Yellen and the FDIC is in a tough spot. This is the important line, "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Thus, on one hand, I'm glad they're doing this, as it should help prevent wider bank runs, and it ensures that banks are the ones that are actually paying for it.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
Banks have lost all excuses to be making money out of other people's deposits. If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd.
Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
>If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
>Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
You are missing something crucial here - treasury bonds are a loan to the government - this is all by design.
Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
> because the Treasury needs banks to purchase government bonds
Does it? Or is this just how the system is currently designed?
50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
>Does it? Or is this just how the system is currently designed?
Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.
The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.
>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.
You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.
That does not address the second question at all? The bonds need to be bought by someone, but you gave no argument why this someone has to be banks and why banks need tax money for bailouts on top of that.
It was explained, maybe you didn't connect the reasoning.
First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.
It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)
As to why do banks need tax money for bailouts?
The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.
But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.
It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.
The banks need to buy treasuries, because they treat bonds as a risk free financial instrument. Everyone else would have to recognize the risks inherent in those bonds and thus demand higher interest. The federal government can't afford that.
The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.
So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.
But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.
I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.
Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation of the actual present value of that capital at that time).
Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.
But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.
That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.
My open question is whether the current system is the only way, yet alone the best way, to practically achieve this goal?
you think inflation is a problem now, wait until Congress has the literal power to order the Fed the print money which is effectively what you are proposing.
I do not trust the Fed, but I Sure as shit do not trust the US Congress.
Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury
The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill
Of course it is the fed who prints the money in the US and has dual inflation/unemployment targeting mandate. In other countries this role is typically performed by the central bank.
The debt ceiling doesn’t control spending because it is a misnomer. The money has already been spent. The debt ceiling controls whether the government will honor the obligations it has already made.
And that is cheaper? How much more expensive would a "correct" interest rate be compared to bailouts+economic fallout+loss of public trust you get from the current "risk-free" fantasy?
Trying to keep up the growth half a century ago was the last thing that (at least the West) needed to do - and it was already aware of that at that point.
I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.
People can learn how to use Treasurydirect.gov instead of using their bank as a lousy bond broker. Inflation protected bonds, that you can buy only $10k a year of are some of the highest yielding risk free investments that exist. Banks should just make money off fees and hold short duration Treasury bills only.
Other institutions that have LPs should lend to businesses, students and home owners.
But then you don't have the convenience and liquidity of a bank account. The system works because the bank can invest the aggregate deposits of all depositors and still be ready to cash people out as needed (of course, barring a situation like this one, which is what the deposit insurance is for).
The majority of people don't need daily bank accounts. The only reason why we are using them is because to dollar notes have not kept up with inflation. A $500 bill from 1900 would be a $17,500 note today. Two of those notes provide more liquidity than the majority of bank accounts in the US.
>Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
War bonds were bought by people directly. I see no reason why we can't have the same today. God knows the US needs a WWII sized investment in repairing infrastructure.
Individuals purchasing war bonds helped, but didn't pay for WWII.
The war cost a little over $300 billion. $50 billion of that was through individual purchases of War Bonds, the rest came from banks and taxes.
Bankers and merchants have always funded the United States. A representation of Robert Morris, the "financier of the American Revolution" is painted in The Apotheosis of Washington, the fresco decorating the ceiling of the rotunda in the Capitol building where he is shown receiving a bag of gold from the god Mercury. Soldiers and supplies were paid for with "morris notes" which was a proto-currency of the US that was backed by Morris' personal fortune.
Yup. The reasonable UX here is that you as a retail customer get to pick what assets your deposits should go into, and you take the risk. Bank just gets a minor cut for doing the admin work.
And yes, that means if you picked “10y treasuries at 1.56% interest rate” back in 2021, then 80% of your deposit would now be gone. You should have picked “3m treasuries at 0.1% interest rate”.
This whole idea that a bank deposit is some magical asset that you can never lose anything on (other than through inflation) is a leaky abstraction. Like with all leaky abstractions the happy path is great, but when it starts leaking it can get real bad.
So people rather than banks would now be sitting on hundereds of billions of losses. Instead of depressing bank profits those losses would be depressing consumption or home purchases.
Depressing home purchases might well be a good idea. Right now people treat them as investments rather than mere housing, and as a result that market is thrown entirely out of whack.
Indeed, home prices increasing at more than a modest rate is a bad thing for everyone in the long term.
Homes should be investments in the same way that a factory or warehouse is an investment. You buy instead of renting in order to fix the cost of doing business over time, not to speculate on potential future values.
Yes, with "Land Bank" being a big thing now, with people just buying up land and holding it to simply fight inflation, things are just going to spiral out of control one way or another.
The US government already sells billions of dollars worth of various types of bonds to consumers every year. How is what you're proposing any different, and how would you entice more people to buy them than are currently buying T-bills, T-bonds, I-bonds, etc.?
Who is going to buy them? Most US citizens have less than a month's worth of income in their savings account. I'd be surprised if they enough confidence in their own income to tie even half of that up in war bonds.
Many (most?) Americans have no savings account. Not because they are poor but because a savings account is largely an obsolete anachronism. The common tactic of conflating "savings" with "having a savings account" is intentionally misleading.
Per the US government, the median US household has $1000/month they could invest after all ordinary expenses.
Perhaps we'll be forced to accept that we cannot continue to have "endless growth" with a declining workforce. The cost of Labor is going to go up at all levels, and that will mean smaller profits and more inflation until things stabilize and enough of us are incentivized to do productive work.
> Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?
That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business).
The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
> If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers.
More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
You're not supposed to talk about that! "If something we don't like happens we'll have to raise prices!" seems to be taken at face value all the time. It's true that in an idealised perfectly competitive market a measure which increases the costs of all producers equally will raise prices across the board, but this is absolutely not realistic.
As you say, the what really matters is (perceived) elasticity. If a company thought they could increase profit by increasing prices then they'd just do it. Conversely if they get fined or regulated or whatever but, as expected, it doesn't affect their elasticity curve then they'll leave prices where they are. If they were acting rationally it was already at the ideal point.
Normal/poor people don't put enough money into banks for it to represent much of their earnings. IIRC, from that image that was circulating around, much less than half of the deposits of even BofA are from accounts <$250k. So I don't think accounts like your grandma's are going to bear any percentage of the brunt of this.
> Normal/poor people don't put enough money into banks for it to represent much of their earnings.
This is hurtful in more ways than one.
Banks routinely charge all kinds of fees from account maintenance to whatever Wells Fargo did for years.
Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Either what you say is true and the retail customers are insignificant, and banks must offer no fee accounts. If not, they can't block federal reserve from creating default USD accounts for everyone.
Or they are an important part of the bank's marketing strategy or whatever. In this case, banks must lose the ability to gamble customer funds.
> Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Actually the FED is opposed to this themselves. A company called the narrow bank was going to try this. The FED refused them a banking license, all the way to court.
The FED wants deposits reinvested into the economy.
> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee.
> Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.
It feels like they were offloading their cost to a service that the government maybe offers at a loss.
It's not so much about the loss, its about the fact that banks lose their depositors. It is great for an economy that the 'savings' of people are used to safely invest in good ideas. This is the function of banks, and incidentally a function that really benefits from a profit motive.
Hence I believe the Fed was against this to keep the economy running by 'keeping money rolling'.
I am not convinced by this argument* because banks can already do that. I don't think that bank are "required" to invest client's deposits, so they can already just stash paper cash in a big vault. It is clearly a dumb strategy for a retail bank.
This proposal for narrow banking seems to employ the government as this vault, sort of like treasury bonds that can be freely withdrawn, which seems a more significant difference.
* I am not denying that this is what the feds claimed and/or believed
It’s deposit volume rather than number of accounts that are over $250k. I’m sure that most of the accounts are <$250k, but a single $1m account accounts weighs the same as 100 $10k accounts.
> Yeah, the fees and lower interest rates from this will be pretty brutal for the poor.
I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
It's not only the earned interest on savings being discussed here, the OP was also including higher interest rates on the variable rate loans that most poorer borrowers qualify for.
They only need to cover 20 billion or so for SVB? In the grand scheme of all banks, that's not a ton. SVB wasn't some FTX oops it's all gone level fraud.
Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
An assessment on banks costs shareholders of the bank, not accountholders. (Maybe it indirectly costs accountholders if banks lower interest rates on customer deposits, but these rates are generally not affected by a small short term shock).
It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented.
Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers.
If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
4) Banks get their privileges revoked and they are no longer an oligopoly with privileges of being the only way to store dollars legally, and the only investment institutions who get to gamble their customers money while the government is insuring their loses but does nothing about their gains.
The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money.
Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
They got to play with 10x leverage with their client funds for free. You can't barely get 2x leverage at broker, you pay interest rates much higher and they actually enforce strict margins.
Minewhile these people out of their privilege as bankers got to play with much bigger leverage, while paying zero interest rates to their counterparty which turned out to be fully paid for by the government in the end.
100% investment loss in this case is hardly enough, with the leverage levels banks can access they can literally collect pennies in front of a train and have positive expectation values for shareholders, while investing in negative expectation value investments.
And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows. They paid their customers nothing for it.
VC investment strategy for VC bank. They took the zero or hero attitude until the end. Again, we're taking about people with already VC mentality of "worst case 100% loss, best case 1000%".
No wonder that once VCs recognized their own shadow they fled so fast.
And now they are pretending as if it's the fate of the banking system on the line.
VC bank, managed like VC venture for VC firms. They deserve to lose VC money.
Their loans are probably also worthless than they claim, but they managed to successfully swindle the Fed in the most VC way ever with the shortest deadline. I'm betting FDIC is going to pay twice as much as expected in the end.
> And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows.
> worst case 100% loss, best case 1000%
See I don't understand how you can have 1000% return by buying treasuries, at any time. It was a stupid decision in hind sight, but the best case is order of magnitudes below 1000% return.
And you've put these two things right next to each other, what am I missing?
They would be perfectly safe have they dumped their deposits into T-Bills.
They didn't went for the 1000%, they went for the 5-10% extra and ended up losing everything.
Had they used T-Bills or even straight up depositing it against the Federal Reserve for NO return, they would remain liquid and could now reinvest into higher yield bonds as the rates have risen. Instead they now hold 1.5% 10 year HTM bonds that are now valued at 70% original today because the prevailing rate is 4.5%.
To clarify I don't know the actual strategy they took. I am responding to how they can have risk in "make safe loans" or "buy safe bonds" scenario.
> They would be perfectly safe have they dumped their deposits into T-Bills.
How is this different than what you described? If the rate increases beyond the coupon of a 10 year treasury, its value drops. Are you referring to extremely short term treasuries?
Thanks for explaining it so well. I was thinking that simply losing the bank was enough in this case, but you make a very good point, and this kind of insight is what's good about this site.
You seem to be conflating the bankers with the bank owners here. The former have done well, the latter have lost everything (total SVB dividends are less than the value of the bank).
Do you really think the owners and senior management of SVB ended up with nothing? What about the stock sales they made right before the FDIC took over, or the bonuses given out, or even their compensation during the years in which this high-risk interest rate scheme was going on?
They have orders of magnitude more money than most people, and will get away with no liability.
> What about the stock sales they made right before the FDIC took over
Is there a more clear cut case of insider trading? SEC should already been working on that now.
Anyhow, you're arguing that they SHOULD end up with nothing, that is an entirely different subject of its own. Because you're talking about punishment, while I'm talking about deterrence.
Punishment must be enacted from outside after the fact, while deterrence can be innate before it happens. These senior management could have years of cushy job and more equity, and now they have to rely on savings and have the SEC up their ass. It's clear which is more preferable.
Just wondering, if they know for sure that they will be sued afterwards, why would they sale their stocks? Why not do nothing and live with what they already have? Is there a possibility that they can get away with it?
> Is there a more clear cut case of insider trading?
Genuine question, is there any evidence that these trades were out of the norm, rather than a regular portfolio rebalancing that’s common with any employee who receives part of their comp in RSUs?
Honestly I'd like for there to be a decent look-back period to recover the funds from any stock sold ahead of time, as appears to have happened in this instance. Use the proceeds to help make depositors whole.
No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
I would guess that these executives entered their sales months in advance as is relatively typical to avoid insider trading. You can look this up on the SEC website
And in the case of company failure, perhaps the lookback period should be extended beyond several months. I don't have nearly the financial or legal knowledge to suggest viable policy, but from what we know of how SVB failed it would have likely been visible well in advance of the failure to someone with access to the requisite information.
I don't know why people keep calling out the CEO stock sales, unless we find out something new this was almost guaranteed to have been done pursuant to a publicly filed 10b5-1 plan which has a 30 or 90 day cooling off period and must be filed when they have no material non-public information. So if the CEO could see this coming, anyone else could have too on the basis of the same information.
These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading.
Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.
I don’t know if your are just ignorant or if your are intentionally misleading people but this system is widely abused. A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time. The CEO used exactly this type of sham plan to unload his shares. Look at the plan he filed this year and the plan he filed every year for the last three years.
> A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time.
Canceling a 10b5-1 is not in and of itself a violation, correct, but it can kill your affirmative defense as it jeopardizes the good faith element.
However, they would have had to have entered into the 10b5-1 prior to them coming into material nonpublic information in the first place for it to have been valid at all. My point is they made the decision to sell before they knew what was happening and filed a compliant trading plan.
> I think that's a good enough deterrence against bad things.
Nah. They should liquidate the owner's private property as well to cover uninsured depositor losses. Better than making them whole by printing money and having everyone else pay for it indirectly through inflation.
Do realize that the SVB bankers and shareholders remain completely screwed. This bailout does not save them. Nor will any FDIC bailout.
