worth a dollar. Those are not the same
When DoorDash puts themselves as a delivery service front end for restaurants without them knowing, and then raises the prices, that is simply legally stealing money. The restaurant, on the other hand, actually sells something of value.
If they don't create value, why do people pay for it? And by your logic, isn't Google doing the same thing for website owners.
There's more nuance to these issues that you suggest. The U.S. government is investing in tech for various legitimate strategic reasons you can read about. Government bureaucracies historically fail to produce (or contract) good products for reasons you can observe by working at one (or by reading Dilbert). Many tertiary sector businesses are indeed just middlemen but still create value in a more complex way.
I get it that tech can be criticized in the way you're doing it. This discussion had been had thousands of times on this site. I have nothing to contribute besides what I already said, and even all of that had probably been said thousands of times as well.
> If they don't create value, why do people pay for it?
How much would you pay for a machine that steals a dollar out of everyone else in the world’s pocket? Maybe you’re a good person and the answer is not much but I’d guess most people would pay, say, 7 billion for it.
If you’re asking about DoorDash specifically, people pay because they think that’s the price. It still damages the restaurant’s reputation, lowers their order numbers, etc. it’s legal stealing.
People who disagreed with this comment: I would love to understand why. Is this not the line of reasoning likely to be used by government officials in the bailout/no-bailout decision?
> many of us have been outspoken about our disagreements with the techbro culture
This is an odd thing to read. I always thought you were one of the people that began SV techbro culture when you replied to David Miller’s technical critique of Solaris with “have you ever kissed a girl?”
Yes, you have brought this up before.[0] And as I have said before[1] -- and will presumably say for the next 26 years as well -- I very much regret that quip. (The irony is that that was dredged up in part because people very strongly disagreed with my handling of the Noordhuis incident a decade ago.) But I will stand by my assertion that I have been outspoken about my disagreements with what I have found to be problematic in modern Silicon Valley, e.g. [2][3][4].
>Yes, you have brought this up before.[0] And as I have said before[1] -- and will presumably say for the next 26 years as well -- I very much regret that quip.
Do you also regret this post? I'm genuinely curious.
So if you follow the link that you're quoting there, you'll get your answer:
That said, I do think that this is contrast to the Noordhuis incident. I know that this position is not popular here (and that I will be downvoted into oblivion), and that it's likely foolish to revisit this, but just to make clear my position: I am understanding (very understanding, given my own history) of gaffes made on the internet. The Noordhuis issue, however, was not a gaffe: it's not that he rejected the pull request (that's arguably a gaffe), it's that when he was overruled by Isaac some hours later, he unilaterally reverted Isaac's commit. (And, it must be said, sent a very nasty private note to make clear that this was no accident.) This transcended gaffe, and it became an issue of principle -- one that I feel strongly about. So what I wrote at the time was entirely honest, and it is something that I absolutely stand by -- more than ever, actually.
I wrote that in 2015, and still feel that way in 2023 -- up to and including that I feel that way more than ever. (That is, I feel more strongly about this in 2023 than I did in 2015.) The world has changed quite a bit since 2015, and I daresay that the incident wouldn't repeat itself because I really doubt that Noordhuis would repeat his actions.
Getting into a revision war is bad behaviour, but it looks like Isaac rather than Noordhuis was the first to do that.
But let’s ignore your efforts to reframe the second situation, and focus on the the thing people are critical of you for: writing a blog post about someone that doesn’t work for you stating “if he worked here he’d be fired”.
This was the second example you came to many people’s attention, the second time with an empty display of machismo.
It seems odd that that the person from “I get more girls than you” when losing a technical argument and “you’re fired” when someone doesn’t work for them - would complain about “SV tech bro” culture.
I suppose I shouldn't be surprised that we're relitigating an incident from a decade ago, but certainly noted that you disagree with the handling of the Noordhuis incident so strenuously that you are unwilling to acknowledge anything else that I've said or done in the last decade. I personally think that that itself is revealing of your own character, but I think it best to let everything here speak for itself.
Your link shows I didn’t bring the incident up previously. Your link shows the user thristian did. I added a link to Miller’s critique of Solaris performance and Miller’s wikipedia page.
I do think it’s fitting (rather than ironic) people would bring your first incident of bullying behaviour up in light of your second, but I’ve replied about that further down the thread.
Also the original commenter added another comment saying that they actually enjoyed bcantrill's "have you even kissed a girl" remark:
"On the other hand, even as a Linux advocate I found bcantrill's post freakin' hilarious. There are very few times when the universe gives you a perfect opportunity for a snappy retort, so I can't blame him for seizing the moment. While it's probably not bcantrill's favourite memory, I think that moment deserves to be remembered and respected for its comedic value, if nothing else."
To me it sounds like he did a quick google search "bcantrill nailer site:ycombinator.com" (note: it's the top result), didn't pay too much attention to the context and guessed that you all just had a grudge and were being mean. Except he's missed that it was more nuanced and respectful than that.
> maybe stop tweeting images of guillotines when our employees are anxious about their next paycheck?
I've been watching Elon Musk, Marc Andreessen, David Sacks, Peter Thiel, Jason Calacanis and on and on rant for the past weeks/months/years about the homeless in San Francisco, how students don't deserve student loan relief etc.
Now you're finding a lack of empathy galling? These prep school scions and maladroits, mostly wafting in angel/VC parasitism suddenly do an about face and beg for a government bailout. Of course they have been paying the piper and we hear before the weekend is over that their sweetheart deposits have been bailed out by the full faith and credit of the US taxpayer.
The structure of all of this points one way, and the intentions of a handful that are "outspoken about disagreements with the techbro culture" has no effect on that.
The reckoning did not come this week but it is coming, tweeted images and all.
We were required by covenant to bank exclusively with SVB as part of the venture debt line we had with them. This is a condition that is (was!) very standard and non-negotiable. This is part of what I mean about the real talk: that venture debt line was clutch for us -- and I would wager than any hard tech company that you revere has used venture debt at one time or another.
This is the problem though! And why people don't feel as much sympathy as you would like. Agreeing to those terms was not a risk-neutral thing. And now the feds have eliminated the downside of that risk, leaving only the upside. And I'm glad you were able to get a venture debt line and I'm glad your deposits are going to be whole, because I really like your business. But this kind of thing creates perverse incentives.
Edit to add: In sensitivity to your point about insufficient empathy, I want to say that I have felt personally very worried for everyone waiting to hear about their paychecks, and about whether businesses I admire would be ruined by this mistake that was not their own. I (unsurprisingly as a commenter here) have a lot of attachments to people affected by this, and I've been very nervous about everybody. But I just also feel like we should be able to take a step back from our own personal feelings and look at this dispassionately and ask: Is this actually good, broadly?
Would you take $100k in free AWS credits if it came with a covenant that forced you to run only in us-east-1? That sounds exactly like what is happening here. If you really need the AWS credits, that's fine and good, but you can expect to take a reputation hit if running only in us-east-1 brings down your servers.
I'm sure you got a really good deal on that venture debt, though. Probably much better than everyone else who offered you a line of credit, and for a good reason.
Well, first, we can't make payroll or pay vendors with AWS credits, so your analogy isn't terribly apt, but it misses the mark in a deeper way: this is more like taking that deal and then AWS deleting some fraction of your S3 objects. That is, unavailability would be in your AWS calculus, but data loss (rightfully) wouldn't be. (I can assure you that total SVB failure would have been viewed as less likely than S3 data loss as recently as a week ago.)
This scenario actually is more like unavailability. SVB has assets that cover your account at par value, but needs time to liquidate them at a decent price (or let them mature). The FDIC has that luxury. Your account would have been open (with most of your money available) on Wednesday without this action.
This isn't a Lehman scenario. Those assets are marketable and worth something. They just can't be sold too quickly. This is why the TARP program made money: the sellers needed money now, but the government could hold those assets to sell at a good time.
I'm sure you could otherwise call up your creditors and they would say, "that sucks, pay us by Friday," and life would be pretty much normal.
That is the way that neither receivership nor payroll actually work. (And we needed to wire by Tuesday -- which is kind of the point?) Now, even in the scenario, we would have made payroll -- but it would have been because heroic investors wired out of personal funds, and I know that not every startup would have been as lucky.
I took a loan like that once; "sign here, don't worry about the blank spots". There was no other alternative if the job was to be done.
When i saw the form again, the blank spots had been filled in with things like "24.99% APR" and other fun things that were not as had been advertised. I knew I was gonna get shaved, going into the deal, but this turned out to be right to the bone.
I learned lessons from that experience. Hopefully y'all learn without incurring unsustainable costs. Good luck getting through this, its gotta be less than fun even if it all turns out right in the end.
I've been told by numerous people, and ChatGPT apparently, that the way to minimize your risk at a bank is to only deposit a maximum of $250K into each bank, and use different banks with 250K at each bank, to ensure that FDIC will cover each person at each bank for that limit maximum of 250k.
Empathy is completely irrelevant. You agreed to a particular financial contract, one that ended up being a mistake ex-post. Now you want to wind back the clock and pretend you agreed to a different contract, and leave other people on the hook for it.
"Well, if you want to see startups solving hard technical problems we need to have some real talk about how that has to be structured financially"
There are deep, functioning, financial markets. Private buyers were already making offers to buy uninsured deposits at a discount. The world wasn't going to implode. Equity holders and founders were going to take a haircut. That's fine, that's equity's job here. Don't try to get out of it when shit hits the fan.
Putting your series A check into a fucking bank isn’t a risky financial strategy.
Speaking of private markets, they should have bid higher. Instead the government won and will likely come out ahead with their arrangement. No taxpayer money is being spent.
Sounds like you’re just bitter about tech/biotech companies surviving?
No, storing everything in one account at one institution is a risky strategy. You're conflating what you want (something without risk), with something that fundamentally has risk anyways. You take a risk anytime you decide to do something with money, whether that's storing it under a mattress, giving you wallet to your kids, investing in a 401k, or putting money in a bank. There fundamentally is no such thing as a risk free investment when it comes to money. Even treasury bonds have risk to them, especially speaking in real terms.
You're talking about financial risk like it's physics. Consider that financial risk is a psychological tool we invented to balance human behavior and we can reshape the tool whenever we want.
If you can consider that perspective, think about the activities we want to incentivize vs disincentivize in helping us decide when we _should_ reshape that tool.
Are simple bank deposits really something we want people to feel shaky about now and in the future??
> Are simple bank deposits really something we want people to feel shaky about now and in the future??
There is a strong argument for "yes": it will cause people to consider their (now extant) alternatives and some fraction of those people will choose something else, loosening the stranglehold that retail banking has on routine business transactions.
No, normal bitcoin. It doesn't take much to be less risky than "you might have all of it frozen at any time by factors wholly outside of your control".
Or Ether. Or DAI. Or USDC if that's your risk appetite (the diversification of the storage of which is abstracted away already, as you will note it has regained its peg before SVB even reopened under FDIC management). Or a lot of other choices that present themselves.
This is so aloof. People are engaging in a conversation about how to structure innovation. Many, many people don't want to see "startups solving hard technical problems." That's the nature of the guillotine images. They want a more equitable system and they want stricter vetting of what constitutes a problem worth working on.
The fact that you can't see that in the discourse -- that you instead just take personal offense despite the need in your message to claim you are sort of outlier -- is emblematic of our community's lack of self awareness, constant need for praise, and general ego. Much of the criticism being leveled right now is deserved. While you can complain about civility, you shouldn't expect that critics sentiments would not exceed your own critiques when you stand to gain by the continuation of the system.
Same place and people as always: the venture capital firms. Now their scope and focus will just be under harsh criticism and slight duress from the treasury dept for all the assurances they've been given.
I wonder if we can still build mobile-app based dog food delivery services
I know you’re not really engaging with the argument here, but IMO I'd like to see more early capital directed by agencies that are ultimately accountable to democratic bodies. Plenty of examples at DoE
The CIA has long had a "VC" arm; I think it's inevitable that there will be climate and energy investment funds (more like agencies) directed by DoE, DoT, and whatever Department gets created when the US finally decides to tackle climate change at large.
So I think you'll certainly get your wish but it's a matter of when. Until then it will be a small amount of informal control through a sort of cronyist "you owe us now" type pressure.
A lot of people are asking “how is this not a bailout?” right now. I would caution against dismissing them, it’s a legitimate question. Pointing to the “Taxpayers will not pick up the bill” line counts as dismissive: this is a press release, and it’s from the government, that’s two strong reasons for some skepticism.
So, in earnest, how is it not a bailout? Feel free to offer your answer! Mine is:
“Banks are required by law to pay for insurance on deposits they take. FDIC stands for Federal Deposit Insurance Corp, and they are the ones that manage the Deposit Insurance Fund, which is where that insurance money goes. The FDIC is going to take from that fund to pay out all the depositors in SVB in one go on Monday morning, and then over the next few weeks and months it is going to sell off SVB’s assets and put the proceeds back into the fund. SVB has plenty of assets, so the FDIC expects to recover 99% of the money. If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.”
Edit: if we take things like https://twitter.com/josephjacks_/status/1634569997266870272 at their word, the FDIC will likely see asset sales produce >100% of deposits, so absolutely no bailout of any kind. A good reminder that SBV didn’t die because they lied about their value or invested in financial instruments that exploded; they died because they didn’t have the cash on hand on the one day it mattered.
One reason why it's not (mostly) a bailout is that SVB's deposits are (as far as we know) still backed by bonds and mortgage backed securities, the problem is that those securities can't be easily sold right now (because people want higher valued investments) - a sudden forced sale means selling at a loss (or a cash flow crisis which is how SVB got into this state), holding on to them and letting them play out and they still have their value (worst case you sell them at a loss that is the difference between what they yield and what current investments yield)
They're worth alot - I haven't seen any indication that they're more than 10% underwater. Even 20% underwater is much more than 'not be[ing] worth very much'
One thing nobody seems to be talking about is whether SVB had more assets than liabilities- presumably they did since it was a money-making enterprise, right? So even if they sell at a loss there may be more than enough to cover the liabilities.
From [1]:
> The bank initially sold more than $20 billion of bonds, but did so at a $1.8 billion loss.
What we don't know is did they liquidate the positions that were more valuable in order to take a smaller loss, or positions that were most underwater? I'm guessing it's the former, which would mean they were in even worse shape with the unsold securities.
They absolutely did the former. Those are the securities which were marketable reasonably quickly, and they were planning to sell equity, too (another expensive but liquid asset).
Now that those assets are in the FDIC's hands, though, they can likely be unwound really slowly and without a ton of execution slippage, which would have otherwise happened if this were a firesale.
the problem is if I sell my own investments right now at loss nobody will come to pay my obligations. so why large institutions get to reap profit but get out of jail free when they screw up.. one set of rule for common man and another for investor..elite class.
Where do you see the 99%? My understanding is the bulk of their assets (long-term bonds) dropped 30% in value. If these bonds are sold on the market, they wont have 99% of the money.
Maybe the treasury is giving them the money back of the bond?
I'm guessing the FDIC can just hold them to maturity. The FDIC also has immediate access to a $100 billion loan from the treasury via statute if they needed cash.
Over the lifetime of the bonds/loans, they might even make money like what happened in the TARP program.
not to be pedantic, but my understanding is their value dropped because the treasury is selling higher interest bonds. Why would anyone buy a low interest bond at face value when for the same-price purchase a high interest bond?
It's not just that. A bond's price is simply the sum of its discounted future cash flows. i.e. the coupon value divided by (1+) the interest rate. When interest rates rise, the price goes down.
The Fed will accept treasuries as collateral for face value loans to banks for 1 year as part of the announcement. The losers here will be bank shareholders (of underwater banks) because they will need to dilute themselves to make up the difference when the loan gets called unless they can find other ways to make money in the meantime.
My answer: It is a bailout. And that's ok, if it was the best of bad options. Must we play the silly semantic game? By your explanation, all the bailouts during the '08 financial crisis also weren't bailouts. But they were.
I don’t like semantic games either. I always do my best to resolve a word to mean “the thing people care about when they use this word”. In the case of “bailout” it seems to me that what people care about is whether it will cost taxpayers.
In the case of SVB, it seems that their assets will cover their deposits, and FDIC has an insurance fund that gives them the liquid capital to cover deposits immediately while waiting for assets to sell. So no cost to taxpayers - not even in the form of “higher deposit insurance costs to banks being passed on to bank customers, who are taxpayers”.
(It’s possible to play semantic games until we formulate a picture that does show taxpayers will pay, e.g. “the FDIC’s deposit insurance fund is made up of payments made by banks, and banks would have passed on the cost of those payments to customers in the form of not offering as much interest on deposits as they otherwise would have offered, so the funds used to make the bridge are a bailout the taxpayer has already paid for”. Money is infinitely fungible, you can always tell a story where taxpayers paid the bill. But we said we weren’t going to play semantic games.)
The anger I’m familiar with surrounding bailouts has to do with the government stepping in to rescue banks that, in the eyes of the angered, were engaging in corrupt and risky/greedy practices. Whether the money came from taxpayers, or was truly magically free, this anger would remain.
Your definition of ballot is the one that is strange to me —- in attempting to avoid confusion, you would have created much confusion with me.
I don't think the second part is a semantic game at all. This switch to insure all deposits rather than just deposits up to a fairly low limit will definitely impose additional costs to the banking sector which will definitely be passed on to some degree or other. I agree this is certainly not a transfer of tax money to private institutions, and I applaud that, but I still think it is socializing a big chunk of additional risks of an industry where the rewards are large and private.
But more broadly I just don't think "bailout" is as narrow as just "costs taxpayers". This may be wrong, but I think of "bailout" as having its root in what you do to save a sinking ship. The widespread belief here is that there was a significant risk of an important ship - the banking sector - sinking, and government action has been taken to keep it from sinking. To me, we've bailed out that sinking ship. (And I'm glad we did!)
I guess it remains to be seen whether I'm the weirdo with a strange definition, or whether everyone will agree that this was a bailout, once it stops being a question with such immediacy.
I do see where your definition of a bailout is coming from, I don’t think it’s that weird. Perhaps the disconnect is that I’m assuming people would not hate a bailout that they actually genuinely really don’t pay anything for; they would press a button to bail out a sinking ship if it was really free to do so, even if the ship was sinking solely by incompetence on the part of the ship’s captain.
So the opposition to bailouts is actually “opposition to bailouts that cost taxpayers” plus an enormous dose of “we know you sneaky fuckers always lie about bailouts not costing taxpayers so we will assume all bailouts cost taxpayers”.
The disconnect comes from the question of whether there is actually a magical thing where government can provide insurance to private entities without it costing society anything. Of course that magic doesn't actually exist. Public subsidies always cost something.
I liked this definition of what a bailout is, which meshes with mine but puts it in better words, via Dan Davies on today's Odd Lots podcast:
> "When the state steps in and provides insurance so that something economically destructive doesn't happen."
Yeah, like I said, this is the disconnect. Assume for a moment that magic does exist. Maybe aliens come to Earth and hands the government a stack of gold from outside the solar system worth exactly that much, which the government uses to pay for the bank’s issues and nothing else, and then the aliens leave promising to never return. If that happens, it didn’t cost taxpayers anything, so it can’t be called a bailout, since bailouts necessarily cost the taxpayers. Except in another sense it is obviously a bailout, the aliens literally flew in from outer space and bailed out the bank and the government.
So a bank bailout is when an outside party pays to solve the issue, and a bailout is also when taxpayers foot the bill. If taxpayers do not foot the bill for SVB in any appreciable way, is it a bailout?
> I liked this definition of what a bailout is, which meshes with mine but puts it in better words, via Dan Davies on today's Odd Lots podcast:
> "When the state steps in and provides insurance so that something economically destructive doesn't happen."
So the FDIC existing is a bailout to start with, so arguing over whether SVB should get a bailout isn’t about the systemic risk exception being invoked at all, but about the existence of public deposit insurance in any form?
This is a definition of bailout that seems to have been conveniently invented within the last 18 hours. Does it really not set your "I wonder if I'm rationalizing" alarm bells off when you find yourself writing out this weirdly very specifically narrow definition?
It's just simpler and more honest to recognize it was a bailout, and one that you support (as do I).
I think Matthew Klein put this pretty well on Twitter[0]:
> "We aren't using taxpayer money to do a bailout, we are just using the ESF and also having the Fed pretend that banks haven't lost money on their bond portfolios and we are going to charge depositors at banks that didn't fail to make depositors whole at banks that did"
I'm being perfectly simple and honest, here is the a legal definition of 'bailout', which is closest to the context we're all using:
"A bailout is when the government gives financial support to rescue a company that is in financial trouble and possibly at risk for bankruptcy. The bailout enables the survival of the company." [1]
The government is not giving financial support to rescue SVB. SVB's dead. The government is not giving money to depositors. The money comes from the bank's assets. Current estimates are showing that assets will cover over 100% of deposits. Let's say that SVB's assets don't cover 100%. In that case, the government is still not bailing out depositors. The banks themselves will pay through a special assessment. In 2009, that was about 5 basis points of deposits. 5 cents on $100 seems like a pretty good deal, all things considered.
I included the entire text of something someone wrote, along with a source of where it was written. Twitter has nothing to do with it, besides being the source of the text.
I didn't know about that legal definition, that's interesting! I would argue that it is not "the definition" of a word that is used a lot colloquially outside of legal cases, but I definitely appreciate being made aware that such a definition exists!
In any case, I think that definition clearly applies to all of the other banks that many believe may well have gone under today, were it not for the bailout.
Says who to which part? The part about where the money is coming from (other banks) is just factual; it's the structure of the rescue action.
If you mean the question of whether that will be passed on to the depositors at those other banks is not based on a factual thing you can point to, but it's just what happens, it's how businesses work; you can't charge them money without expecting some kind of pass-through to their customers.
We are talking about a single assessment of 5 basis points of deposits, which is what was assessed in 2009 after the 2008 crisis. This is unlikely to be a major cost for banks.
I dunno, it seems like a pretty sizable assessment as is. But this also isn't the end of this. There will be an expansion of banking regulations to cover smaller banks, which will incur costs, and they'll have to increase depository insurance premiums a lot to insure all deposits rather than just the first $250k.
> If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.
Regardless of size that sure sounds like “taxpayers will pick up the bill”
Bank customers will pick up the bill. There are actually a large number of US residents that aren't bank customers or are too small to meaningfully increase fees on. This will cost money but it will be smeared out across businesses and middle class/upper class individuals.
It's an in extra cost that the government is forcing people to pay against their will, in order to achieve social objectives decided by the government. It's a tax and making banks act as the collectors doesn't change that. I really hope the tech community doesn't try and pull this sort of stupid word game on the rest of society because everyone will see through it.
So you're saying they're just raising an existing tax by that logic (since FDIC is already using this mechanism and all banks already pay into it for the base FDIC insurance)
Agreed, not a bailout as this is the purpose of the insurance scheme.
If someone gave me 10-to-1 odds that actually there will be no shortfall associated with this action I would happily take that bet. Shareholders will be wiped out but SVB's assets will cover all of the deposits, the regulator is just being extra-conservative.
Because even a single dollar disappearing from someone's bank account will drastically decrease confidence in the US banking sector. Modern society requires people to trust banks, if everyone tries to pull their funds and hide it under their mattress we are fucked.
As opposed to decreasing trust in the government, which will now be seen as an institution that takes money from normal people and allocates it to those who confuse real money with Monopoly money.
I don’t think the accounting of losses to the fund is actually discretionary, if they lose money they have to report it, they can’t just re-define the fund as marginally smaller than it was before. I don’t think I understand what you mean.
This is merely an answer. Stock of SVB may ( may because at this point I am not discounting anything ) go to zero, however based on available information, vast majority of depositors ( 90% range ) were above FDIC insurance cap, which makes it a bailout of depositors AND, effectively and likely more importantly, all the smart ( and well-connected money ) that are invested in those startups.
It is a bailout. Its true beneficiaries are not as straightforward as in 2008 though.
<< bail outs keep the stock afloat. Here the stock goes to $0.
In such a case you are wrong about this statement then. This bailout is 100% intended to keep stock afloat; just not SVB's.
Interesting. So a bailout is when the rules are changed so that some people get to keep money that they otherwise would have lost (or would not have gotten). I'm onboard with that.
But then the PPP and pandemic payments were bailouts, too - a bailout isn't necessarily a "bad" thing, right?
Like, we judge the bailout by who benefits, right?
We should just bail out families, small businesses with payroll needs, etc., and VC firms should take a haircut? Or rich people shouldn't be bailed out - cap FDIC guaranteed deposits at 1m?
Or should Signature have gotten the full deposit bailout (not tained with VC funny-money), while SVB should not?
Serious question: what is the rule / policy / threshold that solves the problem better than "everyone affected by the problem gets the same full deposit insurance"? It's a decision full of tradeoffs, being made in a limited time and information situation. I don't think the Fed+FDIC+Yellen are making calls based on trying to "save" nor "punish" certain groups - they can't possibly have the time or resources to figure out an optimal solution.
<< So a bailout is when the rules are changed so that some people get to keep money that they otherwise would have lost (or would not have gotten). I'm onboard with that.
I would say that bailout is a bailout is a bailout. No need for conditionals here. Most people instinctively know the bank would not survive without government intervention.
<< But then the PPP and pandemic payments were bailouts, too - a bailout isn't necessarily a "bad" thing, right?
You may be assuming something about me that I did not say. I am not sure what PPPs were exactly, but at its core, they were bailouts too ( or at least that was their intended purpose ).
<< what is the rule / policy / threshold that solves the problem better than "everyone affected by the problem gets the same full deposit insurance"?
The rule is really simple: follow the policy you claim to follow. Otherwise some may think you are lying all the time.
> But then the PPP and pandemic payments were bailouts, too
Yes, PPP loans were 100% bailouts. I do think, however, that there’s a significant difference, which is that we didn’t have widely available insurance for pandemics. Even if businesses wanted to protect themselves against the risk of pandemic, they probably could not have done so before COVID.
Businesses that fail to hedge risks when the option is readily available to them should fail.
A bailout is a bailout is a bailout. I am not sure why people get so offended by this. Here it is a bailout with extra steps to allow for claims that it is not a bailout. I have no real horse here. My market exposure is maybe 10k usd now.
The point made is rather simple: whatever the rules are, enforce them. Otherwise they are not rules and no one will take you seriously.
Its a (potential, whether any funds will be necessary is unknown) bailout of depositors (not the bank or its shareholders) at the (potential) expense of other banks (not taxpayers).
> If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.
Sounds like a bailout at the taxpayers' expense, just with extra steps. A bailout of a few billion dollars that banks are allowed to pass on to their customers is still a bailout.
This is quite different than a bailout. They can’t just go to their customers and say, hey, we got this bill now you have to pay for it. They can raise fees, but then customers can go to another bank. They can lower what they pay in interest rates, but again, customers can go to other banks. Or customers can buy treasuries instead of keeping money in bank accounts. Banks are not the only place to keep money, nor the only way to raise money. Sure, chances are that some of the money will come from raising rates on customers, but some of this will just come out of bank profits.
So by your own words, it’s still a bailout being paid by taxpayers.
It’s just that taxpayers may decide to pay in either money (fees, less interest) or time (switching banks and updating payment methods, or taking money out to buy bonds).
In a painfully literal sense, yeah it's being paid by tax payers because everyone pays taxes. The better distinction is that it is not paid via tax revenue. Even if the FDIC has to levy fees on banks to help cover the cost and the banks raise fees on their customers to cover this, this is not the same as the tax payers funding the bailout because they're not funding it in their capacity as tax payers (where they have no option but to pay the government and would probably prefer their money go towards building a school or something). Additionally, the banks wouldn't just be scooping the extra money out of people's accounts, it would be in the form of higher fees or something which the customer could decide to leave the bank over if they desired. Most wouldn't do this, but again the point is that there is at least an option where as a tax payer funded bailout there isn't. At a certain point, everything in the economy is connected and you could drill deep enough to say the tax payer pays for literally everything, but at that point the label becomes meaningless.
> Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Note the uninsured depositors clause in there — FDIC &co seem to have acted unilaterally to extend deposit insurance beyond the 250k and to the full amounts of any deposit account.
And they are charging the banks for it.
If this doesn’t stop a run on the banks, nothing will, frankly.
This round of bank failures was special because the debt held by these banks lost value because there is better stuff on the market, not because there was anything intrinsically uncollectable about the original debt. In fact, the debt probably is pretty similar to stuff held by everyone else in this ecosystem. This provides flexibility to meet the urgency of the situation, and FDIC, Fed, Treasury are simply saying "we know what the stuff is worth and there is enough money in the pot to make all depositors hole." "No more bank runs at this time please."
