How Silicon Valley Bank Avoided Oversight(wsj.com)
wsj.com
How Silicon Valley Bank Avoided Oversight
https://www.wsj.com/articles/how-silicon-valley-bank-avoided-oversight-fdic-systemic-risk-midsize-greg-becker-dodd-frank-reporting-lobbying-5b3ff837
127 comments
https://archive.ph/ert4b
A good comment on all this...
If a bank is complaining about the overhead, effort, cost, complexity of adhering to risk management protocols...
they're really actually saying "if it wasn't for pesky government, we'd be more than happy to take more risks with -your- money."
If a bank is complaining about the overhead, effort, cost, complexity of adhering to risk management protocols...
they're really actually saying "if it wasn't for pesky government, we'd be more than happy to take more risks with -your- money."
Large banks do better with more rules, but that's not necessarily the outcome actually desired, or at least I'm tired of the Goldman Sachs running the sector with little to no risk of any challengers.
The main problem is that the government is too involved; namely that banks can get Congress/Federal Reserve to bail them out, as we see yet again. It really doesn't matter what rules gov sets, if it's always going to panic and dole out printed money at the slightest hint of hardship (and thus potential incumbent demise), you will get bad behavior, and those involved will do something like this again (plus inflation to boot).
If the costs are instead borne by the bank, and depositors of that bank, yes it will suck for many, but also risky investments like the kind SVB engaged in will be shown not to pay off. Depositors will ask many questions on the status of their deposits at other banks, forcing banks to be more transparent/less frivolous with client money.
None of which will happen now; the Fed took care of it after all! Maybe we'll get more emotional banking rules implemented, maybe not. Can definitely kicked down the road though, I'll be expecting another such failure in ~15 years time, if that. It's really getting old, and seemingly happening with more frequency regardless of the number of rules implemented.
The main problem is that the government is too involved; namely that banks can get Congress/Federal Reserve to bail them out, as we see yet again. It really doesn't matter what rules gov sets, if it's always going to panic and dole out printed money at the slightest hint of hardship (and thus potential incumbent demise), you will get bad behavior, and those involved will do something like this again (plus inflation to boot).
If the costs are instead borne by the bank, and depositors of that bank, yes it will suck for many, but also risky investments like the kind SVB engaged in will be shown not to pay off. Depositors will ask many questions on the status of their deposits at other banks, forcing banks to be more transparent/less frivolous with client money.
None of which will happen now; the Fed took care of it after all! Maybe we'll get more emotional banking rules implemented, maybe not. Can definitely kicked down the road though, I'll be expecting another such failure in ~15 years time, if that. It's really getting old, and seemingly happening with more frequency regardless of the number of rules implemented.
> If the costs are instead borne by the ... depositors of that bank, yes it will suck for many
You should have finished your post here. Nobody with any exposure to the real world should be suggesting if a bank's highly skilled risk management professionals working full time on assessing the bank's financial position with access to the confidential data can't assess the risk factors of the bank's bond portfolio adequately enough to keep the bank alive to continue paying them massive salaries and nor can any of the bank's wiped-out equity investors, the real problem is that Joe Sixpack just isn't motivated to spot it in the few minutes of his spare time he gets to ponder changing his bank account.
I mean, you're in a minority of people so confident in your knowledge of the banking system you're willing to offer a diagnosis of its "main problem", but I bet you still couldn't tell me what's unusually risky about the composition of SVB's bond portfolio and what implications that has for your own banking arrangements now it's been in the news for a week, never mind last month when people would have needed to know if they wanted to still have a startup.
I mean, I'm not saying people shouldn't learn lessons from bank failures. It's just that the lesson most of us learned is banks failed a lot more when they weren't regulated and insured.
You should have finished your post here. Nobody with any exposure to the real world should be suggesting if a bank's highly skilled risk management professionals working full time on assessing the bank's financial position with access to the confidential data can't assess the risk factors of the bank's bond portfolio adequately enough to keep the bank alive to continue paying them massive salaries and nor can any of the bank's wiped-out equity investors, the real problem is that Joe Sixpack just isn't motivated to spot it in the few minutes of his spare time he gets to ponder changing his bank account.
I mean, you're in a minority of people so confident in your knowledge of the banking system you're willing to offer a diagnosis of its "main problem", but I bet you still couldn't tell me what's unusually risky about the composition of SVB's bond portfolio and what implications that has for your own banking arrangements now it's been in the news for a week, never mind last month when people would have needed to know if they wanted to still have a startup.
I mean, I'm not saying people shouldn't learn lessons from bank failures. It's just that the lesson most of us learned is banks failed a lot more when they weren't regulated and insured.
You seem to have forgotten that all the shareholders of SVB were wiped out. The government only took care of depositors.
I know, but no action is better, in the long term.
As it is, more inflation at least is likely
The effect of bailing out SVB depositors on inflation is pretty much zero...
I would actually agree with you.
Although this is almost trivially true: any single gov spend inflation effect is 'pretty much zero'. That's not the same as 'free' though. All spend together adds up to at least 2-3% in good times.
... and it just went up by 0.4% last month: https://reason.com/2023/03/14/inflation-isnt-going-away/
yikes
Although this is almost trivially true: any single gov spend inflation effect is 'pretty much zero'. That's not the same as 'free' though. All spend together adds up to at least 2-3% in good times.
... and it just went up by 0.4% last month: https://reason.com/2023/03/14/inflation-isnt-going-away/
yikes
I mean, yeah sure, it's trivially true that all spending by anyone in the economy adds some tiny portion of inflationary pressure.
That doesn't mean that the Fed making depositors' bank balances that already existed continue to exist (and mostly continue to stay in the bank) most of which is simply a payout from an insurance fund doesn't add less inflationary pressure per dollar than most other types of spending, that the number of dollars involved isn't an exceptionally tiny fraction of the economy or that a 0.25% rise in the interest rate wouldn't have several orders of magnitude more impact in the opposite direction.
