SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all(twitter.com)
twitter.com
SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all
https://twitter.com/MacroAlf/status/1634626124260028419
87 comments
> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose?
How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/most of the debt holders. Letting debt holders also shoulder some of the costs is worth considering, but the authorities generally believe it's too risky (the risk being a huge amount of debt holders pulling their money and/or demanding much higher interests which raises general borrowing costs).
How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/most of the debt holders. Letting debt holders also shoulder some of the costs is worth considering, but the authorities generally believe it's too risky (the risk being a huge amount of debt holders pulling their money and/or demanding much higher interests which raises general borrowing costs).
Where do I sign up to play with these levels of leverage of other people's money too?
Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with?
Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the central bank?
All these privileges for no responsibility. This has to end. If we all admit it's other people's money, and we all admit that in failure, the government will also cover for them, and they get to play these completely absurd investments with leverage of 20 to 1, their privilege is just unjustified.
When the broker fucks up and let you blow your margins, the broker pays the bills. But banks get to blow the margins with everyone's money and somehow the government only comes in when they blew it, but wasn't responsible to keep tabs on their margin in the first place? And there's barely any margins, the leverage ratios are insane.
Of course debt holders would require much higher interests. The whole thing is just a sad scheme where the government is letting privileged entities a monopoly of using leverage on other people money, while the government holds the tail risk.
I would love to get 20 to 1 margin with the government taking all the tail risk to zero and allowing me to dip below zero by design. If I blew it I could start again just like Lehman CFO which moved over to SVB.
If you take their responsibility, you have to take their privileges too.
Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with?
Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the central bank?
All these privileges for no responsibility. This has to end. If we all admit it's other people's money, and we all admit that in failure, the government will also cover for them, and they get to play these completely absurd investments with leverage of 20 to 1, their privilege is just unjustified.
When the broker fucks up and let you blow your margins, the broker pays the bills. But banks get to blow the margins with everyone's money and somehow the government only comes in when they blew it, but wasn't responsible to keep tabs on their margin in the first place? And there's barely any margins, the leverage ratios are insane.
Of course debt holders would require much higher interests. The whole thing is just a sad scheme where the government is letting privileged entities a monopoly of using leverage on other people money, while the government holds the tail risk.
I would love to get 20 to 1 margin with the government taking all the tail risk to zero and allowing me to dip below zero by design. If I blew it I could start again just like Lehman CFO which moved over to SVB.
If you take their responsibility, you have to take their privileges too.
You seem to be saying, that bank owners can take big risks and make enough money that it’s worth it to occasionally lose all equity. But if we make sure depositors also lose money from this, you think depositors will be more careful - they’ll demand higher interest or choose banks with a lower risk profile?
I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later.
Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.
I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later.
Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.
Of course, when you're forced to pick a bank, and you're forced to stay in that bank because it's a nightmare to move banks, and you're forced to pick the largest banks because only they are too big to fail, there is no point doing any due diligence.
If you banked directly at the Fed, or with crypto, then moving some of your money to a bank would actually be a choice. And the entire incentive structure would shift accordingly.
They have no incentive to change. They are given a government backed mandate to be your only choice. Given those privileges, it's their incentives to abuse them. They have been continuously abusing them for years. It's not only risk, it's the interest rates they give customers. They get to arbitrarily pick and choose their friends to get good interest rate while you get trash.
They get to do all of this because they are protected with innocent people as meat shields. Meat shields that have no other choice but to protect these people from consequences.
If you banked directly at the Fed, or with crypto, then moving some of your money to a bank would actually be a choice. And the entire incentive structure would shift accordingly.
They have no incentive to change. They are given a government backed mandate to be your only choice. Given those privileges, it's their incentives to abuse them. They have been continuously abusing them for years. It's not only risk, it's the interest rates they give customers. They get to arbitrarily pick and choose their friends to get good interest rate while you get trash.
They get to do all of this because they are protected with innocent people as meat shields. Meat shields that have no other choice but to protect these people from consequences.
> Where do I sign up to play with these levels of leverage of other people's money too?
Presumably you apply for a banking license, commit a lot of capital and subject yourself to countless onerous regulations (with more to come, as usual). I'm pretty sure it's significantly less fun than you imply.
Presumably you apply for a banking license, commit a lot of capital and subject yourself to countless onerous regulations (with more to come, as usual). I'm pretty sure it's significantly less fun than you imply.
Treating your question as non-rhetorical, you get to play with the money if you work at a bank (most bank have a standard career webpage where you can sign up). But most normal employees don't profit all that much unless they make it to upper management.
As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.
As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.
But isn’t resetting the shareholders to zero exactly the problem? If we’re keeping score, the shareholders should owe the government exactly how much money was used to make the debt holders whole, right?