I would be careful using the past tense on this one. Tomorrow morning will be very interesting in a bad sort of way. A war, a pandemic, a financial crisis. What's next?
> In fact, the debt probably is pretty similar to stuff held by everyone else in this ecosystem.
This doesn't appear to be true. Everything I've read points to SVB being truly unique in their lack of risk management. SVB left these positions unhedged against rates. That is very atypical.
> how do you interpret this part? what is an example of somebody who would be an unsecured debtholder? as in somebody with a stake in SVB the buisness?
Yeah it's an investor who invested in a debt instrument offered by the bank. So CD holders will be made whole but holders of any corporate bonds won't.
We deserve to see more useful top comments on this matter.
The top ones in this and the main announcement thread [1] are just ad hominem complaining against some ostensibly "salty" or "cognitively dissonant" majority.
Let's talk about skin in the game and bailouts. Explain to a peasant why he should have to share the risk you took with your money. Explain to him this game being played where he gains nothing when you win but loses when you lose. And please inform him the recourse he has should he disagree with sharing your loss.
No moral appeals about making payroll, no ad hominems about non-positivism or cognitive dissonance, no complaints about "saltiness".
I speak for many when I say I'd like to hear a proper explanation on this matter, in terms of skin in the game.
EDIT: The above comment takes the following to be bullshit (from the article):
"Yellen approved actions enabling the FDIC to complete its resolution...in a manner that fully protects all depositors...
No losses...will be borne by the taxpayer."
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?
You are better off because the government is helping, and so are all of the people in the country who need to work for a living and need companies to work for. You can't let the banking system collapse and expect it will only hurt the people you don't like.
> 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."
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 while the rich get slightly less rich.
This isn't grounded in reality. You make it sound like banks will just end as an enterprise, and we'll have to go back to carrying little bags of silver coins.
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.
The important role of banks in our economy is lending, funded by deposits. Few businesses can survive, let alone get started, without access to credit.
If the banking system collapses most businesses will fail.
Made up, mostly by bankers, and not grounded in history. Bank panics don't mean most businesses fail.
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.
You've baked the answer into your question. They wouldn't have a bank account singular.
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.
What price are VCs paying for concentrating too much of their portfolios into a bank that was careless? No price. And that is what is upsetting some people.
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.
VC portfolio companies don't need loans; that's what they have all that cash for. It's also why SVB had everything in treasuries because they couldn't loan it out.
Founders used SVB because of hearing things like how regular banks, if they see you have a failed startup in your history, might not give you a home loan. (And because it was trendy.)
Venture debt is a thing. I worked for a startup that had a loan through SVB ... so I don't think you're quite correct, though I don't know how common those loans were.
This is it, and really banking (and any currency for that matter) is a make believe system that ONLY works because we all believe in it. If that trust is broken or there’s a panic leading to a banking system collapse, everything else will. Like the world will grind to a halt. If people stop believing in the currency, our paper monopoly money won’t be worth shit.
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.
If you look at the history of banks, it's clear that banks naturally fail whenever a bank run occurs. This happens because banks exist to turn liquid deposits into long term loans for things like homes.
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.)
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.
They did let the bank fail. The bankers lost any wealth that was tied to ownership of the bank. Of course, a bunch of them sold shares as they saw the end near, but that's something the SEC should prosecute as insider trading.
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.
> Of course, a bunch of them sold shares as they saw the end near
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.
In this case, 30 days in advance. So it's much more like a transaction delayed by a few weeks, rather than one planned months/years in advance with no knowledge of how stock price will perform in the future.
There are lots and lots of ways to use 10b5-1 plans and still trade on insider information, I.e., selective cancellation or trading on longer-term insider info.
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.
All banks are under control of the state via bank regulators. And those bank execs just lost their jobs when the banks stopped existing, so you got that.
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.
>> And those bank execs just lost their jobs when the banks stopped existing, so you got that.
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.
Eh, this is just that story about the engineer who makes a big expensive mistake and his boss who refuses to fire him because he just got expensively trained to not do it again.
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.
> 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.
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.
We also give it to sports teams, private enterprises which receive huge amounts of free advertising and discounted real estate, and huge subsidies for same, from public coffers.
No explanation other than "this is the way things are done".
Someone has to pay for the cost of lending the money. If the aim is to ensure that in the future depositors are always safe, then it might be cheaper to offer anyone an account at a risk free institution rather than backstop commercial banks.
Yes but that isn’t going to happen before the market opens on Monday. This is triage. When there is an emergency you solve it and then you have time to think about longer term solutions.
Agreed, but I have severe doubts that we see a longer term solution that basically removes deposits from most banks - so in the end it will amount to some permanent government backstop of all deposits (and it is a government backstop because its borrowing ability is needed).
It might then need more regulation as to what can be done with deposits, how much can be paid on them etc.
Obviously the regulations need to change, and frankly bad regulation is probably complicit in this whole affair. SVB is almost certainly NOT the only bank that invested money like this without the government knowing.
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.
Might as well give everyone an account at the Fed instead of tinkering around the symptoms. Commercial banks can then fund via bonds, CDs, etc., but not deposits (as they are inviolable). Basically, have a risky commercial banking systems and a riskless payment/checking account system.
The businesses you refer to that need more than $250k in an account can purchase additional insurance. Example: I work at a financial institution and when we offer a $1m CD, the FDIC covers the first $250k and we purchase additional insurance to cover the remaining $750k so that the entire product is covered.
Not necessarily, the govt is still shopping for a buyer. You can looking into Wamu+Chase for a historic example. SVB has an even more attractive client base, ripe actually for even a rogue nation-state to sabotage.
Note also although TARP was as derided as it was, the govt and the public made a fantastic return on their investment
> SVB has the money to pay back almost all of the depositors.
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.
Edit: Fundamental fallacy here is not understanding the time value of money. Thinking of money without the time dimension is like thinking about space without time.
If you need to repay the bond's principal now (as SVB does), then you lose the extra interest you need to pay on the money you'll borrow today until you get the full principal back at maturity. You don't lose money if you can borrow money at the same rate as the bond coupons pay, you lose money if now the interest is higher. You can't simply treat dollars-after-X-years as equivalent to dollars-now, those are two different 'currencies' and the former is worth less.
> extra interest you need to pay on the money you'll borrow today until you get the full principal back at maturity
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]
> If you need to repay the bond's principal now (as SVB does)
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.
If you need to pay someone now, the fact that in X years you have the money creates costs - whether the bonds pay 100% or not at maturity doesn't really matter, only the current MtM matters for money now as opposed to money in the future.
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.
Yes, but you also need to look at the net present value. 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.
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.
The nominal value is what matters because deposits are also nominally valued.
We don't live in a magical world where deposits (aka liabilities) are exempt from inflation and the assets that back them are not.
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.
Of course it is irrelevant to depositors, that is why the bank failed.
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.
They cannot hold to maturity. Because you cannot offer your depositors 1.45% on deposits when their best alternative is 4.5-5% in risk free money market funds and treasury bills. Depositors won't just sit there and watch 6%+ inflation eat away at the real value of their deposits. The assets are correctly priced and bond losses are real.
They are an investment loss if you need to sell them at a loss, which seems to be the case here.
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.
It's not moving the goalposts - this is an actual, real, and extremely sneaky loss. Having bonds that will pay out say $100 in eight years time is pretty much exactly equivalent to having the reduced value of those bonds now (say $80) because if you had that reduced amount of money now you could invest it in similar bonds and receive $100 in eight years time. In fact, I think with current interest rates you could even stick it in more liquid bank accounts or short-term bills and likely still receive more interest whilst not being locked in.
Only a potential buyer would lose. Not SVB - for them the price and return is locked if they can wait. The problem comes when they are forced to sell (as they were).
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.
In addition to my comment below, the following are financially equivalent [I simplify a bit]:
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.
why do you think those bonds are worth only 80% now, if you believe they should be worth 100%? is it a market inefficiency? do you think you could make risk-free 25% profit by buying them?
It's material here because the reason Tbills are paying 5% is because inflation is roughly 6.5%. (I used a fixed inflation rate of 3% to get 74% above.) Usually they're down at like 0.05% or so, which is what SVB was holding, which is what sank them.
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.
Sounds like they needed more diversity in their overall capital portfolio; based on significant risk of these long-term bond rate increases -- is this a common tactic that would be employed at other banks, but it's just that SVB had a "special" system where customers would hold more money there or something?
What's stopping my Local Bank from crashing this week?
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.
Here’s the thing: when illiquidity leads to temporary insolvency, it’s easy to chalk it up to bad luck. SBF would probably agree. But an Austrian economist would probably argue that no, actually what is happening is that market forces have determined that you made bad long-term investments and they ought to be liquidated sooner rather than later so the economy can shift that capital into more productive uses.
You can't just add up future value and current value of things. The future value is in future dollars, they are different from current dollars. You owe depositors their current dollars.
Yes you owe the depositor in current dollars, and that's why the bank failed. But I was responding to the parent about it not mattering if the bond is held to maturity - it does matter.
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.
The government needs to get its money from somewhere. If it spends the taxpayers' money, that money cannot be spent on other things. So instead of doing things that are useful to society, like maintaining roads, the money is just sitting there until the bond matures. If it creates money out of thin air, the effect is the same, except that now every market participant pays (in the form of increased inflation). So in either case, the losses are socialised.
Of course, you can still argue that stabilising the system is worth it.
$1000 worth of bonds at 2% simple interest rate returns $1200.
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.
There’s no default risk, that’s all. “Risk-free” only refers to the risk of default. Every (fixed-rate) debt instrument has unavoidable interest rate risk. And the floating rate ones are just transmuting it into default risk.
You are correct, these are two different kind of risks. The "risk-free" rate refers to counterparty risk (which should be zero when the counterparty has the money printer, or can be bailed out by the money printer.)
In your example, the market's saying that $1200 in 10 years won't have the purchasing power of $1200. And the future purchasing power would be closer to $800 than to $1000. Consider an alternative world where inflation is zero but you paid $1200 for a $1000-par bond.
The important concept here is the time value of money.
The price doesn't fall because the future purchasing power falls, the price falls because there are better alternatives in the market. No one will pay $1000 for a 2% return when they can pay $1000 for a 5% return. Market participants will always maximize their return. Bond prices adjust to be competitive or equivalent.
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.
Inflation strongly determines interest rates. You are getting 5% return because inflation expectations are high which caused the Fed to raise interest rates. When you see 5% risk free, you assume high inflation. The price falls because of the risk free rate, which is caused by high inflation, which causes drop in purchasing power.
> 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.
The cost of the loans should be in the same ballpark as the losses on the long term bonds.
No matter how many times you say this it's not going to be true. If you hold bonds to maturity you get the principal back. If you sell them at market rates you don't. Those are different outcomes.
Nobody is talking about taking on debt at market rates to float the bonds. The bank died because it couldn't do that and couldn't raise capital in other ways either. Now we are talking about the government backstopping things, which is a whole different ballgame.
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.
You’re the one who said “The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.”
I’m lost. The FDIC doesn’t take public money but it will receive loans from the government?
If you mean that the Fed will give an zero-interest loan with the bond as collateral that’s the same as just buying it right away at par and eat the loss.
Put otherwise, the Fed lends money at almost 5% now. If it does it at 0% it will be earning less than if it was done at the proper rate.
In either case, the treasury will get less money in the end. That looks like costing money to the taxpayers.
Doesnt the Fed receive interest on bonds/money 'loaned to the government' - but any profits are then sent to the Treasury?
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?
And where does the government get the money to lend to the bank? Right, it issues Treasury debt for which it pays a market-determined rate of interest. In other words, taxpayers would be subsidizing any below-market rate loans.
Doesnt the Fed receive interest on bonds/money 'loaned to the government' - but any profits are then sent to the Treasury?
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 you need money now and not in the future, there is cost. The fact that the principal gets paid at maturity is irrelevant - a risky bond does have interest rate sensitivity, too.
I would have thought that the deposits will leave SVB/what is left of SVB pretty soon, so the FDIC will need to cover that rather now than in the far future.
The point of doing this is that the deposits hopefully won't feel the need to leave. After all, the BoA account you were planning to move them to doesn't have a public letter from the Treasury Secretary saying it's insured to no limit by the FDIC.
>Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes.
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).
> 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.
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.
> Can they buy the same bonds that SVB has to patch the hole in their balance sheet?
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.
I don’t thing those loans would be very useful for the bank that buys discounted debt in that example. Being able to borrow with “bad” collateral is nice but the main selling-point is not needing to recognize losses. If you don’t have unrealized loses to hide it doesn’t help much.
Say the 1% 10y $100 bond is now worth $80 and there are now 5% bonds available. Say the monkey NFT is down from $100 to $80. The monkey NFT could be sold and 5% bonds could be bought, which will also pay out >$100 eventually.
The second bank has just bought - because it has enough money to do so selling its NFT or whatever - the same bonds that SVB has.
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 are better off because the government is helping, and so are all of the people in the country who need to work for a living and need companies to work for. You can't let the banking system collapse and expect it will only hurt the people you don't like.
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.
> "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."
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.
> You are better off because the government is helping
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.
> 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?
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?
> Because that is what a crisis is, and it’s how crisis response works!
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.
"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."
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.
> 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?
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,
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.
"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."
From where do you think this money will, or has come from?
From the FDIC's own Insurance Fund, which is paid by fees assessed on banks. Ultimately I guess taxpayers pay for this because they pay for banking, but it isn't through taxes.
All banks take risks with the money that their customers deposit with them.
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.
Anyone having a bank account will pay for it trough the banks fees/rates etc. Yellen avoided directly using tax money for the bail out, but it just is the next closest thing.
It really isn't though. Sure, at some level of abstraction, someone, somewhere, will have to pay for it, but this is clearly distinct from one's capacity as a taxpayer. All banks, however, benefit from the trust in banking system, so make sense for them to foot the bill. It's unclear how much of that will directly materially affect the average US depositor compared to letting SVB clients lose their shirt and thus erode the trust of the entire banking system.
If in the end the government is needed to (at least temporarily) backstop any deposits anyway, then why have commercial banks for deposits in the first place? Might was well give anyone an account at the Fed or something like that and fund loans and other assets at commercial banks out of bonds, CDs, etc. and never deposits.
> Might was well give anyone an account at the Fed or something like that
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.
The absolute worst assessment for FDIC insurance for the riskiest banks is ~.042% of [assets - equity]. For every $100 of deposits, the riskiest banks pay 42 cents in FDIC assessments. The safest banks pay about ~.005%. Pick a safe bank. Or don't. The cost doesn't really matter.
> 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?
SVB has a ton of bonds that mature (will be cashable) after ten years, but nobody wants to pay for them today because they can make more money placing their cash in a savings account. For a silly analogy, imagine if you had a bunch of cash locked up in a CD, but also had a surprise medical bill. Our parents could very easily look at your books and say “huh, I can advance you 80% of your CD because there is really no chance the CD won’t pay me back once it matures.” Is this a bailout? I don’t think so. It’s different than paying off our drunk uncle’s gambling debts for the 7th time.
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.
In terms of real dollars, those bonds will be worth less in 10 years because of inflation.
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.
Treasury bonds are not irresponsible. What is irresponsible is to not hedge your interest rate risk in the form of interest rate swaps. Most other conventional banks do exactly that; they have a portfolio of held-to-maturity (HTM) securities that they hedge with interest rate swaps to avoid bearing that risk. In the financial sector, you only leave unhedged the investments you are _actually_ betting on; if you are to say that they were betting on 10y bonds (until maturity) holding the same value as the day they bought them, without any form of risk management, I would consider that irresponsible.
Its not as clear as treasuries are safe or not. The price function is clearly dependent on term.
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.
If you're a bank that can't differentiate/navigate long term vs short term debts while experiencing ballooning deposits, then yes I agree it's time to jump ship and find a new profession.
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.
Printing money and loaning it out is literally monetary inflation.
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.
Printing money is not the same thing as inflation. It could cause inflation, but doesn't have to. And other things can cause inflation too. Inflation is merely the fact that stuff gets more expensive, but that can have many different causes. Excessive money printing is certainly the most notorious cause, but not all money printing is excessive. Sometimes printing money is the prudent thing to do because there's a growing need and therefore demand for money.
The definition of monetary inflation is increasing the monetary supply. That doesn’t need to happen by starting a printing press. It could be someone typing a bunch of zeros on a keyboard somewhere to create new money out of nothing.
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.
I am sorry and you are correct. I blindly assumed that "inflation" means "price inflation", but you explicitly specified "monetary inflation", which is something completely different (though sometimes related).
My apologies for reading incorrectly. My comment is true only for price inflation.
where is there any indication that money is being printed for this? if anything trillions have been printed to support the so-called "peasants" (hate that term) that kick-started the avalanche.
Only the small percentage that was available in the bank's reserves; the money of all the people who didn't get their money out in time was indeed erased.
I believe the Fed is opening a new program to allow for "systemic risk" loans at typical Govt. interest rates; so there aren't any worries about running out of cash to give to customers having a panic
Just note that the FDIC provides deposit insurance up to $250k per named individual on the account. So joint accounts with married couples would be $500k. You can add children to increase as well.
Also, holding all of your fiat in a single bank or financial instrument is usually not a great idea. Diversification is important to any relatively stable financial position.
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.
Companies making payroll or not is where the general public's skin in the game comes from. We can let them fail by crossing our arms, but this would lead to mass layoffs and financial turmoil as otherwise healthy companies have to shut doors due to this bank's mistakes. This would then also likely lead to a huge bank run, as most other companies realize they have to diversify their accounts and start scrambling to divert money at the same time.
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.
> mass layoffs and financial turmoil as otherwise healthy companies have to shut doors due to this bank's mistakes
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.
I would consider myself a reasonably sophisticated financial advisor. however, within thousands of pages of SEC disclosures and fine print, I have not the time nor the resources nor the skill sets to do due diligence on a bank's daily operations.
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
> thousands of pages of SEC disclosures and fine print, I have not the time nor the resources nor the skill sets to do due diligence on a bank's daily operations
The FDIC deposit insurance limit isn't hidden away in disclosures or in any fine print.
This just indicates that the $250K insured threshold makes no sense these days for corporate bank accounts.
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.
> This just indicates that the $250K insured threshold makes no sense these days for corporate bank accounts.
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]
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.
> Language like this suggests your primary concern is punishing tech bros for having too much money
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?
> My hypothesis is that when things go bad, the poorer in society get thrown under the bus, yet the weathier get bailed out
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.
In the link you provide, you can see that most median small businesses hold an average of ~30 days of cash buffer. This would already put them over the $250k threshold.
> 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
"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.
Sam Altman literally called for more regulation on banking (and also AI) today, though I think may be misplaced and self-serving.
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?
I share your concern about moral hazard. What I think you’re doing is letting your desire of an idealized outcome eclipse consideration of the least-worst workable outcome, which is realistically all we can hope for.
> 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?
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?
> and (I paraphase) SVB and the sector can sort itself out
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 depositors lose big sums, potentially triggering much wider fallout. By doing that they can minimise further costs/failures for everyone.
> 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.
Further to this: I’m reading this thread [1] from Mercury’s CEO, Immad Akhund (disclosure: a friend from my YC days many years ago though we’ve not had contact for years), that their neobank product automatically spreads funds across a sweep network and delivers $3M of insurance.
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”, then it would be reasonable next time to say “should have known better”.
I understand your position that startup founders should already "have known better"; it's defensible on pure technical grounds, but just impractical/inefficient given contemporary realities.
Is it feasible to keep active cash flow spread across multiple financial institutions? (Honest question)
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?
That would average around 225K/yr salary after payroll tax. With retirement, health, etc benefits it’s closer to reality for an engineering salary than you think.
The entire banking system was about to be revealed as a total clown show scam (that it is) if they weren’t going to step in here. How do you expect an SVB company to run payroll for more than 10 or so employees in a risk free way? How about 100 employees? If you can’t even ensure a tiny company can do that without losing everything and folding then you have problems with your banking system that are wayyyy more serious. This epiphany was going to happen in an extraordinary way today if they didn’t restore confidence in the (very broken) system.
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’d say, go look for a job in the Bat Area, except, that might not be such a good idea right now ;-) that’s not out of line for an engineering salary 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!)
I think you are referring to the $250k limit. It's not very practical for companies to diversify according to that limit. Apple has 50 billion in reserves, do you think they can find 200 thousand banks to spread that around?
> Apple has 50 billion in reserves, do you think they can find 200 thousand banks to spread that around?
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.
Certainly, but what should be clear here is that we are not rescuing a failed investment. We are not giving out money to those who lost on crypto or whatever other risky asset. People are getting furious because they think something analogous to that is actually happening, when in fact all those companies are not at fault and did not benefit from SVB's suboptimal resource allocation.
Making depositors whole isn't coming from taxpayer money, it's coming from FDIC and potentially higher fees on banks if it's needed as a function of the end result of SVB liquidation.
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.
That sounds an awful lot like "too big to fail". Are we here again? Why do we still have companies that big?
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 whose wealth is lower than the FDIC limit. Again.
Their point entirely is the opposite - that a pull of deposits on Monday would have destroyed banks that are small. and deposits would get consolidated into the big 4 "too big to fail" banks.
If I can paraphrase: "the risk would have been that banks that are too small would have been emptied, because a clear delineation would have been set between those that are too big to fail, and those that are not. This hazard induced by the existance of too-big-to-fail banks makes it hard to have small banks. Therefore, the solution to declare small banks somewhat too-big-to-fail and bail them out beyond legal obligations is reasonable."
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.
The 2008 financial disaster led to regulations on banks which largely seem to avoid the need for govt bailouts of the big banks, but these regulations only patched up the type of issue 2008 posed, in particular working for banks where the majority of holders have below $250K.
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.
Not sure what SVB's total assets were but in 2018 Congress changed up the asset size requirements in which Dodd-Frank regulations kick in [1]. Seems like the sensible thing to do is to rollback those changes and put Dodd-Frank back to its initial state.
I like this all upside, minimal downside method of business. How can I set up a nice company that will partially insure the money I get but ensure a bailout will cover the rest should the risks come to fruition?
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?
Our society has created a complex set of rules and regulators to prevent bank runs. That system society created failed to detect a problem in one of the top 20 banks in our country. What other problems is it not detecting? The full backstop to the depositors is because this should have never happened - the system should have prevented it.
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.
people will once again try to defend the indefensible. antediluvian fractional reserve banking as it currently stands is not fit-for-purpose and the price paid by society is high and will keep growin.
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.
The question asked is why socialized losses need to be accepted, not posit a new financial system. The current system requires socialized handling of losses.
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.
>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 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".
Do we know for sure that there’s not enough to make all depositors whole, all assets considered? Or is it just that they can’t quickly liquidate things to get to the total?
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.
It's sleight of hand. I'm guessing the solution is that the money comes from all of us, but just through bank fees, higher interest rates on loans, and lower interest rates on deposits because the banks are paying more to the FDIC, as opposed to the money coming directly from the treasury and thus our taxes.
That is a reasonable sacrifice in exchange for a functional financial system.
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 shouldn’t parts of a functional financial system be allowed to fail without massive contagion? Part of a healthy market economy is providing ways for weak businesses to fail and be replaced with new competitors.
I lose confidence in banks when their failure results in special treatment that no one else has access to, perpetuating the behavior that caused the failure.
Your sort of loss in confidence don't lead to further bank runs and complete collapse of the financial system so I think it's a loss they are willing to suffer.
> 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.
> 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
Over a period of 10 years which is the duration of the bonds they bought, I would say that the chances are pretty fair.
A controversial statement to some, but IMO the US is a Corporatocracy more than a Federal Constitutional Republic. More "Modern Corporate Capitalism", less Free-market Capitalism.
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.
It's a reasonable sacrifice the other 330 million Americans should make, so that your AI-powered dog cappucino business doesn't have to suffer a 20% haircut for choosing the bank with the 50% higher APY offered on deposits, without ever asking yourself where that free lunch is coming from.
A charitable response I think is that depositors did not choose to make risky bets, the bank did. It's a shame really. So, you're blaming the wrong party.
Somehow, the bank definitely needs to be punished, but I'm not sure how or if that can happen in this current system.
What greater penalty for a bank or any other corporation is there than what has already happened to SVB? The shareholders are wiped out. The only thing left would be pursuing individual executives for… something, but aside from possible insider trading it’s not clear what.
And the US government should do whatever they have to do to make that risk zero. I have enough problems to worry about without having to assume that even my bank balance can disappear at any moment. I certainly can't read through thousands of pages of SEC filings from whichever bank I use to assess risk, and even if I had done that I wouldn't have seen government bonds and thought it was a red flag.
If that means we get less interest on savings accounts then so be it.
I might be missing something, but not sure why this was downvoted.
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.
In a more perfect world, I totally agree. But with American average savings so low and with the average level of financial literacy so low, expecting half of America to join the ranks of financial system watchmen is, IMHO, a tough hill to climb.
People now ain't stupider than in the past. And banking systems around the world (apart from the US, probably) did just fine without government backed deposit insurance. Eg in Canada or Scotland during their free banking eras.
Yes, but depositors are generally not expected to be sophisticated investors in the context of bank liquidity abd solvency. You don't get a prospectus of the bank itself when you consider opening an account.
But someone that has over 250K in a bank can be expected to understand that FDIC insurance is (or better was, effective now it is unlimited) 250K, right?
First, no. My wife earns more than me, but phrases like "FDIC insurance" make her eyes glaze. She'd ask her parents, "What do you do?" They'd answer, "Keep cash under your mattress."
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.
The prospectus is easily available, for all the good it would do.
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.
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.
Liability insurance is required for automobile drivers, because of the externalities. Perhaps bank run insurance should be required for depositors, because of the externalities. That'd force depositors to internalize the externality of banking with a fragile bank.
Why does everybody think this is going to be a huge burden on the government, lots of sensationalism here.
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.
Unsurprisingly, the top comment complaining about top comment quality is the worst of them all.
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.
Anyone having a bank account will pay for it trough the banks fees/rates etc. Yellen avoided directly using tax money for the bail out, but it just is the next closest thing.
SVB's assets cover an overwhelming majority of the deposits, and other banks cover the rest through FDIC. the impact on the American citizen is negligible, bordering non-existent. yes, this money comes from customers of those banks, but again, the $ amount likely translates to pennies.
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.
Every bank account holder was made to pay insurance premium for those with more than $250K in a couple of banks. And this was done AFTER the risky event the insurance covers has already happened. This absolutely is socialization of losses, while privatization of profits goes on as usual. Good reason to be upset, IMHO.
The socialization of losses is the hallmark of a functioning society or social system. A person breaks an arm in a hunter-gatherer tribe, and the rest continues to feed them. A farmer's house burns down, and each person in the village chips in a bit to help them rebuild. A hail storm wipes out farmers in a region, and the state or federal government helps them cope with it. A bank collapses, and the FDIC makes the depositors whole.
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.
This isn’t a random event or act of God. If the person said they would take care of everyone’s food while taking whatever share of that food they wanted, then broke their arm after finishing off the last steak, how do you think the tribe would respond?
But in the future we can avoid such situations on deposits: Why should commercial banks be allowed to fund themselves via deposits? If deposits are inviolable, they really shouldn't be with commercial banks but rather with the Fed etc.
Banks are a business and they invest deposits. It’s the very idea of a bank. What SVB did was not foolish nor crazy. Somewhat less conventional and more risky, sure. But all the strong adjectives flying around in the media do not describe the situation properly.
> The socialization of losses is the hallmark of a functioning society or social system.
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.
It is insurance that banks pay for, so yeah that is how it works. The issue is that if FDIC doesn't save this regional bank, all regional banks would probably fail in the next week and there would be 4 banks left that the government refuses to let fail.
IDGAF about the morality of SVB's clients being able to make payroll or not.
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?
I disagree with this non-bailout bailout, but I can somewhat easily generate one such response without even engaging my brain. As a member of this society, you, by default, have skin in the game. If you do not want to see a run on more banks as a result of wide-spread panic that would effectively undermine the entire system and result in unpredictable chaos ( as opposed to predictable anger that can be managed ), then the choice seems relatively simple. Unless, naturally, one does not want to enjoy relative stability.
I guess what I am really saying between Yellen's carefully worded statement and Summer's hand wringing about 'contagion/extinction/whathaveyou' event and is that this action is very easy to defend on merits despite being very unpopular. I would hate to have to make this decision and I remember being pissed off in 2008 ( while technically being an indirect beneficiary of that policy ).
