I see a lot of unexpected saltiness and clear misconceptions in any thread about SVB.
“Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
“This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
Generic screeching against the tech world. I get the schaudenfreude, but this will not hurt big tech and VCs as much as tens of thousands of small businesses, and the people employed at them. Some billionaires will be upset at some relatively insignificant losses, while hundreds of thousands may lose their jobs.
I'm pretty baffled to see so much of this on HN. Like a whole lot of people here, I've worked at startups for my whole career. People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money because our CEO used a well-reputed bank?
Absolutely wipe out the equityholders of SVB. They deserve nothing, because that's what you should end up with if you own stock in a company that goes bankrupt. Claw back executive pay if that's something you can do. But kill a bunch of startups because of their choice of financial institution? I just don't get where that comes from.
I think the backlash against tech comes from many years of tech celebrating themselves and being celebrated as “disrupters” for a lot of bullshit startups. And the amounts of money made with companies hat have no real business is just astonishing. It would be nice if it went back to focusing on creating sustainable businesses that make useful products that benefit their users and aren’t just another vehicle for mass surveillance.
Plenty of startups fit that bill and will nonetheless be impacted by SVB’s failure, while the most pointless businesses surf by on their founders’ access to inherited wealth and political power. Any revenge on them will be short-lived and will have serious, lasting consequences for middle class workers throughout the industry. For anyone reading this who doesn’t already know: startups aren’t all snotty trust fund kids making $300k+ selling AI deodorant on the blockchain.
As I said on another post this weekend, I’ll remember the comments I’m reading here for the rest of my life.
> Plenty of startups fit that bill and will nonetheless be impacted by SVB’s failure
Startups are going to get most of their deposits back-- perhaps all if there's an acquisition. If SVB is not acquired, I hope the FDIC is able to get a substantial dividend quickly so that they can keep operating and that everyone works to keep disruption low.
But I don't think the federal government needs to make depositors whole beyond the insurance limits. I think that sets its own bad precedent. Maybe some startups are going to lose 5-40% of their cash because of their treasury management choices. That is OK.
The times when I was a founder of a startup with a substantial cash balance--- we hedged the bank risk. There was a cost to it. I don't think those costs should be socialized.
To further this, a lot of people (see Sam Altman, for example[1]) are saying the federal government should give depositors all of their money bank, and don't seem to care at all about what this would mean in the long run. Is the FDIC now insuring all deposits in the U.S. for an unlimited amount? What would the implications of that be?
Maybe there should be changes made to help protect depositors more, but instead of a collected and rational conversation about how we'll treat deposits going forward we're getting glib "just give these people there money back, they don't deserve this" responses. Of course these things are tragedies, but the degree to which the federal government assists people in these situations is a complex discussion, and we have to come up with a consistent approach.
People are asking about salty response, but this kind of cavalier attitude toward the financial system from supposedly serious thought leaders is a bit alarming.
> Maybe the fed should open a bank for deposits that's guaranteed but provides either tbill interest or zero interest.
> It's pretty ridiculous for people to need to judge whether their bank is fiscally sound.
This is a great idea. We should look into this more.
iirc three researchers asked this same question back in 2018.
> A potential policy recommendation was posed in 2018 by three researchers, two of whom worked in the Treasury Department. Under their proposal, the Federal Reserve would offer the option to all individuals and businesses in the United States to open a bank account, termed a “Fed Account,” with the Federal Reserve itself, providing an alternative to private banks or credit unions. Such an option could have significant effects on a wide array of monetary and economic issues.
If you operate in 1% space of wealth there are and should be risks. Making everything the lowest common denominator literally leaves us with Camacho for president.
Why should there be risks? If someone just wants to park some cash without it possibly disappearing, that seems like a solvable problem. E.g. as the parent said, central banks could simply offer accounts to anybody.
> The 250k limit should be inflation adjusted. It’s not been raised since 2008. If inflation adjusted the FDIC insurance would be closer to 350k
That 100k difference wouldn't make any difference here though, since the problem is for businesses (startups mostly) who had accounts there.