We're not keeping negative scores, that's the whole point of the invention of limited liability corporations. It's has large upsides (democratization of capitalism, ability to participate in larger and riskier ventures). Like most powerful tools, it can be abused, but it's such a powerful force multiplier that giving it up is just too costly.
Normally if I have contract with somebody of borrowing money, and I don't pay, the other side lost money. Because it was my responsibility who I do business with. So we both get to play until we reach zero. That's fair game.
Now we're saying, actually, banks effectively don't impose counterparty risk on their clients. So the government is actually who's taking the counterparty risk.
If that's the government and not the customers, why did they get that privilege? Why is the government only there when the risk is fulfilled?
Limited liability is fine. It's not fine when who's really liable is the government, while the original deal was between the bank and its customer. Student loans are also not fine either, since you don't get to set them to zero.
Revoke Banks privilege of handling money. Let them play the game like the rest. Even the government itself needs to raise money using Treasury bonds. I want a fair game. This game is rigged. One player has the privilege of effectively using the government as an insurer for it's counterparty risk. It has repeatedly blown and abused that privilege. Revoke it.
Let me hold my account at the Fed if I have positive balance, just like the rest of the banks. Call it CDBC or whatever. Let me get the Fed interest rates just like banks do. The banks are free to do business as they have always done, to loan money. They are free to deal with the trench of people who need loans. Not with my money. My money is only there because they forced me to. That's not a fair system. I don't approve their usage of it for their margins but I literally don't have a choice. Which is why they also get to give me zero interest rates while the Fed gives them much higher rates.
Now we're saying, actually, banks effectively don't impose counterparty risk on their clients. So the government is actually who's taking the counterparty risk.
If that's the government and not the customers, why did they get that privilege? Why is the government only there when the risk is fulfilled?
Limited liability is fine. It's not fine when who's really liable is the government, while the original deal was between the bank and its customer. Student loans are also not fine either, since you don't get to set them to zero.
Revoke Banks privilege of handling money. Let them play the game like the rest. Even the government itself needs to raise money using Treasury bonds. I want a fair game. This game is rigged. One player has the privilege of effectively using the government as an insurer for it's counterparty risk. It has repeatedly blown and abused that privilege. Revoke it.
Let me hold my account at the Fed if I have positive balance, just like the rest of the banks. Call it CDBC or whatever. Let me get the Fed interest rates just like banks do. The banks are free to do business as they have always done, to loan money. They are free to deal with the trench of people who need loans. Not with my money. My money is only there because they forced me to. That's not a fair system. I don't approve their usage of it for their margins but I literally don't have a choice. Which is why they also get to give me zero interest rates while the Fed gives them much higher rates.
The Fed really wants the discount window to back loans, and they’re fighting at least one bank that wants to operate with a 100% reserve ratio.
https://news.ycombinator.com/item?id=32235721
https://news.ycombinator.com/item?id=32235721
> We're not keeping negative score
And that's problematic for banking.
Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely.
Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.
And that's problematic for banking.
Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely.
Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.
I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.
> Shareholders could lose 100% of their investment, their EV is not +5%.
Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive.
> Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job.
Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job.
This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive.
> Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job.
Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job.
This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company.
AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
> depositors get back 100% up to the FDIC limit
Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part.
I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.
Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part.
I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.
No need to give it up. Just narrow its application to banks. Or even just certain bank transactions.
If elements in the finance industry keep acting irresponsibly - clearly true - why should they get a pass on personal consequences?
If elements in the finance industry keep acting irresponsibly - clearly true - why should they get a pass on personal consequences?
You don’t have to use a bank. Cash is one option, and perhaps someday soon a self managed/federal CBDC.
You can also put your cash into money market funds that invest in T-Bills, which is what anybody with some common sense and a large amount of money should do.
But in this world entities that offer you a return on your money will still exist, e.g. banks. If I can register my cash and you pay me x% per year, that’s better than getting 0. So banks would form regardless.
Banks make loans and create credit which allows the broader economy to grow. Better to have properly regulated private sector entities with skin in the game making lending decisions than having the federal government do it.
If you take a big chunk of credit creation and issuance out of service, the economy is likely to regress fairly significantly.
Clearly the existing bank regulations aren’t sufficient though.
You can also put your cash into money market funds that invest in T-Bills, which is what anybody with some common sense and a large amount of money should do.
But in this world entities that offer you a return on your money will still exist, e.g. banks. If I can register my cash and you pay me x% per year, that’s better than getting 0. So banks would form regardless.
Banks make loans and create credit which allows the broader economy to grow. Better to have properly regulated private sector entities with skin in the game making lending decisions than having the federal government do it.
If you take a big chunk of credit creation and issuance out of service, the economy is likely to regress fairly significantly.
Clearly the existing bank regulations aren’t sufficient though.
>If you take a big chunk of credit creation and issuance out of service, the economy is likely to regress fairly significantly.