So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.
Well that's far from the complete picture. It's not that the gov't is backstopping all bank stupidity -- the new facility simply says that for redemptions, US government bonds and MBS can be valued at face value not market value. Only for the purpose of ensuring liquidity for redemptions
Yes, they keep on inventing all kinds of new rules that effectively transform the assets that banks happen to be holding onto assets that are worth more. It's just printing money in an obscure way.
The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else.
It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government.
They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk.
All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk.
The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash.
If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money.
It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.
They must pay salaries - about 2% of deposits. They must pay interest on deposits - now people are demanding 4%. They must pay some dividends too. So they must invest in something.
What's the point of cake if you can't eat it? You'd have to start charging for having the cake.
The current practice of limited investment is reasonable and helps keep the system self funded without much in the way of account fees. It's not as if banks are investing the funds in the equity market. Appreciate I'm commenting from afar and without emotion but these failures are normal. This kind of chaos makes the system stronger. And I think most commentators can agree that this is largely a symptom of a swift increase in the repo rate shortly after significant bond purchases by SVB. There are lessons to be learnt but I don't think if you were sitting on the SVB board and were part of the decision to purchase these low risk bonds did you in any way think it would lead to this outcome.
They didn't have risk officer for months. They lobbied to repeal regulations. And I don't blame them, that's their incentives.
At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders.
even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%!
This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment.
You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse.
It's just a matter of time before they blow it beyond repair.
Why would customers being made whole (at the cost of wiping out all equity and possibly at some cost to other banks) affect the incentives of banks in this kind of situation? What would banks do differently if account holders could lose everything over $250k? If they are happy to “gamble with 10x leverage” then presumably they don’t care about impact to their customers. If bank management risked jail time that might change incentives but doing that doesn’t seem to require a cost to account holders.
Customers should be diversifying in these situations. It’s easy enough to set up a sweep. Those that don’t for whatever reason shouldn’t get bailed out for their poor decision making. That’s de facto subsidizing any future banks that want to make risky investments.
This strikes me as more a perspective of someone whose lived so long in a stable system that they consider it a fundamental immoral failing when something does occasionally go wrong. The loaning of your clients money is the fundemental idea that banking works on, if you weren't able to grow your clients money through lending it you would have no reason to accept clients money in the first place.
Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.
Define “invest.” Banks invest. That’s literally what they do.
People deposit their money rather than put it under their mattress, and the banks reward them by giving extra money to them.
Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors.
The point is, why doesn't the government just capture that revenue? Instead we are letting private companies keep those earnings, without taking on any risk.
Let's deposit at the bank of USA and cut out the middle man.
I see this issue in so many areas. Government orgs and companies have different organizational incentives and tradeoffs. When we substitute a government function with a wallet for contractors, we lose those tradeoff. But it's even worse because now the company has moral hazard.
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I think everyone knew that already. Since 2008 at least.
It's very possible that if this is not done, the only banks left at the end of the week will be the "too big to fail" ones. A domino effect is very hard to prevent when it's based entirely on consumer confidence and those consumers can very easily create a bank run on literally anything if they freak out.
Not sure I follow the logic. SVB is done right? Saving the companies that banked there is very different than saving the bank. Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least). I like that the gov is acting more like a scrappy company here and getting some shit done when the stakes are high. I dunno, just spitballing here, curious about the counterpoint.
From the perspective of just the people working at SVB, I guess so? But from the perspective of people putting lots of money in one place, it's a reinforcing signal that the most important part of picking a bank is that it be big enough to get bailed out in case of poor planning.
> From the perspective of just the people working at SVB
Who had the former CFO of Lehman Brothers just before it collapsed on their executive team? These people will continue to fail upwards with taxpayer support as they always do.
See you in ten years when he's involved in the next one.
What is the advantage of encouraging people/companies to spread their deposits among multiple banks? Say people were really worried about losing anything over the FDIC limit and so kept multiple separate accounts. Then a bank fails and the government still has to cover the deposits, so what's the benefit? Is the idea that if people are worried about their deposits they won't put more than the limit in banks that are making particularly risky investments? Isn't it more likely though that anyone who would do that would just spread their money out regardless, and therefore there's no disincentive to the banks.
The bank isn't being bailed out though. The depositors are being covered by FDIC in the short term, while FDIC will sell assets seized from the bank. The bondholders and shareholders will take the haircuts. If that's not enough to cover the depositors, banks will be given a special assessment.
The banks left standing will be made to cover the deposits, insured or not, of other banks. It is rather remarkable and I'm not entirely certain it'll work - at what point the special assessment could be unsustainable. Presumably this special assessment isn't instant, and FDIC could just use accounting to make it politically and legally valid to consider it as a non-public and industry financed private bailout.
shrug will it work? I don't know. It really better.
>_shrug_ will it work? I don't know. It really better
The need to be able to field questions like these is why I feel we need open-source economic simultion packages. Does anyone think that people in the individual Fed reserve banks are running anything other than flat spreadsheets to model the financial system? Theyneed to develop economic modeling scripts (at minimum!) a field which is in its infancy. The datascience & modeling capability in HN would eclipse the forecasting power of an econometrics-focused Fed statistical modeling group.
I'd like to see a python library devoted to economic modeling w/ classes for central banks, investent & retail banks, applied into umpteen think tanks' different competing models.
"Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least)."
* As the gp said, it's done. The guarantee isn't new, it's how thing are done now. The Fed is not changing things by doing this, the Fed is doing things as they are expected to be done. Anything else would be changing things, anything else would panic people. Is the Fed "scrappy"? IDK, the "scrappy" efforts to stop crises began with the "plunge prevention team" in the 1990s and have continued more systematically since then, if you want to call that scrappy.
* As to whether there are black marks on people - only the companies who can whether to hire these people later can decide that. Financial companies hire people who've done time for financial fraud so it's questionable what sort of "black marks" the Fed could give if it wanted to (People mention the Lehman guy but was Lehman really worse than the others in 2008 or just a scapegoat - like fricken Martha Stewart. Was that guy involved in excess or just a random manager? I recall he was now managing a stock subsidiary that's being spun-off whole. But still).
> It's very possible that if this is not done, the only banks left at the end of the week will be the "too big to fail" ones.
I don't get it. Doesn't the unlimited FDIC insurance encourage mega-banks? If funds were only insured up to 250k, wouldn't that just mean we would have to spread money across multiple banks. And sure some banks would be wiped out but new better banks would take their place. It's not a closed system
Banks used to fail and be smaller failures. Now we removed almost all failures except when we have a failure its huge:
It's like forest fires, we shouldn't build fragility into the system by removing all risk and then rely on regulations to mitigate it. Hasn't worked in the past and will lead to more consolidation and bigger fires in the future. Remember in 08 the answer was to combine a bunch of banks and since then we've had no new banks created (besides Ally which was a spin off of an auto workers pension fund if i remember)
That estimate is misleading as SV failed after people pulled 45 billion out. It wasn’t a 200 billion dollar bank when it failed and people didn’t lose 200 billion dollars.
We are at ~1.3 bank failures per month in 2023 which is much closer to 2020’s 0.3/month than 2009’s 11.7 banks failing per month. That IMO says more about the rest of the year than the size of the banks that failed.
The parent comment just made the point that you need to normalize for the size of the bank, not for the number of banks per year.
Your comment takes the annual frequency and divides it by 12 to get an average monthly frequency, adding nothing to the argument of the grandparent comment.
They suggested you should normalize for the size of the bank but didn’t support it. They even used non inflation adjusted numbers.
Maximum assets under control don’t correlate with actual losses especially when people pulled money out before the collapse. It’s a completely meaningless number on it’s own.
Certainly very valid criticisms. To be fair, I specifically was trying to ballpark it and this graph does not contain the Signature failure yet so I think it is a fair representation of this particular metric.
I also think it's a good point that a dollar is not necessarily equal to another dollar in this context. But the same can be said for individual banks as well.
I put the majority of my cash in one of the smaller banks. The news that has transpired in the past few days had me mulling moving those funds to a larger bank, likely Chase (one of the too big to fail ones).
Even with the FDIC guarantees, I was not at all confident that :
1. they actually had the funds to cover _many_ bank runs; and
2. it won’t take weeks if not months for me to recover my funds, if my bank fails.
It’s entirely possibly that these lines of thoughts will motivate many more people to consider this exact move, putting even more stress in the system.
The FDIC is backed by the full faith and credit of the US government. If a bank fails, your insured deposits will be made while, usually the next business day.
The US government has a debt limit. The government is going to run out of options for not exceeding that limit in a few months unless it is raised. There are people in congress suggesting that they should let the limit get hit. If the debt limit is hit, do you e pectin the government to be able to pay out FDIC money in a timely manner?
Not just FDIC though, in 2008 and again today the Fed is making clear that their backstop is bigger than just FDIC. it can’t be any bigger than the debt limit so I find it sobering to have this discussion while we’re heading towards that cliff.
With the Bank Term Funding Program, people who moved or previously kept monies in large banks have less incentive to do so, until 2024 when this program is scheduled to end. That is, if they think 25 billion is enough to prevent more runs, and the FED/treasury/FDIC will not greatly expand that in the event of another run.
IMO you should probably do business with multiple banks with somewhat separate market segments to try and diversify risks. You shouldn't have all your cash under one mattress ;)
Imagine you’re a business owner. Would you rather bank with Local Community Bank, the failure of which will essentially kill your business, due to haircuts on uninsured deposits that’ll annihilate your working capital, or will you bank with Chase, the failure of which forces government action to cover depositors because the economy is a goner otherwise?
But isn’t your CFO planning for financial risk? Do you have hazard insurance on your leased offices, what happens if one of your key employees is unavailable, a large customer is late on payment, you get hit by supply chain issues, etc.
You can’t seriously tell me that the CFO who is responsible for corporate finance at these SVB customers didn’t realize a business checking or savings account is not fully guaranteed? It’s in every single bank brochure and statement. If that’s that case, they need to suffer the consequences of poor contingency planning.
Isnt then the whole thing fault of VCs who included those covenant? The same VCs that now cry hardest?
Moreover, both startups and VCs are literally the groups that celebrate risk taking and disruption. This is it, this is the flip side of risk, the definition of risk is that you might loose. But somehow, when they loose, due to risk taking, then suddenly they want extra bail outs and help.
According to the AP, there was a second bank failure today (Sunday) and there was a risk of a third:
> In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history.
> Also Sunday, another beleaguered bank, First Republic Bank, announced that it had bolstered its financial health by gaining access to funding from the Fed and JPMorgan Chase.
That article is already out of date. Signature Bank also failed today.
I suspect that Signature Bank's failure is tied to their crypto activity. But the sight of 2 banks failing while there was an ongoing run on at least one more bank does seem like the kind of thing that could start a panic.
The entire regulatory system encourages mega-banks. The entire “too big to fail” concept encourages it. Complex regulations benefit those who can afford the legal costs of compliance. Dodd-Frank probably made this outcome more likely.
The role of the government in letting this happen has been under-covered so far. Weren’t they supposed to be overseeing things, stress-testing banks, etc? Regulators either were not looking, or were looking but did not notice. Regardless, there is not much sense to the argument that the government is “stepping in” tonight, because it was always involved.
Has nothing to do with flooding the world with cheap money which chased unrealistic yields. Systemic excess liquidity when deposited needs excess assets to balance. Assets which were bought at inflated prices. The question now is only how much will this house of cards collapse.
That didn't prevent multiple runs against Washington Mutual in 2008, and it won't prevent runs now. People are worried that they won't be able to get to their money even if it is insured.
Plus, even if the "typical" consumers don't freak out, businesses might. There are a lot of businesses with accounts over the FDIC limit. Only about 60% of bank deposits in the US are insured.
If I thought the US government was going to fail I'd simply try to be the first to convert my dollars to a dense and valuable commodity, like gold, and then find another government to live under. It's not like people pulling out dollars have to keep their wealth in dollars.
How would they even do that? Bitcoin handles ~350k transactions per day. VTI (Vanguard's Total Stock Index), a large size fund is on average traded 3,670k per day. That's one fund. There is no reasonable way for small customers to pull out of index funds to bitcoin unless there is a fundamental change to how bitcoin operates.
Small customers get BTC from an exchange, which keeps their accounting internally. No transaction volume limits.
Later the small customer may move that BTC to self-custody, which could be an on-chain transaction or LN or other side chain with more transaction capacity.
And perhaps there's no other way? The Japanese did the same with their overpriced real estate provlem, Europe did the same with their almost defaulting countries.
Think about who gets hurt if the banking system collapses. It ripples out into the rest of the economy, because in fact the economy runs on debt. It would be harder to maintain existing businesses and start new ones if there was a credit crunch -- we lived through a credit crunch after 2008 and it was very bad for everyone.
Even if you want certain people to get hurt by this (and there is definitely a baying mob that seems to want to cause as much suffering as possible because they just don't like certain classes of people), keep in mind that this could cause a 2008-style recession that hurts everyone.
Who do you think gets hurt more by an economic downturn? The billionaires who lose millions and end up still being rich, or the working people who lose their jobs and can't afford housing? This isn't a theoretical question, we know the answer because it happened before.
I have some off-the-grid and expat friends who I suspect are rooting for a collapse primarily to justify all the shit they did and said. These types seem to thrive on doom and I have no doubt they've always existed throughout history.
Eventually I suppose they'll be right, but primarily as a result of one of those broken clock coincidences ...
The desire to let it all burn comes from those who played by the rules.
The government's intervention creates moral hazard: those that played with fire got burnt, and those who didn't didn't, but those who didn't get burnt were positioning themselves to take advantage of the opportunities that the crispy bodies would have generated.