The 250K insurance limit seems quite reasonable for individual personal accounts per bank. But applying the same limit to a whole company which may well have more than 250K in payroll per month... well there's a problem.
Yeah, there was a lot of balls to Sam's post, "many of the relevant people in government don't understand the magnitude of this"? Like the FDIC? I think they understand plenty. That's very specifically why they don't communicate with the bank before they take it over, that's why as many people have seen and been impressed with, they come in with almost surgical precision and take things over and work (literally) around the clock, realizing every hour, day counts, and get this stuff sorted.
No Sam, it was people like you who underplayed the magnitude of this, and are now panicking, and looking for a bailout, and are entirely unable to justify why of the several hundred or more banks FDIC has closed (though one of the larger ones), SVB should be special, beyond "well, it's MY money".
> I hope the FDIC is able to get a substantial dividend quickly so that they can keep operating and that everyone works to keep disruption low
The FDIC has publicly said there will be an advance dividend and I don't see why it wouldn't be substantial, given that there's going to be a LOT of recovery unless SVB has big non-public problems.
FDIC has to make a decision about risk. There's no way they have done enough diligence to have a complete picture of liabilities (e.g. to find any non-public problems).
FDIC should pay early (Monday-Tuesday, not anytime "next week" as they've indicated so far) and should pay a big chunk, even though it's not completely safe.
Every day that goes by with uncertainty, the cost of the fear grows.
Why wouldn't there be a way? They're a government corporation with a $2bn budget, thousands of employees, whose only purpose is to oversee this kind of event. And it's not like they've been overwhelmed with work recently. The bankruptcy was only made public Friday, but they've been working on it for longer than that. Yes, they've certainly done their due diligence.
So, legally speaking what authority does the Treasury Department have to make depositors whole beyond the legally guaranteed $250,000 insured and an equal share up to the amount of their deposits of the auctioned and liquidated assets?
The question I have is do some of the proceeds of the liquidation get used for $250,000 insurance payout first? Or do the tax payers get to help?
> The question I have is do some of the proceeds of the liquidation get used for $250,000 insurance payout first?
Yup. FDIC gets the bank, and has to pay the insured amount. Then, the remainder must be managed for the benefit of depositors, other creditors, and shareholders. Any shortfall of the insured amount can be paid from the deposit insurance fund.
> Or do the tax payers get to help?
The FDIC deposit insurance fund is paid for by banks.
I think people have forgotten that depositor bailouts are not just free money, but money taken from other people. There's a balance between minimizing the pain to depositors and minimizing the pain to the rest of society by not only taking money from them, but creating an environment where people don't have to care about where they put their money and thus have no reason to demand the people they trust with their money not act like reckless assholes. Corrupting the entire concept of risk vs reward would destroy us all.
…where does the extra money go then? If a bank has more than the insured deposits still, but is insolvent, where does the rest of it go? To the depositors, is what makes sense to me.
Yes, if the bank isn't acquired then the assets will be liquidated and depositors will receive most of the proceeds. They are relatively senior in a bankruptcy process.
Right, that makes sense to me. So I guess I'm confused by the other commenters suggesting that depositors should only receive the $250,000 and no more. What are they proposing happens to the remaining money?
> I simply don't believe you ever founded a startup.
CTO Recourse Technologies; acquired by Symantec in 2002.
CEO, later VP of Engineering TransLattice; acquired by QualComm 2017.
And a couple of other things inbetween. Now I'm a middle school/high school teacher.
Your assumption of bad faith is terrible.
> A big variable here is simply when and how money market sweep funds will be handled and made available, if you had millions without sweeping into a money market fund, that's silly.
You just use IntraFi and they take care of the details for you. Odds are your bank makes the introduction when you ask the question about the exposure.
> This is one of the dumbest views
Make an argument without calling people dumb.
> If the government can protect against huge losses because of their liquidity, why in the world wouldn't we let them? The bonds SVB held are only mark-to-market losses right now because they haven't matured.