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.
> 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.
We had exactly the same arguments during the last bailouts. The future of back then is today.
True AND the results were major adjustments to the regulatory regime to banks. Without going into politics too much, banks successfully lobbied congress to relax those rules for banks of 50b size. In fact, SVB president argued for it in front of congress as part official testimony.
So.. actions were taken. Regulations mostly worked until they got lifted.
It seems that the risky behavior was buying low rate bonds when inflation was low. Is the lesson to learn buy bonds only when inflation is high and rates are high?
Short-term bonds have low risk. Long-term bonds are volatile and can go up or down opposite interest rates. SVB made a huge bet on interest rates not going up, and lost. In an alternate world where interest rates went back to zero, they could have made a sweet profit. Banks should have limits on how much they can gamble like this.
I'm not sure about that. As a depositor I put my money in an account and forget about it. We do have to put money in an account, right?
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 gets difficult as you grow. A monthly payroll for 40 employees is around $500k, which all goes out on the same day. You can't avoid having that much money in your checking account. A well-run barely-profitable company might float between 3 and 6 months salary in the bank, with spikes and dips when they get paid or buy equipment. Businesses like that need accounts capable of safely holding several million.
> I'm not sure about that. As a depositor I put my money in an account and forget about it. We do have to put money in an account, right?
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.
Does this comment really start by complaining the rest aren't "useful" and then immediately switched to assuming it knows better than Janet Yellen about whether something will cost taxpayers?
Also, there isn't a bailout - protecting unnamed bank depositors is not a useful definition of a bailout.
> 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?
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.
The taxpayer won't bear the burden, at least theoretically. The money still exist in the form of bonds which are not liquid right now. The FDIC will provide the liquidity so one of the most important sector of the us economy doesn't implode. This is not the same situation as FTX
I'll just copy one of my previous comments on this, but this time I'll leave out the /s
"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."
This but unironically. In Germany the government guarantees every deposit in a regulated bank. The US should do the same, even if that means substantially tightening the regulations on banks.
> 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
Depositors are made whole. Shareholders are not. There were enough assets sold over the weekend to cover deposits.
That’s inflation, the word you’re looking for right? It’s a form of tax that isn’t thought of as a tax through the act of printing more money. Or, some similar mechanism of that shape.
> Explain to a peasant why he should have to share the risk you took with your money
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.
> It actually has a pretty solid financial situation except for that!
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.
Their bonds average 1.9% with a 10 year maturity. They pay out when they mature. But because rates are so much higher now, if they sold today they'd take a massive haircut.
The bank made mistakes, and their startup assets are a big ? of unrealized losses. But they do have assets, just not liquid.
But the reason why they'd take a massive haircut if sold today is that when they get the principal back in 10 years it will probably be worth a lot less. Their assets are completely liquid, they're just worth a lot less right now than what they're owed, and for good reason. That the assets might nominally cover the deposits in 10 years is besides the point, the depositors don't want to wait 10 years. Whoever pays to make depositors whole, be it FDIC, tax payers or other banks/bank customers, is transferring real value to the SVB depositors.
Not if you let them do their shenanigans to let the assets be on the balance sheet on "face" value because they are in a "HTM" portfolio and not on the real market value. Many of the other banks are silently insolvent too, just the simple little account trick keeping them afloat.
That's whats need to be changed, not a bail out of which more will follow
> Explain to a peasant why he should have to share the risk you took with your money.
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.
> 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
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.
The discourse on this thread and Twitter is astoundingly inept. If the FDIC had permitted uninsured depositors to not be made whole, there would’ve been a systemic risk to American banking. Confidence in the banking system is critical to its well functioning. Quite literally banks are built by confidence that their depositors will get their money back. Discussing whether SVBs depositors should’ve taken a haircut misses the point entirely.
People are arguing whether SVB depositors should’ve been permitted to take a haircut. This not a discussion. Had depositors lost a SINGLE penny, there would be a very widespread run on bank deposits as people try to get below the $250k figure. There was never a question that the Treasury was going to ensure that uninsured depositors were made whole. To argue about whether the depositors should’ve been made whole or not is tantamount to arguing whether we should willfully inflict a depression worse than 1929 on American citizens. It’s unconscionable and profoundly stupid.
I think this is that rare case where "begging the question" is actually apt! You are taking this as an inarguably factual premise:
> "Had depositors lost a SINGLE penny, there would be a very widespread run on bank deposits as people try to get below the $250k figure."
But whether a federal bailout was necessary to avoid that is exactly the question that people have been debating all weekend. It isn't an inarguably factual premise, it's the thing that is being discussed.
For my part, I think that if 1. A private purchaser had been found or 2. A bunch of jackasses with huge social platforms hadn't spent the weekend demanding they be bailed out, then your premise would have been false.
Both of those different outcomes was plausible on Friday. But in the universe that actually played out, I tend to agree that the bailout ended up being necessary.
But I still think it's bad that it was. And not just bad for everyone else, bad for us, here, many of whose livelihoods depend on the continued thriving of an industry that has sadly just demonstrated itself to be (to borrow a word) inept and unworthy of sympathy.
> Any other action would create systemic contagion that could spread far and wide.
They could increase the FDIC coverage limit to a level that would avert a run, shoring up public confidence in other U.S. banks.
The BTFP if I'm reading this correctly values assets at par instead of face which is wild. It's not just providing liquidity to banks but rather giving them free money.
The Bank Term Fund Program (BTFP) allows banks to pledge their underwater MBS as collateral to borrow at par value from the Federal Reserve. This lending facility is a stop gap measure and still requires repayment from the banks if they utilize this facility, within a one year time. If the banks do not pay back the loans, then that means they have defaulted and will be seized by the FDIC or Federal Reserve. The Treasury department has promised to cover $25 bn in losses for this program to the Federal Reserve but it’s unlikely this fact will be used. This program is giving free money in the sense of providing below market cost of liquidity but, it is not even close to the Troubled Asset Relief Program in 2008 or Payroll Protection Program in 2020.
It is not inept. People aren't however pointing out the actual switcheroo here: by the definitions everyone was using just 48 hours ago SVB was not systemically important nor did it post systemic risk. That designation was meant to be for financial institutions that were directly depended on by other financial institutions. Nobody is saying that's true here.
What Yellen has done now is redefine "bank that poses systemic risk" to mean "any bank at all", which in turn shows that the insurance limit was never real, and that in turn the winners of the system are those who don't believe in the rules, but rather those who gamble on duplicity and the socialist leanings of government employees. Those who tried to believe in the honesty of the system got burned, again, and those who bet on it being meaningless won, again. The long term consequences are fearful.
You're correct, in that it was not immediately clear whether SVB warranted the systemic risk declaration. However, it should appear clear that fear is very contagious and it has never been easier to move tens of billions of dollars of deposits with just a few button clicks. This poses a sincere risk to banks not already declared Systematically Important Banks (SIBS). The Treasury and Federal Reserve correctly intuit that it would cost far more to the real economy, and to tax payers to cover the cost of SIBs then it would be to signal that uninsured depositors will be made whole.
Your claim that "those who believed in the honesty of the system got burned again", is not entirely true. Equity and debt holders have been completely wiped out. Compared to the Trouble Asset Relief Program (TARP), in 2008, this barely constitutes a bailout. Furthermore, if the Frank-Dodd stress test requirements for banks with greater than $50 billion had not been relaxed in 2018 to $250 billion, then SVB and Signature bank would have been seized and sold off well before there was this bank run. It is clear that even smaller regional banks need to face the same rigorous stress tests that SIBs face.
it should appear clear that fear is very contagious
This can be true, and the Fed's move can be the right one, and it can still be case that the system has been dishonestly socialized by the back door and that this will have terrible long term consequences. It can also be that the Fed's fears were overblown and that in fact letting SVB and a few other similar banks fail would not wreck the entire system.
Equity and debt holders have been completely wiped out.
Only those who were bag holding at the moment of collapse. There will have been plenty of equity and debt holders who profited from SVB's risk-taking behavior and got out in time to realize that profit. The lesson bank equity holders will learn here is not that banks need to be more careful. It's that you can set up a bank, drive custom and profit with hyper-risky tactics, and as long as you sell your stake before the fraud collapses you'll not only get away scott free but nobody will even care because the large numbers of angry people who might organize politically to get justice will all be bought off by taxes on everyone else.
> Shouldn't the goal be to create a bank ecosystem that is more robust?
You are seeing the robustness in the actions taken by the FDIC right now. Not all failure modes can be prevented ahead of time. There is no failure-proof banking system structure.
> So that the failure of one does not lead to a domino reaction of failures?
The "domino effect" in the context of bank runs is a result of human psychology, specifically herd panic behavior - not something that can be changed by the financial system. At best it can be tempered.
Maybe people should have the option to save their money in a bank that doesn't loan out their savings at all? Does such a thing exist? I would be willing to pay a flat monthly fee to keep my money in a bank and use their services in lieu of receiving their paltry interest on my savings account, in exchange for the knowledge that they actually have my money. I know this system of massive loan-to-deposit ratios is conducive to economic growth, nevertheless I get the impression we're all being scammed on a fundamental level by the banking system at large- and any suggestion of meaningful change is always dismissed as if this house of cards is just the way things have to be, and always has been
According to some comments here, such a narrow bank was proposed, but was denied license by the Fed, which apparently even fought in court to uphold the denial.
The labor market numbers have been strong despite rising interest rates and inflation has been falling (albeit still somewhat high). The signs seem to indicate a soft landing is possible.
However: widespread bank failures and panics can change the situation in an instant. If belief in the banking system evaporates, its not just a recession but likely a total meltdown that we’re looking at.
When the future cannot be predicted accurately, it may be wiser to prioritize making prudent decisions that benefit everyone, rather than seeking retribution against wrongdoers. It's important to consider that both bank shareholders and senior management could face significant losses and lose their positions.
No, they don’t know about the risks and they’re shouldn’t be any to the depositors. Banks are highly regulated institutions and the creation of the FDIC was intended to prevent a systemic bank run, with people shoving cash into their mattress. This is precisely what would’ve happened had SVBs depositors taken any form of haircut.
Toilet paper consumers should know the risk of not having 30 rolls of toilet paper stashed at all times and should face the consequences for that risk.
So they made their decision, everyone can move on. I just hope nobody forgets how prominent VCs behaved during the brief period of uncertainty. The idea of some noble class of investors championing disruption is dead. They're just a bunch of rent seekers like everybody else. For some silly reason I had some respect for the startup industry before this, now I see it as a joke.
It's great at a personal level that "founders" and startup employees didn't have to do without. But it's important to remember that they no longer automatically deserve any credit for taking risks and doing something new. It might as well be a bunch of FAANG employees
And here it starts.. Lots of prominent people have just been exposed by this whole fiasco. 100% truly exposed and they're not gonna like it.
They're gonna want to try to rebuild their reputations. What's coming is a lot of "who are you gonna trust me or your lying eyes?". Starting soon you're gonna hear all the sob stories about how the VCs all this wonderful all did X and Y and Z. And nothing we just saw really mattered. And downplaying how as soon as the going got tough they abandoned all of their SV ethos and immediately went begging to the government to be bailed out.
Be prepared because there will be a huge PR push soon like you haven't seen.
Start collecting all the evidence that shows how bad these people acted before it disappears into the ether and prepare rebuttals that you can copypasta on Reddit, Twitter and wherever else they post their PR garbage...
If you're looking at a bunch of companies you're invested in taking a 5, 10, whatever percent haircut on their deposits, it might be to your interest to take to the media and encourage everyone to panic, helping to create the very risk of contagion that you're talking about, to try to force the government's hand.
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
But that is the risk founders chose when they put their money in (a) any bank and (b) specifically SVB.
Your money is only insured to $250k. SVB had no CRO, lobbied against regulation, made no efforts to comply with Basel 3 and was engaging in risky bets that many had previously warned about.
CEOs have a fudiciary responsibility to understand and mitigate risks. And expecting taxpayers to bail you out (either directly or indirectly) when your incompetence causes harm is simply not fair.
This is a very weird blame shift. At 250k/account insured suddenly it's a CEOs fiduciary incompetence that a seed round isn't distributed amongst 16 banks?
lol @ the hackernews commentariat learning that the ideal CEO isn't just some ascendant version of a rockstar coder that makes gantt charts.
> suddenly it's a CEOs fiduciary incompetence that a seed round isn't distributed amongst 16 banks
Yes. There's no "suddenly" to it - you're describing well-established fiduciary responsibilities. A CEO's responsibility is to delegate those tasks to someone like a CFO, who _absolutely should_ incorporate a strategy that balances liquidity with stability. The CFO also has a responsibility to see just what, exactly, a bank is doing with their deposits and make a determination about the associated risk. And yes, it is very normal to park money in various accounts and instruments as part of that strategy.
It is deeply distressing that half the comments here and abroad think this is some absurd, unattainable standard instead of the operative norm for the other 90% of the economy that doesn't get treated like a miracle baby for simply existing. You're not running a lemonade stand, and witnessing self-anointed "innovators" screech for a bailout because they somehow accrued millions of dollars in investments without ever learning about private deposit insurance or Cash Sweep or T-bills goes a long way to explaining why the majority of these goofs fashioned their Twitter bios into graveyards for failed ventures.
Look, I get that in hindsight the "of course you should do this thing that historically you would never think of" thing makes sense, but my bigger point was the blame shifting.
Sub-20 person startup CEOs didn't cause this problem. Saying "this is YOUR fault, person who just got their first seed round" seems to gloss over the large(r) issues.
You don't need 16 banks to eliminate all risk. You need one bank and a treasurydirect account.
Anybody, including corporations and partnerships, can safely park excess cash at treasurydirect.gov. Buy short term treasuries and time the redemptions to coincide with next month's payrolls. The shortest bills are 4 weeks and they're paying like 4% right now.
I honestly don't understand why more people don't do it.
Treasurydirect is great and everything you say is true, but the poor user experience and the commonly reported difficulty involved in getting help if there is a problem make it more appropriate for personal finance than business, I would think.
More generally the approach of using a cash sweep account in conjunction with t-bills held with a custodian bank seems like pretty sane advice. I don't think I'd emphasize "one bank," but otherwise, sure.
No whether you have $1 in the bank or $100 million is irrelevant.
Your job is to understand and mitigate financial risk as is required by law.
And in this case there are many options for managing this risk other than splitting it up manually into multiple bank accounts. Speaking with a financial advisor would help with this.
Taxpayers are not covering any cost. The banks will pay for it via potentially higher FDIC insurance premiums. It’s possible they pass that on to customers, but there’s no direct link here.
Um, yes? If you have several million dollars of deposits you should absolutely split them among a series of banks as well as money market funds. This is why you need to find a competent banker who can give you sound financial advice.
So what exactly is a CEOs responsibility then? I feel like people are increasingly just removing any and all blame from CEOs for mismanaging their companies. Why should they even exist if they have zero responsibilities?
> Except people that owned T-Bills that they bought through SVB also lost access to their money.
I don't think that's the case, though I may be wrong and would appreciate correction if so. Anyone who held T-Bills at SVB as a broker should have been able to transfer them to another broker at no loss (but at a small delay), and the remaining $250k in their checking account should have been available within one business day.
No it’s the CEOs job to hire people who know like a CFO and everyone else in finance. Lots of companies make short investments with extra cash. No need to put everything in a single bank account.
Why would we want a situation where everyone splits up their cash into $250k accounts? Seems like that would waste a lot of time while removing competition (who cares what the bank is, any bank is fine for $250k). And it wouldn't ultimately save taxpayers any money, it's just a strategy for gaming the current FDIC guarantee.
You don't need to limit your accounts to a maximum of $250k. You just need to use more than one bank if you're going to use a regional bank like SVB.
Especially a regional bank like SVB that fought hard against regulation, caters specifically to herd-thinking VCs and startups, offered 4.5% APY, and went all in on mortgage backed securities shortly before the Fed hiked rates way up.
Don't forget the benefits they got from white glove treatment and easy access to loans. This wasn't a one way street, there was a reason they deposited the money there.
If you want your investments to be guaranteed by the US governent, that product exists (US Treasury bonds) and it is popular. The yields are pretty low though. People with megabucks to invest who put it in something other than treasuries do that because they chose to accept higher risks in order to chase higher returns. Except surprise, now the risk is socialized.
No, people with deposits in SVB never faced having it all disappear. SVB was insolvent which meant that its liabilities were larger than its assets. That doesn't mean the assets were worthless. The FDIC process is like a bankruptcy. First, everyone gets restored up to the $250K insurance limit. Next, the remaining assets are sold off and the proceeds are divvied up among the uninsured depositors. So the depositors take a haircut: some fraction goes poof and they get back the rest. They don't end up empty handed. Figures like 90% (i.e. they lose 10%) were being thrown around this morning, before the bailout.
You don't have to be anywhere close to "omniscient" to understand the concepts of risk and insurance. Every layman knows about FDIC limits. In addition, these CEOs are backed and advised by resourceful VCs. Those VCs wrote checks into SVB accounts and apparently didn't care to give any advice about protecting those uninsured piles of cash. Hubris or incompetence or both.
Founders are often coming into new levels of financial responsibility when they get funded and as their business draws in later rounds of investment and customer revenue. You can’t assume $4M works the same way as $40k or your liable to lose a big chunk of it. Thankfully, there are professionals whose role is to help with that.
Or the VC companies that lent the money would pool resources and have one person handle a few smaller businesses using similar procedures to mitigate risk. Helping manage growth is part of what these companies are supposed to do and you'd think it would protect the investment (in a world where you thought the limit was actually $250k).
Oddly though, a thing I've heard repeated over and over is "it was in our covenant to use only SVC."
You think the CEO of a 100 person startup should be worried about something like a bank run happening? It's not the 1920s. Most people don't ever consider that money in their bank could disappear for no reason.
Next you should tell me they should worry about "the big one" hitting Silicon Valley which we know the actual odds for and people still seem to live there.
> Most people don't ever consider that money in their bank could disappear for no reason.
The $250k FDIC account limit was really well known, so I'd expect someone in the CxO ranks to have it properly managed in a 100 person startup. CFO maybe?
Several people have mentioned over the last few days that spreading $$$ across a bunch of ($250k limit) accounts at banks is a service offered by third parties, to address this very risk.
Wonder what the cost of using such a service would have been, and how many SVB customers were using it?
Anyway, with the current US regulatory approach of "oh shit, lets cover all deposits anyway" I wonder if those services have a future...
Just wow. "Money Saving Expert", a UK website which gives pretty decent advice for the average person in the UK mentions the government provided insurance limit for deposit accounts (£85,000). Anyone reading that site knows their money could be lost if they have more than the limit in any single bank (or multiple banks where a subsidiary shares the owner banks insurance).
But then again it doesn't really surprise me that an SV CEO would have no concept of deposit insurance. They live in a different world.
> Most people don't ever consider that money in their bank could disappear for no reason.
Geez. Let’s hope you’re wrong. Financial illiteracy is bad news in a society built on markets.
I can’t speak for “most people” and especially not people in Gen Z, but otherwise, as a matter of fact, many people do think about that and manage their money accordingly.
>> Next you should tell me they should worry about "the big one" hitting Silicon Valley
The big one as well as this banking debacle should both be on your radar, yes. You are in this for the money. You have money but you want to increase the amount by orders of magnitudes. So you gamble.
You gamble on lots of things so that you spread the risk. Gamble gamble gamble.
Hey, you know what? I sat on three different poker tables this evening. Lost all. I'd like my money back. Now, please.
I'm just some jackass that knows about FDIC limits and how they (used to) work, and I'm as far from a CEO as I can be. I absolutely expect CEOs to be thinking about this stuff.
And most of the feasible scenarios in which banks start collapsing so quickly and widely that depositors end up with barely anything left bar the FDIC insurance are scenarios in which the economic outlook is so grim your startup that's relying on rapid growth and further funding to survive isn't going to make it anyway.
Admittedly, picking a startup as a bank increases that risk somewhat, but so does picking a startup to provide your CRM system or web platform or other mission critical stuff that's a lot more likely to be shut down with minimal warning, or indeed choosing to raise funding from a VC that wants you to 20x or bust...
I'm a nobody who got some startup lotto monies that were in excess of FDIC limits. You know what I did? I used multiple banks.
If you are not planning for "the big one," you are, again, accepting risk. My parents did not have earthquake insurance in SoCal in 1992 and had to start thinking about how they were going to repair the collapsed chimney on our house. I also didn't carry earthquake insurance on my SoCal house, knowing full well it is a risk. My mitigation being stocking up on food and water and having alternative sources of heat.
> You think the CEO of a 100 person startup should be worried about something like a bank run happening?
Yes. Not specifically a bank run, but bank failure. Cash is the lifeblood of a company. Let's not worry about our cash becoming unavailable, in a bank that buys risky assets with our cash, in a perilous interest rates environment, "cuz it's not 1920."
So many people in all these threads that are doing the Monday morning quarterback of startup founders and believing that they would have done things differently if only THEY had been the CEO.
Obviously the #1 top priority of the CEO of an early stage startup is to spend time assessing and countering risks such as bank runs, gross mismanagement at their bank, earthquakes
This is reducto ad absurdum. The kind of risk management that would have saved startups here is basic, elementary business. Parking money at treasurydirect, firms that handle this kind of thing as a service.
It's an impossible standard to hold founders to know that deposits are insured up to $250,000? This isn't exactly fine print. Just be minimally competent and not a clown.
A lot of prominent VCs were also screaming their heads off that other banks were about to fail.
These people played a zero-sum game, purposefully generating as much panic as possible to force the fed to act.
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
The fed has sat on its hands for decades and done nothing to mandate better protection for ACH transactions, done nothing to mandate phasing ou magstripe transactions (Europe has been on chip and pin for decades), our check cashing system is a complete mess in ways scammers take advantage of, and debit cards have a fraction of the protection credit cards do despite "real money" being involved instead of credit.
But then a bunch of billionaires force hundreds of companies to do business with just one bank, that bank is outright incompetent in how it manages its funds and employed people who were central in the last financial crisis, and suddenly it's "well, we must act to protect confidence in the banking system"?
I have zero confidence in the banking system. My money doesn't feel remotely safe from being stolen. I can't even find a bank that will do hardware 2FA instead of SMS 2FA, which is worse than not having it at all.
"Having your bank account randomly disappear isn't one of the risks that anyone should have to take." Companies actually do. That's why they keep their assets as cash at a minimum and typically don't concentrate that cash in one institution. Risk management is a big part of institutional financial management. This isn't the first bank failure and this isn't going to be the last. This situation will, however, probably make bank bail outs less likely in the future. The political fall out will be huge. 100% this is a big point in the 2024 election. (Having a bank named Silicon Valley Bank collapse couldn't be a better metaphor).
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
Not only is it a risk many take, but many end up losing a significant amount. The FDIC actually has a list of the numerous failed banks they've helped depositors recover assets from here[1]. You can see that depositors often lose a lot when banks fail.
Now I don't think this is a good thing, and I think it would be worthwhile to have a conversation about a systemic way to avoid this. But it was eye-opening to see so many not advocating any systemic approach, and instead just saying "the government should do whatever it can to cover all SVB loses because people like us are special."
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
I mean, having all your data randomly disappear isn't one of the risks that anyone should have to take. But if a company suffered systems failure without backups, what would we be saying? If a company had a breach and all their data got release or encrypted by ransomware attackers, would people seriously be arguing for a taxpayer-funded government bailout?
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
Then you put your funds in less risky banks who did not lobby to get an exemption from the regulations that protect against precisely this kind of thing. Even, spread it around safer banks.
Putting all of one's money in a bank because they have better returns or other investment opportunities is business. Not something that someone can be safe at the public's expense.
The public, because the public will pay for this one way or the other - if this is paid from the insurance that insures all banks like how the statement says, then it will cause all the banks who pay into this insurance pool to reflect it on their customers with fees. So every single person with a bank account in the US will pay. Its still public money, but it doesnt come directly from the US govt.'s pocked, so its 'okay'.
Especially given that an adequate alternative to putting all your money in one bank is to put it into two banks. Unless you're already on thin ice, that solves the short-term cash flow problem. Historically, even in bank failures, depositors get most or all of their money back, it just takes a while.
And if that isn't adequate for a given company, it sounds like it's time for them to hire a finance professional who has experience with cash management.
SVB didnt lobby to relax the laws against unpaid overtime, faulty advertising etc. Not any banal evil like that. SVB lobbied against laws that protected both the bank and its depositors from the very thing that happened. And succeeded to get an exemption for itself.
> A ton of the prominent VCs were writing out checks from their personal bank accounts so that founders could meet payroll.
Because they have duty to do so, as (part) owners of those companies. They could face personal liability for being negligent enough. You'd think any company with non-trivial payroll should've known better than not to hedge on all the things, including their banking partner.
This is inaccurate. In no way did people have to turn to their personal finances to help companies that their company invested in. That is like your banker, seeing your dire situation caused by a third party to you, and writing you a personal check… That is actually what happened across multiple situations I witnessed. Not saying these folks are saints but pretty unexpected to see.
True, but getting a board to be liable has a very high standard of proof. If not then there wouldn't be any boards, the compensation would not outweigh the risks.
Given the choice between bridging some cash (knowing that the full faith and credit of the US government backs the funds being bridged), or having the possibility of getting dragged into proceedings in the future, which at best would increase my liability insurance premiums, I'd pick the former.
>Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
This bank choose to _avoid_ safety regulations from the 2008 financial crisis, which is completely open information. They used this avoidance to pursue greater risk.
What is "randomly disappear" about putting your money into such a bank?
The "changing the world" talk is just as hollow as corporate business talk. Just a way to talk about what you're doing without specifically mentioning that "we're doing this to get more money", which is the actual reason anyone ever does anything.
Some founders/investors believe their own BS because that's what a good salesman does.
Being practical and sugar coating words has been the way to do business forever. The startup speak is just a specific flavor of words that's popular in a region/culture now, is representative of the business culture to some degree, but is just as hollow as any pleasantry.
> Just a way to talk about what you're doing without specifically mentioning that "we're doing this to get more money", which is the actual reason anyone ever does anything.
blanket statement, also bullshit. Of course money is a driver, but if that's your only driver as an entrepreneur then you're likely not going to be very successful. In fact, this is the primary difference between VCs and builders.
Fine, humans are multifaceted creatures and some business owners do actually care about making a change in their market in a positive way. The moment you choose to start a private for-profit business however, you're still forced to optimize your business decisions to favor your own economic growth -- that will end up being the major driving factor behind most decisions. Few people let ideology come between them and large sums of cash.
What is the “utterly despicable behaviour”? Startups trying to protect their investor’s assets? Banks trying to secure low risk long-term returns? Clearly they should have hedged, but is this really a moral failure?
I think people are unhappy about the hypocrisy in the form of a special carve out. This class of people, despite their wealth and influence, aren't exactly lobbying for expansion of similar protections for the average person. In fact, who's to say if a lot of these startups weren't just laying off people as part of the crowd recently? So people are mad of the unfairness.
And all the average persons the OP mentioned were already protected. We’ll see if this stops the contagion. It’s in our collective interest that it does.
I think of people like David Sacks preaching libertarianism and not taking money from the government until the moment things seemed uncertain at which point he’s practically begging for government bail out.
I think given his influence and hypocrisy this is despicable. But pathetic is another word that comes to mind.
I imagine you are not looking too hard. I have met many people who have dedicated their life to service and not greed. Richard Stillman is one if you need an example.
VCs have always been money managers looking to make a big return on their existing capital. No part of that has ever included being a good person or trying to do the right thing.
It's convenient for tech companies that VC investment strategy involves giving seed money to some startups, but it comes at a price of the VCs having some say over company decisions and a high percentage of ownership (and therefore eventual value).
> I believed that VCs and startups were mostly good people trying to do the right thing.
I'm sure a lot of mortgage originators in 2006 thought they were doing the right thing by getting risky people into houses before prices rocketed into the stratosphere, because, you know, home values never go down.
Not for many of us. I work in medtech, medical devices specifically. For me it's about bringing new medical treatments to market and therefore to be able to help people with those new devices. Large intrenched medical device manufacturers cannot innovate, they don't know how, so the only way to really innovate AMF bring new medical devices to market is through thr startup pathway.
Unfortunately the finance industry has perverted the purpose of startups and companies as a whole. While it is the way currently, it wasn’t until the past 15 years or so.
It used to be you solved a problem or met a need. You made money because of this.