But the government swooped in and saved the crispies, without penalty to them, at the cost of those who had proper risk-adjusted positioning.
We see this time and time again. The government is changing the rules after the game is over to change the losers to winners. It's nonsense.
Sounds similar to when people were rooting for airlines and auto manufactures to just die in 2008 to say "fuck the rich". I'm glad they were all saved.
In human psychology, fairness is a big driving force in society. I think studies have regularly shown that people will tolerate outcomes that are objectively worse for themselves if the alternative seems unfair but objectively better.
People are not rational. Homo economicus is a myth.
Isn't spite just wanting that version of karma or justice but hurting yourself in the process. If we let these banks collapse it's definitely going to hurt lower income people more than wealthy people so to me that is 100% spite
No. Spite is hurting yourself to hurt someone else. A desire for karma is willing to hurt yourself for justice. They look very similar, but are different.
That is incorrect, spite is seeking the deliberate harm of another. It’s possible for spite to include hurting yourself to inflict it, but that’s not in any way necessary.
Sure, and karma doesn't require hurting yourself either. I meant in the specific case we were discussing, in which harming yourself was already baked into the situation. I admit I could have been clearer initially and am sorry I spoke clumsily.
Justice is the idea that people are treated equally, impartially, and fairly under a set of standards. If someone breaks the rules justice is them getting the same punishment anyone else would get, concerns about externalities don’t come into it.
Is everyone getting hurt ideal? No. But that’s a different question than is it justice.
IMO this is what happened during 2008. The government tried to minimize harm at the expense of justice, and people are angry because they don’t realize how bad it could have been.
If the two options are a) everybody except the rich get hurt and b) everybody including the rich get hurt, then I think the majority of Americans would go with b.
B is definitely where we're at. Many Americans are tired of watching the rich get bailed out with socialism-for-the-rich-not-for-the-poor. Meanwhile the not-rich continue to struggle in every aspect of life, from food to housing. And blame is placed squarely on the rich, who have a greater voice in the elected government.
No. That is called crony capitalism. True capitalism would let these banks burn and allow those who saved or have capital buy them up. No gov intervention allowed.
No, it's just called "capitalism". The thing you call cronyism is a core feature, not a bug: under capitalism, the capitalist class advances its own interests.
Please stop trying to redefine basic terminology to suit your agenda.
Yes, but we're disagreeing about the specific meaning of words. Capitalism describes an economy where capital is the mechanism through which goods and services are allocated. It is not the partnership of public and private entities, as you suggest. That would be crony capitalism.
That page describes how "crony capitalism" is used colloquially. Dictionaries are not a great source for determining canonical meaning of complex political terminology.
I argue that usage of the term "crony capitalism" is itself a form of capitalist ideology.
The socio-economic system where social relations are based on commodities for exchange, in particular private ownership of the means of production and on the exploitation of wage labour.
Wage labour is the labour process in capitalist society: the owners of the means of production (the bourgeoisie) buy the labour power of those who do not own the means of production (the proletariat), and use it to increase the value of their property (capital). In pre-capitalist societies, the labour of the producers was rendered to the ruling class by traditional obligations or sheer force, rather than as a “free” act of purchase and sale as in capitalist society.
Value is increased through the appropriation of surplus value from wage labour. In societies which produce beyond the necessary level of subsistence, there is a social surplus, i.e. people produce more than they need for immediate reproduction. In capitalism, surplus value is appropriated by the capitalist class by extending the working day beyond necessary labour time. That extra labour is used by the capitalist for profit; used in whatever ways they choose.
The main classes under capitalism are the proletariat (the sellers of labour power) and the bourgeoisie (the buyers of labour power). The value of every product is divided between wages and profit, and there is an irreconcilable class struggle over the division of this product.
It probably doesn't need to be said, but it's pretty obvious the bias in that definition.
There is no singular definition of capitalism, but many others would differ on the distinction you've drawn from earlier posts. E.g., a system based on the reinvestment of excess profits does not necessarily equate to crony-capitalism. It seems your issue is with the person using the word "socialism" to describe a social ill of crony capitalism. But there is a distinction there that is being muddled in the conversation.
Can you coherently define "crony capitalism" and explain how it's not a fallacious no-true-Scotsman defense of "real capitalism" (or whatever term you prefer)?
Capitalism disallows private and public collusion beyond what is necessary to ensure public goods, defined by those gods which are nonexcludable and nonrivalous.
How does capitalism "disallow" any of that? Where is your evidence that disallowing this is a stated goal under capitalism?
I think you're confusing "free market" USAmerican right-Libertarian ideology with capitalism itself.
Capitalism, simply put, is defined as private ownership over the means of production, and the people who have that ownership are called the capitalist class. None of that precludes any sort of collusion.
Such collusion (and other things, such as child labor) was commonplace in the Western world recently and is still commonplace elsewhere — capitalists still wail and cry foul when legislation, no matter how toothless or perfunctory, is introduced to curtail such behavior.
You’re confusing what is a central tenet and what may occur as an outcome of a poorly executed version of the principle. By that same logic, tyrannical despots could be argued as a stated goal of socialism.
I don't think those are the only two options though. b) The rich now have less billions but still billions and everyone else now has to budget even harder.
There was no guarantee that the govt will make money but there is a guarantee it creates a moral hazard. If you are a banker take excessive risks and enjoy the profits, if things go wrong, the govt will bail you out.
Heads I win, Tails I dont lose.
You also ignored that govt/Fed keeps printing more money, so the taxpayer ultimately loses with inflation.
>At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
No, there are systemic risk exceptions within the rules. If a bank is large enough, then the systemic risk to the economy as a whole is large enough to warrant this step. "Too big to fail" is typically a derisive comment, but it is not without practical reason. Governments are supposed to act in the best interest of the governed. I hope it is clear to all of us that avoiding the economic disruption of a cascade of bank failures is in our interest.
Smaller bank failures do not pose systemic risk and so they will not be backstopped in the same way. Might seem like unfair treatment, but practical concerns often outweigh the theoretical. By the way, SVB is still a failure and as a company is now gone. Some other entity will take over its assets, debts, and customer services. All senior management has been removed.
>I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
We did. That is why we have the FDIC, the Federal Reserve, and the Treasury department. They did their job and did it quickly and effectively. SVB did not get bailed out, the depositors did.
Is it though? I think there's a proportion of readers who might feel grifted by regulatory capture (eg: unable to get on the housing ladder due to draconian zoning policy) and reasonably feel that some of the moral hazard has to be addressed to stop what has been unstoppable growth to give them a chance to establish financial security. It's a fallacy to see it as zero sum, but a temporary crisis in confidence might produce the only opportunity in a lifetime to create the conditions needed for affordable housing to be available for purchase for folks who can keep their jobs during the crisis. Many feel economically abandoned.
You can't just snap your figures and have the housing market drop by 60% and keep everything else the same.
Those same people are going to lose their jobs and burn through all their savings and be unable to secure loans to buy houses.
Even if you bank at a supposed safe and secure credit union, a systemic crisis will affect them as well. You won't be able to get a loan. There goes your opportunity.
The whole financial and economic system is intertwined and you're part of it, if it blows up and crashes into the rocks, you're going down with the ship as well. Get over your Main Character Syndrome where you think you're going to be the one immune to the catastrophe.
I know many good, hardworking people who secured their position on the housing ladder in the aftermath of the global financial crisis. In conversation, they were bewildered by how much their homes appreciated even by 2018, well before the pandemic bump in valuations.
But is anything being done about it? It is both unequality and bananism at its best. You give money to the "rich" (though this time indirectly), you encourage recklessness and you also change the rules when you see fit.
All of these described above are "disrupting" the economy. And none of them is in our interest.
The really rough part about HN is the low level of knowledge about how governments and politics work. It's ok to judge these outcomes harshly but many commenters here intermingle their judgements with their mental models that seem to have not evolved beyond what they were taught in secondary school.
It's really quite concerning because some of these people have tremendous power. I suppose the only positive is that a number of titans of Silicon Valley are not savvy enough to challenge increasingly assertive governments.
While what you say is true, maybe we shouldn't allow mergers and other avenues to allow these banks (and other verticals) to be too big to fail. We've made that a target for all companies. Just get too big to fail and you get all the upside and none of the downside for free. That is my main complaint. By allowing deposits to be invested without risk, these too big to fail banks are encouraged to chase the highest yield, highest risk re-investments possible. If it works, another yacht for everyone! If it fails, we must be made whole!
I think at least a part of the solution is to increase regulation as banks get larger. Since it is clear that the fate of very large banks is tied in to the the fate of the economy itself, they should be appropriately regulated. In particular, short term asset/deposit ratio requirements should be modified as a bank gets larger. That could reduce the need for the FDIC to step in when depositors get nervous and provide disincentives to getting too large.
I think something like this could make large banks more of an asset for the economy rather than a liability. I wouldn't want to just set a maximum size. If a bank wants to get huge and maintain conservative and safe asset/deposit ratios, good for them.
The problem is that guaranteeing a bank and regulating it's investments still changes the incentives for the bankers. The banker has an incentive make an investment that can presented as "prudent" but which actually has a large up and down side. The banker keeps the upside, the bank's depositors are protected from the downside and the worst the investors face is losing their existing capital.
I would argue no. The issue is that the FDIC has deposit insurance limits already. The depositors are free-rolling on the amount they are getting made whole on above the limit. Then you are just encouraging some new kind of "bank" with limited access to become a customer (e.g. > $50M deposit) and then you can just put all "shareholders" in the role as customers. You are still giving free upside outside the rules that all other depositors are stuck with. Every investment comes with the statement: "Investment contains risk". If the bank wasn't leveraging these deposit as investment cash, there would have been no collapse.
You're right this produces risk but you're wrong about exactly how.
Any bank call pull in deposit and use them as capital. But being a customer also doesn't give one any particular upside - you just get interest on the money you deposit. And if you have a special bank with only large deposits and paying extra high interest, then regulators look at you and quite likely see something not to be protected in the same way.
The way you get risk is basically the way SVB did it. Share holders can lose at most their entire capital but they can get to play with all the money the depositors give them. If they bet on something that pays off big, they get that payoff minus the modest interest they pay depositors and if they lose, they lose at most their capital.
If you can use just a bit of capital to borrow a whole lot of capital, with the only risk to you being your original capital, then you can engage in very risky ventures, getting a huge payoff if you succeed and at worst losing your original capital if you lose.
Come to think of it, that seems a bit like what SVB did. Buying long term bonds when interest rates were likely rise seems like a recipe for disaster - and in fact the logical outcome was this bankruptcy. But there was a chance that interest rates wouldn't have risen, at which point the shareholder get a big payoff, pocket it and go on to the next risky maneuver.
> > Governments are supposed to act in the best interest of the governed
Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
> > They did their job and did it quickly and effectively
Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up? Or a small family owned boat builder in Maine? Nowhere to be found. Their fault? Not being systemically important enough. Whatever the fuck that means.
> Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
I'm curious if you have a citation to support that the wealthy in the US are descendants of wealthy land owners from the times of the Crusades at a substantially greater rate than the general population.
> Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up?
How much of their going belly up was due to Fed policy? Particularly driving and holding interest rates to near zero through market actions then pushing interest rates to nearly 5%?
Read over the history of the US settlement. While they came from the UK and Germany, the vast majority are not descendants of the Normans.
One of the major draws to the US has always been the opportunity to do a little crusading of ones own and find whatever opportunity your courage and lack of scruples allowed you to get away with.
In cases where you can't predict the future appropriately, sometimes it's better to make prudent decisions that help everyone instead of attempting to punish the sinful.
Keep in mind that bank shareholders and senior management are going to get wiped out and fired.
I mostly agree with this, but I feel like the past 25 years or so, ever since "the Greenspan put", has just gone more and more in the direction of telling people that they don't need to worry about doing adequate risk assessments, because if you have powerful people that yell loud enough, and you can cause enough damage, that Washington will come to the rescue. Eventually, I just don't see this ending well.
As someone who is naturally risk averse, I feel like a sucker. I was having a conversation in a separate thread where someone remarked "How can you expect startup companies to spread their deposits across multiple banks?" Besides the fact that there are tons of account structures specifically set up to do that, as an individual, I know what these insurance limits are and have moved assets around accordingly (for me, FDIC limits weren't relevant but SIPC limits were).
How much time I wasted. I should have just gone with a powerful enough institution that I knew would get bailed out if they ever failed. I certainly won't waste my time doing this again, which is probably not the follow-on effect that the feds want.
The decisions about "is this bank adequately capitalized to serve its depositors" should be made by the regulators, not by the market. We know what it takes to run a bank safely, and its really easy to both quantify and test. This is how the "too big to fail" banks are run today. No one talks about the moral hazard of elevators (make sure you inspect it before you get on) or airplanes (make sure you do your own pre flight check) we trust that the regulators have set up processes that make this infrastructure safe for the public to use. Even with a deposit guarantee, a poorly run bank can still be closed by regulators, a bank run doesn't need to happen for a bank to be shut down, just like an elevator accident doesn't need to happen to decertify an elevator in a building.
It doesn't take a CPA to know that depositing above 250k comes with increased risk. And I think you're kind of conflating types of consumers here. People depositing above that limit are generally not working from the same limitations and lack of information that regular people are.
Companies need to run payroll twice a month. $250k is about one months payroll to 25 people. Many companies are a lot larger than that. You also have planned and unexpected expenses and other payments. Many payroll and providers also require you to set up one account where the funds are pulled.
You don’t want to move money around every week, so you keep heathy balance.