Similarly, ceasing steroid use will reduce muscle mass.
Similarly, ceasing steroid use will reduce muscle mass.
Imagine trying to buy a house without a loan. Or start a business without cash up front.
We can move to a world without credit, but standard of living for people will drop significantly. Look at what happened when they tightened lending standards into a recession in the 1930s.
The key is to find the right balance in regulations to make the system robust
We can move to a world without credit, but standard of living for people will drop significantly. Look at what happened when they tightened lending standards into a recession in the 1930s.
The key is to find the right balance in regulations to make the system robust
Imagine a world where people had enough cash to do those things without needing a loan.
No doubt it would be "inflationary" or some other nonsense, but the reality is that banking is a form of deliberate rationing and enforced political hierarchy.
The financial industry exists solely for its own benefit, at spectacular cost to everyone else - not just by making significant capital almost cripplingly expensive for most of the population, but also by acting in irresponsible self-serving ways which everyone else has to pay for.
No doubt it would be "inflationary" or some other nonsense, but the reality is that banking is a form of deliberate rationing and enforced political hierarchy.
The financial industry exists solely for its own benefit, at spectacular cost to everyone else - not just by making significant capital almost cripplingly expensive for most of the population, but also by acting in irresponsible self-serving ways which everyone else has to pay for.
How is giving financial leverage to people with not enough cash in the bank, but a solid forseeable revenue stream "a form of deliberate rationing and enforced political hierarchy"?
It's like wishing that healthcare system wouldn't exist because you imagine a world where people were just healthy instead.
It's like wishing that healthcare system wouldn't exist because you imagine a world where people were just healthy instead.
Because the current overinflated housing market is a direct consequence (in the US) of loosening credit requirements for mortgages, the product of a herculean lobbying effort by investment banks in the late 70s to get the government to allow them to securitize mortgages (that is, immediately sell the off after origination), with the mortgage interest deduction (a subsidy to banks) the cherry on top.
Mortgages used to be boring and conservative, house prices were rational, but financial middlemen didn't make any money on it so it had to stop. It took the Reagan administration installing the Merrill Lynch CEO as head of Treasury to get it done.
The 2008 financial crisis and today's overinflated shitshow of a housing market are the direct result, along with tons of wealth creation for the rentier class.
Mortgages used to be boring and conservative, house prices were rational, but financial middlemen didn't make any money on it so it had to stop. It took the Reagan administration installing the Merrill Lynch CEO as head of Treasury to get it done.
The 2008 financial crisis and today's overinflated shitshow of a housing market are the direct result, along with tons of wealth creation for the rentier class.
The $175,000 brand new 3 bedroom homes in Houston are overinflated? There must be something else that's causing the inflation.
[deleted]
> What's the point in having banks anyway. Why let the people in the bank earn anything if they are risking money that isn't theirs and that the government will pay back anyway if they fail.
They're not exactly risking nothing. Capital requirements mean that each dollar of deposits need to be backed by more than a dollar worth of assets. The extra assets serves as a cushion in case something goes wrong. That cushion makes up the equity of the bank, and comes from shareholders. If the bank "fails", the shareholders lose it all, so it's in their interest to prevent that from happening.
They're not exactly risking nothing. Capital requirements mean that each dollar of deposits need to be backed by more than a dollar worth of assets. The extra assets serves as a cushion in case something goes wrong. That cushion makes up the equity of the bank, and comes from shareholders. If the bank "fails", the shareholders lose it all, so it's in their interest to prevent that from happening.
I know how it works. They get 10 to one leverage while the government effectively insures their counterparty risk for free.
That's absolutely ridiculous. Where do I sign up. I want to gamble other people money at 10 to one leverage and nobody suing me if I fall.
My cushion if I make a margin account at the bank is what, 2 to 1? Do you know the interest rates you pay for these margins? Compare that to interest rates the banks give their customers.
They are absolutely privileged, by law. You as an individual or even as a corporation don't get this privilege.
Why is it in their interest not to risk it in a ridiculous way? If I had several margin accounts of 10 to 1 that can only go down to zero, the highest return isn't by spending it wisely. It's by spending it in the most risky way, getting that sweet 10x on that risk and the rest can go to zero for all I care. I don't even need a positive expectation value investment to have a positive expectation value from this shenanigan.
Even investing in an unfair coin toss of 40% to double, getting free 10 to one margins my expectation value is an absurd 400% return starting from what should be negative expectation value investment.
The banks have privileges that are absolutely rigging the game in the most distorted ways possible. The shareholders equity doesn't justify their privileges.
That's absolutely ridiculous. Where do I sign up. I want to gamble other people money at 10 to one leverage and nobody suing me if I fall.
My cushion if I make a margin account at the bank is what, 2 to 1? Do you know the interest rates you pay for these margins? Compare that to interest rates the banks give their customers.