In a discussion elsewhere, the moment I mentioned my opposition to a bailout, the immediate response was, "Sounds like you haven’t run a startup ¯\_(ツ)_/¯". I've started 4 companies, one of them a classic venture-backed thing.
The immediate assumption of "Oh, you people who are not as me and just can't possibly understand tech, so you don't get to have an opinion," is exactly the sort of arrogant exceptionalism that got a lot of people into this jam. Like, I get that it's awful to realize one's business is possibly doomed. I have been there. But in that moment to flail around and blame others rather than understanding the mistake? That's a great way to keep making the same sort of arrogant mistakes.
> is exactly the sort of arrogant exceptionalism that got a lot of people into this jam
Well, I don't think you start a business if you're being entirely rational, either. You basically need an outsized belief in your own capabilities and need to have the erroneous belief that you entirely control your own destiny.
Black swan events that might entirely wipe you out and that are completely out of your control cause cognitive dissonance.
I do think FDIC should choose to incur some amount of risk of being surprised by additional liabilities by making a quick dividend payment. The benefits of keeping things moving and adding some clarity soon outweigh a small risk of partially bailing out losses.
> You're expecting early stage venture backed companies to have treasury expertise? Time to focus and think about that?
You hire a financial manager, in-house or a service. Basic delegation task that any one (individual or business) dealing with more than a million dollars should probably be doing anyways. Certainly anyone dealing with the kind of money we're talking about here with SVB's customers.
Just keep in mind that miserable jerks are naturally more inclined to be noisy. This is showing up on both sides of this debate. There's these miserable jerk VCs noisily demanding tax funded bailouts to preserve some of their wealth that is at risk. And there are the miserable jerks you're talking about on the other side who claim to want to see a bunch of peoples' livelihoods put at risk.
But those people are just a noisy minority. Most people are quietly somewhere else on the continuum between those extremes.
No, but the median salary for a software engineer is still 120k, a little under double the median salary across all industries.
It's hard to dredge up deep, deep wells of sympathy for folks who were already playing the salary game at double the value of half the players. One can't escape the sense that if they've done the kind of budgeting that a regular American does, they will be fine.
Besides the trivially obvious recognition that people other than engineers work at companies (cooks, janitors, HR, etc.), realize also that, for example, Etsy’s sellers may be affected since the account used to pay them was at SVB. Of course, I’m sure someone here will explain that obviously some lady selling bowls in Michigan should have done due diligence on her platform’s bank of choice to make sure that they didn’t have any maturity risk. Anything short of that really just fundamentally represents business incompetence and deserves to be wiped out since Peter Thiel decided to cause a run at the bank two layers removed from her. But that will teach the correct lessons and punish the right people! Clearly Thiel should be rewarded for prudently advising everyone to remove all funds, while janitors and craftspeople on Etsy alike will finally learn the importance of marking to market treasuries.
Actually, for almost all of these companies, cooks, janitors, etc are contracted employees and work for the contracting company, not the startup. The startup retains a contract for services.
This allows them to keep those employees at arm's length and not have to pay the kind of salary and benefits that their "real" employees enjoy. It has also great bonuses in that if the "real" employees want to abuse the snot out of those contractors (including really vile stuff, obvious violations of the equal employment act), the tech company and the contracting company are heavily incentivized to "solve" the problem by removing the contracted employee from the position. Employees in that position, should they want to take action, have to go through multiple layers of red tape and ambiguous responsibility and risk upsetting the apple cart for all of their peers, because the tech company is always at Liberty to cancel the entire contract to avoid a "problem" contractor.
The whole system is a little bit rotten.
And yeah, it sure does suck for folks who are going to get bit as clients of Etsy because Etsy didn't hedge bets. Maybe Etsy learned a lesson.