It’s also never adjusted for inflation, despite this mess in theory being triggered by raising of interest rates due to super high inflation. 250K when it was set in 2010 is the equivalent of almost $350K now. If we ignore that, then we’re just admitting the number is totally arbitrary and we shouldn’t even bother arguing whether it’s a lot or a little.
Separately, it’s weird that a joint account is insured to 500K but a business account stays at 250K. It actually does weirdly favor wealthy individuals vs. working capital accounts for businesses that might represent many employees.
The sentence clearly means that it was never adjusted from inflation from when it was adjusted to 250K, 12 years ago. You can tell that this is far from being adjusted for inflation since it is now 100K off from what it was in 2010, or 40%. This should be a "neutral" issue with respect to the SVB thing, pegging it to inflation helps everyone in the system.
Obviously people have different salaries but also are payroll taxes and other taxes or fees that also need to be paid like unemployment insurance and whatever else the local government has decided. Sometimes these are collected city/county as well as at state level.
Benefits also cost $500-2500/mo (if you cover 100% employee and 70% dependents).
Not complaining but just saying there are costs that are not always apparent to employees.
also rent, servers, the cost of anything else you have to run your businesses. For broadly generic tech companies, take everyones top line salaries, double them, that is your rule of thumb monthly expense line item that wraps everything up (rent, taxes, the cost of doing business, marketing spend, etc)
Yes, that is a lot of cash for an individual. I don't really know why anyone would sit on a lot more cash than that without at least putting a healthy portion into Treasuries or other durable assets.
For businesses, it is a trickier proposition but there are reasons that companies roll cash into assets and operate largely from credit.
Consider financially responsible people in their 50’s and 60’s that have had decades to save. There are plenty of “regular”, middle class people with this type of savings in their account.
If you have that much in liquid cash, you meet virtually no definition of the term "middle class". You are upper middle class at leadt and you probably have a financial advisor who is telling you that you shouldn't locate all your money in one account unless it is yielding in a way that justifies such a risk. At least I hope you do.
Yeah, that's actually about what I make but let's be real, this is a very small number of people. I have a financial planner.
Are there people in this asset class who aren't getting financial advice? Yes. But it's not like ma and pa kettle are getting wrung out by the savings and loan here.
At this point we should just nationalize the whole banking system. Currently we have the worst of both worlds: privatised profits and socialised losses; strict regulations but limited oversight or appeal; no real market competition but no real voter influence either.
we don't have "socialized losses". Tax payers aren't paying for anything here. The FDIC is run an funded by an interbank consortium. Its essential a union of banks that run a collective risk pool and decide the rules of the risk pool. It works and has worked for nearly 100 years.
> we don't have "socialized losses". Tax payers aren't paying for anything here. The FDIC is run an funded by an interbank consortium. Its essential a union of banks that run a collective risk pool and decide the rules of the risk pool.
What meaningful distinction are you drawing here? It's not practical to opt out of banking, and FDIC has no real competition (the NCUA offers exactly the same terms, and in the credit union thread fans were at pains to emphasise how equivalent to the FDIC it is). Not all taxes are collected by governments from individuals.
Consider: “Reserve requirements are a tool used by the central bank to increase or decrease the money supply in the economy and influence interest rates. Reserve requirements are currently set at ZERO as a response to the COVID-19 pandemic.”
ref: https://www.investopedia.com/terms/r/requiredreserves.asp
I don't think it necessarily is adjusted for risk that specific banks take on as operators. It's likely set at some requirement to help the fed achieve its goal while also adjusting for median or 2 std dev risk.
I prefer to minimise banking's influence over everything, because banking is itself a form of political regulation - but not a democratically accountable one.
at the end of the day, everything in life is political.
Did you also consider that the political incentive for a regulator are at odds with the ones running the bussiness. (mainly, not getting people killed).
I've been a student of housing bubbles for a long time. I remember back in 2003 I was participating in an online forum covering the bubble. The conventional wisdom back then was that when the bubble popped not even the Fed or Alan Greenspan and his helicopters could cover the losses. The hundreds of billions if not trillions of dollars that would be needed would cause runaway inflation.
Then, they did it. The bastards managed to somehow buy tens of billions of mortgage backed securities every month for years. They bailed out automakers and banks with backdoor 0% loans while claiming the "investments" were profitable for the average citizen. Zombie Fannie and Freddie are still out there gobbling up mortgages. It's insane.
None of this is surprising to people who know how bank money actually works. The US congress literally has unlimited nominal credit and practically unlimited useful credit, and it can grant same to any of its creatures.
Of course they could, money is a fiction after all. As long as we all keep walking around believing that fiction, there's no real problem with just inventing more money out of thin air.
The fiction has certain properties when it encounters the real world though, so there are sometimes downstream consequences, but none that could ever totally dissolve the fiction. Only enough people starting to disbelieve in the fiction itself could do that, and people mostly won't do that because money is too useful.
Well if I don't produce that fiction on demand for something called "taxes" I get put in a cage or even killed by men with guns. So I'm pretty motivated to go along with the fiction until the men with guns stop making me.
Why isn't it. Pragmatically it's pretty silly to insure the first 250k and then expect people to go through the trouble of spreading their cash over a multitude of accounts. Punishing people for not having accounted for black swan events in their risk assessment is also not scalable. Do we want people to do useful stuff, or to spend their time digging the rule book to ensure they've accounted for every eventuality?
Also it's not like once you have 250k in the bank, you're suddenly a finance wizz, omniscient of all the tricks and tips with regard to treasury management. Even as you get into the low millions of net worth, it's not like you suddenly became a HBS graduate. A lot of regular hard working people end up hitting those limits and wouldn't reasonably be expected to learn about treasury-foo. A lot of young or small businesses are in the same lot. Being somewhat wealthy doesn't turn you into a fine financier. And even if you think those folks should hire advisors, it's not like they can afford to hire the right ones with this relatively small amount of wealth.
I think resentment of having gone through the pain of spreading your cash, in vein, isn't a good reason to screw up hundreds of thousands of salaried employees, and a bunch of regional banks.
>punishing people for not having accounted for black swan events in their risk assessment is also not scalable
For a country that seems hellbent on abandoning individuals of lesser means to the vagaries of fate, to frequently swoop in to save those already of better standing when misfortune strikes seems pretty hypocritical.
Sickness is still the most frequent cause of bankruptcy in our country. What social programs we have prickle with difficulties in gaining or maintaining access, seemingly designed to make life harder for those already forced through misfortune to require them.
Half our political establishment regularly suggests the destruction of even these, intending to leave individuals with nowhere to turn at all.
>Why isn't it. Pragmatically it's pretty silly to insure the first 250k and then expect people to go through the trouble of spreading their cash over a multitude of accounts
How is it silly? From the perspective of the FDIC, if you have two seperate accounts (at 2 seperate banks) that represents a drop in risk. It's unlikely 2 banks with fail and now FDIC only has to replenish 250K instead of 500k.
I'm not following your logic here. If there's 10 people each with a $2.5m deposit at a separate bank each and they all spread their accounts to $250k in each of the 10 banks, the FDIC still has a risk of $2.5m per bank right?
10 people can go a few days without access to 10% of their money much easier than 1 person can go a few days without access to 100% of their money. And hopefully more customers means more scrutiny for each bank.
Think about this with some numbers: if there are 100 banks, and every business puts 1% of their cash into each bank, the overall risk is the same as if 1% of businesses put 100% of their cash into a random bank out of the 100.
The cost to FDIC if an individual bank fails is the same in both the above scenarios, even though in the first businesses put a lot more effort into spreading out their funds. It looks less like it could have less risk to the FDIC, but really isn’t making any difference.
The odds that 100% of businesses each decide to pull their money out of the same bank at the same time is less than 1% of businesses who invested at the same bank pulling out their money. Especially if they are in the same industry and know the same people urging a sudden withdrawal. Maybe even mostly located in the same geographic region.
But if the FDIC insures all deposits anyway, then there would never be a bank run to begin with because nobody would panic that they wouldn't get their money out, so spreading risk among multiple banks is a "solution" to an artificial problem.
It's a solution to a bank run because of fear of the banks going under. It's not a solution to a bank run because an industry needs cash quickly. For instance, Silvergate had a lot of crypto firms as clients, and in late 2022/early 2023 all those clients needed cash. You can imagine something similar happening in other industries.
I don't see a problem with a rule or regulation that limits individual daily withdrawal limits. That would solve that specific issue as well, and anybody who needs to withdraw more than that per day clearly has enough funds to have accountants that can coordinate across multiple banks.
> Punishing people for not having accounted for black swan events in their risk assessment is also not scalable. Do we want people to do useful stuff, or to spend their time digging the rule book to ensure they've accounted for every eventuality?
So you want government to provide complete health insurance, after all. we want people to spend their time doing usefull stuff not studying the very complex intersection of all known diseases and medical beurocracy?
>So you want government to provide complete health insurance, after all. we want people to spend their time doing usefull stuff not studying the very complex intersection of all known diseases and medical beurocracy?
Yes, obviously. That we have the bulk of our population in precarious wage slavery under threat of medical bankruptcy at best, and a slow painful agonizing death of preventable causes at worse, is a crime against humanity given this is the richest country in human history.
I've never run a large company but I feel like it wouldn't be feasible when you have transactions routinely over 250k, like how I'd imagine most of these companies would be with their payroll.
I think the solution to that is placing predence on the bank selection mechanism. You could audit banks' lending positions and make risk adjusted based decisions.
I just don’t understand this attitude. It’s 250k. We’re not talking about all that much money. Why do you think people with 250k should have extra knowledge or access to special advisers?
Lots of people have way more than that due to retirement accounts (which sometimes need more liquidity or people want to get out of the market so they have more cash on hand). Or even if you have a down payment on a house in most of the coastal states. 250k in the bank is not much money these days.
I think you are wrong to not keep doing this (and I also don’t believe you’ll stop doing it unless it’s actually hard to continue doing, vs. the initial setup being difficult). I can tell you that after this I will start doing it. I don’t see these events as proving anything for the future. I have no idea what the political climate will be next time around, or any other factors. It’s like being down 9-0 in a soccer game and saying “hey, remember that one epic game we were also down 9-0 but then came back 9-10? Everything is fine.” What? No way. I don’t want my team down 9-0 at the half, ever.
BTW, in my experience many many people are risk averse in specific things they see that others don’t. It’s super hard to be an expert on everything. Talk to someone that knows about construction and they’ll have similar laments about home maintenance. Is it bad to “bail out” people that have their homes washed away in a hurricane? I honestly don’t know. But what I do know is that I’m definitely not jealous of them for making a silly location choice and “not paying the price”. That experience is not fun. I promise this episode was fairly disruptive even with this outcome. It is much better to look on from the outside than wonder whether a bunch of people you don’t know will save you. You’ll feel really bad if the next one isn’t bailed out because something is different and it gets you because you stopped doing something that aligned with your values just because of this thing this time.
Sorry you had to spend like an hour opening a second account. But yes, not wasting people's time (not requiring small and medium businesses to hire CPAs to evaluate banks' books) is exactly the outcome the feds want.
"Punishing the sinful" isn't about morals, it's about incentives, and ensuring a level playing field where sinning doesn't improve your long-term competitiveness.
Will senior management have to return their 2021 performance bonuses? If not, successful sinning is just a matter of ensuring you cash out early.
Who are you trying to disincentivize? How would it dissuade the bank's management if depositors took a haircut? What behavior do you think punishing depositors would prevent? Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
This is a simplification, but: the bank should have to offer depositors an interest rate (or other value-add, such as competitive services) that makes it worth their while to trust the bank with their deposits. A bank that makes very conservative investments/loans can only offer a low interest rate to depositors, because they earn less profit on the spread, but their depositors will accept it because of the safety of the institution. A bank that makes speculative investments/loans can offer a high interest rate to depositors, because they earn enough to offer it, and they'll need to, to attract depositors away from the safer conservative institutions.
A bank that can offer a government-backed guarantee to depositors can offer a low interest rate while making big profits, and pay big dividends to their shareholders and executives, steal market share from their conservative competitors while making themselves more systemically essential in the process, and leave the public on the hook if they fail.
If you allow banks to make extremely speculative investments with depositor money, you end up with Ponzi-like behavior that ultimately hurts unsophisticated retail folks. Just like all the crypto "banks" offering 20% staking that are collapsing now.
All you've described is a way to build a pitfall for naive investors so they can lose the first $20k they've ever saved.
> Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
Basically, yes, but without the hyperbole - an accountant yes, an economist no. This is not that hard. Treasury management is a specific function of any company.
I definitely don't blame these startups for not being financial experts, but VCs absolutely should have been coaching their client companies how to manage their cash safely.
Imagine what the world would look like if you got what you're asking for. Tens of thousands of extra dollars of overhead to open a bank account? To save literally nothing directly for taxpayers, and a few dollars per account for banks? I would strongly prefer to he socialized insurance and safety net in this case, and I'm a die hard capitalist.
You seem to think that the world doesn't already work like this. There are tons [1] of [2] products [3] that are offered specifically to make it easy to spread cash around at multiple institutions. And that in and of it self is beneficial, because it is essentially diversifying the risk of those deposits. Now, with what the fed has done, why would anyone bother spreading their risk around?
I think this is exactly it. More and more this arrangement is starting to sound like the baseless justification used for US healthcare: a bunch of middle men milking value for little actual benefit.
Addressing risk can be more efficient and we can make the system far more efficient by cutting out all of this overhead and red tape. As long as the banks are properly disincentivized in other ways from being over-leveraged and taking too much risk, this arrangement would just be much better overall.
It very quickly devolves to socialism, however. Without the incentive to make money, you lose market competition. Eventually it collapses to a handful of big players, but they are all extremely constrained by the government insofar as they are really one government run operation with different names. Suddenly all market efficiencies are lost and you end up in a worse position than the market originally presented.