That doesn't mean that the Fed making depositors' bank balances that already existed continue to exist (and mostly continue to stay in the bank) most of which is simply a payout from an insurance fund doesn't add less inflationary pressure per dollar than most other types of spending, that the number of dollars involved isn't an exceptionally tiny fraction of the economy or that a 0.25% rise in the interest rate wouldn't have several orders of magnitude more impact in the opposite direction.
> The effect of bailing out SVB depositors on inflation is pretty much zero...
Its probably strongly positive, in that the knock-on effects of letting them burn would be an economic meltdown that would rapidly reduce inflation.
The monetary effects of the additional net spending before considering that os probably minimal, though.
Its probably strongly positive, in that the knock-on effects of letting them burn would be an economic meltdown that would rapidly reduce inflation.
The monetary effects of the additional net spending before considering that os probably minimal, though.
Not sure either that an economic meltdown is the sort of inflation reduction the Fed is looking for, or that SV startups getting a few percentage points haircut on their unspent investment capital would do that much damage to the wider economy. Even tech companies actually laying off staff hasn't had much effect on inflation
For who? Maybe SVB has little ordinary banking customers, but what about other banks? Putting ordinary people out on the streets is better for the economy in the long-run? Oh, and now everybody knows when a bank fails they lose their deposits? Better run and get my money out now.
Only the little people, with no connections to the decisions, get hurt when a bank fails. All the leadership gets out, no punishment, and maybe even makes a profit.
Only the little people, with no connections to the decisions, get hurt when a bank fails. All the leadership gets out, no punishment, and maybe even makes a profit.
Certainly the FDIC-insured accounts to that level ($250k) should be guarded, as that is part of the calculus. That does cover most ordinary individual accounts, and most certainly all of the 'little people'.
If we want to talk about changing rules for FDIC on what's covered, then fine.
What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?
And remember that this is happening because interest rates were hiked very quickly recently, causing treasury market prices to dip, and that happened because of the need to combat high inflation, and that happened due to the excessive bailout spending in the pandemic (more money chasing same/fewer goods), and that happened because of gov heavy-handily shutting down a LOT of the economy (it's okay, it was just the non-essential 'little people' work though...).
I could go on, but it's clearly one blunder fix after another. Maybe this recent FDIC action and halting interest rate hikes will be enough to soften the blow, and won't cause enough side effects to notice much. Who knows? I'm just skeptical.
I guess we'll see in 15 years or so...
If we want to talk about changing rules for FDIC on what's covered, then fine.
What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?
And remember that this is happening because interest rates were hiked very quickly recently, causing treasury market prices to dip, and that happened because of the need to combat high inflation, and that happened due to the excessive bailout spending in the pandemic (more money chasing same/fewer goods), and that happened because of gov heavy-handily shutting down a LOT of the economy (it's okay, it was just the non-essential 'little people' work though...).
I could go on, but it's clearly one blunder fix after another. Maybe this recent FDIC action and halting interest rate hikes will be enough to soften the blow, and won't cause enough side effects to notice much. Who knows? I'm just skeptical.
I guess we'll see in 15 years or so...
> What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?
It's very temporary - it has a date baked into the law - they must have bought the treasury before the start date of the law to use it as collateral. And they can't "sell" the treasuries, they can borrow against them at the Fed interest rate plus 1%. It's not exactly the great deal you think it is.
It's just to give banks some liquidity, that's all. They certainly won't profit from it - the US government will actually make money from this.
> Do the 'little people' get such a deal with what treasuries they may have?
Yes actually, you too can borrow under this plan if you bought the right treasury type before the start date. It's a really bad deal for you though, the interest payments will cause you to lose money. It's only worth it for you if you absolutely must have cash right now, and you don't care what it costs.
> I guess we'll see in 15 years or so...
It's a 1 year plan, and the effects will be completely minimal.
It's very temporary - it has a date baked into the law - they must have bought the treasury before the start date of the law to use it as collateral. And they can't "sell" the treasuries, they can borrow against them at the Fed interest rate plus 1%. It's not exactly the great deal you think it is.
It's just to give banks some liquidity, that's all. They certainly won't profit from it - the US government will actually make money from this.
> Do the 'little people' get such a deal with what treasuries they may have?
Yes actually, you too can borrow under this plan if you bought the right treasury type before the start date. It's a really bad deal for you though, the interest payments will cause you to lose money. It's only worth it for you if you absolutely must have cash right now, and you don't care what it costs.
> I guess we'll see in 15 years or so...
It's a 1 year plan, and the effects will be completely minimal.
…but for greater reward though, right?
there are plenty of pointless poorly thought out protocols that have nothing to do with speculation of customer deposits
but do increase operating costs unnecessarily
but do increase operating costs unnecessarily
In a perfect world regulation would be right-sized and not needlessly waste resources, but failing that I'll take "the billionaires make slightly less money but are less likely to crash the economy" over the inverse.
When billionaires get too greedy it’s typically average people who beat the brunt of their responsibility. This is a regressive state of affairs. Banks serving everyday people should not be allowed to make risky bets or engage in transactions that can cause contagion. If that pisses some billionaires off, well thats just the icing on the cake.
Every "pointless" banking protocol exists because of an actual bank failure.
you are choosing to think of your worst nightmare. GAO reports are full of examples that have nothing to do with bank failures.
Such as some random reports banks are required to file to FinCEN. Just creates an infinite loop of paper nobody ever evaluates.
Some mandatory personnel a regulator requires, yet cannot realistic do their adversarial job in an at-will employment world.
There’s more.
Such as some random reports banks are required to file to FinCEN. Just creates an infinite loop of paper nobody ever evaluates.