They are absolutely privileged, by law. You as an individual or even as a corporation don't get this privilege.
Why is it in their interest not to risk it in a ridiculous way? If I had several margin accounts of 10 to 1 that can only go down to zero, the highest return isn't by spending it wisely. It's by spending it in the most risky way, getting that sweet 10x on that risk and the rest can go to zero for all I care. I don't even need a positive expectation value investment to have a positive expectation value from this shenanigan.
Even investing in an unfair coin toss of 40% to double, getting free 10 to one margins my expectation value is an absurd 400% return starting from what should be negative expectation value investment.
The banks have privileges that are absolutely rigging the game in the most distorted ways possible. The shareholders equity doesn't justify their privileges.
[deleted]
You have the right sentiment but the wrong conclusion. It was clear after the large bailouts of 2008 that left to their own demise banks would do anything for a bit more money and were not trustworthy actors. That’s an old conclusion by the way. The same one was reached in the 1930s.
The logical conclusion to these bailouts was that the regulatory environment surrounding banking was plain bad which was unsurprising because successive neoliberal governments had torn down most of it. The conclusion to this one is that it still is and what was done in 2010 (Dodd-Frank) is a joke and clearly insuffisant. Something everyone knew.
You want to be mad at someone? Start with your government.
The logical conclusion to these bailouts was that the regulatory environment surrounding banking was plain bad which was unsurprising because successive neoliberal governments had torn down most of it. The conclusion to this one is that it still is and what was done in 2010 (Dodd-Frank) is a joke and clearly insuffisant. Something everyone knew.
You want to be mad at someone? Start with your government.
You can't regulate away bad incentives which come from the privileges that other regulations grant.
We're only in this mess because banks have excessive privileges. These privileges lead to misaligned incentives. No amount of regulation can realign the incentives back. Only revoking their privileges.
Their privileges include being the only entities able to deal with the Fed and hold deposits .
Let people bank directly at the Fed. Or with crypto. But banks don't deserve a special privilege of being the only way people can hold money.
Furthermore, loans should not be transferable.
Now banks will actually have to price loans correctly. And putting your money in a bank would be a choice they will have to tempt you with, by actually giving real interest rates. And you won't have misaligned incentives, because there is no captive audience.
Giving your money to the bank would be a risk you're doing willingly. A risk they will pay you for taking instead of robbing from you by their regulatory privileges.
We're only in this mess because banks have excessive privileges. These privileges lead to misaligned incentives. No amount of regulation can realign the incentives back. Only revoking their privileges.
Their privileges include being the only entities able to deal with the Fed and hold deposits .
Let people bank directly at the Fed. Or with crypto. But banks don't deserve a special privilege of being the only way people can hold money.
Furthermore, loans should not be transferable.
Now banks will actually have to price loans correctly. And putting your money in a bank would be a choice they will have to tempt you with, by actually giving real interest rates. And you won't have misaligned incentives, because there is no captive audience.
Giving your money to the bank would be a risk you're doing willingly. A risk they will pay you for taking instead of robbing from you by their regulatory privileges.
You are confusing different things.
I also agree that banks shouldn’t be the sole intermediating agents for money creation but this has absolutely nothing to do with retail banking.
Who exactly is the captive audience in retail banking? Last time I checked there was plenty of choice there.
Anyway, SVB clearly is a failure of risk management which is a failure of the regulatory environment.
I also agree that banks shouldn’t be the sole intermediating agents for money creation but this has absolutely nothing to do with retail banking.
Who exactly is the captive audience in retail banking? Last time I checked there was plenty of choice there.
Anyway, SVB clearly is a failure of risk management which is a failure of the regulatory environment.
> conclusion to this one is that it still is and what was done in 2010 (Dodd-Frank) is a joke and clearly insuffisant
SVB was exempted from much of Dodd-Frank and Basel III.
SVB was exempted from much of Dodd-Frank and Basel III.
Because:
In the United States, banks can empower the government in such a way as to crack down on 'problematic' things without a direct Constitutional crisis.
See Bank of America voluntarily handing the FBI their firearm related transaction dataset.
Private industry goves government a plausible deniability proxy in short.
In the United States, banks can empower the government in such a way as to crack down on 'problematic' things without a direct Constitutional crisis.
See Bank of America voluntarily handing the FBI their firearm related transaction dataset.
Private industry goves government a plausible deniability proxy in short.
I wish people would distinguish between "SVB does not deserve a bailout" as in "let it fail" vs as in "wipe out the shareholders and bond holders, but, sure, bail out the depositors"
Exactly. SVB has ceased to exist. The bank is not being bailed out. The depositors are. You know, the normal people who’s only error keeping money in a bank.