A bank makes money from deposits by making available a % of them for loan originations. If all deposits are assured, then either the bank cannot take on any risk, or they can take on risk with the knowledge that the gov will foot the bill for any loss scenarios.
If the gov removes the potential for risk, banks will be free to make wildly speculative loans/investments, which will of course fail in time, causing the gov to tighten regulations even more until all profit is driven out of the game. Thus the gov would be the sole regulator of loans centralizing banking.
Sure,maybe you get some banks that pop up and offer assured deposits by only floating operating costs from risk-free assets like treasuries, but then you're looking at pay-to-bank for economic times with unusually low treasury rates.
Maybe I'm being hyperbolic, but it seems like a potential evolution when moral hazard isn't controlled.
So the government regulates how much risk they're allowed to take. They already do that with leverage ratios, for instance. I'm just not sure I see the problem with changing the status quo, but I do see the benefits of assuring all deposits.
Right now every single business of even moderate size has to have dedicated treasurers distribute payroll and other cash across multiple banks to ensure they fall under the FDIC insurance level cutoff. This is a totally unnecessary waste of time and capital, and so reduces market efficiency. If companies could just deal with one bank and offload risk management to people who should be better informed about doing it properly, backstopped by the government who ensures they stick to sane rules, how is this not a net win?
I agree moral hazard is an issue, and much stricter penalties for malfeasance of over risk, both for banks and for credit rating agencies are needed IMO. Moral hazard is already an issue though as 2008 and SVB have shown.
If they have more than $250K in the one institution: yes, they should.
Better yet would be spreading their deposits around, but if they don't want to do that, they should take the necessary steps to evaluate the risk appropriately.
Ok but that's a bad policy that makes no sense and I'm glad the fed, Treasury, and FDIC are stepping in to change it. Sad that congress hasn't done anything over the past few years, but better the problem be solved than letting faith in our financial system collapse.
It does seem like a weird loophole and charade to have to split money among many banks. Just give businesses a way to store their money without earning interest and with no risk. As far as I know that’s not an option under our banking system
It's neither a loophole nor a charade: it's diversification to reduce exposure to risk. Bank failures are somewhat coordinated, sure. Still, it's much more likely that one bank fails than N>1 banks. Since you are exposed to less risk, your insurer (FDIC) is also exposed to less risk. It makes complete sense for the insurer to incentivize this sort of behavior.
But what it really incentivizes is putting all your money in a too-big-to-fail bank. That's much easier and just as safe as opening a dozen, or hundreds of accounts. And it results in there being 3 banks in the whole country.
There is, in truth, only one “bank” in this country. The Federal Reserve Banks that hold the master ledger for the official US Dollar market. Everything else downstream is basically redundant legacy infrastructure from a time before pervasive broadband network infrastructure.
I think it gives a great explanation why what you are saying in good faith is not quite right. Not punishing the sinful both pushes the problem into the future and makes it bigger.
We tried it your way many times, and it failed in every case (civil war reconstruction, Treaty of Versailles, Iraq provisional authority, response to the great depression, etc).
When we do the other thing and focus on protecting the innocent instead of punishing the guilty, things have worked out far better (Marshall Plan, Covid response, this).
The context is wildly different. For one, war is chosen by a countries aristocracy while the lower classes have little agency in the matter. It is not the lower classes of these countries that are guilty, but the upper class, and therefore plans to help the lower class victims despite their complicity are pragmatic and sound. It is not pragmatic to punish slaves that attacked you, you would seek to arm them so they are not enslaved...
Punishment must be proportional to a person's power.
The COVID response against China is still pending, both of our countries are gearing up for war. Rhetoric around Taiwan has increased, and there is active work to reduce dependency on China.
There's a bit of irony in mentioning the COVID response, considering the knock-on effects of that are partially/largely to blame here.
If we ignore the fact that there may very well be some who are 'guilty' in the COVID saga, that certainly didn't have the same story as a bank that made poor bets, and the (relatively) wealthy depositors of said bank that made poor risk calculations and got burned by the black swan.
Have you considered the covid response openly violated the Constitution's 5th Ammendment? The gov shut down businesses for the public good (took private property) without just compensation. And what marginal compensation was offered was done so through PPP and was corruptly incentivized.
I would describe the covid response as anything but working out well.
I'm talking specifically about fiscal and monetary response, and whether or not we punished people, addressing the comment I was replying to.
For example it was good that we gave out PPP loans fairly literally even though it causes major fraud. If we had moved slower and endured that bad actors couldn't get away with abuse, the response would have been worse.
> For example it was good that we gave out PPP loans fairly literally even though it causes major fraud.
My point was addressing the incentive scheme for PPP: banks got paid a percentage of the origination amount so processed the largest loans first, and by the time they got to the smaller applications, they ran out of money.
https://www.forbes.com/sites/jasonbfreeman/2020/04/23/ppp-la...
The 5th Ammendment doesn't say the government can provide just compensation to some people. It says they must provide just compensation to all that their seizure of private property directly impacts.
Fraud is of course another issue, but my main concern is the corrupt incentive structure and glaring 5A violation.
> Point is that a system of such asymmetries rewards so many at public cost - and that includes the other stakeholders who are today “wiped out” (but still get to keep their gains from the good years). /end
Yep, and that is exactly the point. They must not get to keep their gains and they must lose an additional amount proportional to their chance of success.
The expected value of corruption must be negative.
Probably not, but it is rather exhausting to see this happen again and again and seeing them get bailed out without consequences every time. At least something would be different.
Maybe it's just hearsay but it feels like every person on wallstreetbets who got lucky with options then got the IRS knocking on their door accusing them of everything in the book. They've said it themselves that with the cost cutting in last decades they don't have the resources to build cases against large players anymore. They go after people they can reliably force to pay up without having to fight them too much. Al Capone would've gotten off scot free in today's world, just like most of congress does despite singlehandedly outperforming the best index funds out there.
I can’t believe anyone would put any stock in such “evidence”. No one is going to say “yeah, I pushed the limits of tax filing and got busted, nice catch IRS”. They’re going to say “I was just minding my own business when the IRS robbed me with their machine guns”.
Punishing Depositors no but punishing them yes. There should be personal finanacial Clawback and potentially even legal conseguences for this type of mismangement. When Their personal wealth is at risk they will be more careful. As it is right now, they don't risk anything and will try the same thing again. The worst thing that can happen to them is to loose "unrealiasied profits" not loosing anything already realised.
There should be personal finanacial Clawback and potentially even legal conseguences for this type of mismangement.
There is. That’s what derivative actions are - a mechanism for shareholders to sue the board and management for breaching their fiduciary duties. My guess is that one will be filled Monday.
This is … quite the misrepresentation though? No one sold their entire stake, one executive’s (albeit, sure, the CEO) pre-planned sale of a small portion of his holding executed two weeks ago.
Not a great look, but quite from what you’re insinuating.
Well the notes I've seen is the CEO selling 11%, General Counsel selling 19%, CFO selling 32%, and CMO 25%, and that's just in February. I would call that notable at the very least, and assume they sold the rest in March if they had any sense.
None of those people could sell anything (never mind everything) in March without violating law, unless that selling aligned with preexisting 10b5 plans to sell. You can look at the insider action[0] yourself, everything but the Becker sale looks like routine sale / disposition of options/equity comp, and even that isn’t that aberrational compared to his sales in ‘22 and ‘21.
I think you’re right about the proportional sizes, but it looks like the other officers only held a few thousand shares each, so routine grant/sale transactions were a much larger share of their individual holdings.
Senior management is going to have their recent sales of millions of dollars and significant percentages of their stock and the bonuses they received hours before the FDIC took over reversed? Because otherwise they weren't really "wiped out" or even close to it.
> sometimes it's better to make prudent decisions that help everyone instead of attempting to punish the sinful
I'm conflicted about this. In the last seventy-two hours, I made a ridiculous amount of money standing still because risks that shouldn't have paid are being done so by people who shouldn't have to pay them. I personally benefit. But we've given tech companies a visible privilege American farms, factories and municipalities don't enjoy. T
I think that's fine as long as you are willing to then help anyone in that situation in the future. Not just people who are big enough to be "important".
They should claw back SVB CEO pay and televise the moment the funds move. Show the CEOs number going down and some other public number going up. Bonus points if his face is televised at that moment at well
That's all that's really necessary in terms of handling moral hazard and public perception that this is yet another bailout. Let ppl see the CEO suffer and they will be fine with having taxes foot the bailout bill. It's sad but a spectacle is necessary here.
Do you think software engineers who write bugs should also be publicly humiliated? Should your bonus be clawed back if you tech lead a project that ends up failing because of bugs?
If your bug ends up risking the economy of the country definitly yes.
But Public Humiliation is not the solution because if it worked we ould not have the same executives who failed LB fail yet another Bank. There should be Legal conseguences for this type of mismanagement.
Potentially, yes. Something with real-world catastrophic consequences should require you to prove you weren’t being negligent. In this case, it feels like the equivalent of running for a while knowing that your QA team was empty and ignoring failing tests for a year.
For criminal charges, yes, but that doesn’t mean there aren’t other consequences. For example, a professional engineer can lose their license if they are found to be negligent or deceitful even if it doesn’t rise to the level of criminal charges. This is one of the reasons why most other fields using the term “engineer” don’t think software meets the same level, and having known a couple of people who completed PE qualifications I can understand why.
I don’t think that would make sense for all software development but it certainly doesn’t seem unreasonable to think that, say, the FSD team at Tesla or the accounting team at a bank should be held to a higher level of expectations (and presumably pay) than the ad click optimization team at some retailer.
Whether or not he committed fraud, I think most people are tired of seeing bank (and tech) executives cause real-world harm and make out like bandits. Civil forfeiture is used against poor people all the time for far, far less obvious issues than this one.
As someone who has been on the other side of many of these controversies, I know from experience that the popular narrative is generally wrong and fueled by anger and vengeance rather than sense or justice. I don't have any insider knowledge in this case but the discourse reminds me a lot of times I've seen well intentioned people make good decisions that anyone else would have made in the same position, then the mob viciously demands blood when something goes wrong.
Civil forfeiture isn't a means to punish people for wrongdoing, and neither should we try to retroactively change the rules to try to punish people who you believe wronged you.
> Civil forfeiture isn't a means to punish people for wrongdoing
Could have fooled me.
Thing is, when you are the CEO and you make the big paycheck, being a target for the mob is part of the job. 1,000 years ago if the crops failed, and the peasants started going hungry, either the priest or the lord was blamed. They can't control the weather, but it was someone's responsibility to make sure there was enough food stored.
The common sentiment is that the people who caused the failure should not be allowed to keep the money they made driving the ship ashore. Nobody is forced to be a CEO with million-dollar comp. It isn't some travesty of justice when they are held accountable.
Well I'm hopeful we can move beyond medieval practice and that the presumption of innocence will prevail. Fortunately things seem to be going well for team rule-of-law.
Again, what presumption of innocence? The bank failed, they should have to give up the bonuses and stock gains. It should be statutory to prevent a moral hazard.
> medieval practice
Calm down, no one said we should hang, draw and quarter them, exile them, or do anything untoward. It's a capitalist system, and this is a capitalist penalty.
You said "1,000 years ago if the crops failed, and the peasants started going hungry, either the priest or the lord was blamed."
I'm saying we should not look to the distant past for guidance on how to handle situations like this.
The presumption of innocence applies here because we shouldn't punish individual bank employees unless we demonstrate to a jury of their peers that they broke a law that existed at the time they broke the law. The default should be they keep their bonus and if they broke the law, they pay a fine. Fortunately they are protected by the constitution, there is no possible way the government can take their money without a trial.
It's an analogy about leadership? I didn't suggest a medieval punishment and I obviously recognize we don't do bills of attainder in America. I'm speaking for what the average person is feeling. Literally started off with saying "the average person is sick of seeing rich people get away with it".
But again, what presumption of innocence? I'm saying that if you are a bank CEO and your bank fails, it doesn't actually matter whether a reasonable choice was made or not. Bank failures affect all Americans, so there should be a penalty for causing that disruption. Most people would call that fair.
Executives are shameless. They'll lie to your face, backstab you to get more funds for their department over yours, and whatever else to get ahead for themselves. And they'll do it smiling all the way because they know they still win with their bags of cash payouts despite being "humiliated".
The only way people like that will learn is by sending them to prison. Their actions were so egregious, so completely in disregard for our financial system, that it's impossible to not have done any of that without intent. I'm sure if they turned over all electronic and paper documentation, there's gonna be a written strategy somewhere directing all this.
I think that there are two types of trust at stake here:
1. Trust that bank deposits won't disappear.
2. Trust that the financial system is fair.
A bailout sacrifices 2 for 1.
Letting SVB fail sacrifices 1 for 2.
My proposal is for a bailout, while doing the bare minimum necessary to prevent a backlash. Remember that the death penalty still gets the thumbs-up from voters in many places in America. It's foolish to think that the people who distrust Silicon Valley will be able to "move past this" in a mature, dispassionate way, given the namesake of the bank.
> We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority.
Two closures in three days is a sign that you have to take this very seriously.
> > We are also announcing a similar systemic risk exception for Signature Bank, New York, New York
Signature was another bank whose business was primarily in a volatile and risky market:
"Signature is one of the main banks to the cryptocurrency industry, the biggest one next to Silvergate, which announced its impending liquidation last week. It had a market value of $4.4 billion as of Friday after a 40% sell-off this year..."
This is going to put every regional bank on the map for short sellers as equity holders are being wiped out in these cases without depositors being affected. Why would anyone invest in any regional bank with the risk of a equity wipeout day to day?