It really sucks for Etsy’s sellers so maybe… Etsy learned a lesson? Here’s the confused lesson by association argument again. The majority of your argument is around learning lessons, but you momentarily acknowledge that perhaps there are in fact people hurt here who it would be hard to accuse of deserving it due to a lack of due diligence, but you then immediately resolve the cognitive dissonance by reassuring yourself that perhaps that will make the lesson Etsy learns that much stronger.
The majority of your argument revolves around the idea that only rich people in this “rotten system” will be affected, or that this is an important lesson. When it’s pointed out that there are many types of employees who aren’t rich, you say they don’t count because they’re contractors, ignoring that even if true, which I’m not necessarily granting, it still doesn’t matter since that contracting job will still probably disappear and there is a high likelihood that they can’t just be immediately positioned somewhere new. The rich developer may have an easier time landing a new position than the cook getting a new shift from the contracting company somewhere new. But I suppose that’s irrelevant, because the point about cooks being contractors actually had nothing to do with the topic at hand of whether they deserve to be colateral damage. Rather, it was meant to derail the conversation into a long digression about how these contracting agreements further prove how “rotten” these startups are… and thus deserve to learn a lesson about treasury performance.
> It really sucks for Etsy’s sellers so maybe… Etsy learned a lesson?
I hope so. I don't expect the sellers to have done anything different. Corporations, however, have a responsibility to manage their finances effectively. "We weren't smart enough in that space" is no more an excuse than it would be if sellers were having problems because Etsy's web infrastructure broke down due to lack of proper planning for redundancy and fault tolerance.
And I never said nor implied that only rich people will be affected. But they're basically the only ones with power to do anything different here. The rest of us are along for the ride.
Here's the question. Now that this happened, do the rest of us just accept that this is how it works? Because if we do, nothing changes, and we just get to sit back and wait for the whole system to unspool again. Or, we could stop treating the machine in California like it's better than a Vegas slot machine for most players and start building something better.
> I hope so. I don't expect the sellers to have done anything different. Corporations, however, have a responsibility to manage their finances effectively.
Just so I understand correctly, if the seller has an LLC they made through legalzoom.com for their Etsy bowl business (which is very common and highly recommended), then does your sympathy for them immediately evaporate since they now have a “responsibility to manage their finances effectively”? Why exactly is the Etsy seller off the hook in this scenario? Is it a headcount requirement? If the Etsy seller LLC is 3 people (two sisters and their mom), now are they irresponsible for using Etsy? Are all those 3 person startups in YC different somehow? Only in that they make “useless” things and the Etsy people make “useful” things, and that translates to whether a corporation needs to be responsible?
> Here's the question. Now that this happened, do the rest of us just accept that this is how it works? Because if we do, nothing changes, and we just get to sit back and wait for the whole system to unspool again.
Accept that what is how it works? It depends on the solution. If the solution is providing temporary backstops to depositors so that a sale to another private bank can be more attractive, then I don’t think that’s anything earth shattering to accept? Especially considering it would probably result in a private solution happening faster at little to no cost to the taxpayer. If congress empowers the FDIC to claw back SVB share sales to help make depositors whole, I think that’s also not anything that people would have a problem accepting? Like part of the problem here is that completely different parties are lumped together and in this fury the only acceptable answer is “no help!” No one is arguing for SVB to be bailed out. Those shares are going to zero. That is a sufficient market result. Enabling a bunch of assets that still have value to be maximized to avoid the philosophical dilemma of our Etsy seller doesn’t seem to be the “end all” nightmare scenario it’s being chalked up to be here. If anything, maybe the focus should be on plummeting interest rates to zero making precisely the kinds of “full liquidity paid for checking accounts” become an endangered species in the first place. Or maybe then raising rates at break neck speed despite having questionable results on the inflation they’re targeting, while clearly affecting random pieces of the economy.
> Or, we could stop treating the machine in California like it's better than a Vegas slot machine for most players and start building something better.