Some mandatory personnel a regulator requires, yet cannot realistic do their adversarial job in an at-will employment world.
There’s more.
Banks don't file reports with the GAO, which is the internal auditor of the U.S. federal government that audits government financials.
FinCEN reports aren't related to bank failures, they're related to money laundering and other financial crimes. FinCEN means "Financial Crimes Enforcement Network." Banks file these reports because a number of financial crimes require the use of bank services.
And most agency personnel would outcompete you in an adversarial at-will employment world. They work for the government, for less pay, because they want to, not because they need to.
FinCEN reports aren't related to bank failures, they're related to money laundering and other financial crimes. FinCEN means "Financial Crimes Enforcement Network." Banks file these reports because a number of financial crimes require the use of bank services.
And most agency personnel would outcompete you in an adversarial at-will employment world. They work for the government, for less pay, because they want to, not because they need to.
are you being intentionally dense
Yes the internal auditor of the government released reports of failed government policies, how did you read anything else
Yes the internal auditor of the government released reports of failed government policies, how did you read anything else
???
We're talking about bank regulations, not every failed government policy. It appears you're just trying to move the goal posts.
We're talking about bank regulations, not every failed government policy. It appears you're just trying to move the goal posts.
And this failure is the direct result of those protocols
Care to walk us through that?
Could you name one? (Just to help us understand a real example)
The current implementation and purpose of currency transaction reports.
These are random documents sent to the government when some transactions over a certain dollar amount are done, ostensibly to help prevent money laundering, in practice just waste everyone’s time.
The Government Accountability Office has reported on this for 30 years. GAO reports are full of other examples too.
These are random documents sent to the government when some transactions over a certain dollar amount are done, ostensibly to help prevent money laundering, in practice just waste everyone’s time.
The Government Accountability Office has reported on this for 30 years. GAO reports are full of other examples too.
A lot of HSBC's "interaction" with criminal elements south of the border was detected via analysis of CTRs.
And don't most banking systems automatically generate a CTR based on the transaction ledger? It's not like a teller is filling out a form and faxing it.
And don't most banking systems automatically generate a CTR based on the transaction ledger? It's not like a teller is filling out a form and faxing it.
> And don't most banking systems automatically generate a CTR based on the transaction ledger? It's not like a teller is filling out a form and faxing it.
Getting to that point took a very long time.
But its not that much more efficient on the FinCEN side.
The HSBC thing is also another example of how the rest of AML/KYC is not the best implementation. It is only as strong as its weakest link, while burdening all links in this fairly pointless exercise of whitelisting transactions, instead of tackling the actual regressive behaviors that are illegal.
Getting to that point took a very long time.
But its not that much more efficient on the FinCEN side.
The HSBC thing is also another example of how the rest of AML/KYC is not the best implementation. It is only as strong as its weakest link, while burdening all links in this fairly pointless exercise of whitelisting transactions, instead of tackling the actual regressive behaviors that are illegal.
I appreciate your response here - and I agree, it's the regressive behavior and condoning/blind eyes that are the root of the issue.
Okay, name one?
The current implementation and purpose of currency transaction reports
Forcing people to open cash businesses to launder their money creates economic activity, it’s a win-win situation for everyone except the criminal that gets taxed while converting their dirty money to clean money.
The failure of SVB may be evidence that even the most well-connected, most tech-savvy bankers do not understand the monetary system.
It appears that they naively believed that if they converted $1 of today-money into $1 worth of today-bonds that those bonds would always be worth at least $1 nominally since bonds yield interest and the $1 principal is returned to the bond-holder once it reaches maturity... It seems that they couldn't imagine how a bond which costs $1 and yields $1 + interest could be worth less than $1?
It appears that they failed to understand that $1 in today-money is not necessarily worth the same as $1 in tomorrow-money (or especially 10-years-in-the-future-money). If you look at history over the past 50 years or so, tomorrow-money has always and predictably been worth less than today-money. So it's a gross oversight.
I didn't study economics, finance or business and I'm basically a dumb pleb scraping by the bottom rung of society, yet even I knew that.
That's why I often get caught up in conspiracy theories. It's hard for me to believe that these wealthy, highly educated people don't know this stuff. I tend to think that a lot of such things are malicious and intentional because I believe that the elites are intelligent. But then I think, why would these people risk going to jail over a scheme when they are already well off regardless? Are they compromised individuals being extorted for over a decade straight with the intention to basically run the company into the ground (for the benefit of third parties) and then be the fall guy? Hmmm seems very far fetched...
It appears that they naively believed that if they converted $1 of today-money into $1 worth of today-bonds that those bonds would always be worth at least $1 nominally since bonds yield interest and the $1 principal is returned to the bond-holder once it reaches maturity... It seems that they couldn't imagine how a bond which costs $1 and yields $1 + interest could be worth less than $1?
It appears that they failed to understand that $1 in today-money is not necessarily worth the same as $1 in tomorrow-money (or especially 10-years-in-the-future-money). If you look at history over the past 50 years or so, tomorrow-money has always and predictably been worth less than today-money. So it's a gross oversight.
I didn't study economics, finance or business and I'm basically a dumb pleb scraping by the bottom rung of society, yet even I knew that.
That's why I often get caught up in conspiracy theories. It's hard for me to believe that these wealthy, highly educated people don't know this stuff. I tend to think that a lot of such things are malicious and intentional because I believe that the elites are intelligent. But then I think, why would these people risk going to jail over a scheme when they are already well off regardless? Are they compromised individuals being extorted for over a decade straight with the intention to basically run the company into the ground (for the benefit of third parties) and then be the fall guy? Hmmm seems very far fetched...
These aren’t engineers running the bank. It was always Finance people. They understood the concept of bond duration (interest rate sensitivity). They just made a calculated bet on interest rates to goose their bonuses.