Except SVB’s customers aren’t “normal people”… they’re VCs, their funds and portfolio companies
...portfolio companies which need to make payroll payments to normal people
Still doesn’t make the majority of SVB’s customers normal people
With thousands of your "normal people" on payroll by proxy.
Those normal people still aren't SVB customers… they don't decide where their employer banks or why they bank there
Yes, they're exposed to SVB failing but as everything in life we're all exposed to failures we have no influence over
VCs, founders etc had influence over where companies money was kept, and ultimately whether to start a run on the bank and kill it
Yes, they're exposed to SVB failing but as everything in life we're all exposed to failures we have no influence over
VCs, founders etc had influence over where companies money was kept, and ultimately whether to start a run on the bank and kill it
The situation is that the depositors will eventually get some money. And that should be good enough. If they were so stupid they put all of their money in single bank account they deserve to fail.
> The situation is that the depositors will eventually get some money. And that should be good enough.
No, it's not "good enough". Far too many companies can no longer make payroll as a result of this.
No, it's not "good enough". Far too many companies can no longer make payroll as a result of this.
If you had a payroll to make this month and only had that much in cash on hand, you were already a marginal business and a gust of wind could have knocked you out. Your bank failing was that gust of wind. You’ll definitely get up to $250k back soon and probably more, and hopefully you can sort out the disruption and find a way to carry on.
If, on the other hand, you had a lot more cash on hand but parked it all as uninsured deposits in one bank, you should be screaming at whatever mentor told you that was a reasonable thing to do. Either your mentor was a hack with little financial experience or they were conniving against taxpayers and believed bailouts would magically come to their rescue and remediate well-known tail risk. Somebody done you wrong, kid. Take it up with them, not the rest of us.
If, on the other hand, you had a lot more cash on hand but parked it all as uninsured deposits in one bank, you should be screaming at whatever mentor told you that was a reasonable thing to do. Either your mentor was a hack with little financial experience or they were conniving against taxpayers and believed bailouts would magically come to their rescue and remediate well-known tail risk. Somebody done you wrong, kid. Take it up with them, not the rest of us.
I'm a complete ignoramus in this field, so this is a honest question. Please ELI5:
Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 different banks?)
Or can you pay some extra insurance in order to get the required protection without the operational hassle of having to deal with multiple banks?
Or is it the logic that you need to protect from bank runs to one (or two) of your banks and assume that the others will stay solvent?
Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 different banks?)
Or can you pay some extra insurance in order to get the required protection without the operational hassle of having to deal with multiple banks?
Or is it the logic that you need to protect from bank runs to one (or two) of your banks and assume that the others will stay solvent?
> Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 different banks?)
That is an option, yes. You can also automate it through a couple different ways. Some are third party brokers who then deposits it across multiple institutions keeping each balance below $250k, others are banks that have agreements between each other to share deposits such that the deposit at each institution is below the limit.
For an example of the latter, https://www.intrafinetworkdeposits.com/find-intrafi-network-...
> Or can you pay some extra insurance in order to get the required protection without the operational hassle of having to deal with multiple banks?
The above deals with the operational hassle but you can also directly insure deposits.
The most direct way is the Depositors Insurance Fund, which is run out of Massachusetts and has some participating banks.
Incidentally, really large companies like GM or Toyota, fund their payroll through the commercial paper market. As a result they don’t have the large balances you’re imagining sitting around in bank accounts for a monthly withdrawal.
These sorts of notes actually occupy a fun place in the history of the development of currency, but that’s off topic.
That is an option, yes. You can also automate it through a couple different ways. Some are third party brokers who then deposits it across multiple institutions keeping each balance below $250k, others are banks that have agreements between each other to share deposits such that the deposit at each institution is below the limit.
For an example of the latter, https://www.intrafinetworkdeposits.com/find-intrafi-network-...
> Or can you pay some extra insurance in order to get the required protection without the operational hassle of having to deal with multiple banks?
The above deals with the operational hassle but you can also directly insure deposits.
The most direct way is the Depositors Insurance Fund, which is run out of Massachusetts and has some participating banks.
Incidentally, really large companies like GM or Toyota, fund their payroll through the commercial paper market. As a result they don’t have the large balances you’re imagining sitting around in bank accounts for a monthly withdrawal.
These sorts of notes actually occupy a fun place in the history of the development of currency, but that’s off topic.
Thanks! So where is the catch?
According to https://www.ycombinator.com/blog/urgent-sign-the-petition-no...
> In the Y Combinator community, one-third of startups with exposure to SVB used SVB as their sole bank account
Why did so many startups end up in that situation?
Is doing things properly too expensive? Or just requires hiring an expert? Hubris? (won't happen ever), calculated risk? (Among the many things that can go wrong in a early startup life, the bank going bust is the last worry)
According to https://www.ycombinator.com/blog/urgent-sign-the-petition-no...
> In the Y Combinator community, one-third of startups with exposure to SVB used SVB as their sole bank account
Why did so many startups end up in that situation?