They're also taking action to prevent this kind of thing from happening again-
> The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasurys, agency debt and mortgage-backed securities.
> “This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”
What kind of moral hazard? Let’s be specific about who did something wrong. Do you think that businesses should worry about whether their bank has hedged enough against rising interest rates? Or maybe they should subscribe to news alerts telling them sooner when to get out?
The shareholders getting wiped out and bank management replaced seems like pretty strong incentive for the bank itself not to screw up.
I think that's dubious. If management can make off with enough money prior to being wiped out, and it won't be clawed back, then there's still potentially a moral hazard at hand. So what if we lose the bank! We'll make off with millions anyhow, by investing other people's money imprudently.
Okay, but how does punishing the depositors for management mistakes fix that? It definitely increases the damage, though.
The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?
Fine, but let's talk about the other side of the equation: who should pay to make the depositors whole? Did the depositors do everything in their power to insure against their risk? Is there something in place already to help depositors get some of their money back immediately, and likely more as legal proceedings complete?
It's certainly not clear to me why the depositors, as crappy a deal as they got, should be bailed out by unaffected banks that are financially healthy or, as is the case no matter what, the rest of the citizenry should pay.
The short-term case for other banks bailing out depositors is that any systemic risk affects all banks and the rest of the citizenry, albeit indirectly.
But I think it's probably economically sound in the long-term as well. That is, asking every depositor with $250K+ to assess the financial health of each bank they use and maybe buy insurance is collectively more expensive than just having the FDIC implicitly insure all deposits.
That's different than asking if it's "fair". But I would wager it's probably more efficient.
Insurance always has a cap in the payout at some dollar amount, usually directly related to the amount one is willing to pay for the insurance. It's usually up to the insured to balance those two factors to get adequate, but not excessive, insurance for the risks they are exposed to.
Most of the arguments I've seen are effectively arguing that 250K is too low an amount. While that may be true, that was the well-established 'rule of the game'. The FDIC limit was no doubt chosen, as most insured amounts are, to cover the majority of damaged parties, for an acceptable cost.
This isn't grandma or Joe/Jane Public losing their life savings; the FDIC insurance easily covers the vast majority of individuals depositing cash. These are businesses that have, or should have, the financial wherewithal and resources to mitigate their risk beyond the FDIC baseline.
The way insurance works is that you pay a premium so you don’t need to worry about a risk, whether or not disaster happens to you personally. The timing is a bit irregular, but morally it seems similar?
If paying for deposit insurance were available for large accounts, I expect many businesses would choose it. Might as well make it the default?
I think it is also necessary to consider that many of the regional banks have more diverse clients - individuals, small business and some mid/larger business dealings.
Perhaps I'm wrong but I suspect a much higher share of deposits are under $250K than the 3% at SVIB. The larger deposits are likely from companies doing a much better job of spreading counterparty risk around, ie traditionally managed companies.
Absolutely a business should be worried. I'll give two examples, one old one recent.
As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
More recently, I was president of an HOA. Over a span of 5 years we built up a reserve account to just over $1M for a planned capital improvement. Every 250K we opened a new bank account. Had there been a delay in starting the project we would have opened a 5th.
So yeah, the Treasuer and staff of all of these companies should be taken to the woodshed and most likely fired for incompetency.
> As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.
Wouldn't it have been more useful if that job simply didn't have to exist, and they could just deal with one bank, and then that extra capital could have gone to something more useful?
Change the game so the risk is being managed in a way that doesn't require every single company to wastefully play financial hopscotch so they can instead focus on doing what they do best.
Do you think that was a good use of your time? Maybe it would be better if depositors didn’t have to worry about such things. What would be lost if all that busywork just went away?
Did you explicitly open the new account at a new bank? Because if you just opened a new bank account at the same bank you don't actually get any extra protection.
Absolutely, businesses should worry about bank failures taking down their uninsured assets. If a business's assets are not insured, they should not expect to be made whole by an insurance policy in case of tail risk failures.
Doesnt this just push the can down the road? Interest rates will likely be higher not lower in 1 year so their bond portfolio will be even more underwater.
No, so long as the average maturity is not too long.
The long-term bonds would have paid back enough money for SVB to pay back every depositor if there had not been a run that forced them to pay them all back at the same time. Knowing that everyone can get 12 months of runway will do much to allay fears and so reduce risk of further runs.
Weren't these 10-year bonds and negative-convexity MBS? 12 months doesn't improve the position at all, but maybe you can keep applying for these loans in which case it's just another QE.
What interest rate does that assume for depositors? Sure, the face value of the bonds in 2032 dollars might have been enough to pay back the 2022 obligations to their depositors, but banks are routinely offering 2-4% interest in high interest savings accounts now. So either depositors will leave for better options, or SVB would have had to offer competitive rates (digging the insolvency hole deeper).
Reminds me of a knee-jerk post someone made here promoting credit unions. They didn't intend for this reaction, but credit unions actually have the same risks as SVB because their member pools aren't diversified. The ironic lesson was that you should bank with JP Morgan, Citi, or BofA.
> This is going to put every regional bank on the map for short sellers as equity holders are being wiped out in these cases without depositors being affected. Why would anyone invest in any regional bank with the risk of a equity wipeout day to day?
Why would anyone invest in any business when the risk of bankruptcy exists (FDIC bank takeovers and their resolutions, with or without application of systemic risk exception, are in effect a specialized form of bankruptcy, with a different set of priorities for who gets a haircut, but equity holders are always low on the list for either these or conventional bankruptcies.)
Every business has the risk of an equity wipeout if it goes bankrupt. SVB was always going to have its equity zeroed, the only question was whether depositors were also going to lose out.
At the same time, why would the bank runs continue? AFAIK, this was sparked by Silvergate’s slow motion collapse climaxing on Wednesday, and the infinite FDIC threshold makes more bank runs pointless and self defeating
It was sparked by Founders Fund telling everyone to get money out of SVB, which didn't have any crypto exposure. They're invested in another startup bank (Mercury) so I think prosecuting a few VCs would encourage the others.
I'm pretty sure there would have been a run some other large banks had they not taken these measures. I've gotten several emails from a major regional bank basically saying "WERE FINE TRUST US" over the last few days and I don't even have an account which means they're spamming all their email lists. I did apply for a position at them a while ago so that's my best guess why they are spamming me their unreassuring message. The several banks I actually use have not done that.
Well, apparently they are too big to fail, given that the FDIC is covering them. So they should've been subject to the extra capital requirements that too big to fail banks have.
Should have had more regulation - more stringent reporting and capital requirements (easy to say in retrospect, but they were covered by laws repealed in 2018). It should not be possible for a consumer bank to get into this sort of state so that they are so far from being able to return customer funds.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
No, that's been the implicit rule since 2008 at least (arguably earlier). If anything, not supporting all depositors would have been changing the rules mid game and so would have lead to massive disruption.
The thing a lot of people aren't getting is that the rules of the game haven't been the law but what the Fed does for a while.
Certainly, the game as it's played favors the wealthy, yes. That should be changed. Knocking everything over by suddenly changing expectation wouldn't change things, just disrupt everything. But also, it wouldn't happen anyway 'cause the game is too important.
> No, that’s been the implicit rule since 2008 at least (arguably earlier).
No, depositors have lost money in failures since 2008. Its true that, for a long time, the FDIC has tried to resolve failures in a way which protects as much of the uninsured deposits as possible, but it has very much not been a guarantee.
The systemic risk exception invoked here is an exception.
"The systemic risk exception invoked here is an exception."
Yes but it's not a new exception.
The OP claims Yellen implicitly announced something new. She didn't. She's following the playbook from 2008+. The policy isn't new, it's not unexpected, it's kind of like ... a rule.
And whether a new rule is being created matters for moral hazard purposes and all.
Edit: My above quote could have been read as talking about all depositors in all banks but I meant all depositors in the SVB.
Because a major component of this is human nature causing bank runs they are betting that by doing this upfront it will be cheaper than not doing it and risking a high number of similar bank runs in the coming month as word spreads it isn't safe to keep money over the insurance limit in banks because of the unrealized loses on bonds.
At the same time, they've essentially raised the insurance limit to infinity. Depositors will be made whole, and if they aren't the next time something happens, they'll need some very good arguments for why the 9th largest bank is now also too big too fail but e.g. the 11th largest isn't.
It is already substantially higher than $250k because you can spread your funds between multiple banks. There are even cash management accounts from Fidelity and others that automatically place your funds with multiple banks to get higher insurance levels for larger amounts of cash. Their Fidelity cash management account allows you to spread cash among 26 different banks so you could have 6.5 million FDIC insured. Fidelity isn't the only financial institution to offer this service.
> At the same time, they’ve essentially raised the insurance limit to infinity.
No, they haven’t. The systemic risk exception was used during the last financial crisis for some banks and not others, so using it now doesn’t raise the insurance limit, actually or “essentially”. There is (still) no guarantee that it will be used for any particular failure in the future, just like there wasn’t after the last financial crisis, and people have lost funds in excess of the $250K insurance limit since the last use of the systemic risk exception.
One could argue that SVB depositors would not be expecting the be made whole if it weren't for the bailouts of 2008. The precedent has been set and reinforced. It's hard to argue that this will not encourage more risk taking and moral hazard.
That precedent was set at least as far back in the early 90's when they made depositors of Bank of New England Bank whole after it failed in 1991. This isn't something that started with the financial crisis of '08
> At the same time, this is yet another example of changing the rules in the middle of the game.
No, its not.
The “rules” of the “game” authorize systemic risk exceptions, so applying them is not a change to the rules of the game. Moreover, civilization is one continuous game, changing the rules in the middle is the only way to ever change the rules.
My read is that they see the shortage at SVB as relatively small and that they may be closing some marginal banks like Signature ahead of true insolvency/illiquidity to both protect depositors and minimize reactionary withdrawals across the broader market.
And it sounds like they have the authority to just do this on a Sunday, so it doesn’t sound like any rules being changed.
If I was a banker with a marginal portfolio, I wouldn’t be encouraged by this. Depositors are making it out, but banks are being aggressively shuttered to make that happen.
The government can't generally arbitrarily seize an operating business. (Indeed, in the recent Johnson & Johnson court case we saw the opposite: they asked to undertake bankruptcy proceedings early because they're facing a large liability, the government said no, not until you're proven to be actually bankrupt)
Sounds like a bit of a hazard: the difference between insolvent or not for many entities is just accounting conventions. Lock in some non-MTM losses-- wham!-- insolvent.
Why should bankruptcy protection be denied to any entity that would be unquestionably qualified if they simply took an additional legitimate action that would make their creditors worse off?
I don't get it. The FDIC insurance threshold is the bare minimum provided by law. SVB's assets are being sold off or restructured to protect depositors. This is literally the whole point of the receivership process. This appears at this point to be a fairly pedestrian FDIC bank take-over, save for all the culture war B.S. that's cropped up around it.
So, at least two banks failed this week, 16th largest and a smaller one. Then Fed panics and effectively institutes an “unlimited” insurance/backstop policy, as a direct result.
I don’t know if I would call those events “pedestrian”.
Not much of a choice. Guarantee of the system takes highest precedence.
Although this problem was caused by bank malfeasance and yes this does imply de facto unlimited insurance, unlimited depositor insurance is kinda the whole point and is not itself a bad thing.
Yes, moral hazard is a huge consideration, but I don’t see depositor protection as encouraging future failures of this type, by encouraging bad risk taking by mgmt.
Rather, if banks bet their customers money unhedged on endless zero rate policy, as SVB did, there should be regulations that prevent it. Trace back to lobbying to exclude SVB from dodd frank regulations also at the heart of the crisis.
Part of the rules are that the regulators are supposed to shut down a bank before the run happens. They're not supposed to let the run happen and let the poor saps that were too slow moving their money bear the brunt of the losses.
Yes, and had SVB (among others) not successfully lobbied Congress in 2018 to get big regional banks excluded from more stringent "stress test" requirements, perhaps the regulators could've detected faults in SVB's capital before it was too late.
Worse, it is also a lie that the cost will not be paid by taxpayer. Of course it will be - the remaining banks are going to pass the cost on via fees, higher loan rates and lower deposit rates?
Yellen is not clueless. She knows exactly how this will play out but as it will be spread over time and to many counterparts she simply does not care.
This is terrible moral hazard. Uninsured depositors should have taken whatever haircut would result after the auction. That is, after all, the meaning of uninsured.
Since SVB's deposits were solvent, there isn't an actual loss here as long as it encourages people to not withdraw money early. They collapsed because everyone asked for it too fast.
What would be expensive would be paying for everyone getting laid off after SVB depositors can't make payroll.
SVB failed because all their customers are in group chats with each other and think it would be funny to withdraw all their money at once and then buy stock in the bank.
Any depositors expecting to receive their deposits in due course could take our commercial loans to cover themselves in the meantime. They are being bailed out by the taxpayer to the tune of what those costs would be.
SVB had more asset than liability, at least on paper. They were not able to be solvent selling on open market in the time it had, but perhaps that can be done by a bigger bank over longer period of time?
The “ahead of time” component is partially addressed by the Office of the Comptroller of the Currency which conducts period stress tests of banks. The people doing the testing know their stuff. These bank evaluations have likely caught and mitigated many issues like SVB ahead of time, and we will never know how many more failures would’ve occurred if it weren’t for their efforts and those of other auditors.
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
You are almost certainly misreading that signal. Probably since Friday they have assessed that the depositors can be covered once the assets can be liquidated, and that they may even be able to make money doing it.
If they can’t, they can assess the rest of the losses to the system, and those losses once divided up are likely to be inconsequential, even if not considered in relation to a broader run on the banking system.