In Matt Levine’s words: they were reckless
I am often of the opinion many technical people can't bring abstract ideas across domains. I have seen people recognize things in context and ignore the same idea in another one. They loose sight of the details when looking to high up or looking at reports instead of building the reports themselves.
"Some observers fear that the decision to disregard the $250,000 cap on insured deposits could generate irresistible pressure to insure deposits fully regardless of the amount. This would undermine the purpose of the cap, which was to give large depositors an incentive to monitor the conduct of their banks and subject the system to market discipline. A total guarantee, many argue, is an invitation to irresponsibility. This may be right."
SVB was happy to conceal their precarious position until they were required to recognise and disclose losses when they sold some of their bonds.
Is there any reason we should promote personal responsibility on the part of depositors.
The author's children are VC. What appears to be an easy question suddenly become challenging.
SVB was happy to conceal their precarious position until they were required to recognise and disclose losses when they sold some of their bonds.
Is there any reason we should promote personal responsibility on the part of depositors.
The author's children are VC. What appears to be an easy question suddenly become challenging.
The Federal Reserve is literally an example of the banks self-regulating. Look up the story of Jekyll Island. The problem is, the banks’ idea of self regulating isn’t the same as yours
And don’t think that handing more power to the federal government would be any different. Take a look at what a revolving door there is between banks and regulators, particularly during crises. Geithner, Paulson, Mnuchin, Bernanke, Bob Rubin, Larry Summers, etc…
And don’t think that handing more power to the federal government would be any different. Take a look at what a revolving door there is between banks and regulators, particularly during crises. Geithner, Paulson, Mnuchin, Bernanke, Bob Rubin, Larry Summers, etc…
SVB is actually an inverse example of that hypotheses.
The biggest depositors added pressure on the bank to be more risky.
The biggest depositors added pressure on the bank to be more risky.
In what way did the depositors add pressure for the bank to be more risky? Naively, it seems like there would be zero incentive for a depositor to do that unless they were trying to chase a measly yield on deposits.
Which proves the need for regulation.
Or that the depositors should have lost money, with the ensuing ripple effects: unpaid workers, state fines for violating wage payment laws, bankruptcies, lawsuits, unpaid vendors and contractors and all their downstreams, etc.
i.e. carnage, a big bloody nose, but not an extinction level event.
Maybe the depositors deserved a bloody nose. But do their employees, vendors, and contractors?
i.e. carnage, a big bloody nose, but not an extinction level event.
Maybe the depositors deserved a bloody nose. But do their employees, vendors, and contractors?
In my outspoken opinion you’re onto something. Regular FDIC insurance should kick in. Every aaccount gets their 250k, and rest will take years to figure out with lawyers scrambling to stake claims of the carcass. Enhanced unemployment for the non executive level employees of companies effected by the failure. Highly compensated employees that don’t budget might suffer, good. Executives, investors, etc should all take a bath from this. They should be made whole on the backend if they didn’t have insurance and well managed risk. There should also be a lot of high profile and HNWI people thrown in prison for their gross negligence. Hopefully the regulators can secure the evidence they need for convictions without their investigations getting compromised by any manner of the typical shenanigans.
I asked this too late on the last SVB thread:
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?
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?
This is actually a niche industry, that provides "deposit solutions". A family member used to work at this one for example, who just put a PR release based on the recent news cycle: https://www.reichandtang.com/2023/03/12/statement-on-protect...
They provide up to $50 million worth of combined coverage, by splitting across dozens of partner banks into $250k chunks. Yes there are fees associated with purchasing such a service, but I'm not really sure why it's not more popular or more commonly adopted as SOP for small to medium enterprises to do this.
Maybe there is a convenience or liquidity factor that I'm missing, or maybe people really didn't think the cost was worth it (but I'd guess many are probably reevaluating now, just how safe or unlikely they think a bank failure really is)?
They provide up to $50 million worth of combined coverage, by splitting across dozens of partner banks into $250k chunks. Yes there are fees associated with purchasing such a service, but I'm not really sure why it's not more popular or more commonly adopted as SOP for small to medium enterprises to do this.
Maybe there is a convenience or liquidity factor that I'm missing, or maybe people really didn't think the cost was worth it (but I'd guess many are probably reevaluating now, just how safe or unlikely they think a bank failure really is)?
I could not get into either articles, but..
One can hope at the very least all the execs bonuses for the past 2 years need to be refunded to help pay for what the FDIC needs to pay out.
Why ? Yes, they said the Taxpayer will not pay, but that is a kind of lie of omission. The Fees Banks Pay the FDIC will be raising, that was stated. But where do these fees come from ? You know who, we will pay higher fees on our Bank accounts and higher interest rates on Loans and probably Credit Cards.
None of the journalist asked or brought up that point. So yes, the Taxpayer will pay for so they would not loose the amounts over 250,000. Again, no risk for the well-to-do but "main street" pays.
One can hope at the very least all the execs bonuses for the past 2 years need to be refunded to help pay for what the FDIC needs to pay out.
Why ? Yes, they said the Taxpayer will not pay, but that is a kind of lie of omission. The Fees Banks Pay the FDIC will be raising, that was stated. But where do these fees come from ? You know who, we will pay higher fees on our Bank accounts and higher interest rates on Loans and probably Credit Cards.
None of the journalist asked or brought up that point. So yes, the Taxpayer will pay for so they would not loose the amounts over 250,000. Again, no risk for the well-to-do but "main street" pays.
In their big announcement, the Fed did say that ultimately all costs will be recovered from the bank's remaining assets (and will not fall on the taxpayer).
The government is still providing liquidity and coercive muscle -- so it's still a bailout, plain and simple. Despite the attempts we are seeing to paint it otherwise.
The government is still providing liquidity and coercive muscle -- so it's still a bailout, plain and simple. Despite the attempts we are seeing to paint it otherwise.