It makes me sick that companies’ sole purpose now is to enrich shareholders.
Absolutely - because otherwise the risk to take them on is too high in all measurable terms (time, lost time, lost opportunity, lost capital, emotional toil)
Most good people trying to do the right thing eventually reach the conclusion that they should leave the tech/startup scene altogether. There are so many problems in the tech world that we only overlook them because we have a stake in it.
Why bootstrap? The VCs came through for their companies here. They got the government to change course. Many told their startups ahead of time to pull cash from a failing bank.
Not the OP and I hadn't put them in the noble class category, but until a few years ago I had truly believed that the innovation that was still coming out of the US (and out of the West more generally) was in no small part thanks to SV startups (and hence thanks to the VC industry supporting them).
The whole crypto fiasco plus a few other things (these SV people going from worshipping Musk to hating him in a very short period, for example) have convinced me that I was a holding a view that was not based on anything of substance.
Which begs the question: where does real innovation come from in the US (and the West more generally)? The SV start-ups are not providing it, ditto for the FAANGs, what's left?
> where does real innovation come from in the US (and the West more generally)?
Chinese-style surveillance tech, unironically. The next great experiment after social media is the increasing use of tech to control people with an personalized granularity that free-market capitalism (or even MMT) could never dream to achieve.
In other words, the plot of MGS2.
For obvious reasons all this is unpopular here. But regardless of feelings, it is the next logical step.
Yeah, now that you mention it the one thing at which AI is really good at is image recognition.
There was this drone video [1] of a busy intersection posted on my country's sub-reddit recently, and from second 0:11 or so the way that the software is able to "recognise" and assign an unique ID to each and every car from that intersection is very Minority Report-y. What's scarier is that this looks like consumer-level stuff, not some fancy state-run surveillance thingie.
I assume the drone is Chinese-made, most probably also the software that made that identification possible.
Most people that I have come across who are not experienced in tech startups seem to have some kind of holy image of VCs. They seem to think they're all "rich and successful". They think it is some kind of highly esteemed job to possess. Contrastingly, people who have been in the startup game for years know that VCs are just salespeople, and a great majority of them lose other peoples' money while just raking in a normal salary.
Hey, there’s nothing wrong with the government protecting people when they lose everything due to circumstances beyond their control. I’m glad to see VCs finally fighting for their progressive ideals.
When's the last time you saw a critical appraisal of any senior YC people on this forum? For a long time, Wilson, Andreesen and other marquee names in the VC world were treated with similar deference on HN.
Fawning media startup profiles and hagiographies are one of the reasons why Theranos, WeWork, and many smaller companies are able to thrive and even attract new investment and customers.
> When's the last time you saw a critical appraisal of any senior YC people on this forum?
There was a post a couple of months ago asking what's the secret behind Sam Altman's excellent aptitude when it comes to grifting. Those weren't the exact words, but that was the general attitude of the post. But that post was part of the few exceptions that confirm the rule.
A lot of being repeatedly told to take the most charitable interpretation of peoples words and action. Hoping that folks are more than their animal instincts.
To be fair, we're on a forum that was originally called "Startup News," created by a billionaire venture capitalist and run by a startup incubator. People do question the SV narrative, but this is still the lobby where all the people who drink the Kool-Aid hang out.
When maia arson crimew's site got linked here, she put a notice on top of her airline database hacking article with some disparaging commentaries about HN. Sure it may be a bit harsh for some people but she has got a point. This place is not immune to groupthink but in fact may actually be worse than forums with more diverse topics.
I think anyone who watched Silicon Valley has a more nuanced view of the VC industry than is being asserted here. And U.S. media coverage of tech in recent years has been overwhelmingly negative.
That being said HN is one of the last great (mostly-)unmoderated forums on the internet. I personally think U.S. media has been almost unfairly negative about the whole thing.
I cannot decide if the idea that VCs are some kind of kindhearted patrons and startups in general are all moral straight arrows dedicated to only good things is outright propaganda or just distilled Silicon Valley delusion. Hanlon's Razor indicates the latter, but I do wonder.
For every one company that genuinely is working out of the goodness of their hearts, there are 10 serial founders seeking to inveigle their way into something as a middleman, sorry "disruptor", then cash out and go round again before anyone notices the cracks.
> For every one company that genuinely is working out of the goodness of their hearts, there are 10 serial founders seeking to inveigle their way into something as a middleman, sorry "disruptor", then cash out and go round again before anyone notices the cracks.
I used to believe it until about 7 years ago, when I started to build an open source alternative to the rentseeking Big Tech industry. Too much of Web2 and Web3 was based around the profit motive, and no one stuck around long enough to replicate their stack and give it to the people:
I think as long as they don‘t get entrenched (usually by regulatory moats that prevent disruption) these go hand in hand. Creating a novel product/service and generating product market fit is kind if like science. Even if they get rich from it, now the whole world knows forever that this is a particular way to create value. As long as it is not driven by subsidies or caters other government linked industries that could skew/bias the value signal the demonstration as well as the offering of these goods and services is a net good imo
Not for nothing but literally every person you cited, good and bad, came from well off families who built that wealth via capitalism. We'd be better off fixing the wealth disparity and making it so there are more people with a safety net that allows them to engage in gift economies like the open source software world.
It is difficult to be charitable when you have to worry where your next meal comes from.
A lot of people employed by tech companies are paid by their companies to contribute to open source projects which the company uses, so the gift economy is still deeply tied with capitalism despite the appearance.
Absolutely. People like Garry Tan, Sam Altman, Michael Seibel, Paul Graham, Mark Cuban, all pushed hard to keep their money, not caring if it's at taxpayer expense. Rich people tend to only care about helping others when it aligns with helping their own pockets.
This may have been the most prudent decision by the government, though it'll be hard to say what would've happened otherwise. But in the end, it sounds like the average person will still be negatively affected, by having small accounts under the $250k limit subsidize insurance for larger accounts.
But by default, I assume everyone, rich or poor, acts in a selfish manner. They'll help others only when it helps themselves, often by taking an insignificant financial hit for a substantial reputational bonus. Many rich people like the ones I listed try to act like their overall goal is to help others, but their actions seem to always align with furthering their own interests. If Mark Cuban did something that did substantial damage to his own overall value (financially or reputationally) in order to help someone unrelated, I'd be pleasantly surprised to hear it.
Short version: Mark realized a person needed help, even when those closest to that person didn’t realize. He went above & beyond to help that person, someone who he barely knew.
Note: cutting a check is easy. What’s hard, is to give someone non-monetary help. Because it means you have to actually be involved if it’s non-monetary. This was that type of help he gave.
I assume there's lots of private details you can't share, so I can't judge much. But fair, if that's true, it would be good.
It's not like rich people need to care about what I think, but I just argue that people should avoid glorifying them and believing claims that they want to help the world, as I've seen too many times that they are only interested in helping themselves. And the things I've seen Mark Cuban push for on Twitter are often pretty awful.
Should they not push for a good policy just because it benefits them? I don't really get the criticism, unless you think they were hiding the fact they had skin in the game.
Hey Garry, did YC advise its startups about prudent management of their treasury? How come so many of them had more than $250k in their checking accounts? Do you think you could have advised them better?
Sure, it's possible to justify that, and if I were in the Fed I might make the same decision. But how hard would you fight for this cause if it didn't benefit you personally?
I want to hear those reasons from others, not from a bunch of rich people who would be personally profiting at the ordinary person's expense.
I don't understand why so many people have such a hard time justifying this.
* If the bank collapses then many startups shut down. This is bad, but okay, maybe you think startups are net negative. In addition to that thousands of people will lose jobs — please explain how this is a good thing. Plus there's a potential for ripple effects from people not trusting banks anymore.
* You say it's a bunch of rich people profiting. Who are these rich people you're talking about? Bank management? They went to zero overnight. Shareholders? zero. Who's left? Garry Tan? He has the same incentives as millions of Americans whose retirement savings are parked in VC funds.
I want to say I'm one of those people who's not personally profiting from this, but I acknowledge that's not true — the economy is connected and stable economy is good for everyone and we should celebrate people who push for it.
I actually personally profit from this as a software engineer working at a startup, but I don't agree with it because I recognize it's unfair.
Let's say my house gets burglarized. Everyone agrees this is a bad thing and unfair to me. However, my insurance only covers $2k, and I lost $20k of stuff. Can I expect the government to "backstop" me?
It's bad that the bank got shut down and depositors might have lost some of their money, but it's not fair to expect the government (and the average person indirectly) to reimburse for this, particularly when that's not how the FDIC policy is written.
Garry Tan and all the people I listed have a lot of their value in YC and startups which have direct losses and direct benefit from getting reimbursed for losses. If it weren't for reimbursement, the effective valuation of the startups would go down, and they'd have to invest more money to keep them afloat. So he has much stronger incentives than ordinary Americans.
The stable economy might be good for everyone, but I certainly will not celebrate rich people that push for their own wealth.
The US economy depends on you trusting that your bank account is less likely to disappear than a pile of cash under your bed is.
That's why the US government steps in for one case and not the other.
There is also precident for the government to pay damages above insurance limits after natural disasters, which from the depositor's point of view this basically is.
From what I understand: SVB offered below-market rates on loans and even personal financing for the founders of companies if you, in return, use them exclusively as your bank and put all your raised capital into an account with them.
You buy favorable rates on loans with the increased risk of putting more than the insured amount into the account.
When your house gets damaged in a flood and you've selected to insure it for $250k because that's cheaper, and you've knowingly built it in a floodplain, is the government still going to cover 100% of the cost of building it?
"If the bank collapses then many startups shut down."
No, the equity gets wiped out, and if it's a good idea/good business it persists and gets funding elsewhere.
"You say it's a bunch of rich people profiting. Who are these rich people you're talking about? Bank management? They went to zero overnight. Shareholders? zero. Who's left? Garry Tan? He has the same incentives as millions of Americans whose retirement savings are parked in VC funds."
The VCs and other equity holders of the SVB depositors. Financial markets work: they could have sold their uninsured deposits at a discount, made payroll, with equity eating the loss.
> But how hard would you fight for this cause if it didn't benefit you personally?
Why is that odd or bad? I don't see people in here discussing issues about Syria or Congo. I saw dozens of threads about Trump and relatively none about Bolsonaaro. Why are you discussing about Fed and Biden and not thinking of economy of Pakistan? People will be more vocal and active about issues in their proximity.
It might not be odd or bad if you consider that almost everyone is selfish.
However, the fundamental problem here is that SVB lost $X billion dollars of depositors' money, and Garry et al. wanted the government i.e. taxpayers to pay for those billions instead of the depositors, hurting us for the benefit of him and his community.
This is ordinary human nature and I don't care about Peter Thiel doing that because everyone already knows he's selfish, but some others want to act like they're selfless and be celebrated for it, and I don't accept that hypocrisy. Rich people should be assumed selfish until very strongly proven otherwise.
Pakistan shoots itself in the foot in the same exact way every N years running up balance of payments, hiding foreign and military aid in Dubai and running to Saudis, IMF and China. It’s not interesting when it’s same old story.
There was plenty of private capital ready to step in and buy these deposits, at a discount of course, making it possible to make payrolls. You and your ilk just didn't like that the equity holders would have to eat the loss. Stop pretending this is about anything else.
If you want to reap the benefits of capitalism, you should also get punishment for not doing the job well. Getting a haircut above the insured amount was the sensible thing here.
If we are so fearful of this, and banks are so core to the economy, why not just have government owned banks then, since it seems like government has to subsidize mismanagement.
Aaron Klein (former Treasury official, now with Brookings) agrees with you:
>There are just under 5,000 banks in America ... the right answer for the number of banks to fail in a year is greater than zero. If you have no bank failing, then you probably have bigger problems in the economy. Look, the first time in American history you went a year without a bank failure was 2005. 2006 was the second year and the regulators told us at the time, that they'd won, that this was great regulation, see, no one was failing, the system couldn't be safer. Kablooey.
I don't understand this comment. 1) SVB was not managed by VC's. 2) SVB went under because they bought US Treasuries, not because they took risky bets on startups.
I see it the other way around. The VCs started a panic. Name one other bank that could survive $42 billion in withdrawals in a single day. Other than Bank of Zimbabwe, obviously. Even Wells and JP Morgan would collapse under that strain. The VCs caused their own pain.
Yeah, but what are the specific cash amounts we are talking about?
Such extreme exposure to interest rate risk would've blown up in some other ways - say, a large client processing a routine payroll, executing stock buyback, or investing in an entity that banks elsewhere.
SVB had risks, VCs did what they should do to respond to said risk. Would you blame regular working class people in a retail bank run scenario for wanting to save their money from potential risk?
No. SVB price crashed 50% in one day and got downrated by Moodys, which exposed a bunch of red flags that would have resulted in a bank run regardless of what VCs said.
The stock crashed because of the initial pseudo bank run due to high interest rates on capital (at least that's the reason given for withdrawals), and the bank's subsequent failure to make up the difference after selling a treasuries portfolio. After which a real bank run occurred. Then the bank started down a path of a more desperate measure, and that's when they were shut down. At least that's what I got from an article.
1. If they had more short dated treasuries, they could have used them to fund drawdowns, and would not have had to sell their long dated treasuries, that went underwater as interest rates rise.
2. If they had not been overly exposed to one sector, a sector that largely existed due to 'free money' of zero interest rates, then large scale draw downs would not have happened as interest rates rise.
YC asked for exactly what just happened. (Depositors be made whole.) They did not ask for anything beyond what regulators ultimately deemed reasonable.
I think this is very much in question. Silicon Valley Bank was absolutely part of a cohesive microeconomy. There's no other explanation for the absolutely uniformity with which all those startups were using it for what should have been 100% commodity banking services. Those startups all banked with SVB because their VCs told them to.
And the VCs told their startups to bank with SVB because... we don't know yet. But any time you have a signal this strong, there's a driver.
Add to that the fact that the moment all those startups seemed likely to lose banking services, however temporarily, those same VCs freaked the fuck out of their minds on twitter and started shrieking in all caps about the end of western capitalism. That's not mere concern for their poor startups (most of whom were going to fail anyway, after all -- they're startups!). These VCs were exposed to the SVB failure. They were leveraged somehow and about to get caught holding the bag.
There was some kind of insider dealing going on with SVB. It wasn't just a bank. We for sure know that much. Whether we have criminal fraud or not is an open question.
SVB made loans to cash-rich companies approximate to their funding rounds, when they were least likely to immediately use the cash. These loans typically required the company to hold the money as a deposit in SVB. These deposits were used to buy long duration bonds.
In other words, SVB used these companies to produce new money that they could earn interest on.
Yeah, that's the kind of thing I'm imagining. Though it doesn't explain the VC tweetpanic unless they were getting kickbacks. Is there a cite for that, or a story posted somewhere?
One element is that the banking industry as a whole behaves pretty chaotically with 'unusual' customers.
Big wire in from a fundraising round? Account frozen. Big wire out for an acquisition? Account frozen. Bank learns your customers include cryptocurrency companies? Account frozen. Bank account balance huge relative to your business' cashflow? Account frozen. Random bank staff doesn't understand what you're doing? Account frozen.
In that kind of climate its almost inevitable that VC's would recommend a single bank known to not behave erratically for the activities that are usual for their investments.
"I just hope nobody forgets how prominent VCs behaved during the brief period of uncertainty."
The point is that these VC's didn't act to support their investments, they flailed around begging for bailout (that they probably didn't need but they didn't understand banking well enough to know that or bother to consult any experts before making public statements).
They behaved badly and should be embarrassed and everyone should remember it.
Why do you find it believable that they asked for government intervention to protect "the innocent" as opposed to simply acting to protect their own private financial interests, which seems to be the simplest explanation?
I'm not even convinced that the depositors made whole here were innocent--they accepted a known risk by exceeding the risk-free FDIC limit. The sad part is that in our society, we have no qualms about literally turning working people out into the street when they make financial missteps, but the already-wealthy receive prompt intervention from the highest levels to protect them and other wealthy people from the consequences of their investment decisions.
What argument is really left for this kind of intervention, besides appeals to the trickle-down system where the rich must be vigilantly protected since the rest of our society is set up to be disrupted when they fail. The whole system is morally and politically bankrupt.
> Why do you find it believable that they asked for government intervention to protect "the innocent" as opposed to simply acting to protect their own private financial interests
They are the innocent party here though (well, except for maybe Peter Thiel). The depositors didn't cause this problem.
Being against student loan forgiveness or any sort of help to anyone, ever, but then running to mommy Yellen the second you get in trouble is just too hypocritical to believe.
If that's where you (philosophical you, not you personally) landed on those two issues, you can get fucked.
They begged for special dispensation that they didn't ever need. They proved themselves to be both selfish and ignorant and deserve any derision they receive.
This was an extremely obvious example of when the private sector could've collaborated to solve a problem. SVB was doing a capital raise just last week. Instead the VC community colluded to accelerate the problem and is now asking for a government bailout
What innocent? They could have sold the uninsured deposits at a discount, made payroll, and let the equity eat the loss. Instead they went on an embarrassing bailout begging extravaganza and unfortunately succeeded. Nobody, ever, should take any of these people seriously again.
They actually brewed up the contagion. Without the alarmism everyone would just assume that they get a 10-20% haircut and have most of their money back within a week
SVB regularly provides credit to risky startups, which is why they existed in the first place (because other banks wouldn't lend at those rates). So, yes, they sorta did place risky bets on startups.
Source for this? All evidence show that their failure at least started with them owning a lot of "safe" bonds, whose value declined with increasing fed rates.
Yes, long-term treasuries which for years had been at very low interest rates. You're certainly right that they shouldn't have done that, but it doesn't invalidate GP's point.
Some VCs were definitely better than others: the very worse was probably the All In Crew who were trying to spread a bank run to tie the government's hand. Truly despicable.
Agreed, I‘m a big fan of the all in podcast but this really showed them (especially Sacks) from their worst side. They clearly pressured the regulators by saying that everyone who has more than the amount insured by the FDIC in their account at a regional bank is stupid and reckless if they don‘t transfer it to one of the top four banks on Monday. The situation at SVB seemed very manageable but even a small chance of this „mind virus“ spreading would be so devastating that they decided to backstop the situation.
Yes, this and his Solana pump (and dump?) really showed his true face to a point where I have to start questioning his qualities as a capital allocator
> It's great at a personal level that "founders" and startup employees didn't have to do without. But it's important to remember that they no longer automatically deserve any credit for taking risks and doing something new.
Mm hmm. Yes, after all is said and done, the main take away from this is that startup employees and founders no longer deserve credit for taking risks and doing something new. Glad our priorities are straight here on hackernews.
They don't have much agency in this. Go with a typical "small business account" meant for mom and pop shops at a bigger bank and you miss out on all the advantages of a more dynamic bank like SVB. Your investors would be asking questions. Collectively agree not to create a bank run, your investors would still ask questions.
Unless you are fully bootstrapped with no major cashflow issues, there are no right answers to this.
Oh, so they, wanting an advantage, made a choice that turned out to have some downsides as well? That sounds like a situation where they have plenty of agency to me. Especially when there are alternatives like putting their eggs in two baskets.
I bet you are one of those people who insist that companies making under 1mil ARR should support multiple auxiliary payment providers in the event you get your funds frozen by the Stripe/PayPal. The infrastructure providers need to do better, the burden should not be on small businesses to account for the cost of black swan structural failures. Words are cheap when you only work for well capitalized large corporations because your personal check book is rarely impacted aside from short term unemployment.
The burden is not on small businesses. Most small businesses don't just have well over a quarter million dollars in cash just lying around collecting dust. And the few that do can open an account at second bank. It's not rocket surgery.
Beyond that, if they have the kind of cash flow where they need millions in cash sitting around, they should hire a finance professional. For many, many reasons, bank failure risk being a very small part of it.
SVB doesn’t exactly go around publishing the details of their internal operations. Do you expect a small startup without significant ARR to question SVB’s treasury managers before opening an account?
No but their quarterly statements do have relevant information, if someone wants to dig around. One would assume that if people spend hundreds of thousands of dollars on AWS (someone to manage their compute), they would spend some time doing due-diligence on the financial institution where they choose to park their money.
What evidence is their that this due-diligence would conclude SVB was any more risky than a different bank? They bought US government bonds, this is not an FTX situation.
> For some sily reason I had some respect for the startup industry before this, now I see it as a joke.
1. silly reason
2. It's a joke
It looks like you just found your silly reason.
The greed of startups have evolved to become bigger and bigger as years pass by.
The romanticizing of startups came from propaganda. It's just that some of us were too young and naive to understand the puppetmaster while others had seen the puppeteer before...
> they no longer deserve credit for taking risks and doing something new
What on earth. Putting money in the bank was never a risk founders were lauded for, nor should it be on the titanic list of things they have to worry about.
We can brawl in the peanut gallery over FDIC limits and precedents and moral hazard (which lies with the banks, btw) but at the end of the day there can only be one “best country to start a startup” and whatever that is, it’s definitionally one where you don’t have to worry about getting rugged by the bank because someone you wouldn’t know from Adam made a bad bond trade.
VC's and YC have burned a lot of credibility overnight with their tech employees during this mask-off moment. I wouldn't be surprised if this forum harbors long term resentment, lack of respect, and a more adversarial relationship going forward. I haven't ever seen such a large lack of respect for them as the past couple days. This industry has gone full Wall St. The next generation of individualist, regulation-disruption startup founders will be reconsidering the YC club a bit more...
> VC's and YC have burned a lot of credibility overnight with their tech employees during this mask-off moment
Why? It should be other way round. They worked hard to make sure that payrolls are met and jobs are secure, that is my most important expectation from my management and investors.
There is nothing but economic interest. If you want to predict how any company, startup or not, will behave just look at how they make money. In 99% of the cases companies act according to their business model. It is that simple, there is nothing else. All the "we will make the world a better place" rhetoric and mission statements are just recruiting and PR BS.
What did VCs do wrong here? They warned of impending solvency problems at SVB and told founders to withdraw their money ASAP. And indeed, the bank failed the next day. The companies in trouble are those who didn't listen to the VCs.
VCs Group-B to Z were too late so they asked Govt to help them.
It's not just founders who put their money there, VC funds are there as well and they are probably close to 100% uninsured (cause it's the Fund Series I - XXX).
If you get your hands on the list of depositors, you'll see the list of Funds Series from VCs.
Everyone withdrawing their money ASAP is what caused the solvency problem. There's a big difference between warning people of a problem and encouraging them to behave in a way that creates it.
They went around begging for bailouts when they could have just had the companies sell the uninsured deposit claims at a discount, paid their workers, and, as equity, eaten the loss.
Part of the issue is a common one: assigning blame for actions taken by individuals to the collective. It’s a nasty internet trope. But these things are true:
- the crisis was at the most caused and at the least exacerbated to the point of no return by the advice that some firms gave
- the general zeitgeist amongst certain firms and from particular individuals in firms leaned towards libertarian ideology, which seemed to go out the window when ish hit the fan. I can really only find one prominent example of this, so I don’t know if it’s fair to paint all of VC-land with the same brush
- it is probably the case that there are members of firms in both group one and group two, which looks bad, because panicking at the last second looks bad, especially when your panic screws (for your own benefit) a business partner of decades who was essentially only in a risk zone because they chose to do business with you. That’s an oversimplification of course, but it all is
Why should they not get credit for taking risks or doing something new? How is that related at all? The risks they take are based on the viability of their product. It was never (supposed to be) based on the risk of if their banking institution could provide them with their cash as needed. None of that has changed.
We’ll because taking risks by definition means you could end up in a negative situation and so it should be more of a personal decision?
It seems like SVB took a risk and lost.
If the majority of Americans voted for SVB taking higher risks it would be understandable but now who comes up with the missing money ? The government, which is tax payers who are already probably getting the raw end of the stick financially compare to silicon valleys.
I think this bailout will see a lot of political backlash.
People like Jason Calcanis were screaming on Twitter like the world was going to collapse and that the contagion would take down regional banks hurting ordinary consumers.
All because he wanted the government to bail out his startups.
Did you miss the part of this press release where they announced that Signature Bank collapsed today? That makes it pretty clear that the contagion was real. Treasury’s actions make it abundantly clear as well.
There are 4,500+ commercial banks in the US with 70,000+ branches.
The idea that regional banks were going to collapse en masse because of the actions of one ineptly managed, highly unusual (in terms of customer and deposit mix) bank is ridiculous.
And trying to deliberately create a scare campaign so you can put political pressure on the FDIC to cover uninsured amounts is insidious and frankly evil.
And you think Jason who-the-fuck-cares-about-what-he-thinks Calacanis somehow has a meaningful role in a scare campaign? He was just one of the scared people.
And guess what, the FDIC and the administration actually do believe there was a clear risk of regional banks going under. That's literally the topic of the article you're commenting under.
I feel this solution is too strong handed and I don't think the world would have ended if there wasn't a solution tomorrow and a hundred startups would have to take a 20-30% haircut on their raised funds by selling their claims, so I don't agree with Jason, but calling him evil for his standpoint and voicing it is what's ridiculous.
Ok but did you really not address the fact that Signature Bank literally collapsed today? You know that is a different bank, correct? Did you see the stocks and sector ETFs for regional banks last week?
ETFs have weightings. SVB actually was a big portfolio piece for some ETFs. Especially because during COVID and the money printer boom, SVB stock went to the moon and hit $800 / share at one point.
I don't think ETFs are a good sign. One of my favorite bank ETFs, PGF is only down 6% on sentiment which isn't much.
> People like Jason Calcanis were screaming on Twitter like the world was going to collapse and that the contagion would take down regional banks hurting ordinary consumers.
If the 18th-largest bank in the country were to be allowed to collapse, with depositors losing money due to something they had no control over, why would any non-insane depositor keep their money in the 17th, or the 19th largest bank?
Any rational person will follow this line of reasoning to conclude that the only safe place to deposit your money would be a too-big-to-fail bank. And nobody wants to see that.
If SVB did fail with depositors not getting more than $250k back then it would be a contagion. I did find some VC tweets overly dramatic but the underlying messaging is still right.
Running to the Fed for help as soon as shit got real; made a lot of the bootstrapping libertarian ethos stereotypically espoused by a certain of VC seem very hollow.
Court records also show he spent months last year making suggestions to Musk on how to engineer a sufficiently hostile environment to mass-sack Twitter staff while evading severance arrangements.
But sure, these guys are so concerned with the posibility of ordinary people getting hurt.
Deposit money in a bank and expect to be able to withdraw it later as agreed seems compatible with borrow money for education and expect to pay it back later as agreed.
When you deposit money at a bank, it is made very clear to you that only $250K is protected by the FDIC. Any more, and you either buy insurance for it or take a risk on losing it in a bank failure.
These depositors knew that and still acted irresponsibly, yet they are going to be made whole. It’s not that much different from taking out a loan you don’t understand.
They benefited with White Glove treatment and easy access to loans. They weren't depositing it there out of the goodness of their hearts. That's why SVB was hunting for yield.
This is why Thiel was first, he can stick to his ideological guns. He also forced Silicon Valley valley to setup the massive bluff that they were too big to fail (and maybe they are indeed to big to fail) that the government refused to call.
So meat is back on the menu. No need for Ramen gents.
Who would've thought post-hand-wringing-over-poor-300k-salary-tech-workers realizing their disposability that we would have another event reminding HN just how different the rules are for capital owners than the rest of us.
Why is that tech workers, many of whom easily have earned over a million dollars in salary over the past few years can't be told to "live within their means"?
Why is it that the same VCs that rallied against student debt relief think their poorly run bank should be bailed out?
I know why, this thread is chalk full of it. "We were smart, we were playing the game with the advantage we were told made us untouchable, we can't fathom gasp 'negative consequences' whatever those are".
I'm sick of it and thankful to see people seeing through this a bit more than usual. Downvoting isnt going to change a damn thing, click your hearts out and enjoy the dissonance. See ya in the next too-big-to-fail-as-a-result-of-unchecked-corporate-greed thread. lmao
> Who would've thought post-hand-wringing-over-poor-300k-salary-tech-workers realizing their disposability that we would have another event reminding HN just how different the rules are for capital owners than the rest of us.
no offense this comment shows lack of even basic understanding of situation.
SVB collapse a zero impact on big tech workers earning $300k. this problem effect small business, maybe 50-75 employee who did not risk they money. they literally put in bank to do thing like pay employees and other bills.
start up employee is not earning $300k USD per year. start up hardly compete with big tech on any compensation. these people working hardest.. not rest and vest like big tech.