> Probably since Friday they have assessed that the depositors can be covered once the assets can be liquidated, and that they may even be able to make money doing it.
The same assets that are yielding <4% interest against a market rate of 5%+ or 7%+ or whatever it is? Seems like it's going to take a long while before those papers are trading at or above cost when you account for inflationary devaluation and their yield horizon.
There is certainly a cost here. The insolvency of the paper is the entire reason the bank failed in the first place.
How does this "special assessment on banks" work? Does the FDIC charge all US banks to cover the missing amount? How are the charges distributed? And what law is this?
Also if this option was available, why did they just bring it up now?
> "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
This has happened before in 2008. Secretary Yellen's announcement is important to secure depositor confidence, so the contagion doesn't spread to more banks. If depositors are confident that the government has their back, there's no reason to pull money out.
> > If depositors are confident that the government has their back, there's no reason to pull money out.
There is also no reason to put the money in.
You go through the trouble of protecting your money because you deem them scarce and irreplaceable.
If tomorrow a commercial bank insured with the FDIC starts offering a product promising 20% interest, then by all means people should get together and apply in mass, get a couple of big political donors on board and all of a sudden there is no downside.
If the wacky bank keeps its promise then it's a 20% gain, if not then the FDIC will have depositors backs anyway to the full amount
Well, paying for it by a special assessment on banks means the banks aren't going to get a free ride. They, as a group, have to get their shit together otherwise they will pay dearly
I think (but am honestly not 100% sure here) that the argument is if other banks are going to have to pay for SVB being greedy, it is in some sense punishing banks for not being greedy enough; as while, sure, the SVB investors are getting hit: 1) a lot of them already made a lot of money years ago (and potentially exited), 2) many of the executives apparently literally sold out last month, and 3) they were hoarding a lot of deposits that other banks couldn't get because they weren't being risky enough. But so like, saying banks are paying dearly for this is strange, as it is the wrong banks... and, by extension, the customers at those banks, who are in turn making decisions about what bank to use in the future.
You probably can't hope for better under the US system. Maybe other banks will push hard to not allow more SVBs in the future after seeing this.
Suppose I'm a Utah bank that is mostly lending money to diverse local businesses and home owners, and mostly taking deposits from other businesses, some local and some not, and would-be future home owners. Last week I probably didn't care that SVB wasn't required to be as risk-averse as I was, if they failed what do I care?
Today, seeing this news, I care a great deal, and I don't want to see other banks allowed to take risks I wouldn't have been permitted unless they're paying a lot more than I am for the privilege, because when they fail - and they will fail - I don't want to pay for that.
I'm no expert, but that Utah bank sounds pretty risky to me.
At least treasuries and MBS are relatively liquid securities that can be quickly sold at prices that don't deviate much from their marks as long as you're marking to market.
Those loans to local businesses and home owners sound much, much scarier.
Sure, as far as I understand from that table the maximum fee FDIC charges is $1 for every $200 on deposit, which if we're expecting it to act like full insurance means they're expecting that these riskiest banks won't fail more often than every 200 years on average, which doesn't come anywhere close to how risky these banks actually are.
“Banks” are legal fictions, abstraction that serve as tools for shareholders, “Banks won’t pay, but…shareholders…will” is a fundamental misunderstanding of what banks are.
the economics of the market still prevail. if they lower salaries, people will find jobs elsewhere. if they overcharge for their services, customers will go elsewhere (and there are alternatives--credit unions)
yes, consumers pay all of the taxes and fees that are charged to companies but it does not change the supply/demand equation in the open market for the services the banks offer. the price elasticity of the things you mention is not affected by a new tax on banks
This. “Backstop” thing is to prevent systemic collapse, but otherwise it will spread the losses to other people who “did nothing wrong”. This is really shaping up as bad lesson here for wrongdoers.
" I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... "
EXACTLY! This will be born by the taxpayer. What were all the VCs f*cking thinking concentrating all their portfolio companies in one financial institution? This was terrible decision making on their part (and by the portfolio companies). Why does this all of a sudden become a taxpayer liability? Because All-In bros got on Twitter and started spamming people?
Where do banks get their revenue and profits from? It’s really immaterial; if depositors weren’t taking a haircut, all of us do in some form or another, it’s simply the optics that change (banks, the Treasury, the Fed, whatever).
No one knows that taxpayers will have to pay anything for any of this. It's possible they'll end up ahead. The assets were/are there to cover depositors. The timing of the asset liquidation/redemption is the problem, and only the "bank of last resort" can help avert contagion from skittish depositors, mass layoffs, and pointless disruption.
As said above: would you prefer to see hundreds or thousands of small companies fail, their employees go on unemployment insurance, etc.?
> No one knows that taxpayers will have to pay anything for any of this. It's possible they'll end up ahead.
Wouldn't SVB have been sold at auction by the FDIC if that were likely to happen?
I don't want to see startups fail or people lose their jobs, but this all feels like a cloaked way of passing the cost of the bailout onto the taxpayers (via raised FDIC fees that will trickle down).
Yellen is an incompetent ideologue. I studied applied economics in university, and the first code I wrote for a real application were inflation simulations. When she and the Fed made the claim a few years ago that "inflation was transitory" I ended up calling several of my smartest classmates. It was a nice excuse to reconnect, and universally all of us were asking what she was smoking.
It wasn't just us. Larry Summers was prominently and publicly stating that the inflation was definitely not transitory. But the banks believed her, and continued in 2021 to buy these securities as if interest rates were going to be going low again in the near future.
> But the banks believed her, and continued in 2021 to buy these securities as if interest rates were going to be going low again in the near future.
The banks most certainly didn't believe her. The banks rightfully took it as a signal that the US gov would step in to cut losses if banks continued to loan. The Fed wanted banks to continue to loan so they didn't grind the overall economy to a halt instantly and send us into stagflation.
But everyone knew it would happen. The Fed knew they were playing a losing strategy. And they still know it. But they refuse to play the strategy that would win the inflation game because it would bankrupt the country.
The only way out now is through severe tax hikes + gov spending cuts OR war with China in the hope to reset debt at its conclusion. The political elite seem to be signaling the latter.
Have you considered the hypothesis that she is competent and was lying and/or bullshitting?
Hypothetically, if I ran a government that was engaged in geopolitical competition, I wouldn't want people to tell the truth to my detriment when alternatives could be gotten away with.
It's too depressing for me to take that hypothesis.
It's far easier for me to believe that Yellen is a deeply intelligent and talented economist who lacked the ability to protect her cognitive processes from optimism bias. People think that when you say incompetent you are saying they aren't intelligent enough for the job. I think she was temperamentally unfit. I want people in the Federal reserve that don't care at all if they get invited to cocktail parties or get job offers. I want them to be people who don't mind being hated by everyone.
I want Paul fucking Volcker level of tolerance to everybody hating you.
All that being said, the thing that undermines my desire to not believe your theory is that she made the terrible mistake of going straight to work for the Biden administration from the Fed. Even if this was done for noble reasons it just makes the Federal Reserve look partisan which is a really bad place for it to be.
> Yellen is an incompetent ideologue. I studied applied economics in university, and the first code I wrote for a real application were inflation simulations.
Damn if only the US government could find someone with credentials as strong as yours
That's the point. I don't think I'm qualified for the job, and yet it was obvious inflation wasn't transitory. The fundamental drivers with money supply and in particular, velocity, pointed this out clearly. A quick look at travel statistics in summer 2021 made it clear that a majority of the public was returning to pre-pandemic spending habits. She clearly isn't qualified, and simply failed upward into working for the administration. You don't have to look hard, far, or even outside of Democratic affiliated economists to find those who were far more accurate than the Fed, including the aforementioned Larry Summers, or Steven Rattner.
Your welcome to be critical of my statement, but where's your criticism of the people being paid high salaries in positions of power who utterly failed to react in a timely manner (when many many economists with tons of credentials were telling them to) and have now forced us into a worse situation?
I think your statement is dumb. Inflation was exacerbated by a large war in 2022 that sparked an energy crisis. Failing to acknowledge that is just naive.
You don't win any points for saying X is inevitable when X is occurs for reasons completely outside your expected scope. That's just luck.
Those were definitely drivers for the inflationary spiral in consumer goods, but we've had massive inflation for a long time; ever since QE started. It's just that the inflation has been relatively hidden in speculative assets (homes, equities, crypto).
The parent is correct in their assessments of the market and the transitory inflation. TBT and TTT were no brainers at the start of the transitory dialogue because everyone knew it wasn't.
You're on point here. Your analysis will be wasted on the dunning-kruger comment you're replying to.
Apparently Larry Summers, probably the greatest living former treasury secretary and architect of the only balanced budget in my lifetime, was "lucky".
It's absolutely not luck and you are betraying an ideological point of view. It's obvious you never studied economics and you're just sitting here parroting partisan talking points. Anyone with common sense is aware of the Ukraine invasion being inflationary on European energy supplies, and knock down effects on things such as grains and fertilizers and other commodities. But those of us with a background who understand the dynamics of inflation knew this in 2021 long before Putin invaded. It's simple math:
Inflation is a product of money supply and monetary velocity. Money supply was already grossly inflated and monetary velocity was quickly gaining steam as the vaccine was rolled out.
You should ask yourself if you have any idea what you're talking about before adopting a negative tone in the future. Frankly it personifies Dunning Kruger arrogance to attribute a simple mathematical prediction shared widely by experts to luck. Projecting your utter lack of expertise on this topic on to everyone else is ridiculous.
Ok, and I think you're "betraying an ideological point of view" when you agree there was a major inflationary force so large that "anyone with common sense" is aware of it, but fail to do the elementary math that if you had inflation X with a major inflationary event; then in the absence of the major inflationary event, inflation would almost certainly have been a lot lower. Imo, to the point of being negligible.
The price of energy is a fundamental input to the global economy. When the price of energy goes up, the price of everything goes up as a supply shock. I don't think you're a dumbass for thinking otherwise. I do think you're a dumbass for asserting whatever this mess of a post is.
Citing "a simple mathematical prediction shared widely by experts to luck" is pretty dumb as well. Economists are hardly a uniform entity. Do you truly believe I could not find an equal army of qualified experts with differing mathematical predictions?
Circling back to you think you're more qualified than Yellen, mr kroog. Look out. Bachelor of Science in economics over here. this guy wrote code!
I just posted this on mastodon but I think maybe the community here knows better:
If you ran a bank that required insurance on all deposits over the $250k FDIC coverage, and then offered 3rd-party insurance as a convenience for those who wanted it... your bank would be much less likely to suffer a blow up due to a bank run and therefore that insurance should be relatively cheap.
Furthermore, people should prefer to bank someplace where all of the depositors are covered. Why is this not commonplace? Simply because the additional fee discourages it?
I think if Yellen announced this as a requirement it would remove that incentive to treat FDIC like free unlimited insurance.
Which apartment block do you thing a most people would rather live in, the one that charges you an extra 10 percent a year but promises to replace all your belongings if it ever burns down, or one that tells you it will never burn down?
>At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
If this wasn't done... nobody in the world is going to trust their bank within a few days (possibly faster than that thanks to twitter, et al), which would trigger Global Depression II
If someone in 1930 overheard a time traveler referring to World War 2.... the shock would have been overwhelming.
In the same way, seeing the start of World Depression II isn't something I could bear.
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Yeah, all corporate customers that have seen an FDIC charge on their statement, based on Q-end balances will have a "special" laugh at this. It's going to be passed through and not be bourn by the surviving banks - that benefit from this 'bailout' of their customers....
Changing the rules is good if evidence emerges that the rules are bad. In this case, the $250k guarantee was thought to be enough to prevent this kind of thing from occurring. We now know it was insufficient. The world has changed since that was implemented. Namely, social contagion, which is one of the causes of bank runs, can act harder and faster in the age of social media.
No, all credible ones work by updating "rules" on the fly. That's literally how most laws are made in general. Something bad happens and appointed agencies and legislators rule and/or pass laws to cover that bad thing from happening again. Ex post facto only deals with retroactive aspects. Which isn't happening here. Just because the government acted one way in the past and not the same way in this instance does not equate to the retroactive definition of ex facto law.
> Yellen has just broadcast that FDIC insurance is essentially unlimited
Although I agree with the Treasury's actions here so far, this is a potential issue. They should instantiate more stringent rules for banks that who cater to business accounts and then raise the cap for insurance on those accounts to a number that makes sense for small businesses across the country.
Too many CEOs and CFOs were allowing their business checking accounts to sit in dangerously uninsured positions. Headliner being Roku with nearly a half a billion dollars sitting in a single checking account with SVB. But plenty of smaller businesses leave ten million plus dollars in their accounts as a course of business as well.
The actual amount those accounts can be insured for needs to be formalized and it should probably be higher than the standard quarter million for consumer accounts as this is way too low for business larger than a half dozen employees.
Haven’t depositors always been first on the list to get paid, even their uninsured deposits? I don’t know if charging a special assessment to member banks is standard operating procedure, but that doesn’t sound like government intervention. It just sounds like reasonable operation of the FDIC.
> Does this statement reflect any shift in policy?
It’s a decision of how to apply existing policy to a specific situation, not a policy change. Existing policy is nonspecific enough that reasonable people could disagree on how best to apply it here without changing it.
> Haven’t depositors always been first on the list to get paid, even their uninsured deposits?
Yes.
> I don’t know if charging a special assessment to member banks is standard operating procedure
It isn’t routine, which is why it requires invoking the systemic risk exception.
> but that doesn’t sound like government intervention.
It’s a government decision to intervene in a particular way, so…
> It just sounds like reasonable operation of the FDIC.