The Fed is saying it will be funded by the banks remaining assets and the "banking system" which assumes higher FDIC premiums, which the banks will likely transfer to customer as additional fees. The taxpayer is definitely paying for it (just with extra steps).
Not higher fees. The FDIC will use a special assessment like they did in 2009. This special assessment was 5 basis points last time. 5 cents on $100. Hardly a major expense to pass on. Banks are highly competitive and those that do pass on the assessment will lose customers to those who eat the 5 basis points.
By that definition literally everything is taxpayer funded and thus taxpayer funded is a meaningless term.
> it's still a bailout, plain and simple. Despite the attempts we are seeing to paint it otherwise.
How do you define a bailout? The shareholders and bondholders of the bank lose everything. The customers (depositees) get their money back. You consider that a bailout?
How do you define a bailout? The shareholders and bondholders of the bank lose everything. The customers (depositees) get their money back. You consider that a bailout?
How do you define a bailout?
Per what sources like Investopedia, Wikipedia, and all the major English dictionaries say. None of which limit the term to protections for investors.
Per what sources like Investopedia, Wikipedia, and all the major English dictionaries say. None of which limit the term to protections for investors.
What happened to the executives, board, and shareholders? I honestly don't know as I haven't followed that closely, but to me those are the most important three questions, and in that order, because that determines the level of moral hazard.
I'm less concerned over semantic arguments of what technically constitutes a bailout. Personally a stable banking system is important to me, as is accountability for risky investment strategies. I have a hard time seeing the situation is black and white enough to jump to a conclusion on exactly what the delta is between what happened and what should have happened.
I'm less concerned over semantic arguments of what technically constitutes a bailout. Personally a stable banking system is important to me, as is accountability for risky investment strategies. I have a hard time seeing the situation is black and white enough to jump to a conclusion on exactly what the delta is between what happened and what should have happened.
The executives have been fired, the board has been fired, the shareholders have been zeroed out.
The shareholders are currently suing the board and the executives for running the bank into the ground.
Ten years from now, once all the long-term investments settle, if there's any money left over, the shareholders might be entitled to two turnips and cup of coffee from Uncle Sam.
As far as 'The guilty getting their just deserts', this is a rare example of the world mostly working in a just way.
The shareholders are currently suing the board and the executives for running the bank into the ground.
Ten years from now, once all the long-term investments settle, if there's any money left over, the shareholders might be entitled to two turnips and cup of coffee from Uncle Sam.
As far as 'The guilty getting their just deserts', this is a rare example of the world mostly working in a just way.
Really?
There are jurisdictions where executives responsible for this sort of failure would be shot and have their assets confiscated.
Neither is likely in this instance.
There are jurisdictions where executives responsible for this sort of failure would be shot and have their assets confiscated.
Neither is likely in this instance.
It sounds like you're advocating for summary execution. That's not really done in the civilized world. What do you really mean?
I think he's arguing for going beyond zeroing out the shareholders.
That's an uncharitable reading.
There'd be a trial before their assets are seized and they're executed.
If being civilized has led to clown world, perhaps alternate modes of civilization should be instituted.
There'd be a trial before their assets are seized and they're executed.
If being civilized has led to clown world, perhaps alternate modes of civilization should be instituted.
I believe the entire executive is without a job. Likewise with board. Shareholders will be able to get what they can that is left over after depositors are made whole, but that seems like it will be effectively zero.
As for consequences beyond that? Unsure.
Hopefully the CEO (now on his second failed bank) doesn't "fail upwards". I mean it's one thing to have a poorly performing bank on your resume... it's another to have two banks forcibly closed by the FDIC.
As for consequences beyond that? Unsure.
Hopefully the CEO (now on his second failed bank) doesn't "fail upwards". I mean it's one thing to have a poorly performing bank on your resume... it's another to have two banks forcibly closed by the FDIC.
Wiped out.
It's a bailout of the creditors. The bank itself is evaporating.
It's not a bailout because the stockholders were wiped out.
I guess you can say that customers were bailed out, but the bank was not.
I guess you can say that customers were bailed out, but the bank was not.
and the govt made a profit from TARP.
I don't want the US government to be driven by a profit motive any more than it already is...
I don't want the US government to be driven by a profit motive any more than it already is...
>> and the govt made a profit from TARP.
TARP had three players:
TARP Fund: via The US Government (fiscal),
POMO/QEx: via The Fed (monetary), and
The Banks (those bailed out)
TARP "made a profit" by the Fed printing money and buying assets at way above market value from the banks. It didnt cost anything because we just printed the money, but there was a cost...inflation. We just spread the cost secretly to everyone.
Real impacts of printing money: Houses jumping in value by 40 or 50%, meanwhile:
https://www.costar.com/article/266860380/most-us-households-... Most US Households Can't Afford a Median-Priced Home
https://www.nahb.org/blog/2022/03/36-million-households-cant... "36 Million Households Can’t Afford a $150,000 Home"
TARP had three players:
TARP Fund: via The US Government (fiscal),
POMO/QEx: via The Fed (monetary), and
The Banks (those bailed out)
TARP "made a profit" by the Fed printing money and buying assets at way above market value from the banks. It didnt cost anything because we just printed the money, but there was a cost...inflation. We just spread the cost secretly to everyone.
Real impacts of printing money: Houses jumping in value by 40 or 50%, meanwhile:
https://www.costar.com/article/266860380/most-us-households-... Most US Households Can't Afford a Median-Priced Home
https://www.nahb.org/blog/2022/03/36-million-households-cant... "36 Million Households Can’t Afford a $150,000 Home"
Just jumping in to point out that to make the profit from TARP, the government had to distort the economy in ways that won’t be fully understood for maybe 30 more years.
Yeah, I don't get this "It didn't cost the taxpayers a cent, so really it's all good, man, and not really a bailout" line that some people keep putting out, at all.