Yes, regular people get their bank accounts automatically protected, and the capital owners had to sweat for a few days.
The bank is not bailed out, it's out of business, its shareholders get nothing, and its execs just lost their jobs. The bank's customers got bailed out.
How many startup employees do you believe are making 300k? That’s FAANG, big-tech companies that were in no way affected by SVB going under. If anything, startups are known for paying below market rate because they have tighter margins and compensate with the tenuous promise that more money might be made in the form of stock options if the company makes it big, which usually doesn’t pan out.
> I just hope nobody forgets how prominent VCs behaved during the brief period of uncertainty. The idea of some noble class of investors championing disruption is dead. They're just a bunch of rent seekers like everybody else. For some silly reason I had some respect for the startup industry before this, now I see it as a joke.
the long term fallout was never going to come from only getting 90 cents on the dollar vs 100%
it’s the fact that the lender most willing to work with non traditional borrowers eg tech startups is now gone, and there’s no bank or lender that will replace them. if anything this will mean lending standards will tighten, and it will be very difficult for any customer with a SVB credit line to find another bank willing to lend to them on the same terms.
this is also coming at a time when more startups relied on debt to fund their companies because the equity raising environment is so tough, so now many founders might be forced to attempt to raise equity in a tech bear market on very bad terms if they can at all
Glorifying founders has always been stupid, they're all trying to get rich, not exactly a noble cause. It's not something to demonize them for either, but founder worship is kinda gross.
It's impossible to move on. There were insufficient funds to pay depositors; meaning, the money was gone - Since the money didn't vanish into thin air; somebody got that money through some scheme.
Now taxpayers are going to be footing the bill... It's a government-ordained transfer of wealth from good, honest taxpayers to whatever (possibly malicious) entities got that money.
It's theft. It's straight theft. Not even complicated. Theft is now legal depending on who you are.
> It's impossible to move on. There was insufficient funds to pay depositors; meaning, the money was gone - Since the money didn't vanish into thin air; somebody got that money through some scheme.
There was no theft. The bank bought bonds that decreased in value rapidly due to rising interest rates. Pure mismanagement, but not theft.
The bonds are good to yield on the stated timeframe. You need to hold them to maturity. They bought long term bonds and tried to sell them after newer higher yielding bonds came out. Bad decision. Also lobbying to avoid stress testing below 250B instead of 50B.
They could have kept deposits as cash and watched the value erode like a dumb retail consumer has an option to do. But that’d look bad for bank investors.
So now the Fed and Treasury are responsible for negative yield on bad bets if that account crosses 100B. Cool. I only have about 100B to go before the US government cares about my negative position. 401K takes an L because interest rate rises and the SP500 being a stock buyback circus. That’s on me I guess.
Anyone saying well it’s not using taxpayer dollars. Whatever, it is using our feds time. This whole thing is now J Powell and Yellen focusing on a cottage industry serving billionaire interests instead of using their time and agency to work for that dumb aforementioned retail consumer undergoing inflation and a pending recession.
In an agency where any intervention sets a precedent this is now telling regional banks to go ahead and yolo your balance sheet. We got you.
I want the startups to get their money through liquidation of the bank at whatever discount that comes to. 80c on the dollar, whatever it isn’t your money anyway it’s VC money. All savings accounts come with 250k FDIC insured. So play by those rules.
SVB shareholders have been wiped out in this, and the prospect of that fate should motivate banks to try to avoid a similar outcome for their institutions going forward.
It depends. It's likely that some of those big SVB shareholders were also shareholders of ventures which had deposits at SVB so they got punished and bailed out at the same time... Less punishment. Maybe even profitable for them.
The whole business of a Bank is to manage interests and money. If a bank didn't consider interest rate and duration risks, it is such a gross mismanagement that it looks identical to theft. That is like a chef saying yeah we had best knife and utensils, we just didn't clean them and some mould was growing on them. On top of that is the suspicious sales of stock by CxOs.
An equally silly error would be concluding that all VCs are like this. Although we heard absolutely unhinged and insane panic from a few (like Jason Calacanis), and some milquetoast statements from others (Redpoint), we heard no panic from the largest players.
I won't reshare anecdotes here, but I heard stories over the weekend about intense and direct conversations between the largest VCs and the Fed.
I will never forget, they revealed their true faces. All these CEOs also. It's a big game, words are just tools to manipulate others into doing what you want them to do, nothing more.
Does realizing this, that they were always like this change your perception of the last decade in any particular way?
I'm genuinely very curious. I've always considered them a bunch of smarmy opportunistic cutthroats, but that shift must be jarring right? Again I don't mean this negatively, genuinely interested in how it changes your understanding of the "startup era," pandemic, etc.
Now they are going to see the light and give the employees the same "bailout" they got when times got tough in the form of "not getting laid off" right? .... Right? Because everyone deserves a break, right?
The people I lost respect for was a large portion of HN commenters calling on bank depositors - largely small businesses - to be snuffed out because there was a run on their bank. The comments have largely been factually wrong, misleading, and downright psychopathic. I am glad our government is not controlled by such people, but I question the value of this forum going forward given the large portion of it that is so incredibly toxic and so poorly informed.
These are the same people that influenced most of the recent opinions around Google, Amazon, Meta, etc. I'm not saying everything is peachy keen at those companies, but just keep this in mind next time you see the next "Google eats babies" or similar un-nuanced headline and comments section.
All of these companies could have sold their uninsured deposits at a discount, made payroll, and let their equity holders take the loss. This is what equity holders are supposed to do. Instead they went on an embarrassing twitter begging campaign and unfortunately succeeded. The whole "workers missing mortgage payments" or "destroying a generation of innovation" is an insane, buck-passing take.
I'm pretty sure that calling your fellow commenters "trolls" and accusing them of having "psychological issues" also violates HN Guidelines, which say:
> Be kind. Don't be snarky. Converse curiously; don't cross-examine. Edit out swipes.
> Please don't fulminate. Please don't sneer, including at the rest of the community.
I suppose that might run afoul of the guidelines, though I did not call out any specific commenters and I think we can all agree there were some trolls on that thread. You can look for yourself and see some newly created and quickly banned green accounts on it.
The comment you're replying to was my honest assessment of the situation, given the many dozens of comments hoping for people to lose their bank deposits and for their businesses (or those that employ them) to fail.
The bank's shareholders are getting wiped out. The depositors are protected. Banks -- who depend on the continued faith of the public -- chip in a little more in insurance. The taxpayer pays nothing.
A bunch of software companies get to succeed or fail now on the basis of whether their business models and execution make any sense, as opposed to whether their bank bought enough interest-rate swaps.
Small regional banks can continue to exist. This will not necessitate even more consolidation in American capitalism. And there will be no follow-on bank runs to jeopardize grandma's CDs.
Seriously, what is there to complain about? The government did its job here. It governed. Fairly and competently.
Money to cover deposits that didn't previously didn't exist, suddenly exists, and there are people like you trying to tell everyone else that everything is rosy and that it's not going to cost the taxpayers anything.
It sounds like a revolutionary system that you're working with and if it truly costs "nothing", may I ask where I can sign up to have my bad financial investments refunded for free?
FDIC insurance is paid for by FDIC members (i.e., by banks), via an insurance premium. In this case, the FDIC is providing extra coverage, and charging member banks an extra assessment to pay for it. So the money comes from all the other banks.
"The taxpayer will pay for it" only in the sense that maybe member banks will try to pass this on in the form of fees.
"Bad financial investments" are almost 100% not being "refunded" to the bank shareholders. Their shares are, I assume, going to zero. The only way in which they are being protected -- the "almost" -- is in the fact that their shares go only to zero, and do not become liabilities.
Let us also consider what the investments were that went bad: Government bonds. So you could say that value flowed from the bank to "the taxpayer" (or to "the government") the minute those bonds lost value, i.e., the minute the Fed devalued them by hiking rates on newly-issued bonds. In that sense, the bank was already the bagholder for the Fed ("the taxpayer").
You're going too far by calling VCs "rent seekers". They do provide value with other peoples' money to build companies. No matter how much people love to hate them, they are a necessary part of the startup ecosystem. Most of them fail and end up in tears in the long run -- it's just the nature of VC. There's no need to punch them when they're down.
in my personal opinion most if not all modern startups are seeking to create a system in which rent seeking behaviour is the end goal.
The stereotypical SV playbook is to enter a market, don't give a crap about the local regulation or laws, try to get big by using your cheap money to outstrip to competition and do rent-seeking when you are the largest.
Also, a lot of startups are solving non fundemental problems.
We should be spending all that engineering effort fixing things like climate change, food security for the global south and a way to deal with the aging population in the western world instead of thinking about algorithms to get more clicks on ads.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
This special fee will most likely be passed onto bank account holders either through lower interest rates or higher fees, so most taxpayers with bank accounts will likely be affected indirectly.
They'll be less affected than they would have been if contagion had been allowed to spread unchecked. All banks have a vested interest in the stability of the financial system in general.
"Too big to fail" is such a bullshit argument, and doesn't make it any less of a bailout at taxpayer expense. Finance is structured so that every time this happens, it just so happens to be a forced choice between a bailout and "nice economy you have there, it'd be a shame if something happened to it..."
> The bank doesn't exist anymore and its shareholders got nothing. The customers' reward is they can make payroll. What bailout?
Depositors knowingly took a risk by keeping more than $250K in an individual bank account. Rather than allow depositors to face the consequences of that decision, the government will now be making an exception to their own rule and covering depositors' losses. That's a bailout.
If a company would have been unable to make payroll because of this, it would have been a direct result of their failure to adequately assess and mitigate risk.
The word bailout seems to be getting redefined a bit here. The government is stepping in with short term funding to guarantee all uninsured bank deposits. This isn't a matter of another bank buying the failed SVB and the government acting as an arbitrator, the government is setting up the program and footing the bill until they can press the cost on to other banks.
This isn't a shareholder bailout and they say the bill ultimately won't sit on tax payers,but it's a bailout none the less.
edit: to clarify I don't mean it's being redefined by the parent post here, bailout is being redefined for the whole SVB situation to avoid using a term that people respond poorly to.
It seems to me that, just like just-in-time inventory control, we've chosen an economic model that maximizes growth but also incurs significant risks to stability.
And with a global economy, and global Internet, and social media giving everyone around the world an opportunity to escalate internal dissension, those risks are escalating.
> we've chosen an economic model that maximizes growth but also incurs significant risks to stability.
You mean the same economic system that has been in place since the industrial revolution?
Sure, the US tried softening it a bit during the aftermath of the great depression, but in the end, this is just a free market economic behaving as expected?
The one thing that keeps surprising me is the belief that the US seems to have in self regulation, which has failed time and time again?
That's a complete misunderstanding of JIT. If SVB were running according to JIT principles it would have matched the duration of liabilities (deposits) to the duration of assets (the bonds it held). In fact it held long-dated bonds, which is analogous to keeping a lot of inventory on hand for a high-throughput manufacturing process: the complete opposite of JIT.
No that's exactly the lesson that they (the banks and the government) don't want people to learn. That lesson had started causing a run on every single bank except the very largest mega-banks.
Stability and trust in reputable banks is not zero-sum - it benefits everyone.
I suppose it's possible that they don't want people to learn it, but if that's really true then the western banking system is in a lot more trouble than I even thought. The idea that learning a basic truth should completely undermine confidence is shocking. Perhaps I've been wrong to be a cryptocurrency skeptic all this time.
It does not, as they are far too small to be "systematically important". If they fail and their assets cannot support their deposits, their depositors will get a haircut.
This will not go unnoticed by depositors.
It's one of the clearer unfairnesses of this bad decision.
This is 100% a bailout and the wording that “no losses […] will be borne by the taxpayer” is a shameful misrepresentation. Just because a bunch of VCs and founders didn’t realize they were at risk of this happening if they kept all their money in one bank, they still bear the responsibility of their losses. Looking forward to this new future where uninsured deposits are actually 100% backed by the FDIC, so actually if your company spends any money to diversify or de-risk your banking posture based on how the rules are written, you’re a rube and potentially being irresponsible towards your shareholders
One of the key components of a bailout is that the company still exists. In this case, the company does not exist any more, and all shareholders have lost their stock.
So whilst there may be some superficial appearance of a bailout (and we don't yet know how much that is, as we don't actually know the value of the assets that are recoverable), it is inaccurate to say that this is "100% a bailout".
I'm talking about the uninsured depositors. Who are first in line after the DINBoSC liquidates SVB's assets. And it doesn't matter what actually shakes out in the end; even if some miracle occurred and the FDIC convinced some other bank to buy out the rubble of SVB, or they managed to sell off SVB's assets without taking a loss (virtually impossible), that does not change whether or not this was a bailout.
Because before any of that was announced, the FDIC and Treasury said that no matter what, they will guarantee uninsured depositors will be made whole. That is not what the rules are, those depositors are getting special treatment not afforded to anyone else. They gambled (and most apparently didn't know it), lost, and the FDIC are going to make sure they don't take a haircut.
You’re being bailed out too. You just don’t understand how.
Signature Bank failed and they didn’t tell anyone. A half dozen more would be dead by noon on Monday. Good luck to rest of the financial system, and good luck to the rest of the economy.
The US has over $9tn of deposits and the entire FDIC insurance fund is only $121bn, which is less than the total assets of SVB alone. FDIC insurance can cover a few bank failures, but not dozens.
This isn’t bailing out the rich this is businesses. If you want businesses to not exist, fine. I suggest you find some communist utopia and go live there.
One of these times where you can see how the concentration of quality reasoning on HN decreased with time and popularity. People think hurting businesses will not affect them. Incredible.
Not really. If 5 or 6 more regional banks fail next week due to depositors seeking the safety of big banks there won’t be enough money to guarantee deposits for more banks.
If they didn’t guarantee the SVB depositors that outcome would have been almost guaranteed, the train wreck would have impacted de-risked companies too, because the entire regional banking system would implode.
Not acting now to stop contagion because of some idea of fairness is short sighted.
Having to wait for the bonds to mature is arguably a haircut. Otherwise you can for example, justify a 10% haircut by saying that you can take that 10%, buy some 5 year treasuries with it, and get back your money once those bonds mature.
Seriously, I really wished this were an inflammatory hippie talking point but unfortunately it isn't: the truth is that for saving the rich, the whole system moves. When the financial world is at risk, there is never ever a lack of money for bailing it out.
They're putting the cost, presently unknown and probably not huge, on the other banks. But the message to depositors everywhere, of every size, is "don't worry about your bank's solvency, we'll protect you".
So market scrutiny is removed as a discipline on bank asset strategy. That leaves regulation as the only control. That politicizes and bureaucratizes bank lending. And the general presumption that Big Government will protect you from yourself is extended just another smidge.
If you had the wit to think "hey, maybe I should be careful with $5 million" and bothered to put it in T-bills or an insured sweep, you're just a nerd who should know the Government will take care of such things.
It isn't the end of the world, but it's a sign of how corrupt and complacent we've become.
I would add, it's just hilarious to see so many claim "it's not a bailout because shareholders were wiped out!" Everyone knows bailouts are bad, and that people shouldn't rely on them. But they want their money, so of course _their_ protection isn't a "bailout". It's just . . . depositors made whole!
Yah. A "bailout" is any injection that makes whole any interested party facing losses. As in "The depositors were bailed out".
The hypocrisy around this is really disappointing.
I don't understand. You think the depositors should be punished for...trusting SVB? Do you expect every startup to run their own little hedge fund to manage their cash?
Agreed, in the abstract the system is better if people and businesses are more protected from events that are out of their control.
The argument that the system should punish people for not risk averse enough to protect themselves against bank failures is like saying that languages with type checking are bad because they make soft programmers who can't protect themselves, even though the safer system is easier to use, and allows its users to focus on different, more important/business relevant problems.
It's not punishment. You know that when you put your money in a bank there's a change you won't get it back. That's why you're supposed to pick a bank you're okay with.
That's how it is with everything. If a farmer plants some crops but it drops in price to the point it's completely unprofitable, is he being punished for growing food? Does the government bail him out?
That's not a great analogy. The farmer is the bank in our case, and yes, it is going under. It should. The question is, should all these local grocers go under too because they had exclusive relationships with that farmer? Some would say yes, they should have diversified their base of farmers. I've learned that "insured sweep accounts" are something that should be used by startups to insure them for more than 250k.
It is the most basic of business tenets to do risk assessment on strategic company decisions to reduce exposure to risk
I am sorry you are offended by the fact that I look down on you for your lack of business competence. I used to expect better of people managing hundreds of millions of usd in capital, but I guess not
It is due time for Silicon Valley to face some financial discipline
> Do you expect every startup to run their own little hedge fund to manage their cash?
Don’t startups already follow the standard model of whatever the VCs say is the right way to do it? As in—there’s a tremendous amount of cargo culting, no? Or perhaps that the banks specifically require an exclusive deal. In either case, not an unsolvable problem.
The depositors didn't make the decision to turn deposits into low interest long term bonds, and hold it after interest rates have risen. They are at best a innocent party with slightly less awareness.
If a drunk driver is doing 120 mph on a freeway and crashed into a normal motorist and sent him to the hospital. The right argument or response isn't that he should've seen it coming in the rare view mirror and moved a lane over.
> Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession.
> The Great Depression/Peak global unemployment 24.9% 1933
> Great Recession/Peak global unemployment 10% Oct 2009
Not even closely comparable, thank you for nominating cases as to why the new model is superior.
Who scrutinizes the banks they make business with? To me, that is exactly the role of the regulators. Make sure the banking system is sound, and if you get the license to run a bank, you do it under certain rules that will protect depositor's money. I don't see how depositors should be held responsible in this case. And worst of all, you are actually punishing depositors who trusted the bank and the banking system, versus the ones that caused the run. Which in my view are also not to judge, since they were only protecting their assets.
It's an incredible waste of time and energy for every business to do this.
Imagine if every company was responsible for making sure their catering services didn't poison their employees. Technically, every company could hire a food safety department to validate that every catered lunch wasn't toxic.
It would be a stupid waste of resources! Businesses should be able to just buy food that isn't toxic! Likewise, they should be able to simply put their money somewhere that isn't dangerous! So they can focus on the solving new problems that every isn't solving pointlessly in parallel.
The amounts of money involved, the relative infrequency required and the relative ease of doing it mean it's absolutely not a waste of time. And it's done by smart companies all around the world today.
Talk to anyone in the treasury function at any company of any reasonable size, most of them will be doing it.
I think you’re missing the piece where “company” means any registered legal entity. This can be a single human to <= 8 employees to <= 50 employees to >= 1000.
You’re getting lost in the current context of what you assume to be SVB’s majority customer; the banger ‘unicorns’ we’ve all read about over the last decade, who would/should have this ‘treasury department’ you’re referencing.
Zoom tf out, remove SVB, and tell the guy who fixed your fucked plumbing last go around that his lack of a treasury department and/or insight into what his primary bank is doing with their deposits is a major problem and they deserve to eventually get fucked because of it. I’ll wait…
The CFO at any reasonable company can read the balance sheets of a few banks in a few hours and will need to do it 4 times per year. It's days of work, not more. And if the company is big enough, this job will be in the treasury team and again, it's certainly less than $100k worth of work.
the message to depositors everywhere, of every size, is "don't worry about your bank's solvency, we'll protect you".
So market scrutiny is removed as a discipline on bank asset strategy.
Uhh.. isn’t that FDIC’s raison d’tere? (Aside from the ‘every size’ part)
Bank runs are caused by low confidence. FDIC makes depositors confident.
It’s also interesting that failure is socialized among banks- who are equipped to judge the risk their peers are taking.
Actually no. The FDIC was created to protect small depositors without the knowledge to protect themselves against bank failure. Larger depositors were expected to assess their banks or find ways of safeguarding themselves.
One argument against deposit insurance was that it would lead to complacency and businesses offloading their responsibility to the government. And, here we are.
100% deposit insurance sounds great until you realize it leads to government regulation of 100% of the lending. TANSTAAFL. That is a very very bad outcome, there's very little room in it for a model like the Silicon Valley Bank, but that's where we are headed.
It makes sense that someone with $1.000 shouldn't have to worry about T-bills, interest rates or splitting his risk across multiple banks. The $250k more than covers that.
But someone that has $250m should be able to understand that money is not really the same at such scale and that storing it is not possible without exposure) to interest rates. He can buy T-bills, sweep accounts, or take the risk. But when your wealth is a few millions or you are managing a few hundred millions, you should know (or your money managers) better.
Welcome to the new old world. Crypto is pumping 10% this morning on this news.
> If you had the wit to think "hey, maybe I should be careful with $5 million" and bothered to put it in T-bills or an insured sweep, you're just a nerd who should know the Government will take care of such things.
It creates the precisely wrong incentives. If you run startup and spend any time, effort, or money to mitigate these risks, you're being irresponsible. The Fed will bail you out, stop wasting your precious runway on nonessential things.
Counterpoint - this is the type of risk that should be abstracted in our system. Screwing around with cash management for risk avoidance is yet another layer of effort that shouldn’t be passed on to the consumer (business or individual) which is the result of an old system that doesn’t exist anymore where a community bank had a comprehensible level of risk and reach.
I think this is probably where we will end up: Deposits above the FDIC insured level have to automatically go into money market funds with a weighted average maturity of 5 days or less instead of the loan portfolio of the bank.
Why not? They're depositors like any other. The bank is at fault for making risky investments. VCs didn't cause that any more than the other depositors did.
The VCs took a risk by choosing to use the same bank, not insuring the deposits beyond the FDIC minimum, then stamping toward the exit every man for themselves instead of looking after their own community. Privatized gains and socialized losses.
Blaming depositors for a bank run is stupid. The bad investments and the lack of diversity in depositors are squarely the bank's fault. The bank does not deserve charity from its depositors.
In this case, the 'depositors' are wealthy companies and individuals, by definition holding >$250k, who could afford to do due diligence.
Obviously they were getting perks working with 'Silicon Valley Bank' that didn't exist at say, Wells Fargo. No farmer in America was banking there because, hey, that's obviously kind of a sketchy bank.
There was a reward being given to the wealthy depositors, and none bothered to investigate the associated risk. Well, actually, Thiel did, noticed the risk, and pulled out his companies. Why should we bail out the people who missed this?
It doesn't matter who was banking there, from my perspective a society where we have to worry about bank runs and bank failures is worse than a society where we don't.
Shareholders in SVB have already lost all their money, and approximately nobody is arguing for them to be made whole, so I’m not sure I understand this statement. The bailout is for depositors
Shareholder scrutiny preceded and caused the depositor scrutiny.
Edit: I guess the point is that without the threat of depositor scrutiny, shareholders would have no reason to care about SVB's poor investment decisions, since they were only a problem in a bank run scenario caused by depositors. Failing that, the only risk to shareholders would be regulators, and regulators weren't doing anything about this problem, they were enabling it. I think you're right about that.
Another concerning factor is that many large VC firms sent emails to their portfolio companies (hundreds or more at a time) warning them to withdraw funds, triggering the run.
An alternative could have been for this group of already closely connected individuals to call an emergency meeting and agreeing to send the opposite message to their portfolio companies to avoid the crisis. Given SVBs issue was really about profitability and not solvency without the bank run.
I'm skeptical a real lesson will be learned here, and we lose the opportunity to build scar tissue. Instead, we wake up from a nightmare, brush it off, and move on.
News of which funds sent emails asking their portcos to withdraw funds from the bank that has supported this industry for 40 years is a reputation hit in my view. Although it may certainly not be a popular opinion.
Totally agreed.bailout anyway you want to cut and slice it! they should have put a cost on the depositors! Why do banks and depositors of other banks have to incur the additional cost coming from here!
You don't have to study plumbing, electricity, medicine, etc - you can buy all this stuff as a service. If something breaks, a person comes and fixes it.
This allows you to specialize on whatever you want to do - say, build a startup. Software. Painting.
This is absolutely, definitely more efficient than forcing everyone to learn plumbing.
Financial system is basically plumbing for money. It should be easier than plumbing, as in plumbing requires us to deal with unpredictable forces of nature. Money is completely in our minds, so controlling it should be trivial in comparison.
But it's not as reliable as plumbing. Which means it's poorly designed. People intentionally made it convoluted to make it possibly to fish in troubled waters.
If you claim that only people with "the wit" deserve their savings to be safe, you're disgusting.
The government is responsible for fiat money, by definition. They should make it safe. SVB problems were caused by insane interest rate jerk by the Fed. They caused the problem, they should fix it.
How it should work: government money is safe, but inflationary. If you have "the wit" you can escape from inflation. Last time I checked, the government does not prevent anyone from offering inflation-hedged products. Financial institutions can use the entirety of math to offer whatever they want.
You realize that if there was such a model SVB wouldn't have existed and startup founders would have to turn to e.g. BoA, which ... would have turned them down? So those startups wouldn't have existed in the first place just as SV as a whole. Problem solved! Back to the USSR!
> But the message to depositors everywhere, of every size, is "don't worry about your bank's solvency, we'll protect you".
Good, because that is the message the public needs to hear right now, if you don't want a domino effect to destroy the banking industry because customers freak out.
Obviously some regulations need to change but it's not worth sacrificing the economy and hurting everyone to make that point.
Because most of the time when a bank fails it is obviously because of problems with only that bank (which is usually a small regional bank that just isn't managed very well), and it doesn't widen into a national banking crisis.
Yeah unfortunately I think this is a good take, and it's a bummer. I'm glad for people getting their deposits made whole and happy everyone will be able to make payroll, but I would have really preferred a private sale, even with some amount of haircut, to further expanding the moral hazard in banking.
To add, now banks will have no incentive to be careful about who they lend to. In fact they will in all probability begin making riskier and riskier loans knowing fully well that if they make enough loans to become a "systemic risk" they will be bailed out by future tax payers.
I mean yes? Don't worry about your bank's solvency is the exact reason why we should have the FDIC. It fundamentally nips bank runs in the bud. Then it's the government's responsibility to call out banks which are acting recklessly.
It is wise for the FDIC, Fed and Treasury to make this joint announcement on the Sunday before banks/markets open on monday morning. The timing is crucial, because without such an announcement, there will likely be a run on all banks, not just SVB and Signature Bank liquidity problems. The liquidity problem would have a ripple effect to all banks. Why put money in banks, over $250k, if all the rest is going to disappear because of the ponzi scheme the bank is playing on the bank end. The banks don't have the money that the customers deposited, obviously.
> the general presumption that Big Government will protect you from yourself is extended just another smidge
What would be a better alternative? Asking a top 20 bank for their data room whenever I need to deposit something over $250k?
At some point, there needs to be some level of trust with simply putting money in a place and not a single cent disappearing. That should be a reasonable expectation in any functional society.
Anything otherwise would be highly inefficient, creating unnecessary work that produces little to no value.
If you've been privy at all to the conversations founders etc. have been having for the last 48 hours, I don't think they're going to come away from this feeling like "don't worry". There was never a guarantee that the fed would step in, and there won't be a guarantee going forward. Treasury management will be a thing that all VCs worth their salt will insist on going forward.
But the message in this announcement is pretty clear, the put is there and none of that turned out to be necessary and won’t be going forward. It will be financially worse for you to put your money into less liquid things.
It's a bit embarrassing to have to invoke the systemic risk exception when regulations on these banks were relaxed in 2018 on the theory that they wouldn't pose a systemic risk if they got into trouble. This should spark some serious soul searching from everyone involved in that effort, but I'm not holding my breath.
From what I understand there use to be a stress test. I.E. government employees would hypothetically withdraw a lot of deposits and see what would happen.
The threshold for the test was recently changed from 50 billion to 250 billion AUM, so SVB no longer met the threshold and didn't have to do the stress test. I have heard the stress test would have caught this.
Dodd Frank != stress testing and nobody was ever stress testing regional banks. Maybe they should start now given that depending on the region bank failure can have national security consequences
It should not have taken a stress test for the FRBSF or CA State Examiners to see the high risk to solvency a run would create for SVB given the size and state of their HTM portfolio.
This is only the case because the vaccine has been so effective that the disease is close to being infected, and a vaccine-caused case is much less severe than a wild case, but they're still looking into a different vaccine type that will lower the risk of vaccine-caused infections.
That article says nothing about the relative risk of no oral polio administration vs. the small number of people who can get polio from it. The level of death pre oral polio vaccine vs after is clear.
The article is simply pointing out that it would be better if everyone could get the vaccine without live virus because the live virus oral version is beginning to have some unintended issues. The use of oral polio vaccines has saved huge numbers of lives but it needs to be modified now. It is not speaking against vaccines in general.