Is doing things properly too expensive? Or just requires hiring an expert? Hubris? (won't happen ever), calculated risk? (Among the many things that can go wrong in a early startup life, the bank going bust is the last worry)
The root cause of all of this is that the US is so corrupt that a large bank was able to exempt itself from international banking standards.
So it really is “the rest of us” who are to blame, by passively accepting corruption and feckless regulators. Taxpayers should pay the bill, it might incentivize them to get off their ass for once.
So it really is “the rest of us” who are to blame, by passively accepting corruption and feckless regulators. Taxpayers should pay the bill, it might incentivize them to get off their ass for once.
> Taxpayers should pay the bill, it might incentivize them to get off their ass for once
like they did in 2008?
I would rather pay off student loans
like they did in 2008?
I would rather pay off student loans
What happened in 2008? I was very young then so I don’t know.
The US plunged into the worst recession since The Great Depression of the 1930s when Lehman Brothers bank collapsed, which quickly cascaded around the world.
2008 is aka 'The Great Recession'; it likely would have been much worse without govt intervention, though the targets of the help were corporations, not the average person affected by it.
The 2008 crash was the culmination of a house of cards largely enabled by deregulation that wiped out huge mainstays in America, including the auto industry. GM and Chrysler are only with us today because of massive govt bailouts. Many banks large and small failed and were absorbed into larger ones (eg Washington Mutual). The govt bailed out other banks deemed 'too big to fail' (eg Chase).
Countries were also failing over this (eg Greece, which used the euro hence was not a sovereign currency issuer and had to rely on Germany et al to assist). Severe govt spending cuts were imposed around the world, leaving the average citizen bearing the brunt of the downturn.
None of the criminal bankers that caused this crash were held criminally or civilly accountable, sparking the Occupy protests. In fact, they still got their big bonuses that taxpayers paid for. Meanwhile, average people lost their homes, businesses, and jobs.
It took about a decade to return to pre-crash economic levels. Not counting 9/11 (the effects of which changed the trajectory of modern life), this was the first 'once in a lifetime' shock for Millennials that set us back many years … just in time for a global pandemic.
There are some movies about the 2008 crash. Maybe checkout 'Margin Call'.
2008 is aka 'The Great Recession'; it likely would have been much worse without govt intervention, though the targets of the help were corporations, not the average person affected by it.
The 2008 crash was the culmination of a house of cards largely enabled by deregulation that wiped out huge mainstays in America, including the auto industry. GM and Chrysler are only with us today because of massive govt bailouts. Many banks large and small failed and were absorbed into larger ones (eg Washington Mutual). The govt bailed out other banks deemed 'too big to fail' (eg Chase).
Countries were also failing over this (eg Greece, which used the euro hence was not a sovereign currency issuer and had to rely on Germany et al to assist). Severe govt spending cuts were imposed around the world, leaving the average citizen bearing the brunt of the downturn.
None of the criminal bankers that caused this crash were held criminally or civilly accountable, sparking the Occupy protests. In fact, they still got their big bonuses that taxpayers paid for. Meanwhile, average people lost their homes, businesses, and jobs.
It took about a decade to return to pre-crash economic levels. Not counting 9/11 (the effects of which changed the trajectory of modern life), this was the first 'once in a lifetime' shock for Millennials that set us back many years … just in time for a global pandemic.
There are some movies about the 2008 crash. Maybe checkout 'Margin Call'.
The Global Financial Crisis.
https://en.wikipedia.org/wiki/2007%E2%80%932008_financial_cr...
https://en.wikipedia.org/wiki/2007%E2%80%932008_financial_cr...
My expectations is they will liquidate all current holdings of SVB, and probably half their assets are down 20% because of interest rate pummeling of long dated bonds, so maybe everyone gets a check on Monday or Friday for 90% of their total assets at SVB. Payroll gets made, most companies will be fine, some runways are a wee bit shorter.
I think fast is better than perfect in this scenario.
I think fast is better than perfect in this scenario.
Looks like that's happening: https://www.bloomberg.com/news/articles/2023-03-11/fdic-race...
That is what will happen, and the assets will be liquidated against some depositor holdings.
As I understand it, the FDIC normally steps in early enough that even non-insured accounts get made while.
No, it is good enough. They knew the rules going in. No rrason to change them after the fact because it now personally affects them. FDIC will write checks up to 250k, and return any/all recovered funds to depositors.
We can discuss changing that moving forward, but SVB is already done and dusted.
We can discuss changing that moving forward, but SVB is already done and dusted.
We already insure 250k in deposits through the FDIC. If you have more than 250k in cash, I don't think its unreasonable to expect that you need to start investing time/money in managing your reserves and not have the rest of society fund the risks you're taking.