> govt made a profit from TARP
That's like selling your used car for a "profit" during the recent supply chain issues caused by the pandemic. Sure, you might have gotten more dollars from the sale than you did when you purchased it. But those dollars are worth a lot less now, and you would not be able to repurchase an equivalent car with those dollars.
The TARP profit line is how they deflect some of the outrage from yet another bank bailout. "See, it didn't cost you, the taxpayer, anything!".
That's like selling your used car for a "profit" during the recent supply chain issues caused by the pandemic. Sure, you might have gotten more dollars from the sale than you did when you purchased it. But those dollars are worth a lot less now, and you would not be able to repurchase an equivalent car with those dollars.
The TARP profit line is how they deflect some of the outrage from yet another bank bailout. "See, it didn't cost you, the taxpayer, anything!".
They are not profiting in the SVB bailout. The available SVB assets aren't increasing in value unless interest rates go back to zero.
The assets do not have to increase in value, the face value on them is enough (if what I am reading is right), but that is if you hold the bonds until maturity. SVB's problem was that suddenly they could not wait for maturity their depositors were asking for their money right now.
Since most of the money is in treasury bonds, the government can either wait until then, or maybe nullify the bonds that are now in their hands, since it is now the government owing the government money (there is probably some complexity there, but I don't know my way though it). In the mean time the depositors' money needs to come out of the FDIC, and that is probably going to increase costs for banks (and thus their consumers), until things can be worked out.
Since most of the money is in treasury bonds, the government can either wait until then, or maybe nullify the bonds that are now in their hands, since it is now the government owing the government money (there is probably some complexity there, but I don't know my way though it). In the mean time the depositors' money needs to come out of the FDIC, and that is probably going to increase costs for banks (and thus their consumers), until things can be worked out.
Do different banks pay different amounts into FDIC insurance based on how risky the FDIC considers them? If so then it’s really the FDIC adjusting their risk model to treat most mid-size banks as likely to cause systemic failures if they fail, and requiring the riskiest banks to cover the cost for that updated model based on how likely the FDIC believes they are to fail.
I don’t know that pricing insurance based on the actual cost of the potential external harm can really be considered a tax increase.
I don’t know that pricing insurance based on the actual cost of the potential external harm can really be considered a tax increase.
Yes. Banks are evaluated for their risk and pay assessments based on their risk scores and total deposits (give or take). The riskiest banks pay the most.
What upsets me the most is that the execs gave themselves bonuses in to their personal FDIC insured accounts, essentially writing a bad check for free bailout money, after the bank went negative.
Source?
SVB had a bonus schedule like every other company, and paid out those bonuses to all eligible employees. The payments were for work done in 2022. There is literally nothing to see here.
https://www.cnbctv18.com/market/silicon-valley-bank-employee...
https://www.cnbctv18.com/market/silicon-valley-bank-employee...
A family member noted to me yesterday (after being frustrated by the coverage and reading the regulatory requirements from the Fed) some stuff that is being poorly articulated by these articles.
Even under Dodd-Frank and prior to the Trump deregulation, SVB was in trouble and acting badly - and regulators probably wouldn't have caught it, nor would SVB have broken the law.
They had to do stress tests this year anyway. But that wouldn't have caught onto the fact that they parked deposits from (now forgiven) PPP loans into treasury bonds in a hold-to-maturity account (thus hiding the asset risk on paper, something that isn't illegal but is suspicious that they did to a degree beyond anyone else apparently), and it wouldn't get over the fact that the Fed's own guidelines for computing asset risk told them to only take into account a 1% rise in the Fed's interest rate (it actually rose 3%!).
Point being, deregulation (real or advocated for) didn't cause SVB to fail. It would have failed anyway. The actual data they base things on is bad, and the bank was nigh criminally mismanaged.
Even under Dodd-Frank and prior to the Trump deregulation, SVB was in trouble and acting badly - and regulators probably wouldn't have caught it, nor would SVB have broken the law.
They had to do stress tests this year anyway. But that wouldn't have caught onto the fact that they parked deposits from (now forgiven) PPP loans into treasury bonds in a hold-to-maturity account (thus hiding the asset risk on paper, something that isn't illegal but is suspicious that they did to a degree beyond anyone else apparently), and it wouldn't get over the fact that the Fed's own guidelines for computing asset risk told them to only take into account a 1% rise in the Fed's interest rate (it actually rose 3%!).
Point being, deregulation (real or advocated for) didn't cause SVB to fail. It would have failed anyway. The actual data they base things on is bad, and the bank was nigh criminally mismanaged.
> hey had to do stress tests this year anyway. But that wouldn't have caught onto the fact
> the bank was nigh criminally mismanaged
For sure this was a crime. It's being reported [1] that executives were aware of the risk and continued to purchase higher yielding assets.
From the article:
I wonder if any of this figured into their Chief Risk Officer's decision to leave the bank in early 2022.
[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
edit: archive.is link to paywalled article [2]
[2] https://archive.is/HqVWn
> the bank was nigh criminally mismanaged
For sure this was a crime. It's being reported [1] that executives were aware of the risk and continued to purchase higher yielding assets.
From the article:
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.
Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.
I wonder if any of this figured into their Chief Risk Officer's decision to leave the bank in early 2022.
[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
edit: archive.is link to paywalled article [2]
[2] https://archive.is/HqVWn
> their Chief Risk Officer's decision to leave the bank in early 2022
they actually had NO chief risk officer for the entirety of 2022. pesky officers nagging in one ear to mitigate risks eh?
https://www.bankingdive.com/news/svb-cro-Laura-Izurieta-chie...
they actually had NO chief risk officer for the entirety of 2022. pesky officers nagging in one ear to mitigate risks eh?
https://www.bankingdive.com/news/svb-cro-Laura-Izurieta-chie...