Fractional reserve banking doesn't pose a systemic risk, it pretty much is the systemic risk. The system will never lobby against itself. There's too much money to be made in risking other people's money.
Imagine a world without lending against liabilities: yes, some people will be able to buy a home, pay for college, buy a car without a loan, but the financial friction will keep a vast majority of people in poverty.
And then it's going to be someone's full-time job to manage those liabilities. Should they do it for free?
> Imagine a world without lending against liabilities
FRB isn’t creation of wealth, it’s plain old redistribution. In other words—welfare for those who can haul in the biggest loans, at the expense of those who earn, work and save up. What would those people do, if they got a chance? What are the compound effects of that over time?
The depositors were largely those with means to manage risk but not doing so. Surely you mean you're happy for the workers, clients, contractors, etc., not the depositors? Right? The backstop was sold on the backs of those people, and if they're not the overwhelming beneficiary it means the depositors might not have been totally honest with us about their motives!
> The depositors did nothing here but put their own money in a bank account?
I'm guessing the mistake parent is implying to is that they put more than what was insured, knowing very well the risk that if the bank fail, they might only get back 250K USD, as it's only insured up to that.
Well, in theory at least. In practice it seems the insurance was actually a unspecified "unlimited" amount, as they'll get all their funds back now.
Bank offers you very favorable rates for cash, better than competitors.
You put lots of cash into bank account, "what could go wrong?"
Bank implodes.
Federal government bails you out and goes to collect the money to do so from other banks who offered more reasonable rates and thus didn't get your business.
Can we all just be reasonable here? There is no black and white.
SVB clearly offered services that other banks couldn't or wouldn't provide - whether that be loans, credit cards, interest, or anything else.
They clearly fought to not be subject to specific regulations that bigger banks were subject to.
Was every depositor thinking about all this when choosing their banking decisions or were they just going with the bank their VC recommended? Probably the latter, but there's definitely some wiggle room here.
I should've said "terms", I suppose. They were offering package deals where you have to exclusively bank with them and in return you get below-market loans, line of credit and potentially investments, and allegedly also for your personal financing needs. Give all your cash, accept the FDIC-limit risk, get favorable terms in return.
Why else would anyone put all their money into a single account, and why would VCs even enforce doing so contractually?
When someone offers you something the market doesn't, you should understand that there's risk attached, especially when you're a company with millions or hundreds of millions in cash. When someone falls for some crypto "18% per year, no risk" scam, that's how we view it.
You could be happy for most of the workers of the bank too... it is not like the tellers and loans officers were managing the systemic risk of the bank! I am happy for them if they have jobs tomorrow if they were doing their jobs well given that we know that the C-suite and board were screwing stuff up.
Are you telling me what was _my_ point when I asked why would anyone be happy for the workers of a bank that won't exist anymore in any form once the liquidation is sorted out?
What makes you say that SVB will continue operations?
This isn't like when Best Buy went bankrupt, the banking operations will continue, the branches will still run. It will take a long time to absorb SVB's operations into a larger entity, the larger entity may choose to run them as a subsidiary. You are making assumptions about the operations and staff based on no information, if SVB is going to be open for services on Monday as the regulator has promised everybody will have to show up for work.
"Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds."
They are running it under a new name. I understand how this can be confusing but they have to keep everything in place so that the systems will all still work and people can get their money, payroll systems, internal systems and processes all still work. And when a buyer for their operations is found it will keep on running and slowly be incorporated into the acquiring entity because it will in effect be a very large bank merger that will take time and effort.
Thanks. It makes sense and I guess that someone wanting to buy (some of) it may appear more easily now. Let's see. (But if I were a client I don't think I'd be inclined to wait.)
I don't want to beat a dead horse here too much but part of what I hope folks will understand is that any potential buyers also know what I know, they all know that once the liquidity crunch is resolved this is a viable business with good operations that ran profitably for a long time and the regulator would put a continuity plan in place immediately. It is not the case that "someone wanting to buy [..] it may appear more easily now" - all the potential buyers have clear expectations of continued operations. This is a matter of understanding banking as currently practiced, unfortunately there are a lot of folks 'round here that think this is like a retail bankruptcy and are spouting off on that basis instead of deferring to experts.
Depositors might choose to run, but any business that runs their payroll though SVB is going to ask their CFO what to do and that guy is going to say, "We're full guaranteed, how much money to you want to spend to accomplish nothing?"
Regarding the workers of SVB itself, I'm not sure what will happen once the receiver process is finished, but for now workers are being given 1.5x pay by the FDIC for staying on. Hopefully they'll be able to stay on afterwards via an acquiring bank.
Why are you happy for the depositors? They took a risk depositing more than what was covered by fdic.
to clarify, i'm happy for the employees, workers, etc that will remain employed while their company made poor decisions. My beef is that companies knowingly took risks. Would this even be an issue if all the VC companies didnt all try to pull their money out on Thur/Fri ?
This is a reasonable middle ground. Depositors are made whole and taxpayers aren’t on the hook directly (although this will filter down to them in aggregate in a de minimis manner).
To those with large amounts of fiat hanging around: please don’t fuck around again. Spend a few hours with your finance team to minimize risk. It is straightforward and well within the means of anyone with these cash or cash equivalents on hand (sweep accounts, short dated treasuries, etc). Build it into your runbook. Costs are minimal, consider them an insurance premium.
Edit: if you don’t have a finance team, you can get the same help from a contract finance professional. There is some responsibility that must be taken.
Spend a few hours with your finance team to minimize risk.
That's great for people who have a finance team, but a startup with over $250k in the bank can easily be just one or two people who raised money and have no particular finance expertise.
Personally I think we should bump the limits - it should be reasonable for a startup that just raised $10m to be able to put that money somewhere safe, and pay rent, payroll, and an AWS bill with it, without having to hire a "finance team".
> it should be reasonable for a startup that just raised $10m to be able to put that money somewhere safe, and pay rent, payroll, and an AWS bill with it, without having to hire a "finance team"
Aren't VCs supposed to support their investments with expertise? This is eminently socializable expertise.
Nobody has made a real case substantiating why the entire economy does not need to insure upwards to protect startups that don't understand how to secure a giant sack with a dollar sign on it.
Few "mom-and-pop" companies get to the point where they have $250K in liquid business cash without hiring an accountant. A "30 person startup" is waving around the cash supplies of a much, much larger actual-business and if those very sage VCs cannot guide them to safeguard that investment I am at a loss as to why every other depositor should do so for them.
This is setting a very low bar for entrepreneurs. What else should be only a "mature company" problem? Should startups also not have to care about doing a good job in other fields orthogonal to the product itself like recruiting, marketing, governance, accounting, security? These are all things that come with the territory of starting your own company. Managing your own finances is just one of them, and it absolutely should be the startup's responsibility. It can delegate if it wants to, but "I'm too small to address it at all" is just naivete or incompetence.
> There should definitely be a place for a company to hold $10M without risk. Maybe $20M.
There is. It's called a T-bill. I know how to buy them, and I am not a hotshot startup CEO. I think it's okay to expect some level of maturity out of somebody handed That Kind Of Money.
Everyone will now act as if all deposits are insured, because the authorities demonstrated that it's true. This in turn will make any other decision in the future even harder, it's kinda self fulfilling prophecy.
Seriously, you'd have to be stupid now to buy deposit insurance.
I can't believe we're on day 3 of this and it still has to be explained. SVBs depositors were mostly companies. Companies don't go to new banks every time their account balance reached $250k. If these deposits were not honored thousands of companies would not be able to make payroll.
The number of comments (including from high-profile people) that completely ignore the fact that deposit sweeps exist in the past few days has been astounding...
Is it really a desirable solution though? Seems like gaming the system, and if the end result will be that effectively all deposits are FDIC insured anyway, why not just get rid of the $250k limit?
It spreads the risk out among a bunch of different banks, thus drastically lowering the odds that the FDIC will have to pay out on the full amount deposited.
I would put it differently. SVB was a bankers' bank, i.e., venture capital. Venture capital now is systemically important, having initiated their own bank run.
Many banks offer ways to get around the $250k limit, sometimes it's as simple as to open an account in another version of the same bank chartered in a different state
There are a zillion ways to deal with this. Split up your cash. Buy private insurance. Whatever. They agreed to a particular contract---deposits insured up to $250,000, and then ex-post, when it turns out they should have done something different, they want special favors.
> Are you aware that SVB had exclusive banking clauses that preclude opening accounts with other banks?
That, in and of itself, ought to be a negative inducement to bank with them, and I think a good case could be made that such clauses should be prohibited by policy, as customer diversification across banks makes the financial system more resilient.
those clauses are a sign that SVB and the VCs are in bed together and if you take their money and agree to these terms you are complicit too. the VCs used SVB loans to their portfolio companies to magnify the effective size of their funds without themselves taking on that leverage. SVB got massive interest income.
I can't believe we're still on day 3 and people are still arguing with the strawman that you'd have to open an account per $250k to mitigate the risk. (You need to open two or three accounts total, and beyond that you're big enough to start buying your own T-Bills. And no, that doesn't mean you do that at $750k. Christ, it's a distributed systems problem, you guys should be able to figure this out.)
Exactly this, take out insurance, open additional accounts so that the companies livelihood is not dependent on a single bank. What about all the companies who funded all these 'companies' ? Why aren't they stepping in to clean up the mess?
I had no idea that was an option. My google-fu is failing me, what is that called? Who are the providers? Seems like it would be a mega capital intensive insurance product.
edit: this is way out of my wheelhouse, so an actual answer would be educational.
The term to google for is "insured cash sweep", but the specifics depend on the particular financial institution you work with. Instead of a single insurance provider, your cash is sharded behind the scenes among many member institutions. Here's one bank I picked at random from Google[0]. Brokerages like Schwab[1] and IBKR[2] also have a private insurer (both use Lloyd's of London) they offer as a service to customers.
Try searching for "reinsurance" as in insurance for insurance, Swiss Re and Lloyds of London are the two big names I can think of, I don't know much other than that.
The point is that diversifying deposits across banks reduces the risk of failures happening in the first place, reducing FDIC payouts. This incentive structure completely breaks down if there's no cap.
As others have pointed out there are of course options: multiple accounts, buying safe bonds, etc. But those are all pretty unrealistic for most small businesses. Startups with 3 or 4 people aren't going to spend a lot of time learning all the ins and outs and risks of the options available.
People have pointed out brokers that will shotgun your deposits across many banks to game the deposit insurance limit, and apparently the FDIC is fine with that. But if every employer needs to do this, they can’t vote with their feet anymore, and I’m not sure there’s still a reason for separate banks to exist and compete.
The same way I feel bad for someone who is at fault in an accident and gets hurt. I don't like seeing bad things happen to people or see people suffer. Those employees who work for these companies don't have a lot of say where the company keeps their money.
I'm surprised the top comment wasn't focusing on this bit of the statement:
"We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority."
I was just surprised crypto hasn't caused more carnage in the banks. SBF had more or less made that small bank his and was pumping massive amounts through it. I feel like that couldn't have been the only bank tied up with crypto.
> If payment is done by other banks, doesn't that serve as mitigation?
Seems the exact opposite. Why would any bank ever conduct risk assessment if their potential failure will be paid by the industry as a whole. This effectively tells any other bank that might be fearing for a bank run to stock up on super risky assets and to let the dice roll to see if they end up winning big, or if their competitors end up paying for their losses.
This is not the moral hazard risk he was referring to. The bank still has no incentive to load up on overly risky investments because in the case of an FDIC takeover, they (the investors and executives) will still loose everything. The moral hazard here is for depositors. They have an incentive to put their money in the bank with the highest possible yield no matter what the bank's investment portfolio looks like, since their deposits are now seemingly guaranteed by the banking system as whole.
To be fair, I'm not sure if this is necessarily a bad thing for certainly types of very low yield accounts (checking accounts with no interest, etc). But there certainly is an element of moral hazard at play.
It’s really amazing the number of people that don’t seem to understand that. It would be like if a dairy farmer overloaded his truck, crashed it and died. The government steps in and makes sure everyone gets milk while they sell off the cows. Then people say “this creates a moral hazard for dairy farmers to overload their trucks without consequences!”. No, dude. He died.
This is incorrect. The correct analogy would be if I set the speed of my automated truck to 20mph over the speed limit causing me to earn 10% more income for 10 years. Then the truck crashes and burns and my neighbors pay for it.
I’d agree that’s what happens with the big rescue loans that save businesses. But, that’s not what’s happening here. There just such extreme hyperbole about how this removes all risk for banks.
I guess where I can meet you in the middle is that in this crash from excessive speed (not over the speed limit, but only because they lobbied to have the speed limit raised) the customers are getting taken care of, the business owner loses his business and his competitors have to pay for the cleanup.
I’m curious how the banks feel about this. I really don’t believe that doubt about the banking industry is in their favor, even if it could be a differentiator in theory. The amount they’ll pay is a tiny fraction compared to the market cap lost this week.
FDIC is arguing that taxpayers will not be affected because they are bankrolling this backstopping operation by forcing other banks to cover losses beyond the limit.
But banks will most likely recover this imposed “fine” from customers, which means that customers (aka: taxpayers) are the ones who are ultimately bankrolling this whole fiasco.
I get what you're saying. But by that token any fines that are levied against banks are also paid by taxpayers. So if you're saying that this move is wrong since it puts the burden on taxpayers, then we shouldn't fine banks either?
The only thing I’m saying is that - technically - taxpayers are footing this bill, even if FDIC claims otherwise. Whether or not this backstop should have even happened in the first place is a different issue.
No it isn't. In the history of the FDIC, no depositor has ever lost money, regardless of balance. The whole point of the FDIC is to avoid contagion, and they nipped this in the bud, again.
Moral hazard is if they made the investors whole. They did not. Depositors are not investors.
> In the history of the FDIC, no depositor has ever lost money, regardless of balance.
This is false. No depositor has ever lost insured money. Uninsured money has been lost.
E.g., Washington Federal Bank for Savings failure in 2018 [0] has resulted in dividend payments for uninsured balances covering only 41.66% [1], and that took nearly three years.
>The whole point of the FDIC is to avoid contagion, and they nipped this in the bud, again.
Maybe. Part of the problem here is related to Glass-Stegall. Depositors are essentially the ones backing the investors at a bank these days. So, they just shifted who's footing things here, from the depositors and investors at SIVB, to depositors and investors at other banks. This approach has essentially dispersed the risk into the broader economy. As so, don't be surprised if this ultimately exacerbates contagion in the end.
I’m inclined to believe that may not be entirely true [1]. It seems there is some evidence of depositor losses but they have been incredibly rare and insubstantial.
“Privatize the profits”? What are you talking about? The owners of SVB are wiped out, they will not see any profits, they lost their entire equity in SVB.
> “Privatize the profits”? What are you talking about? The owners of SVB are wiped out
The depositors took risks by lending their money to such a risky bank for better returns in lieu of the risk. It doesnt matter whether SVB gave 0% interest. It provided other amenities, services and opportunities instead - things which other banks could not take the risk to do. Now these banks who played by the rules and the rest of the people and businesses who played it safe, will have to foot the bill for the risk that those depositors took. This literally says "If you are big enough you can take any risk to win big and have the public pay for it if you screw it up". That's something not afforded to a small business owner. So people who say that there is one rule for the ultra rich and another rule for the majority, they are right.
Additionally removing the burden of the deposits from SVB will allow it to recover some of its lost asset value. The state took over its liabilities now.
The depositors “took risks” by literally keeping their cash in a bank? This is ridiculous. What was the safe, responsible thing to do? Put it in one of the “too big to fail” banks instead, given that those are guaranteed to be bailed out should they encounter difficulties? Assume that the entire banking regulatory system is a sham, that the whole Dodd Frank system of regulators overseeing the books and running stress test is not worth shit, and then what? Pay their employees in crypto? Stuff their cash into a mattress? Please. Let’s not pretend that literally keeping cash in a savings account is irresponsible risk taking.
> The depositors “took risks” by literally keeping their cash in a bank? This is ridiculous
Its not ridiculous. Its how the free market works. Its a choice. There were other banks that were compliant with the regulation that !protects! the bank and its depositors. This bank wasn't one of them. People put their money in this bank anyway. It makes little difference if many startups were forced by their VCs to put their money in that bank - they chose to go with those VCs.
> What was the safe, responsible thing to do? Put it in one of the “too big to fail” banks instead, given that those are guaranteed to be bailed out should they encounter difficulties?
The first thing to do was to put their money in banks that have not lobbied for exemption from the regulations that protect the bank and its depositors' money from exactly what is happening right now.
The second thing would be to put it in multiple banks that are not exempt from that regulation to spread around the risk.
The third thing would be to spread the risk around many investment tools and banks.
It turns out that there ARE startups that did precisely that, and they were not affected by the SVB thing in the slightest manner.
> Let’s not pretend that literally keeping cash in a savings account is irresponsible risk taking.
It is unless it is a state run bank, period. This is the free market, and if the organization that you are putting your money into is a private organization, you are simply taking a risk. If that does not sound good, then it means that all the rhetoric about free market vs government should be revised.
And how much stock he has left that he didn’t sell, and lost entirely a few days later? Is this really the best argument for the “privatize the profits” narrative, that someone picked up a few pennies from in front of $6B steamroller?
Aren't lots of us owners of SVB? I really don't get this "it's ok to wipe out the shareholders", i.e. all of us, "but it's not ok to wipe out the depositors" (e.g. Mark Cuban's 10M or so). Why should I lose money because of a run on this bank? If you're already bailing the bank out, oust the management, claw back what you can, but don't wipe out share holders or bond holders.
No, this is not how the deal works. We do not reimburse investors for wrong, or just plain unlucky investment decisions. Our financial-regulatory system treats banking and speculative investment differently, and this is by design.
> If you're already bailing the bank out, oust the management, claw back what you can, but don't wipe out share holders or bond holders.
You don’t get it: the bank is bailed out using funds of shareholders and bondholders. Taxpayers aren’t bailing out SVB, you are. If you don’t like it, well, I recommend selling your investments and keeping your money in regular savings accounts: the deal is, at the basic, very simple: if the company you own screwed up, your entire equity may be used to made those whom it screwed up whole, and you should be happy that your liability is limited to your equity only.
It's not clear whether the assets are enough to make the depositors whole. It sounds like the FDIC is making up the difference. Which it normally would not.
That's the bailout part. If the government is stepping in to bail people out via making up for any difference of uninsured deposits from FDIC funds then it's no longer a question of risk/being wrong/luck. The depositors were taking risk just as the shareholders were taking risk. If they didn't like it, well they could have kept the money in their mattresses.
I'm totally with you that everyone has to accept the risks they're taking. This is creating a distortion field here for certain types of risk taking.
Even if we ignore the bailout, I don't think the story is as simple as you put it. There was a run on the bank with VCs telling companies to withdraw their funds. From a stock market perspective this could be considered manipulation.
When I invest in a bank I'm also relying on the government's role as a regulator. If they failed in their role, or the government actions contributed to the failure of the bank, or they had other courses of action, why should I be on the hook for the consequences?
Maybe this course of action was necessary to stabilize the situation and protect against more bank runs. It still doesn't feel right. It feels like something we'll pay for in the future.
> It's not clear whether the assets are enough to make the depositors whole. It sounds like the FDIC is making up the difference. Which it normally would not.
Sure, which is why I’m not opposed to depositors taking some haircut. But that’s only more reason to wipe the shareholders to the last penny.
> The depositors were taking risk just as the shareholders were taking risk.
No, they were not, that’s the whole point. They took completely different kinds of risks. Irrespective to what degree the taxpayers are encumbered with extending the bail out loans, shareholders are the ones who are expected to foot any bill first and foremost.
Yes, every part of the economy is indirectly connected. Profits are also democratised via income and capital gains tax, even if it's not at a high enough level that people feel good about.
The important part here is that SVBs assets are basically guaranteed to pay out, you just have to wait it out. It’s fairly likely that there are basically no costs (excepting costs to service the insured 250k in the first place, so no marginal costs)
A dollar in ten years is not the same currency as a dollar today. It’s absurd to say that there is “no cost” to holding bonds that pay 1% interest for years when you can now buy bonds that pay multiple times that.
People would have been paying much more through their bank deposits and mortgages if this contagion had been allowed to spread unchecked. Banks benefit from stability in the financial system. They'll happily pay a small special assessment to stem loss of confidence in the banking system.
What you don't pay for in tax, you will pay for in inflation, basically.
> The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.
They're basically going to allow banks to post treasuries as collateral in exchange for cash. Making this effectively a form of QE.
To understand better, banks don't hold the cash you give them. They take it and invest it in "safe" assets like treasuries and mortgage backed securities. But because rates have sky rocketed US banks are currently sitting on hundreds of billions in loses on these investments.
That's generally not a huge problem though because so long as the banks can hold these assets to maturity they'll eventually get their money back. Problems only occur when a large number of customers start demanding their deposits back ASAP. If enough customers want their deposits in a short enough window then the bank will be force sell those investments at a loss so they can return cash to customers.
To avoid this scenario the Fed are basically saying, if a bank is ever forced to realise loses, then the Fed will take those loses and "print cash" to make them whole again.
It's probably the right thing to do given the systemic risk, but this is inflationary.
The bank uses the $100 to purchase a treasury bill.
The treasury bill falls in value and is now worth $80 on the open market.
The Fed says, it's cool, just pretend it's worth $100 because it will look bad otherwise.
Customer says, I want my $100 back.
The bank is now forced to sell the treasury bill and admit that it's actually worth $80.
Fed says, it's cool, just give us your $80 treasury and we'll print $100 and give it to you.
There now exist, a $80 treasury (held by the Fed) and $100 in cash which is given to the customer.
Where is this $180 of value coming from?
----
Its inflationary in two ways.
Firstly, money in the economy is created via debt, and Fed in this case is creating a debt which increases money supply. Secondly, the Fed is exchanging the bank's assets at an above market price and taking the loss onto its balance sheet.
Edit:
I see. I think you’re missing the full accounting picture. When somebody moves $100 of petty cash into a bank, they don’t have $0. They have $100 of cash. The bank has an asset and a liability. Rinse and repeat with the bank and Fed transactions. There’s not an $80 treasury note anywhere because those aren’t MTM.
idk if the numbers exactly add up here or if there are other sources of funding but the I in FDIC is Insurance, which is already paid for - the FDIC has money from insurance premiums to cover expected cost of losses
It's coming out of the insurance fund, which is paid into by banks. So the cost is still ultimately borne across a wider sphere, but not the government per se. (This is what's meant by "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.")
The costs aren't borne by "the taxpayer", but an awful lot of taxpayers who had nothing to do with this or even purposely avoided it may be paying higher banking fees as a result.
Aren't they (at least some large portion of the assets) mortgage backed securities, i.e the same sort of stuff like 2008? If the economy collapses and the housing market collapses then they can become worthless. Very different than lessay US government bonds. Right now they're worth their market value which right now isn't worthless but also isn't enough...
Because SVB lacks the liquidity to pay out the bank run but doesn't lack the assets, at least as long as you only pay out deposits (which is what they are doing i.e. "Shareholders and certain unsecured debtholders will not be protected.").
The thing is that without this decision there would be two problems:
1. deposits would only re-accessable much later, too late for most small Companies to survive
2. depending on law/regulation aspects I don't know much about it also may have been a possibility that Stockholder get payed out first and similar
So depositors at banks taking on big risks get elevated interest rates or other perks for years, and when the shit hits the fan depositors that put their money in prudent banks get to bail them out through higher fees.
And people wonder why turnout is low. There’s no way to vote for non captured politicians.
Wells Fargo/BoA are "too big to fail" institutions in the United States.
They got significant back hand, handshake deals, from Washington institutions to not only stay afloat, but for hundreds of little issues.
In essence, the FDIC is a well crafted "redistribution," of all the under the table benefits Wells/BoA get from lobbying the Feds, to the smaller banks.
The US has a deep interest in keeping its smaller banks alive.
I can say, in Australia, the small business lending market is hugely overvalued due to monopolist price gouging by a handful of large institutions.
In Canada, I'm told the situation is similar. Costs to small business are immensely higher than the United States.
Banks similar to Silicon Valley Bank are essential because they undercut BoA, and prevent the "Canada" situation.
Unfortunately, SVB blew its top off. But the system itself is good.
Is it thought? The shareholders of SVB are going to lose out big. The message this is sending to bank owners and investors is “the government may bail out your customers but you will lose everything.”
Lose everything ? The responsibility of the shareholders is limited to what they brought to the cap table, but the potential for upside is significant.
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!)
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...
A "money market" account means the money is invested in extremely short term government or corporate bonds. SVB probably wasn't paying that 4.5%, they were just passing through what the market is paying for money market funds right now.
You know, I suspect part of the problem is the lack of diversity in SVB's depositor base. When the tech sector took a hit, a significant chunk of SVB's depositors started to redraw money, combined that with their reduced liquidity due to higher interest rates killing the market value of the long term bonds they held*, it lead to a run.
* 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?
>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. 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.
Canada is 1/10th the population of the US. We don't need regional banks. There are also plenty of credit unions for those of us that don't want to bank with the big banks which are just as capable as many of the larger banks.
Credit unions are by design not meant to serve business customers (some do, but they're the exception for a reason). Further, Canadian credit unions (with the kinda sorta exception of Desjardins) are insignificant in size, which is why I didn't bother mentioning them in the first place.
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.
In fact, in many cases, deposits in provincial Credit Unions in Canada (e.g. Alberta and BC) are 100% guaranteed. (As opposed to the big banks, which are only guaranteed to $100,000). Some provinces hve other rules, but in general, deposits to Canadian Credit Unions have better deposit insurance protection than the big Canadian Banks.
BoA was never at risk of failing. They stepped in to buy Merrill Lynch because basically the treasury ordered them to, but they didn't need TARP to absorb the continued losses in that unit, and paid it back with interest as soon as they were allowed to.
They weren't at risk of failing when TARP passed. If TARP hadn't passed, and a few of their counterparties had gone bankrupt, they might have been next as the whole system went under.
Yes and that is why they did what the Treasury told them to. It was directly in their shareholder's interests to support the recovery of the banking industry. Ken Lewis still lost his job for doing it.
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.)
> Banks similar to Silicon Valley Bank are essential because they undercut BoA, and prevent the "Canada" situation.
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.
We banked at SVB and got 0% interest, it was just the bank recommended for Startup’s to use.
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.
> 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.
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".
Well, yeah, that’s why SVB no longer exists, all the execs are canned, and shareholders are losing their shirts.
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.
SVB locked in losses after a 3% run that caused them to seek outside capital.
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.
What is the exact % liquidity that your bank can withstand? Should it be the responsibility of every US person to independently and periodically validate their top US 20 Bank has enough liquidity to withstand unforeseen variable economic conditions that bank regulations are supposed to protect against?
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.
Again this is not about people but about businesses... in this case startups which are somewhat unusual businesses since they have tons of cash an no income, and often don't spend money on things like CFOs that aren't really necessary for them yet.
IF they have tons and tons of cash they are rich. Which means they should know much better. They have less than zero excuses. They are often not making positive money so they should be extremely prudent with their finance. Tells a lot that nothing is expected from them and they should be treated like kids...
I would have said this shows that’s are necessary but it turns out you’re right. Who needs a CFO when you have the nation’s politicians in your pocket?
No idea, how many? Up until now I would've thought keeping your money in a bank was the safest liquid asset class.
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.
> Up until today that was the threshold. This FDIC limit is printed on every document from every bank, so you should have seen it before.
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.
Murray McMurray officially started his chicken business in 1917. He had always been interested in poultry as a young man and particularly enjoyed showing birds at the local and state fairs. He was in the banking business at this time and sold baby chicks through the bank to area farmers and hobbyists. When incubators became available he was able to purchase several small Buckeye incubators to hatch and sell his own stock. In 1919 he sent out his first catalog and price list and continued to carry on both the banking and the hatchery business. During the early stages of the depression his bank went broke. It was then he decided to go into the hatchery and mail order baby chick business full time.
Never, the funds are just what's left over after business operations, the entire purpose of which is to conservatively reinvest back to help grow the business and build a buffer to withstand future economic downturns.
Your take does not seem to reflect reality to me. SVB did not offer particularly attractive interest rates to depositors. No one banked with SVB because of some extra APR on their savings/checking accounts. SVB mismatched interest rate risk and deposit flight risk, bungled a poorly timed asset sale and report thereof, and then compounded the problem with a few silly comments to the public at exactly the wrong time.