It’s not just “reasonable operation of the FDIC”, since both Fed and Treasury actions are involved. And, even if it was, FDIC is a government corporation, so its actions are government intervention. Its reasonable operation is reasonable government intervention, but its still government intervention.
Not sure how "taxing depositors at other banks to pay for uninsured deposits" is "reasonable operation of the FDIC".
(And yes, it's taxing the depositors. Because even if it's "officially" a fee to the other banks, it will be trickled down to their customers through lower interest rates and higher fees rather than absorbed.)
If this was necessary to recover insured deposits, that would be reasonable. But instead, the people who made poor decisions aren't going to lose anything, because the extra money is coming out of the pockets of everybody else with money in banks.
How can they change the rules? Surely it’s already written into law… right? Are they actually able to unilaterally decide to tax banks to fill up their rainy day fund?
My guess is that they’re not changing the rules, they’re utilizing them. Either that, or they have far too much executive power over banks. Which would be shocking.
If this were a middle America community bank failure with deposits from a bunch of farmers and factory workers that is a 0% chance they would have changed the rules. This happened because the tech industry has massive lobbying power.
> At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy
And it doesn’t have to be that wide a threat. The threat here was pretty localized. Aside from blue chips that everyone has their pensions invested in (which don’t seem to be at risk) the rest of the country doesn’t have much exposure to this.
Maybe I’m wrong but that seems like a significant shift in policy, where the government will change the rules to respond to a localized crisis.
> I really wish we could plan for these entirely foreseeable events ahead of time.
This is unlikely TBH. When a system this complex and a global clear visibility if offered to no one on the planet, foreseeing ALL risks isn't a possibility.
> I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
That’s an unrealistic utopian fantasy. The real world doesn’t even remotely lend itself to that kind of planning.
Even calling it “selective justice” involves an unrealistic bias. What is happening is that the particular circumstances are being weighed an a suitable response is being formulated.
The rulebook for planning for all such events ahead of time would not be that much shorter than the future history of human civilization.
> Every time the FDIC has stepped in like this they have made all depositors whole.
This is a false assertion. Usually depositors end up losing some of their money above the insurance limits-- only not doing so if the amount of remaining assets proves sufficient to pay the liabilities.
I thought the old $100k limit was statutory. Then in 2008 it was changed by the executive w/o Congress approving it (or has it, since?). Now it's being changed no limit and fees are being raised. These are fees charged by a government entity, so one would expect Congress to have to be involved. Can a depositor sue to have the old fees restored? Can a bank sue to have the old fees restored?
> Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy
"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. Paul Getty
(Or as I heard it more aptly paraphrased, "if you owe the bank a million dollars, the bank owns you. If you owe the bank a billion dollars, you own the bank.")
They know (and it is obvious) that all deposits are going to be fine without any extra funds, wacko VC's and nutjob politicians are stoking the sort of flames that might cause a contagion so they are forced to make statements like this.
The fact that the statement is so milquetoast is certainly on them, but being uber-conservative in your promises is generally a failing/asset for bank regulators.
… which is why Signature Bank was also placed in receivership this weekend. The contagion was spreading, if they did nothing there would be runs on a number of banks tomorrow. There still may be runs tomorrow.
Looking at other banks that maybe be in a similar position and taking prompt action is competence to be celebrated, I view it as more evidence that despite weaknesses in the regulatory framework they are not in a tough spot at all. They know they can act decisively without fear.
A tough spot would be an environment where they let the SVB situation drag out and didn't act on Signature until a run was in motion and had both to deal with at once.. then they would be fighting to restore confidence.
If you look at the numbers from 2007-08 and this stuff, plus the much tougher regulatory environment (despite SVB's ability to fall under a lot of thresholds) there just isn't the sort of systemic risk at play here that folks seem to be implying. Also this isn't a replay of the S&L Crisis of the 1980's because those lessons were actually learned but some institutions are still going to screw up because a rising interest rate environment is still challenging in the current regulatory regime.
>"At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy."
Rules exist to serve a purpose. If one risks fucking up the economy with the only goal that the rules are preserved - it could end up with pitchforks.
This is going to be the beginning of the end of the banking system. I foresee a huge dollar collapse, the US banking system has just lost its final shred of credibility. It's only a facade of a bank at this point. It's just privileged people with a government mandate to leverage on everyone else's money with no consequences.
It's more immune to moral hazards. But I'm not really into crypto, I'm just purely frustrated by the current system. It's an absolute joke at this point.
It's not though, SVB equity holders are getting zeroed out. Raiding the DIF to pay out depositors in extraordinary circumstances and then recovering it through a special assessment is basically the whole point of having an FDIC. The justice is that SVB equity went to $0.
> broadcast that FDIC insurance is essentially unlimited
Shouldn’t it be? The government is in the best position to regulate and manage the risk of these institutions. We cannot expect average depositors to be financial analysts with the capacity to assess financial institutions.
Because that's not how modern banking works. This isn't George Bailey lending out deposits; retail banks don't use deposited money at all it just kind of disappears.
> I really wish we could plan for these entirely foreseeable events ahead of time
That's exactly what Dodd-Frank did. The audit and stress testing requirements got rolled back in the Trump administration. "Planning" is not the problem here.
I can't pinpoint anything specific they did wrong, compared to peers. Their operating expenses were not that large, for example. So what happened to them, can happen to any bank now. That's why FED are worried.
> At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
The criteria isn't threatening a "wider disruption to the economy", it's threatening the quality of life of a certain class of people. When unions threaten a wider disruption to the economy for maintaining their quality of life, they'll do their damnedest to not give in. They'll pass laws outlawing strikes. Or send in "law-enforcement". As the saying goes, laws are for the poor.
> The criteria isn't threatening a "wider disruption to the economy", it's threatening the quality of life of a certain class of people.
In support of this view, they could have easily extended FDIC on a dynamic metric, for example 20k for each employee. If you are 5 employee VC fund sitting on 0.5 billion in cash, no bailout for you from taxpayer money (because let's be real, FDIC is all taxpayer money, it's irrelevant if that tax is collected by the govt directly or indirectly via mandatory banking fees).
An alternative path was to provide zero interest loans against your SVB holdings, with the expectation that you are on the hook for the shortfall that would be yielded by the liquidation. If SVB is well capitalized as the Fed claims it is and there is "no cost for the taxpayers", then this shortfall should be relatively small if any.
Another, even more radical option would be to quickly set-up a secondary market for the debt issued by these banks and let the market provide liquity and discover the value of the assets. This is one of the few innovations form the crypto world I wish we could see in traditional finance, we can't keep bailing out rich mofos like it's 2008 when we have all these wonderful new technologies which can stop contagion and bank runs, protect depositors and zero in on those responsible.
> In support of this view, they could have easily extended FDIC on a dynamic metric, for example 20k for each employee.
Implementing any such "dynamic metric" would have taken time, which would mean they would not have been able to restore all deposits by Monday, which means a significant risk of contagion.
They can make those rules and preparations beforehand, for the next SVB, Signature etc. Banks would definitely want to optin under such a protective regime and have their systems ready since it alleviates customer panic in an event of a liquidity crisis.
> it's threatening the quality of life of a certain class of people.
Like the jerks who chose to work for a company that picked a specific SaaS payroll provider. Or those entitled Etsy sellers that expected to get paid. The absolute nerve.
The money isnt going directly to the workers. It goes to the companies who employ them to make sure the employers are ok. I think the point being made is that when workers ask for protections or concessions it's this massive struggle but when Etsy needs help the money somehow appears literally overnight.
What you're glossing over is that when the employers suddenly lose most or all of their liquid assets and don't have perfect positive cash flow, then they cannot pay their employees.
As long as the Fed is making up rules on the spot, they could make up a fund to pay employees of the depositors directly in the short term, and start liquidating any assets of Silicon Valley Bank to pay for those. Call it, say, the Silicon Valley Bank Victims Fund.
Avoids the moral hazard created by propping up SVB while still keeping workers paid. But I bet that would be showcased by the upper class as a "handout".
> By Monday morning? With protections in place against fraud or double-dipping? It wouldn’t be as easy as you think.
But you are somehow convinced that this fund [1] created in 1 day by the Fed to solve "temporary liquidity issues" with vague promises of "loans against securities" and "assessment charged on the banks" will be entirely free of fraud or double-dipping?
Everything involving money has the potential for fraud and double-dipping, and the banking sector has a ton of it. We can figure it out and prosecute people afterwards (or not, it's not like senior management at SVB is going to be prosecuted).
> (And for the nth time, SVB isn’t being propped up. The owners are losing their whole stake.)
Oh sure, three Federal departments make a joint statement on the weekend and create a new liquidity fund every time a company goes bankrupt. Nothing to see here!
Sure, but why is it any more absurd than creating a fund out of thin air to guarantee SVB deposits?
Money provided to individuals is highly trackable; ask anyone with student loans. And this would give the former SVB's employees something to do past the current 45-day window. More employment for the win!
Creating a system to work with one entity, especially a bank, is far easier than creating one to work with 10s of thousands of individuals, not to mention that you can do this work all abstracted behind the bank without any existing systems (payroll) having to consider anything.
You can spin "what this is about" whatever way you want, but it's simply a fact that for the kind of businesses that typically had deposits at SVB, the overwhelming part of those deposits existed to pay employee's salaries.
Yep. And when other business can not pay salaries because of events they could not control, neither them nor their employees get any extra help. They get mockery from very same people that call for help now. This is about who got it.
The startups did not had all of their money in this particular bank randomly. It was by design.
A corrupt program that incentivized banks to finance the largest sums first, which of course were only demanded by the largest companies, and ended up running out of funds by the time the small players got their turn in line.
It was a sad attempt at preventing a 5th Ammendment violation, and it was done so poorly that it didn't solve the issue. The 5th was still violated.
> And when other business can not pay salaries because of events they could not control
Can you give an example of such a company? I can’t think of a way in which an otherwise healthy (long term viable) company could suddenly be unable to make payroll in such a way that assistance would not be available (e.g. inexpensive bridge loan), or the company should not have bought relevant insurance.
Literally the only thing I can think of is if smaller banks failed and companies were stuck with 250k + haircuts and didn’t get this same deal. So did that actually happen?
Every depositor is getting $250k back immediately, surely that's enough to make payroll a few times over, factoring in other revenue they must have if their payroll is that large.
For the rest of it, they might take a 20% haircut at most. Even if they had no revenue, and that was say 10 months runway, then it's down to 8 months. It's not like people aren't going to get paid, there's plenty of notice there.
> $250k back immediately, surely that's enough to make payroll a few times over
I'm not sure I follow. A US 60k/Y job means the company has to pay 5k p/m (to employee and taxman). So a company-depositor getting 250k would be enough to serve 50 employees. "A few times over" would only be true for less than 25 employees. If we go Silicon-Valley level, where salaries seem to be twice as high (or more), those numbers would halve again. They seem very small numbers, most SMEs would not fit them.
> They seem very small numbers, most SMEs would not fit them.
In the USA 78% of businesses have fewer than 10 employees. 89% percent have fewer than 20. The typical SMB has only a couple of employees.
When you include sole proprietors (like the typical etsy store) "the share of U.S. businesses with fewer than 20 workers increases to 98.0% and the share with fewer than 10 employees registers 96.0%".
Yeah that is probably wrong but I think a notion of "omg all my money is gone" is also wrong. As long as the bank run is stopped in time, people with uninsured deposits would lose who didn't make it out of the bank in time will only a minority share instead of everything. That's what a bank run basically is, if you have 102$ in liabilities and 100$ in assets, and the FDIC steps in, everyone who holds 1$ at the bank gets 0.98$ out. Not bad. If 99$ exit the bank then the owners of the remaining 3$ only get 1$ out, a 66% loss.
The customers of SVB were quickly growing business in an industry where you can quickly obtain immensely high profit margins. A 20% cut is not the end of it.
I believe the big impact of this announcement is not the money itself, in fact it was the lowering in value of government bonds that caused the bankruptcy in the first place, so the govnernment effectively made money from the 10-year bonds deal they struck with SVB. Maybe in the end it might still be a profit for taxpayers/USD users overall. But this announcement still implies something for banks: they can do the dumbest decisions (like this failure for risk management), and the government will bail them out.
Lots of people are starving and homeless for as trivial a "decision" as that.
I'd much rather give everybody food and a home, including the Etsy seller, instead of: giving the bankers a ski jolly, people still starving and homeless, less this Etsy seller. Why can't we do that?
Some of those entitled Etsy sellers voted against everybody having food and a home; My heart breaks, but not as much for those who have and hate. Maybe now that they are hungry and homeless too they will be a little more sympathetic. Surely that would be best.
Rather than prop up a bank that support x number of businesses that support y number employees, you'd had the government prop up xy employees? For how long? And if another z number of banks fail? Support xyz employees?
This! Exactly this, because the government is also doing a backstop for a second bank, Signature Bank of New York. Silicon Valley Bank is the 2nd largest bank failure in U.S. history, and one day later, Signature Bank was also closed and its uninsured deposits guaranteed by the FDIC.
All of Europe is regularly dismissed as socialist whenever the EU enacts regulations that a certain part of the HN population does not like. I would consider the label "socialist" an epitheton ornans here.
What banker got a “ski jolly” here? The bankers in this case are in exactly the same position they would have been in if the bank were allowed to fail without supporting depositors.
That happened before the fdic got involved. If it turns out he was hiding something, the SEC might get involved but otherwise he was fully allowed to sell his own stock based compensation. That's how stock based compensation works.
Thus, on one hand, I'm glad they're doing this, as it should help prevent wider bank runs, and it ensures that banks are the ones that are actually paying for it.
At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.