The logical conclusion for the facts you present is that we should increase regulation, not that deregulation didn't matter.
Also, to possibly strengthen the criminal code around handling bank deposits.
Also, to possibly strengthen the criminal code around handling bank deposits.
Those are two different things. I didn't say we need less regulation. I said that the deregulation that happened over the last few years is irrelevant.
Exactly. It's also unfair to say VCs and depositors should have noticed the problems when regulators didn't see them either.
Banking has been a quasi-government-operated industry since 1933, and even more so since 2008, and we need to make sure that the government does not dodge blame for the failure of SVB. Government regulators are supposed to prevent this kind of thing from happening, and they didn't prevent it. You can't as deeply involved as the government is in banking and not be complicit in the outcomes of banking.
People will try to blame "lobbying" for this but let's be honest, even if regulators were looking at every bank in the US with a microscope no matter how many deposits they held, those regulators probably would have missed this. Hey, government bonds are a great investment! Duration risk is sneaky.
Who caused that duration risk to actually manifest as a real problem? The Fed! The same people who are supposed to run the banking system in a stable way have contributed to the instability of the banking system by trying to squash inflation. If the Fed hadn't raised rates so much everyone would be praising SVB for doing so well.
People have an impression that banking is a private industry and the government comes in to bail it out, when really the government was involved the entire time. If we don't understand that, we won't be able to actually fix the problems.
Banking has been a quasi-government-operated industry since 1933, and even more so since 2008, and we need to make sure that the government does not dodge blame for the failure of SVB. Government regulators are supposed to prevent this kind of thing from happening, and they didn't prevent it. You can't as deeply involved as the government is in banking and not be complicit in the outcomes of banking.
People will try to blame "lobbying" for this but let's be honest, even if regulators were looking at every bank in the US with a microscope no matter how many deposits they held, those regulators probably would have missed this. Hey, government bonds are a great investment! Duration risk is sneaky.
Who caused that duration risk to actually manifest as a real problem? The Fed! The same people who are supposed to run the banking system in a stable way have contributed to the instability of the banking system by trying to squash inflation. If the Fed hadn't raised rates so much everyone would be praising SVB for doing so well.
People have an impression that banking is a private industry and the government comes in to bail it out, when really the government was involved the entire time. If we don't understand that, we won't be able to actually fix the problems.
This particular type of response blows my mind... "They were hiding their behavior... Therefore we don't need regulation."
When regulation fails, we update it to cover what we learned. When someone hides from regulation, we update the criminal codes. Regulation's goal is to steer behavior, not be a Minority Report for balance sheets.
When regulation fails, we update it to cover what we learned. When someone hides from regulation, we update the criminal codes. Regulation's goal is to steer behavior, not be a Minority Report for balance sheets.
Did the person you are responding to actually say "They were hiding their behavior... Therefore we don't need regulation?"
Does anyone say that?
Does anyone say that?
That's not what I said, or meant to imply. What I meant was firstly - depositors being made whole, investors losing everything, and management (hopefully) going to jail is the kind of response we want. Bad banks should fail, and the job of regulation should not be to protect banks or people who own equity in the bank itself. It should protect customers and society.
The second point that needs to be refuted, loudly, is that this is the Trump administration's fault for lowering the reporting frequency for smaller banks - what should really be scrutinized is what those requirements actually are and how they can be improved.
The second point that needs to be refuted, loudly, is that this is the Trump administration's fault for lowering the reporting frequency for smaller banks - what should really be scrutinized is what those requirements actually are and how they can be improved.
So, I push back some on the depositors being made completely whole. Customers are choosing to put their money in the bank, and their putting money in the bank is what is allowing the bank to take the risks. It's not like depositors are completely faultless here. I'm all on board with the selling of the assets being used to make depositors as whole as possible, but anything the current sale price the assets couldn't cover, I don't see why depositors should be made whole.
What you say is true, but the point remains that the limits imposed by the government only work if some depositors (large ones) bear some risk of losing their deposits. The limits may simply be moved up to $2 million or $5 million for certain kinds of banks, but the rules imposed by VCs and related investors require companies to concentrate all their business with one bank; this increases risk and needs to be outlawed (this kind of sweetheart deal is one of the reasons the bad managers at SVB piled up so many deposits). The VCs share a good deal of the blame here. There needs to be some incentive for multimillion dollar depositors to both evaluate risk and to be able to reduce it.
[deleted]
Frank was on the board of Signature Bank, that should tell you a lot about how useless Dodd-Frank was. The Biden admin had 2 years of total congressional control to overturn Trump's rollback of these supposedly amazing regulatory requirements.
Government encouragement of risky behavior due to bailouts is the problem, not deregulation.
Government encouragement of risky behavior due to bailouts is the problem, not deregulation.
I think it's reasonable to say that both things are bad. We need more stringent regulation and we need to stop bailing out bad actors. I can't fathom why the government voluntarily dialed FDIC insurance up to infinity for this particular bank crash - the rules around how FDIC insurance should work are extreme clear.
Either the government wants more control over the market, and failing banks that require bailouts does that or they're just receiving so much money under the table from these people it behooves them to bail them out.
I think stopping the bailout is in effect mostly enough "regulation" on its own. Anything else requires very good analysts watching this stuff and enforcing the regulation. From what I've seen, the government is very bad at enforcing most of their regulation. They're unable to do it with firearms, and they're unable to do it with the financial industry.
I think stopping the bailout is in effect mostly enough "regulation" on its own. Anything else requires very good analysts watching this stuff and enforcing the regulation. From what I've seen, the government is very bad at enforcing most of their regulation. They're unable to do it with firearms, and they're unable to do it with the financial industry.
> total congressional control
It most certainly did not have that.
It most certainly did not have that.