No, they banked there because SVB would throw money at VC's and founders (ski trips, free meals, lines of credit) who in turn would recommend/force their companies to use the bank. For all the talk of being "friendly" and "relationships" thats basically it.
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).
On some level I don't get this. Ultimately a bank is providing depositors a service. Maybe their interests rates weren't the absolute highest, but they were still solid AND they were able to spend a ton on marketers, engineers, reps etc. to keep clients happy.
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"
The CEO may have made out like a bandit, but the shareholders lost everything, and the next set of shareholders will think twice before retaining a CEO that engages in high-risk activities.
> 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?
> The CEO may have made out like a bandit, but the shareholders lost everything, and the next set of shareholders will think twice before retaining a CEO that engages in high-risk activities.
OK, so you can only rip everyone else off massively once.
Yeah, and once you do that, the shareholders at other banks will be asking their CEOs questions, like 'Prove to us that you're not doing the same shit that sunk SVB.'
True, we've invented new classes of "mistakes". It's fucking ridiculous. There's something very wrong with American banks and if the only solution we can come up with is further consolidation we're going to be in for a bumpy ride.
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).
SVB shareholders losing 100% of their investment seems like a consequence. They are probably kicking themselves for not doing more DD over the C-suite.
Sure. The point I was making that the mistakes which caused bank failures in 1930s and bank failures today, is fundamentally the same kind of mistakes. Ergo, we still make those mistakes; they still happen, we just don't let depositors bear the consequences of it anymore.
The 'shareholders' are all 401k fund managers. They make sure their CEO friends come in and get paid. It doesn't matter to the 'shareholders' if one or two companies go bust, they collect the fees anyway, and the losses are socialized across an entire country's retirement accounts.
$15.5B market cap Wednesday to S&P500's ~$32.3T. If you held the S&P500, you lost about 0.05% when SIVB got zeroed. In comparison, S&P500 was down 1.45% Friday. (Almost all of the impact to your retirement from SVB's failure will be from indirect effects, like downswings in other bank stocks, rather than direct losses from SIVB. Unless you held a highly concentrated position in SIVB.)
Why would #7 happen if shareholders get wiped out? Surely, people on the board and other C suite executives are big enough shareholders that they would care if their equity went to zero.
> Why would #7 happen if shareholders get wiped out? Surely, people on the board and other C suite executives are big enough shareholders that they would care if their equity went to zero.
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”.
> I remember reading about something called principal agent problem...
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".
Matt Levine frequently discusses the fact that losing billions of dollars means at some point, someone trusted you with billions of dollars. Which new employers (especially banks) look on favorably.
In particular, because the people are management who don’t lose anything when investors get wiped out. The solution is clawing back money that execs paid themselves with these embezzled (on a risk-adjusted perspective) funds.
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.
To be frank, letting depositors get wiped out will not stop those executives from doing the same thing. Most depositors won’t look too closely at what their banks do - heck most don’t understand how banks work. Simpler to just create laws and ban executives who break them from ever working for a bank again.
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.
Why do we keep speaking of SVB depositors with over 250k in deposits as if they are part of the hapless hoi polloi? These are founders who practice and preach capitalism with a capital C. They are part of a class of individuals with immense power and wealth in our society; or looking to soon enter that class. They deserve none of the type of sympathy you're extending towards them when it comes to matters of business and finance.
Just because they have a lot of money doesn’t mean they have the expertise to evaluate a bank’s inner workings. Although I guess they could have hired people at considerable expense to do that … and I think some of them did which was what exasperated the run when they mass redrew their deposits. That or I think they can buy insurance … that said I wonder how many people/corporations actually buy insurance for their deposits above $250k.
Still my point stands, having depositors drown won’t stop others from pulling another SVB.
I love these metaphors that equate losing money with death. The whole point of capitalism is that people who make good decisions get to become rich and people who make bad ones don't. SV founders believe this at their core; at least they pretend to. No wonder people think it's a total scam the way it's currently implemented.
You seem like you want to ‘stick it’ to these people because they are capitalists lol. You’re saying we should let everyone lost deposits over 250k because they are capitalists? A knowledgable capitalist knows that decreasing trust in banks hurts the economy and lead to less growth, just because you dislike them them and make wild assumptions about what they believe doesn’t mean the US ‘should’ do what you are prescribing.
You shouldn't know how an internal combustion engine works, right? So you bought a shitty truck for you business, it broke (let's say the warranty has expired), now you are broke. A knowledgeable capitalist knows that decreasing trust in vehicles hurts economy, so let's government intervene and compensate you for your broken truck. Right? Or maybe take over Ford/GM so they can build reliable trucks and they don't break, it will be good for economy, right? Banking and choice of banking tools is as important as choosing your truck and it's on you if you call yourself a capitalist, and if you failed, well, blame yourself.
It takes a lot of talent, hard work, and luck to be a successful bank CEO if you play by the rules. The invest imprudently while the sun is shining is a much easier strategy to pull off.
You become the CEO of a small regional bank. You can draw small regional bank pay for several years until they find someone else to be caretaker or you can invest imprudently, massively expand the size of the bank and be a growth CEO with growth CEO pay until the whole thing blows up.
Why? You can cash out along the way - your stock would perform well since your growth metrics will be great.
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.
I don't think oversight comes from shareholders or the CEO, it comes from the customers, right? The desired outcome here is for the companies that banked with SVB to demand more caution from their next bank, meaning they'll pay higher fees; they have no incentive to do that if they don't lose any money in this mess.
Kinda. As someone who banked at SVB, I would not willing put myself, my CFO, and my director of operations through this Friday + weekend again if you handed me a million bucks. We didn't lose money but we're going to have a lot of inconvenience and we had a lot - a lot - of stress and uncertainty and spent a lot of time making contingency plans. A very high cost for a 15 person startup.
Yeah, shit is gonna hit the fan over this in terms of domestic turmoil. All those people who took PPP loans and Silicon Valley VCs getting bailed out who railed against student debt relief, it's just mind boggling. Just wait until student borrowers start getting squeezed and the Supreme Court nixes the debt relief. This is not good for long term political stability.
PPP loans were designed to be forgiven from the start. They were loans only in the technical sense. It was a mechanism for the government to allow companies to continue to pay employees during the pandemic lockdown, instead of firing them. Complaining about PPP loan forgiveness is disingenuous.
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.
> expecting that Federal regulators were doing their job
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.
>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,
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".
None of the SVB customers signed up (or paid premiums) for unlimited depositor insurance. Nonetheless they will now receive that, paid for by a new assessment (tax) on other banks and their customers.
WRT student loans: I am not clear why the law cannot change to allow them to be discharged in bankruptcy like every other debt. It seems to me that would make things better for everyone. I do not thing people w/huge student loans would all just a. immediately declare bankruptcy, and b. get their debt forgiven.
Federal student loans can’t, absent unusual circumstances, drive anyone into bankruptcy. The government offers income contingent payment plans. You only have to pay if you make enough income. The same thing that happens in a restructuring bankruptcy, which most people have to use after bankruptcy reform, already happens with student loans automatically.
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?
Making student loans bankruptable has less to do with protecting students and more to do with 1.) reigning in tuition costs and 2.) forcing lenders to consider risk.
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.
There are no lenders. That’s been gone since the Obama administration. It’s almost entirely direct government loans now. If you want them to consider risk or limit the lending amount you need to change the law.
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.
For their own benefit? Seems like an educated population benefits everyone, hence why we spend a portion of the national and local budgets funding schools kids can go to for free. The big miss in the usa seems to be not extending this idea to higher education - perhaps this is why the usa is so dependant on immigration for jobs that require higher education.
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.
Thinking the young people in the USA have the competency, discipline, means, and determination to even organize, let alone threaten “political stability” is a stretch. This has been happening for 20 years.
The revolution has already happened in the form of quiet quitting, reduced consumerism, forgoing creating the next generation indefinitely. The impact are not felt over night but will eventually be felt decades from now. There is no other way to fight back. You can't vote for anyone that isn
't captured, any form of violence and you will be shot on sight. What else is there?
I'm sorry but if this "revolution" was designed to change behavior, it was an abject failure.
"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...
>I'm sorry but if this "revolution" was designed to change behavior, it was an abject failure.
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.
No. Let me be abundantly clear; quiet quitting is a blessing to employers, by about a mile and a half. It's what they've always wanted employees to do, but now the employees think they're "sticking it to the man" by... doing their jobs???
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.
>but now the employees think they're "sticking it to the man" by... doing their jobs???
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.
Yeah, that's exactly how we called it in the USSR. Employer pretends they are paying, employees pretend they are working. How it's ended is well known.
The US is going through the same extreme as the USSR did, just in the other direction. I'm sure given the nature of extremes there will be some similarities on the journey to the outcome even if the overall outcome might end up being different due to the US heading off the cliff in the other direction.
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.
>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.
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).
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.
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.
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.
Yeah, ironically had SVB had a strong consumer brand, they probably could've boosted their cash reserves by offering higher-yelding CDs to general public.
My understanding is their cash reserves were part of the problem. They had too much cash to lend it back out at variable interest rates, so they bought long term government bonds
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...
Actually a lot of depositors would be happy with a narrow bank that takes no risk, just holds the money at the Fed. But the Fed decided it's too safe so narrow banking is essentially banned. Seems fair if they ensure safety of deposits in return.
How is that banned? The Fed Fund Rate is effectively the same as the 1yr Treasury Note, except even if everything collapses like the Black Monday, 2008 or March 2020 (trifecta of bonds,stocks and commodities collapsing) you (as a commercial bank) can always and in any event access those funds.
before the 1980's, this was actually the case for a lot of countries. (the netherlands had the "spaarbank" for instance).
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.
I am in Canada so not sure how it compares to the US.
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.
Just use Big Five in Canada, I assume you have 100% guarantee then. In the US $250,000 is guaranteed by FDIC (per bank), so you would probably be fine here too. OTOH not all businesses can operate from a founder's wallet, some need loans. Who's going to provide those loans if every bank is a full-reserve bank?
Are you also willing to pay a fee for that when interest rates are so low the bank does not earn enough spread to cover the costs of maintaining those accounts?
That would a reasonable ask for such a “clean” bank, especially when the upside is that there is no “special assessment” being imposed due to recklessness of other “dirty” banks.
Also, the deflationary impact of all that wealth evaporating would have made my dollars more valuable. I was denied that benefit of keeping my money in a safer location. Not to mention the investment opportunities that may have come from the chaos.
The cost may be pretty low but not because the FDIC will somehow get the nominal price for those bonds. They are not worth more than what they are worth. (On the other hand, they are worth more now than they were on Thursday.)
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.
Silicon Valley is the wealthiest area in the world. CEOs, founders, employees, janitors...etc.
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.
It seems like a bad idea to have a large amount of static cash sitting in an account unbacked by any asset, regardless of who is your primary bank.
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.
> 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.
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.
> 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?
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.
> The commenter asked me what financial advice I thought was poor.
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.
All our efforts are spent on improving our products, we've never sought any financial advisors and spent exactly zero time worrying about the liquidity of the bank we're with. Any funds left over from business operations are simply left in the bank they were collected in.
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.
For your own sake, pay someone to help you with this. It doesn't need to be someone full time. You can use a consultant. You are not protected even with a big bank. Given the way the political climate has developed, if there's another "big one" even a fraction of this size of 2008, it may be politically impossible to wrangle another bailout. Your only protection is diversification.
No, I don't need to pay for an external consultant's help to tell us to spread our funds over multiple accounts to fit within 250k FDIC insured limit. If any of the top 3 "too big to fail" US Banks collapses we'll all have bigger problems resulting from the collapse of the US Banking system.
What? I'm literally saying the opposite. Not that you should try to predict the future and pick a winner but that you cannot possibly know who is a winner and who is a loser and therefore you should be diversified.
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 part that annoys me the most is the idea that all the depositors are mom and pop small businesses or early stage startups.
I’ve heard it said that Circle and USDC have an amazing business model: create a coin, call it a dollar, and deposit real dollars in the bank for interest while customers hold the coin. You don’t even have to offer a percent for the deposit like a normal bank. You can then make a couple percent on billions.
With this bailout the US Government just backstopped the business model with no haircut for a total lack of risk management. But sure, punish all banks (and thus customers / taxpayers) since the costs will be spread to others. Protecting us from systemic risks always seems to create more systemic risk. I’m sure were done though, they are putting protections in place this time.
Confidence in property rights? Not sure what you are talking about. They just provided guaranteed non-negative returns on loans. Put your dollars in a safety deposit box if you want property rights. Depositors need to be able to accept a haircut for banking to function, that's why you get interest and don't pay the bank.
You're not thinking what the most logical course of action would be for all companies that use regional banks. It would be to get your money out ASAP on Monday and into JPM or BOA. That's why the treasury has stepped in.
Many of the big banks give effectively 0% interest right now for everyone, so it isn't really that much different, but yeah I agree with your sentiment.
Can anyone help me understand why would any bank practice proper risk management after this?
SVB took on risk by catering to high risk clients (startups). Growth metrics were great as a result. And stock performed spectacularly (up nearly 6x from April 2020 lows at ath).
More conservative banks like JPM, however, saw modest growth.
If you're a banker and your salary is tied to stock performance, why not just adopt the SVB playbook, take on riskier clients, show strong growth, cash out your stock options, and when it all ends, just walk away without any guilt since the government will bail out your customers anyway?
It is probably a concern to the founders or others with the most power, as you imply. Sure, I guess once we get to, let's see you said exec #107? That's pretty far down, they're maybe not too different than any other employee, though they still might not want their stock to vanish and they still might wish to continue their current career path etc.
A bank will have to justify its investments to its regulators. And if those regulators have any helpful suggestions about "under-banked sectors" that could use additional capital, management will be very attentive.
It's pretty embarrassing how many people thought depositors should be on the hook for this. A banking system where companies or people would actually lose money due to bank failures (especially one caused by a run on the bank) would just lead to people only using BOA, JPM, and some merged WF/Citi/whoever else.
I think they are not completely blameless. Companies deposited money in a riskier-bank because they got more favorable terms/perks/... compared to other options. Now they don't have to bear the results of that risk because the Govt has stepped in.
Similar to the current US discussion around Student Loan repayment. Bailing students out of loans disadvantages everyone else who did not take those loans, or who paid them off already, because they had the foresight to choose a less-risky option.
The depositors could and should have been aware of the 250k FDIC limit and employed widely-available countermeasures including (manual or as-a-service) account spreading and/or private insurance.
In defense of Bitcoin, it would have taken a decade to process the $40 billion of withdrawals from SVB on the blockchain, so a bank run couldn't have happened.
hmm, i saw somewhere that svb had some 37000 depositors
there's no relevant limit to the amount of money in a bitcoin transaction, so this could have been one transaction with 37000 outputs, or 37000 transactions one output, or 370 transactions with 100 outputs, or whatever
the latest block in the bitcoin blockchain is block 780'537 https://www.blockchain.com/explorer/blocks/btc/780537 containing 1788 transactions, totaling 4489.31 bitcoin, which is currently about 98 million dollars; the block weighs 1847 kilobytes
most of these transactions had 2 outputs, though many had more (7, 8, 9, 20) and a few had only 1. if we estimate this block as containing 3700 outputs we wouldn't be far wrong. in that case it would take 10 blocks (a little under two hours) to process all 37000 withdrawals
processing 200 billion dollars of transactions at the rate that money was being transferred in this block would take 2000 blocks, almost two weeks, because the average transaction size in this block was much smaller than svb's average account size; this is still less than a decade
consider transaction a400f39693ab997c162156a09599557b26c7a6d1efa711c49f4ccf5b12505b66 https://btcscan.org/tx/a400f39693ab997c162156a09599557b26c7a... with 21 outputs. this transaction is 837 bytes, so it's a little smaller than average for this block despite its large number of outputs; an 1837-kilobyte block consisting only of such transactions would contain 2206 transactions, paying out to 46326 different addresses
so in fact the bitcoin blockchain could have processed all of svb's withdrawals in a single block
the price of bitcoin would have to go up quite a bit for that to happen; bitcoin's market cap is currently only 389 billion dollars, so this one piddly bank would have been more than half of it, and transferring such a large amount of bitcoin around at once would likely freak people out enough to blow the whole system up
but there's no technical reason in the bitcoin blockchain that dissolving such a bank would be impossible or even difficult
there have been any number of bank runs in bitcoin already, unfortunately
If the treasury allowed a bank run to wipe out depositors, every single business would be transferring funds out of their regional bank Monday morning.
exactly, the idea is for depositors not to care if a bank run happens or not, because the way that bank runs happen is that depositors worry that a bank run will happen
The “special assessment” is levied directly on banks, and is referenced in 12 U.S.C. 1817(b)(5):
In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary
(A) to provide sufficient assessment income to repay amounts borrowed from the Secretary of the Treasury under section 1824(a) of this title in accordance with the repayment schedule in effect under section 1824(c) of this title during the period with respect to which such assessment is imposed;
(B) to provide sufficient assessment income to repay obligations issued to and other amounts borrowed from insured depository institutions under section 1824(d) of this title; or
(C) for any other purpose that the Corporation may deem necessary.
Not a lawyer but a lawyer once attempted to explain this common legalese pattern to me. Here’s my terrible attempt:
It’s not like a programming type system where C widens the type to make A and B meaningless. It’s that A and B are communicating intent. “It’s meant for these things… and maybe something else we don’t yet know.” Apparently this is important if you ever had to fight over it.
I'm not quite sure of that interpretation of the text. Here's the quote:
> We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
To me, that last sentence about SVB is distinct and separate and not implying that the previous sentence about Signature depositors applies to SVB. But you could be right as well, I don't think it's clear.
The "also announcing a similar" bit is a subtle hint that one may also want to read the previous paragraph :-)
"After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
It’s pretty astonishing reading the comments in this thread just how many people have not read this press release. It’s not even a complicated message!
i thought it was an unnecessarily ambiguous way to phrase it; 'fully protects all depositors' and 'will have access to all of their money' doesn't explicitly say that they won't take a haircut; after all, after a haircut, you still have access to all of your money, it's just that 'all of your money' is less than it was before
it relies on the following paragraph to be explicit that all depositors will be made whole and will not lose any money
Oddly, that's whats happening on Twitter too: the haute couture space ppl ran to start a space and frame it as "the contagion beginning"
I find this to be an odd moment in internet history, a lot of its senior elders seem to have forgotten the odd effects it has on discourse and are unintentionally leaning into it
Signature Bank going under is proof that contagion was indeed happening, contra what some people (e.g. Paul Krugman) were saying.
This decisive action by the government (both ensuring depositors will be made whole immediately, and the Federal Reserve giving out extra liquidity) should ensure that the contagion doesn't spread any further though, an banks like First Republic will avoid going under as well.
> So 3 out of 7 Circle USDC bank partners failed in a week.
It's almost as if when a company (Circle) had actual assets under management, it was very hard to find honest banks able to deal with actual billions without fucking it up and you're better served yourself. Like Circle which decided to put 80% of the USD it holds to back USDC in short term US treasuries: 80% not at banks, 80% not in long term investments... But 80% in the one most stable and safe asset of them all. And Circle got in trouble for the 20% in actual USD which they thought they could entrust to banks.
Kudos to Circle if they get out of this fine because it certainly seems hard to do business with monkeys.
> "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Very curious to see who ends up paying this special assessment. Are we all going to pay in lower deposit/investment interest from banks? Are bank shareholders/profits gonna eat it?
My reading is that the "assessment" (tax) will be borne by all banks, not just the bank that fails.
My gut says that the incidence will fall primarily on deposit holders (likely in the form of marginally lower interest rates), and not significantly on bank equity holders, but I suspect it'd take an econ phd to fully parse that out.
It's slightly disheartening to see so many people on HN willing to invite a wider collapse of the US banking system in order to punish/hurt a group of people they deem to be "elite".
Talk about cutting off your nose to spite your face!
> It's slightly disheartening to see so many people on HN willing to invite a wider collapse of the US banking system in order to punish/hurt a group of people they deem to be "elite".
People are tired of being around rhetoric that students are undeserving of a bailout because they decided to take loans from banks that were more than willing to lend them money for degrees with no prospects of recouping, however, when banks make their own poor decisions the banks plead with the regulators they've been deregulating, defanging, and lobbying, there are calls for yet __another__ round of socialism. Only now we have no choice because the options are a) bailouts or b) systemic collapse of life as we know it. Tone-deaf.
We are now changing definitions as to what a 'systemically important bank' is, apparently it is no longer 1 of the big-5, but any bank that has 200,000 depositors. Why and how is a bank with 200,000 depositors in a position to bring the entire financial system to a halt?
In his Twitter spaces, Jason C. said that he is now a newly minted 'single-issue voter' looking at candidates that call for limiting of spending. Mind you, after he went on his all caps tirade on Twitter in an attempt to stoke fear.
What's disheartening is seeing the complete disconnect in comments like yours with the optics of the situation.
People aren't inviting the collapse of the system; they are criticizing the complete hypocrisy of those that call for financial prudence when it's other people's problems or needs but blame the government when they are now in a precarious situation. Utterly self-serving and shameless.
We're slowly chipping away at the social contract, seemingly all while forgetting the previous times when bank bailouts were given.
Rationalize this however you want, at the end of the day a bank mismanaged risk, it's C-suites cashed out before news hit, those in the know using means such as Podcast at their disposal, used their privileged position in order to get themselves out of harm’s way before others could, and now want losses to get socialized.
These guys will never learn, this will happen again, and in 10 years we'll be right back here, only eggs will cost 30$ a dozen and you'll be financing your microwave.
CNBC: 2023/03/09 "Wells Fargo says buy Signature bank the last game in crypto-town
JPM: 2023/03/09 "JPMorgan predicts customers will migrate to Signature Bank’s Signet payments network. Cryptocurrency firms can incorporate the Signet network into their platforms using application programming interfaces.
However, Signature also faces pressure to minimize crypto risks and recently announced that it would cut crypto deposits by $10 billion. Coinbase recently switched to Signature for its Prime customers."
Barrons 1/19/23: After Silvergate and Signature Earnings, the Worst Might Be Over for Crypto Banks
Incredible that this can just be done over a weekend. Is there a good writeup of (what I assume is a mountain-load of work) of how this works, and what happens during this process?
Also, will the FDIC just eventually feed SVB's MBSs back into its insurance fund once they mature?
Looking at the bigger picture, I do not know if this was the correct decision. The depositors were bailed out (it wasn’t just a liquidity issue) and the FDIC is paying for it.
This means all FDIC members will need to pay less interest on deposits to make up for increased FDIC insurance cost.
This will increase the speed with which people take out deposits and put it into e.g., short term treasuries because they get more interest. Enabled by easy-to-use fintec made in Silicon Valley.
This will decrease bank profitability.
And this is on the “Liability” side of the balance sheet. If the FED is successful in causing a recession surely there will be a lot of insolvencies (people swimming naked etc.) and there will be problems on the “Asset” side as well.
How can this end well? We just failed at most easy hurdle here.
It's the right move. If they didn't do it, every regional bank, especially those that primarily deal with businesses (which are likely to have more than $250K in deposits), would be at risk, since the expectation is that your "money is safe in the bank" is what allows the banking system as it is to exist.
None of the other regional banks had the investment risk profile or the depositor distribution (number of individual investors, SMBs, startups) of SVB.
It doesn't matter. The goal is to contain fear, and fear does not act rationally, nor do depositors try to understand all of the intricacies of their bank's risk profile--they'll figure that BoA or WellsFargo will be better because they are "too big to fail".
The fact is that if depositors hadn't run on SVB it also would have been ok.
But in today's economy, any rumor or random event can cause a run on any bank. In fact, there are stories as we speak of the current run on SVB being caused by Peter Thiel and his buddies.
If the banking system is so fragile that it is prone to bank runs on slight rumors, which can be contagious and spread to other banks, what is the solution? To just continue bailing out banks as they fail?
In today's economy, banking -- and by that I mean the basic function of a secure place to put your cash other than having it in dollar bills in a safety deposit box or under a mattress -- may be considered an "essential service", particularly for businesses. The fact is, you cannot operate a business without it. So putting your money somewhere safe (I'm talking cash here, not investments) should be something that is guaranteed. The $250K limit does that for individuals but not for businesses who may need millions in readily-available zero-risk (other than inflation) cash.
This line of thinking leads towards basic banking services being fully guaranteed, and perhaps owned, by the government (like the postal bank in some countries). Banks make money by providing other services on top of that.
Something along the lines of how power utilities work might be a model for the future.
Nothing is going to change in this country until people start questioning how we have seemingly limitless money for foreign aid, wars, bank bailouts, etc. but we can’t seem to get shit done for working class people. It’s not a left vs right issue. It’s a class and power issue.
While I'm glad that no depositors will lose even a single dollar, can anyone justify how banks and the astonishingly rich continually take large, greedy risks only to be bailed out when they fail? I can't imagine the twists of logic it would take to accomplish that.
So, the government presumably creates money to cover, inflates the supply and the tax payer pays for the bailout and also gets punished with inflation. Say what you want about this being good for the depositors but it can't be sustainable. At some point, people and corporations need to be held accountable, monetarily, , suffer the consequences of their actions and be allowed to fail.
[edit] It seems that it's not a "full bailout" as shareholders won't be made whole but if the assets don't cover all the deposits, where is that money coming from?
The fault, dear VCs, is not in your stars. It's in you.
"As the news of the Silicon Valley Bank collapse reverberates through the technology ecosystem — and investors and founders alike furiously Google terms such as “available-for-sale” and “held-to-maturity” — even some of our most prominent financiers, like ‘PayPal Mafia’ member David Sacks, are learning once again how banks work, the hard way."
This is unbelievable. SVB had services that others did not provide (in particular taking risky assets to secure loads or lines of credit). Those who partook in those services had to know that they made the bank more risky.
Who comes up with these kinds of policies? My god. The moral hazard is unreal.
> 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.
This tells me there were other banks in a similar position, and those other banks are being offered free money... And those banks don't even have to get rid of their shareholders, bondholders, or upper management.
An analogy: Smart guy is on the freeway when he's passed by someone going 90. Smart guy pushes up to 90 also, but stays 1/4 mile back. A lot of miles later, flashing blue lights pull up behind the leading speeder. SG slows to the limit and congratulates self on the early arrival.
The assets will take a few years to fully wind down but are likely to payoff anywhere from 80-98% so the actual haircut won't be that large. The insurance fund will float the money until final resolution, then increase insurance premiums if needed to makeup the difference.
The rest of the industry is paying. "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.". RIP the $250k FDIC limit, I guess.
Dipping into the FDIC pool beyond what's needed to cover the $250k. That, combined with the ability to sell of SVBs assets must give confidence to cover all deposits without burdening taxpayers.
My understanding is that all of the assets are still there. Moreover, many of them were expected to be safe for long term holding, such that anyone that can play a long game with a diversified portfolio could welcome these assets onto the books.
Problem, of course, is that they were some massive assets and adding them to a book without unbalancing it is going to be difficult to do.
Translation: the Fed is done raising interest rates. Period. Forget all of the tough talk by the team over the last few months. We raise until we break something. Now that we broke it, that's that.
As for that inflation problem... It will require another solution...
Or maybe it's what they had to do to justify future rate hikes? I hope so, need some way out of this hole. But certainly billionaires are plotting how to capitalize on it. Feels like 2008 but in much slower motion so the wealthy can squeeze every dollar out of it on the way down.
The more things like this happen, the more I get the sense that the medieval Muslim world did this right: your market can only be free if the state does not intervene whatsoever in matters of debt or interest. Someone doesn't pay, that should be the creditor's problem, they shouldn't get to use the government as a recollection agency.
Its possible. Its called sovereign money. You basically have an account with the central bank just like private banks do (but they dont want anybody else to have)
These accounts pay strictly zero but can never default.
Anybody who wants to get a return can deposit with a private bank but then they need to monitor that bank because if it mismanages risk they are on the hook.
The thing to understand is that private banks are experts at risk free profiteering and passing the buck, not at managing risks which is really hard work
The monetary system is an absurd and unfair anachronism and it lurches from disaster to disaster.
SVB was offering higher returns by taking on more risk than was required. Those customers now lost nothing. The rest of us who went with safer banks offering market rate returns not only received less over that duration, but we have to pickup their tab.
Why should I or a bank ever do diligence again? I can just claim I misjudged the risk.
They were supposedly safe. Misconceptions exist everywhere in business and finance. Silicon Valley's entire modus operandi is about "disrupting" industries that feel their business models are safe.