If companies want to lobby for some sort of tax like unemployment tax on wage labor, to fund a business version of unemployment, it might be a different story.
If companies want to lobby for some sort of tax like unemployment tax on wage labor, to fund a business version of unemployment, it might be a different story.
250k is not a lot. A 15-20 person company could conceivably spend more than that month, especially with dev salaries, rent etc.
How many of those have a treasury function?
How many of those have a treasury function?
They have to “make payroll” but couldn’t they cut all employees down to minimum wage? And then promise a performance bonus when money is restored and they haven’t quit.
Tech workers are usually at will, no union, so I think salary is completely discretionary.
This would be for hours going forward, not the payrolls due for hours already worked.
Tech workers are usually at will, no union, so I think salary is completely discretionary.
This would be for hours going forward, not the payrolls due for hours already worked.
[deleted]
i guess they should have thought of that before they deposited their money into a business that plays games with money to scam wealth out of the economy
I guarantee that you have almost no understanding of whatever the bank you use is really doing. Feel free to point me to the balance sheet, and explain it.
Of course, that won't matter because in the event that you can explain it, there's no guarantee you're not being unknowingly defrauded. Save your schadenfreude, it's gross.
Of course, that won't matter because in the event that you can explain it, there's no guarantee you're not being unknowingly defrauded. Save your schadenfreude, it's gross.
What I'm saying applies to all banks including the ones I use, not just SVB. I'm fully aware of the fact a significant portion of my money is in the hands of a bunch of coke addicts.
Why would they hedge? They would lose pretty much all of the return that they were getting by going long duration.
The problem is that their portfolio was too long duration, not a lack of hedging.
The problem is that their portfolio was too long duration, not a lack of hedging.
> Why would they hedge? They would lose pretty much all of the return that they were getting by going long duration.
In general you are right. But last year was special. Everyone and their grandmother knew the Fed will hike rates, numerous times. The Fed did not tire to tell that to whomever bothered to listen. Not putting any interest rates hedge on in such a situation sounds a bit crazy.
In general you are right. But last year was special. Everyone and their grandmother knew the Fed will hike rates, numerous times. The Fed did not tire to tell that to whomever bothered to listen. Not putting any interest rates hedge on in such a situation sounds a bit crazy.
Sure, but they could have sold off a lot of their long term assets earlier instead. To me, the problem was not an outright lack of hedges, rather it was continuing to take too much risk all of the way down. Hedges only make sense to me if they were a cheaper way to achieve the same thing as selling the assets.
Right, the problem was greed driving risk
i don't know what the hedge would be, but if they made some return rather than a loss?
SVB is not getting a bailout. It is dead. Its share price is $0 and all shareholders are walking away with nothing.
The government's decision on whether to bail out its depositors or not isn't going to be (and shouldn't be) based on how well the bank was run, especially given that it was fully compliant with all regulations.
The government's decision on whether to bail out its depositors or not isn't going to be (and shouldn't be) based on how well the bank was run, especially given that it was fully compliant with all regulations.
Depositors knowingly took the risk of having such large deposits there. They made this decision and should face the consequences of it, not the taxpayers.
The collapse of the regional banking sector across the country and possibly silicon valley as a whole is going to affect regular taxpayers a lot more than a few billions in temporary spending by the federal government. Doubly so because most of the funds are in risk free securities that can be easily liquidated over time. Remember that SVB is one in a long list of small to mid sized banks that made such investments in the last couple of years and now have to realize losses because of it. If left unchecked plenty more banks are going to have runs next week. The government's job is not to sit by and say "I told you so!" but do the best it can to prevent the iceberg from tipping. People forget that taxpayers made a profit on TARP bailouts and prevented the collapse of the banking system and the economy in doing so.
If the securities can be easily liquidated then there's really no economic loss for these guys going under. The real economic cost of a bank run is the early liquidation of good firms. If all these small and medium banks just have to sell their liquid treasuries or MBS portfolios then no big deal. Whatever working capital they're providing is pretty straightforward for some other financial institution to provide. The rest is just transfers from one party to another, no need to intervene.
Nope. This is a commonly used scare tactic.
Tan's proposed bailout is nothing like TARP
Tan's proposed bailout is nothing like TARP
What is the difference between the two?
With TARP the government owned assets. For every dollar they invested, they could receive less, equal, or more than a dollar. Overall, they received more.
Tan is proposing the backstop deposits. In this case, the govt can receive AT MOST a dollar for every one of its dollars. The absolute best case is a break-even on the investment (and the government eating the cost of administering the program)
Tan is proposing the backstop deposits. In this case, the govt can receive AT MOST a dollar for every one of its dollars. The absolute best case is a break-even on the investment (and the government eating the cost of administering the program)
How are you getting to an at best break-even?