Dems had the Senate and House. Stop with the gaslighting. If you want to let them pull the wool over your eyes over and over and blame the guy that's been out of office for 3 years for their failures, I guess you kinda deserve what you get.
If you don't have 60 seats in the Senate, you don't control it under current rules. 41 Senators is all it takes to declare a bill filibustered and dead.
These rules are a severe perversion of the intention of a filibuster. They absolutely should be undone, but both parties are too afraid of giving up power when they have less than the majority. It's obscene and a perfect illustration of American politics.
These rules are a severe perversion of the intention of a filibuster. They absolutely should be undone, but both parties are too afraid of giving up power when they have less than the majority. It's obscene and a perfect illustration of American politics.
I’d be fine with the preservation of the filibuster if it was a true filibuster. Make the people who want to stop the bill stand up in front of the Senate and the world and make their case, indefinitely, until something gives.
Now it’s just a cheap veto with no meaningful short-term cost.
Now it’s just a cheap veto with no meaningful short-term cost.
The argument that I've heard is that a speaking filibuster results in inability to pass other bills through the chamber. So we can at least get other bills passed, but also some bills which can't be voted on would be able to get through because it's so easy to block things. I'm not sure which option is better.
Halting all Senate activity should be a consequence of of the filibuster. It increases the negative consequences of using it, something that is desperately needed. Right now there is basically zero cost to filibustering anything, so it happens all the time and tons of legislation isn't even proposed for debate since it's not the worth the hassle when senators know bills will just be filibustered anyway. If using what is supposed to be an extreme tool came with more consequences senators would (hopefully) reserve usage for more extreme legislation. If using the filibuster angered other members of your party who have worked hard to move bills through the legislative process there would be a lot more pushback to using it every time there is a day in the week.
The 1972 2 track rule has made it far easier to sustain a filibuster since there is little to no pressure from other minority members to compromise or just move on. The 2nd track allows just enough bill movement to prevent backlash from more moderate members.
The 1972 2 track rule has made it far easier to sustain a filibuster since there is little to no pressure from other minority members to compromise or just move on. The 2nd track allows just enough bill movement to prevent backlash from more moderate members.
That’s a feature, not a bug. It requires you to decide the legislation is so bad it’s worth tying up the Senate indefinitely.
Right now, there are no consequences for filibustering, so there’s little reason to use it judiciously.
Right now, there are no consequences for filibustering, so there’s little reason to use it judiciously.
The House used to have a filibuster rule in the 1800s. They finally got rid of it exactly because it ended up blocking everything... then restored it... then got rid of it again.
With the more than 20 years, and continuing, of Republican overrepresentation in the Senate, control by the Democratic majority is impossible. What needs to happen is making D.C. and Puerto Rico States of the Union and get rid of the Electoral College. Only then will the federally elected actually represent the voters.
The original intent of the Senate was to represent the States, not the voters. That's what the House is for.
FTFA: “Among other measures, Dodd-Frank imposed new reporting requirements on banks, toughened standards for capital adequacy, and restrained banks’ ability to use deposits for speculative investment. Banks with assets above $50 billion were deemed “systemically important” and subjected to especially strict scrutiny.”
Hold your horse. Back up a bit to 2014, to where this snippet appeared when SVB was a nonbank at the time:
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule.l
https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
Hold your horse. Back up a bit to 2014, to where this snippet appeared when SVB was a nonbank at the time:
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule.l
https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
Shouldn't journalists be writing these types of stories before the bank collapses? What happened to investigative journalism?
This guy had it in his newsletter in February: https://twitter.com/ByrneHobart/status/1628779894183272452
> What happened to investigative journalism?
Infotainment consumers happened.
Infotainment consumers happened.
[deleted]
"Oversight", is not the issue. The issue is our government has incentivized risky behavior by bailing these fools out. If you're bank management and you know big daddy government will save you no matter what... well then, why would you not continue to engage in this risky behavior?
I love how the white house is trying to paint this as an issue with lack of oversight and the need for MORE regulation when that's not even the issue.
I love how the white house is trying to paint this as an issue with lack of oversight and the need for MORE regulation when that's not even the issue.
I mean you loose all your investors' money and your job. As the CEO of a bank you probably get paid a lot in equity and that would be gone. If they were really reckless they could go to jail.
Hopefully they look into the exec stock sales over the past few months. If money in a checking account is not safe, and I can't spend cash over 10k without a ton of paperwork, where can I keep cash that is safe?
Hopefully they look into the exec stock sales over the past few months. If money in a checking account is not safe, and I can't spend cash over 10k without a ton of paperwork, where can I keep cash that is safe?
Oh how terrible. Must be awful losing your job while raking in millions off the stock you sold beforehand and then getting re-hired at the next massive bank that does the same thing.
These people rarely go to jail, and if they do it's a minimum sentence in low security white-collar "jail". The politicians will do everything they can to keep their donors donating.
The fact they ARE and continue engaging in this behavior right now proves you're just wrong about any possible "risk" they perceive.
These people rarely go to jail, and if they do it's a minimum sentence in low security white-collar "jail". The politicians will do everything they can to keep their donors donating.
The fact they ARE and continue engaging in this behavior right now proves you're just wrong about any possible "risk" they perceive.
Revolving treasury bills
[deleted]
How would this explain...that vast majority of banks were not doing what you say they were incentivized to do?
Maybe they weren't?
Maybe they weren't?
You might want to hold off on that statement. This isn't over yet.
Also, is your stance that if the majority don't do it then there's no incentive to be risky like these failed banks?
What happens if the government continues the trend of bailing them out? Do you think maybe banks will start to see a pattern and start changing investments?
Also, is your stance that if the majority don't do it then there's no incentive to be risky like these failed banks?
What happens if the government continues the trend of bailing them out? Do you think maybe banks will start to see a pattern and start changing investments?