They were in fact not safe. The bank no longer exists after failing to cough up depositors' cash.
They were returning interest to the depositors, so actually the depositors decided to take on the risk. You will never earn interest without risk. If you're told that any form of interest is risk free, it's not true. In the case of treasuries, the risk is not default - it's inflation risk. This is because there is a chance that inflation outpaces the bond yield, meaning you lose money over the life of the bond (as the principal will lose buying power) and the underlying bond will also lose it's value as higher yielding bonds are auctioned by the government.
Yeah as long as the banks hold actually valuable things- SVB had treasury bonds- no reason the federal government can’t treat those as cash. I mean it’s their own issued assets!
The problem in this particular case is they already sold those treasury bonds, at a loss. But yeah, it would be ridiculous for a bank to go bankrupt because it bought it's own government bonds.
If you look at the FDIC data for bank closures a lot of times the ultimate resolution is over 90% payback - the FDIC calls these "dividends". In some cases the payback is 100% to depositors and general creditors get some money. It just takes time - a 2009 bank failure may not finish dividend paybacks until 2014.
The odds are the FDIC will ultimately (in the next 5 years) wind down SVB's assets with enough excess to nearly cover all deposits. The amount the insurance fund will eat isn't likely to be very large.
The statement about an assessment on member banks is just how the fund works normally: whenever there's a large payout event exceeding normal reserves the fund recoups the money by assessing member banks.
I have a naive question. When I was a little kid and the FDIC only insured the first $100,000, I thought, "If I were rich, I'd have to have multiple bank accounts."
Do big companies not do this with their liquid assets as a matter of course? Are there just not enough banks? Or would per-account fees unknown to me as a little guy eat into savings?
I get that big companies directly hold a bunch of bonds, too. But if they use a bank so they can actually write checks, why not many banks?
It's not a bailout. Silicon Valley Bank will cease operating, the shareholders get zero, anyone who loaned them money likely gets zero, the executives have been fired, the employees will all be laid off within two months.
The point of this action is to ensure that Silicon Valley Bank's customers, however, will not be harmed by doing business with a regulated major bank.
The typical bailout doesn't zero shareholders. Here, shareholders were zeroed. You can call it a bailout of depositors, but the association with bailouts that didn't zero shareholders is bogus.
If you want to call it a bailout it would be an bailout of investment/company money parked in SVB but _not of SVB itself_.
Furthermore SVB might still have enough assets to cover that (or most likely a very huge part of it), they just don't have enough cash/liquidity to continue on as a company.
> After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13.
this is also material. means the fear for SVB depositors being unsecured creditors stops today.
This seems like that thing with power companies offering varying rates based on demand, then when power failed people's bills went sky high and someone just has to resume them.
What I mean is, all this risk was baked in by design, with some stupid assumption of "well that won't happen." Now it's happened and the response is "well that's not supposed to happen, please rescue."
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks”
So you as a taxpayer will not have to fund this bailout, unless you’re the kind of taxpayer with a bank account, in which case you’re going to be paying for it.
What if the Federal Reserve offered retail banking. Would it stabilize the banking sector? They wouldn’t be forced to try to find loans to pay interest on deposits. Where do private banks add value over what the Fed could do. ELI5.
Couldn’t the Fed just offer retail loans at the Federal Reserver rate, with maybe some kind of premium if inflation is high, or discount if inflation is low? What am I missing? Why do we need all these banks, some of which catastrophically explode every decade or so?
I mean, you would be substantially increasing the size of government. The federal government currently employs about 3 million workers. The banking sector employs 1.4 million. To perform similar functions, the US government would need (at least) a similar number of employees. That is probably politically disagreeable.
They would be employees of the Fed, not the Federal Government, no? Also, I am not afraid of a big government so there’s that. Also, they would be paid well, but not get insane bonuses, etc. so that’s a distributive plus in my book (i.e., less wealth concentrated in a tumescent financial sector).
I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't exist before and doesn't point to a stack of $$ on the shelf. But it does point to the bank, and the bank itself has tons of customer deposits. And if I take that IOU and give it to a car dealership who puts it in their bank, for the transfer my bank will take actual money from the general pool of customer deposits. AND I have to pay back the loan which goes into the general pool. So while specific money isn't earmarked, the IOU represents money that the bank has right?
I guess a way to ask the question would be: if i were to liquidate all assets of a bank and call in every loan, would that be >= all customer deposits?
If I deposit $5 in my bank account, and then the bank keeps $1 in reserve and lends out $4, then they just added $4 to the money supply. I can withdraw my $5, and the loan-taker can withdraw their $4. This is possible because there’s a reserve pool of money which is not loaned out, and because people tend to just leave the money in their account.
At least that’s my understanding. Happy to be corrected
This is nitpicking. While that paper is a good read and important to understand how banking works, the parent commenter's point about how money creation works, and how a narrow bank would not participate in it, is valid. Deposits _are_ a source of funding that a bank considers when making loans, even if a bank does not "turn deposits into loans."
You may be thinking of iBonds themselves. Universal banking has been proposed a number of times and the banks squeak each time (the last time resulted in changing how overdrafts were calculated iirc).
Some other countries already provide banking via their postal system. And the US has a toe in there with postal money orders.
The Fed is already decentralized, no? There are branches in different regions throughout the country with their own governance, and a central board of governors to oversee the whole thing. I guess what I am asking is, why not treat banking like the utility that it is. Their is a natural monopoly on currency issuance after all, no?
It's the state giving itself no bid contracts. There's no financial risk (except to the buyers) and the officials who secured it get the money. The buildings aren't made to a high standard because there's no accountability for when they fail. The officials who would hold them accountable are the ones who assigned the nobid. The people who got it built already made their money.
Thats what ghost cities are about. CCP financing cities almost no one will live in to make money off the no bid contracts. People buy property in the ghost cities to move in and/or as an investment (its government-secured right? what could go wrong?) but then housing prices crash (because supply far exceeds demand), the lower classes are left holding the bag and legally prevented from refinancing. So they're making payments on a property that they bought at $300,000 even though it would only be worth $50k if they got it appraised & refinanced.
It's only possible if the government is also the bank. It's a totally conflicted situation.
If this represented a systemic risk, I will eat my hat. This reeks of influence peddling, particularly given the significant growth in lobbying over the past two decades by the very kinds of people invested here.
> Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
Yes, there's a lot of sleight of hand going on here. This is also highly suspcious:
> 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.
> Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
To me, this one sounds like "we'll cover even the uninsured amounts and make all banks pay for it"?
> 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.
This one sounds like it may mean "we'll print money so no bank goes bankrupt"?
Yesterday, high-profile investor types declared that the govt should definitely bailout SVB.
Now the govt are "refunding" the depositors, but not the shareholders.
In what way is this a bad thing, if someone is willing to play the devil's advocate for a second?
Either these high-profile investors only want to save their own asses OR they ostensibly have a bigger plan to rescue the banking system in some unbeknownst way.
I'm interested in hearing the rationale for the latter.
If I interpret the action correctly the Fed just granted all banks a giant put option to place any government securities at par for cash whenever interest rates move against them
The only decent thing would be to remove the bank's freedom to (mis)manage interest risk altogether, have sovereign money deposits with the central bank and force private banks actually work for their profits by properly managing risks
It's the only sensible choice with unlimited backstop. It should have already been happening, really because the only difference from last week is that the guarantee was made explicit and we don't have to wonder.
So we have a bailout. In case you missed it, SVB successfully lobbied Congress to weaken dodds regulations. So in a way, similar to 2008, Main Street pays so the rich will not loose their funds.
This is not a bailout in the historical sense of the word. Equity holders in the bank are getting nothing. They'll be wiped out. Senior leadership has been removed.
All this did was protect _depositors_, the people who put their money in the bank and thought it would be there tomorrow. And it's being done by dipping further into the FDIC fund, which is paid by banks. It will reach down to taxpayers likely through reduced rates or increased fees.
It is absolutely in the collective market's best interest to retain confidence in the bank infrastructure of the nation. There were already people lining up at First Republic over the weekend, Signature Bank was shut down as part of this same announcement, and almost certainly more would have come in the following week.
The collapse of a ~$200B bank was going to have significant ripple effects that would almost certainly have exceeded the fees that banks will pay to fill in any shortfall resulting from this backstop, whether they're ultimately charged down to account holders or not.
Why are people so freaking obsessed with passing responsibility onto depositors. It’s perfectly reasonable for the government to be responsible for protecting money as property, just like we do with every other property. Unlike a house which needs maintenance, money is a virtual good. There’s nothing I should have to do to maintain my claim on my bank account.
> There’s nothing I should have to do to maintain my claim on my bank account.
Thats a wrong statement. You are thinking of money as a public good and thats how it should be, but thats not what it is now. Your claim is against a private enterprize.
You could have access to risk free sovereign money with the central bank and its entirely possible. But private banks are livid against it because it would deprive them of precisely the kind of game that blew up in their face with rising interest rates and discounted government securities.
Ultimately this is not about idiot VC depositors and whether they deserve a haircut or not. Its about idiot bank managers and whether they deserve extracting rents from the entire economy doing basically nothing.
Bank bailouts in 2008 were not made to bail out 'the shareholders'. They were made to bail out the sunken assets inside the banks so that those banks could continue operating, including still 'having' the depositors' deposits. Because if the bailout was not made, all of those deposits would go away due to there not being assets enough to cover the deposits.
That's what a bailout is. And this is precisely that.
Pretty mild consequences considering the magnitude of their screw up. Doubt they're going to be missing any meals or have trouble paying the electric bill.
From the UK branch which also is in severe trouble[0]
Jay Ersapah, the boss of Financial Risk Management at SVB’s UK branch, launched initiatives such as the company’s first month-long Pride campaign and a new blog emphasizing mental health awareness for LGBTQ+ youth.
“The phrase ‘you can’t be what you can’t see’ resonates with me,’” Ersapah was quoted as saying on the company website.
“As a queer person of color and a first-generation immigrant from a working-class background, there were not many role models for me to ‘see’ growing up.”
Her efforts as the company’s European LGBTQIA+ Employee Resource Group co-chair earned her a spot on SVB’s “outstanding LGBT+ Role Model Lists 2022,” a list shared in a company post just four months before the bank was shut down by federal authorities over liquidity fears.
This is part of why the bank appealed to funders and startups. These positions are just marketing to better reach their target customer base, as far as I see them.
Because people are only allowed to be their job? How is the fact that they also have other passions outside of their job mean they must have been a terrible employee.
If I had a major fuckup at my job and then someone dug up how my job talked about me running a board game group at lunch at work, would you be pulling quotes about how my love of Illimat and The Crew was a sign that my company was negligent?
I mean would you say the same of S.B.F of FTX who was playing league of legends while on the clock?
If everything were running smoothly there would be no reason to look. But if mistakes are getting made while on the job, could it be because an individual is doing more than the job description?
To put things in perspective, the US government guaranteed $2.4 trillion in money market funds after the Reserve Primary Fund broke the buck in 2009 [1] and that guarantee came directly from the Treasury.
They should tell everyone that the government issues USD and therefore doesn’t need to first obtain the reserves from tax payers before making them available to protect bank depositors.
If they were honest about this and everyone realised it, they could go one step further and eliminate involuntary unemployment overnight with a job guarantee.
It is not clear to me why only these depositors of SVB deserve special treatment of full reimbursement of their funds. Is this not unfair towards those that held > $ 250 K in other bank failures where the rule of law was applied of not insuring such deposits?
$42B was withdrawn from SVB on Thursday. That's a lot of $$$ in one day. No wonder this collapsed. CRO/CEO should be held accountable, including their poor messaging that started this. So should anyone who was spreading the panic including some VCs and startups.
Poor messaging amplified by speed of light communications (twitter) and fast online redemptions. We're in a new era of flash mob bank runs. Likely time for a rethink on regulations - like moving to daily mark-to-market of bank security holdings.
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks" - a "special" money printer?
"U.S. banking system remains resilient ... due to reforms that were made after the financial crisis " - more lies.
Majority of US banks are not required to follow the NSFR or LCR standards at all. Fed took advantage of the fact that the Basel Accords are only internationally agreed to apply to “large, internationally active” banks. While most jurisdictions apply the Basel rules to their entire banking system anyway, the US has a strong and powerful community bank lobby, so only the largest international banks were subject to the full Basel NSFR requirements.
So, it turns out that the taxpayers are footing the bill to make the depositors whole.
Good day to be an account holder, bad day to be everyone else.
I am sympathetic to the account holders, who are at low fault, but still not happy that the cost gets foisted on the public, who is even less at fault.
How about a special levy on VC funds to pay for the special risk that they create in the banking sector?
I asked on another thread why everyone was banking with the same bank. The answer was that SVB was willing to do things for the VCs clients that other banks were not.
I think some folks are rightfully curious how the depositors are being fully protected here, given that FDIC only insures up to $250,000.
But really there should be no limit on FDIC insurance. Depositors should not be categorized as risk takers. Joe Schmoe should never have to concern himself with where he banks, or where his company payroll banks, for that matter. Telling depositors to take responsibility and disperse their funds across as many banks as possible is...silly. These aren't investors in bonds or stocks. These are cash accounts.
Yellen is 100% doing the correct thing here. And the precedent being set makes logical sense.
At no cost to the tax payer?
I keep on reading bail out but I’m inclined to think it’s going to more like a bail in. Depositors transformed into shareholders. I read about these possible type of changes after the last banking crisis.
Interesting that they're announcing this for SVB and Signature. I infer from this that they will backstop the depositors at these two banks, and they assume that by doing so no other banks will be 'run' by depositors.
I just gotta say, banking has changed a ton since 1870. Then banks going bust was normal. Now everyone freaks out. It must be nice having a banking system where “bank loses my money” is not the major systemic risk.
If they had wanted to avoid a contagion, they could have just given a 6-month 100% deposit backstop to all the other banks, and let SVB play out naturally. But then the VCs might have lost a little money.
Not just the VCs though and therein lies the rub. You'd have to start differentiating between various kinds of account holders and that doesn't really work beyond the 'private individual/business' classification.
I have a somewhat basic question that nonetheless seems to be difficult for a non-specialist to answer with just internet research. I am hoping someone here can answer it:
I have my liquid savings in a local credit union (which therefore isn't insured by FDIC, but by NCUA). Will the bank fees mentioned in this letter ("Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.") apply to my credit union?
Why involve the Fed? Doesn't FDIC have existing funding mechanisms since 1933 or so?
Not an expert; just my personal model of history is being violated a little here.
I just don't understand why invoking the Fed's infinite line of credit is necessary. It comes across as a vote of no confidence in existing precedent and process, which somehow got us this far.
There's nothing unprecedented happening, so why is an unprecedented response needed?
This is one of those situations where the Federal government is doing what it should be doing: protecting depositor funds, making banks pay for it and shareholders are left out in the cold if there's nothing left over.
Also, the speed with which this is happening going from SVB insolvency late last week to an asset auction today and depositor fund access tomorrow is astounding.
Most of this protection comes as a result of the Dodd-Frank Act passed in 2010 in the wake of the GFC. Senate and House Republicans largely voted against the bill. Remember that.
It's also worth remembering that this is a huge example of how ridiculous libertarianism and deregulation is.
Another takeaway is how central authority is a feature not a bug in the financial system. Just compar ethis to FTX or any other crypto collapse.
The US debt to GDP ratio has been over 120% since 2020. By IMF definition the US is in an economic death spiral. Unless drastic measures are taken (balanced budget amendment, massive cuts in spending for starters) by 2028 the death spiral will be irreversible and the US will be insolvent by 2042.
This is because by 2028 all of the payments we make on the loans for all that printed money will only be going to the interest, not the principal, and the spiral will be inescapable. (unless they change all the rules/trow them away which is where things like war and The Great Reset come in.
What does this have to do with the banks failing? There will be no more stimulus or bailouts, that's what. FDIC will be lucky if they can cover insured funds. Social Security it has already been reported will be bankrupt by 2033. The money supply has already contracted 2% and historically I think only once when that happened we didn't go into a deep recession or depression. Depression because of what I stated above is on the menu.
Cling to your jobs, folks, save all the money you can, cut all unnecessary spending. The next decade if we're lucky will not turned out like last century, but I'm not holding my breath. All that free money given to cronies by politicians leads to this. This is why you have a god standard and don't use fiat currency. So you can' spend money you don't have politicians buying votes with bailouts and handouts.
What does it mean "Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."?
How is the taxpayer not bearing the losses? Did the gov't just make a special exception to release the treasury bonds SVB has in order to provide the missing liquidity? What exactly is happening?
Yeah this all stinks. I think they are playing games with words. The US taxpayer was the beneficiary of those cheap bonds, so releasing them early IS the taxpayer footing the bill.
These bailouts are very good for me in the short run, as I'm exposed to USDC, but they teach the wrong lessons, by redistributing the cost of a lack of depositor due diligence, to the general public.
This will only encourage more high-risking banking practices - by both the banks and their customers - in the long run. Regulatory regimentation is a poor substitute for meaningful market consequences.
And we wonder why people are turning to marxism. If the "people" are being forced to bail out a bunch of rich people who create self serving incestuous relations between their companies to game the system and bend and break laws when it suits them, why not just have the "people" own everything ?
As a capitalist, I am appalled by the behavior of the VC industry and the government that enables them.
And, yes, it is a bailout. There may not be any taxpayer money front and center, but this will be paid by the average person in some way, and not by the people who created this fiasco, or those who are going to benefit from it.
The problem here is a fundamental flaw in the design of bonds.. They're non fungible by design. Why not make their yields fixed to the current fed funds rate regardless of when they were issued? That would eliminate market dislocations like what was experienced by SVB where their 1% yeilding bonds lost tremendous value.
if this is the way we're going to behave, then cap the maximum size of accounts at the FDIC coverage limit (implement account software in Rust, not C, no overruns :) If you go over this amount, the bank should automatically create a new account for you and put the excess in there. done, you're 100% insured, we don't have to do anything special to protect you.
.
Probably that means (I don't know the regs) that the bank will have to hold more of your money as reserves in cash on their books and not put it at risk, possibly pay more in insurance premiums if that's how FDIC insurance works. Probably it would make things really inconvenient for Roku to keep $500million in their bank account. But at least we would then deal with it at the time it occurs, and not in an emergency.
It would have to be a new account at a different bank. FDIC coverage is per bank, per depositor, and per ownership category (e.g. single vs joint account).
i'm pretty sure you're wrong about that, but not invested enough to check.
but if you're right, it seems a little silly, why impose that "diversification" on bank customers? if 100 millionaires live in a city, why should they all have accounts at all the different banks, as if that's somehow safer for the FDIC than have the same funds spread around in the same quantities across the same banks, just under different names.
And of course there are consequences to senior management.
<s>
Since they cashed out a bit and got their bonuses, they can probably take a vacation for a month or two and then come back and get a promotion in some other part of the financial industry. After all, they have learned a multi-billion dollar lesson. Don't want to throw that away!
A stern talking to about using their infinite money wisely, and not charging customers for the convenience. Perhaps a finger wag about doubling overdrafts to pay for their infinite money. A tsk for tripling monthly payments for student checking accounts.
"...Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law..."
Is this what passes for a FED press release? Which law? Clear as mud. Did the Fed just established an infinite deposit insurance coverage in the US?
Yes but also interestingly in Page 4 of that PDF under (2) Setting assessments
(A) In general - (B) Factors to be considered
Besides the we can do anything, anytime mentioned in that Pag 5, there is the requirement to in general look at the impact on other banks. Something they clearly could not have the time to do in this short time.
(2) Setting assessments - (A) In general - (B) Factors to be considered
Section (iii) "The projected effects of the payment
of assessments on the capital and earnings
of insured depository institutions."
The market is buying this up, failing to realize that things will continue to break as interest rates are increased further. The Fed isn't interested in saving banks. They're there to quell inflation.
> The market is buying this up, failing to realize that things will continue to break as interest rates are increased further.
Expectations of Fed action haven’t changed, expectations of FDIC/Treasury action to protect banks have. The information not already priced in is positive.
That's incorrect. Last week, the market was expecting a 50BPS increase. Now it has suddenly decided there is a 0% chance of 50BPS, an 81% chance of 25 BPS and a 19% chance of no hike.
What I meant was that expectation of continuing increases wasn't new, but thank you for pointing out that, in fact, expectation of such increases is actually declining.
This may be in support of the 50bp hike the media was stuffing into Powell's mouth all last week after his statements before the Senate, find out where else powerful people have built crab traps.
Taking a bit of a longer term view into why this happens, I feel the Fed (and Treasury/FDIC/OCC) needs to do quite a bit of soul searching:
1) After the crisis the new Liquidity Coverage Ratio (LCR) regulation required banks to hold a lot of "high-quality-liquid-assets" (HQLA) for every dollar of deposits they have. Kinda like reserve requirements...
2) HQLAs include liquid assets (cash, Fed reserves) plus treasuries and agency bonds. Well cash pays zero so of course banks will be investing in the juicier long dated assets. This is the first mistake by the Fed (and Basel) who took the approach "treasuries have absolutely no risk" which ignores interest rate risk.
For instance; say you bought a ten-year zero-coupon treasury when rates were 1; that's valued at 1/1.01^10 = 90.5 cents on the dollar. But if rates are now 5% that's worth only 61.3 cents of the dollar (!) but you are allowed to ignore this loss...
3) The way we allowed banks to hide these losses in the now popular Held-to-Maturity (HTM) category instead of Available-For-Sale (AFS). Any security put there can be valued for capital regulation purposes at the amount you paid for it, instead of it's actual value (i.e. market value). So in other words, we first incentivized banks to invest in these risky securities and then provided a way to hide the risks from capital regulations.
4) To make it worse, if you as a bank realize that "oh shit I have too much of this crap" there's another regulation disincentivizing you from fixing things. If you even sell $1 of the HTM bucket then ALL the assets of that class move into AFS and you are forced to realize all the losses. So you will only sell HTM at the very end, as SVB did.
5) Lastly, the govt flooded the markets with cash over the last years (zero interest rates) so everyone (firms, households) had lots of deposit. Lending opportunities were much lower than deposits so they had to put the money into these securities.
6) But central banks did QE, which drove the price of these assets very high (and thus the yield very low). For instance, SVB had agency bonds with 1.5% yields. So, to recap, banks were incentivized strongly to buy these securities which the govt made sure had terrible yields.
7) Then, once COVID ended and inflation started it was time to do quantitative tightening (QT) where the govt became a net seller of these securities, driving their price to the ground, creating huge losses for banks.
And that's where we are now. Most banks have HUGE HTM positions of mostly long-dated bonds, with huge losses, not because they are all idiots, but b/c that's how the incentives were aligned. And now we are paying its cost, including the cost of QE/QT.
It is a bailout - the 2008 bailouts were done to save the deposits and investments inside the banks, not 'the shareholders' as so many seem to try to use as an escape argument. Its because if the banks' hollowed assets were not 'made whole', the depositors would not have their money anymore.
Precisely the case with SVB as of this very moment - a sunken bank that does not have enough assets to cover its deposits is being bailed out by the state.
By the state and taxpayer money, make no mistake - even if the funds will not directly come from the US govt., the fees that they will impose on the banks by using the nation-wide bank insurance fund will eventually get imposed on everyone with a bank account in the US by those very banks in turn. So again, the public will pay.
Actually, its beyond using taxpayer money - if you are a taxpayer and your children have bank accounts too, they will also pay the fee instead of just you paying a tax.
If uninsured depositors took losses in the run on SVB, lots of other banks were going down too in the coming weeks. I think the argument is not that SVB is getting bailed out but investors in all the other poorly funded banks that won't fail.
There used to be a TV show in Europe called "Domino Day", where teams competed to build very elaborate domino structures. Used to love the sound of the dominos falling ...
Can crypto currencies solve this problem? Why yes and why not? I am still learning and my first impression is it could work if done correctly and transparently.
It's interesting to see how this started just before the weekend and how they're seemingly working hard towards a solution before the markets open tomorrow.
But don’t they have assets equal to their deposits? So why the fuck do they need bailing out? Tell the bank runners to get stuffed and wait for the assets to be sold.
I feel like the global banking system is surfing a wave that’s just about to pull all of us under. I wonder if today will be an entry in a Wikipedia page.
The regulators panicking and putting a tiny backstop of $25BN vs $150BN+ of uninsured deposits to attempt to stop a run on the bank is a resolution?
This is only to calm the markets before market open. We'll see if that enough to stop a bank run when this time everyone knows about the SVB situation and withdraws all their money at the same time.
Seems like this is an attempt to save the VC pyramid scheme that got caught up in the collapse and needed government intervention to 'save' them.
Seeing how quickly David Sacks turned from anti government to practically begging the government to save him was one of the highlights of this weekend for me.
It’s almost a shame they couldn’t carve out a few exceptions for those who don’t believe in regulation.
the more you read into this story of SVB, the more it seems like it (and other banks?) are nothing more than a ponzi scheme where they take customer's money, reinvest it in risky business, and then use the new customers money to back the people requesting withdrawals from the bank. Is this true?
After 2008 collapse and now this, what has government done to prevent this? Bailing out needs to be done to protect the depositors everyone sympathizes with small businesses. However, what safe guards were put in place or are being put in place for this to not happen again?
Capitalism is supposed to be about profit and loss, you bail out the losers, there is no end to the loss.
I guess we still haven't learned the lessons from 2008. Effective regulation should have been put in place to oversee that banks are effectively managing their risks. Not bailing out companies whenever times get tough.
> you bail out the losers, there is no end to the loss
The difference here is that the "losers" made was supposed to be an incredibly safe bet. The people who made the actual bad bets are all losing their jobs. Shareholders are getting nothing (ish). It's the customer who's getting protected, here.
> I guess we still haven't learned the lessons from 2008
Not my observation, but it's more like we were fighting the last crisis. Stress tests were focused more on bad assets, not safe assets in an environment with rapidly raising rates. Regulation and oversight only work for failure modes you're looking for. A handful of short sellers spotted this earlier in the year, but what happened is only obvious in hindsight.
There are thousands and thousands of banks to choose from. Why did they pick this particular bank? High rates? Connections to the right people? It's not like it's the only bank in the Valley, much less the country. They chose to be with that bank above all others. That was their freedom, their choice. Now everyone with a bank account anywhere will have to pick up part of the cost for that choice.
https://news.ycombinator.com/item?id=35112295 talked about how SVB was one of a very few banks whose staff understood startup problems. And they didn’t fail because of bad loans to customers! Instead they had too many deposits locked into long term bonds, interest rates spiked, and some customers panicked.
When a building company, building my house goes bust. The government doesn't step in to get someone to finish building it. When I order goods from a company and it goes bust, the government doesn't step in to ensure I get my goods.
Engaging with any third party entails a level of risk.
Isn’t the creation of a new and easy way for banks to access liquidity a bailout by another name? And what happens to base money supply of tons of people withdraw cash?
The shear volume of misinformed, misleading, or malicious takes produced over the weekend, priced at a buck each, could probably cover whatever losses are eventually realized in this mess.
I don’t mean to minimize this severity of the problem - if a bank can follow the rules, and be undone so easily, the rules need to be reevaluated. SVB management was negligent in their risk and deserves to be wiped out. But in a disaster precipitated and fueled by panic, professional and amateur purveyors of opinion and analysis should take more care to be well reasoned and factual.
Given that the reasoning for dipping into the insurance fund is to prevent anything else from failing, if any more do this is just SV getting into the grift on the ground floor again.
Hey everyone, banking is a safe endeavour. When you fail. we'll give you money. So keep on building banks. Startup banks. Any type of bank. We love them. You see, our taxpayers are absolutely thrilled about them.
People who want a full picture and like listening to a conversation instead of an article can listen to the recent All-In Podcast episode which discusses root cause and options.
The right-libertarian techbros at All-In Podcast are the last people who will tell you the truth about this. They are at the core of the rot. David Sacks will probably do his usual monologue blaming dead Ukrainian children.
> Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.
Ah cool, so you’re:
(1) revoking the bailout money you took from us for the 2008 and 2020 crises
(2) disallowing overdraft fees
(3) reimplementing glass steagall
(4) firing yourselves and then immediately committing seppukku
Like my God, can the wording get any more toothless and cynical? “We know you don’t trust us, and you know we don’t care, but for fear of the nameless void possibly transmogrifying into an angry mob of tens of millions of Americans, we will keep up appearances.”
Thus, on one hand, I'm glad they're doing this, as it should help prevent wider bank runs, and it ensures that banks are the ones that are actually paying for it.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.