Looking at the most recent 10-K (12/21), if you have more recent figures I’d be happy to use those:
Granted, some of this has already been liquidated, but if the government paid out depositors one-for-one, and held the rest of the book to maturity they’d make 31B. That’s basically the same argument employed when stating the government “made” money with TARP.
Looking at the most recent 10-K (12/21), if you have more recent figures I’d be happy to use those:
Total deposits: 173.109B
Total assets: 211.793B
13.8B cash
26.1B available-for-sale (presumably marked to market, so that’s supposed to represent today’s sale price)
91.3B held to maturity securities (these aren’t marked to market AFAIK, so this represents the value if they’re held to maturity not sold today)
73.6B in loans net of loss allowances
Total: 204.8B
Granted, some of this has already been liquidated, but if the government paid out depositors one-for-one, and held the rest of the book to maturity they’d make 31B. That’s basically the same argument employed when stating the government “made” money with TARP.
Good points
> presumably marked to market
This is the key-- not sure if we really know what is marked to market at what isn't
> held the rest of the book to maturity
That's like 8 years? and a gain in nominal terms but to real terms ie inflation-adjusted since a 2031 dollar is worth less than a 2023 dollar
> presumably marked to market
This is the key-- not sure if we really know what is marked to market at what isn't
> held the rest of the book to maturity
That's like 8 years? and a gain in nominal terms but to real terms ie inflation-adjusted since a 2031 dollar is worth less than a 2023 dollar
You're technically right, but people treat it as de-facto zero risk.
You also need to look at second-order effects. If startups go out of business because of this, that's a drain on unemployment funds. Those are income taxes not getting paid. Then there are downstream job losses on top of it. It could set back the sector for years, giving other countries sudden advantage in tech. In addition, some LPs are pension funds, so taxpayers would have to make up pension shortfalls. Then there's the risk of contagion now that everyone will be looking at their bank closely. You really don't want to take that chance.
Companies need to get some money very quickly, and you really want them to get at least 95 cents on the dollar back within a month.
It's one thing to let tech suffer because of its own hubris, but because of a run on a traditional bank?
You also need to look at second-order effects. If startups go out of business because of this, that's a drain on unemployment funds. Those are income taxes not getting paid. Then there are downstream job losses on top of it. It could set back the sector for years, giving other countries sudden advantage in tech. In addition, some LPs are pension funds, so taxpayers would have to make up pension shortfalls. Then there's the risk of contagion now that everyone will be looking at their bank closely. You really don't want to take that chance.
Companies need to get some money very quickly, and you really want them to get at least 95 cents on the dollar back within a month.
It's one thing to let tech suffer because of its own hubris, but because of a run on a traditional bank?
> but people treat it as de-facto zero risk.
FDIC guarantees deposits up to 250k and everyone should know this. I know grandmothers with better risk mitigation strategies than these startups.
Your second paragraph is pure scare tactic. Companies that fail at the basics of managing their own money against simple obvious risks should face the result of their careless. They will be replaced by better-run companies.
FDIC guarantees deposits up to 250k and everyone should know this. I know grandmothers with better risk mitigation strategies than these startups.
Your second paragraph is pure scare tactic. Companies that fail at the basics of managing their own money against simple obvious risks should face the result of their careless. They will be replaced by better-run companies.
> Your second paragraph is pure scare tactic.
This isn't the time to be a purist. What happened happened; now you have to look hard at possible outcomes and be pragmatic about the best response.
This isn't the time to be a purist. What happened happened; now you have to look hard at possible outcomes and be pragmatic about the best response.
> people treat it as de-facto zero risk
Silicon Valley was not an investment-grade bank. If you’re running a corporate treasury function, you should have sweep, have a back-up bank account and know how to pull deposits into Treasuries.
Silicon Valley was not an investment-grade bank. If you’re running a corporate treasury function, you should have sweep, have a back-up bank account and know how to pull deposits into Treasuries.
If 'knowing the risks' means banks cannot be trusted then the economy as a whole will be devastated. Banking is a pillar - alternatively we can go back to the 1930s and store money under mattresses.
Odd assumption to make
I am kinda shocked that the focus is still on hedging against a 100% singular (riskiest) form of T-bill investing.
Shouldn't we be looking at the implementing Basel III capital requirements for ALL financial companies, and not just toward banks (thus exempting non-banks such as SVB)?
Shouldn't we be looking at the implementing Basel III capital requirements for ALL financial companies, and not just toward banks (thus exempting non-banks such as SVB)?
There are multiple parties sharing this moral hazard. The group includes captured politicians and administration who have SVB's back and have assured them about bailing out.
If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose?
Let it all fail. If you don't let it fail, might as well go full on CDBC and revoke banks privilege and role in managing money. What's even the point of having banks when the banks don't really hold the risk themselves? Why have them as gatekeepers? They don't deserve a single dollar earned from risk that they don't hold.