It seems like choosing a random 30% of Silicon Valley companies to put in hard mode is a close approximation to the Vegas slot machine than fad imitating zero interest checking accounts that were in no way high risk irresponsible investments that had the chance to wildly benefit the depositors if the bet would have “paid off” vs. if it crashed to zero. Especially given the high likelihood that there are sufficient assets to make depositors either whole or almost whole, it seems even more the case that those disproportionately affected will be workers, and not companies. Not to even mention the fact that those most responsible (Thiel) aren’t going to suffer, nor are the mega tech companies that can easily survive this, and may even end up just absorbing some of these companies and consolidating even more.
I am super curious as to what “something better” looks like though. Because right now, the world 6 months from now where a random subsection of tech and wine workers had their year ruined, while big tech companies and VCs are still doing just fine, doesn’t exactly seem like fertile ground for whatever amazing new system you have dreamed up.
Headcount and age. Etsy is a +1,000 employee company that's been around over a decade. Practically bedrock by Valley standards. I personally draw the line between "small" and "big enough to know better" at 100+ employees (around where the EEOC draws the line for mandatory reporting). I acknowledge people may disagree on this topic; that's where my line happens to be.
FWIW, I don't disagree on the mechanics of your suggestion for back-stopping SVB enough for most folks to be made whole. I'm more concerned about the mechanisms that led to one bank becoming such a linchpin for the whole system. We should have learned about "too big to fail" already.
> It seems like choosing a random 30% of Silicon Valley companies to put in hard mode is a close approximation to the Vegas slot machine.
Yes... That's what SV just did to its ecosystem due to over-reliance on one bad bank because "optimization is king" is the mantra of the whole machine. For us to not find ourselves in this boat again in 20 years, the people with money power in SV need to un-learn the lesson that's been driving SV for decades. Someone needs to be less-than-optimal for the system to not be so fragile.
> Headcount and age. Etsy is a +1,000 employee company that's been around over a decade. Practically bedrock by Valley standards. I personally draw the line between "small" and "big enough to know better" at 100+ employees (around where the EEOC draws the line for mandatory reporting). I acknowledge people may disagree on this topic; that's where my line happens to be.
To be clear, Etsy is not my concern here. They will probably survive just fine regardless of whether we deem them to be responsible or not. That's part of the point. The sole question was the sellers, and trying to examine why they inspire more sympathy to similar-sized companies that may be directly banking with SVB. Hence my question of whether the mere existence of a legal entity is the difference, given that in fact many Etsy sellers do of course have simple LLCs set up. I would fine "Hey, Etsy sellers need to look into Etsy's bank to be responsible too" consistent with "3 person YC companies need to be responsible about the bank they choose", or acknowledging that's a tall order for both. But not one and not the other, was my only point here.
> Yes... That's what SV just did to its ecosystem due to over-reliance on one bad bank because "optimization is king" is the mantra of the whole machine.
If it puts your mind at ease, I think the result is going to be the same regardless of what happens to depositors: everyone now will try to spread out their money and sweeps will become part of startups 101, etc. In that sense, the system has worked: the irresponsible bankers are being punished, they and their investors lost their bank. I promise no one is going to wake up and say "well, glad that got magically solved" and not be super paranoid going forward. If anything, if depositors aren't made whole, this particular demographic is more likely to, to your point, over-optimize in that direction (perhaps create investment vehicles to short regional banks or something, who knows).
> The majority of your argument revolves around the idea that only rich people in this “rotten system” will be affected, or that this is an important lesson.
I think the main issue is that the status quo is that more often than not such classes never learn any lessons, so people are cheering on any hurt they receive, no matter who else gets in the way. Discontent is such a state that people are becoming, as they say, Jokerfied.
That's not the situation here. Etsy holds seller payments in SVB in an account, that yes of course, is probably above the FDIC 250K limit since it represents the amount to be paid out to hundres if not thousands of sellers: https://www.nbcsandiego.com/news/business/etsy-warns-sellers...
Without derailing the discussion into whether Etsy "should have known better" (which to be clear is an argument that would be made in a simplified vacuum given the complexity of them probably just being an intermediary between a credit card processor and the sellers and thus it being fairly logistically complicated to set up that intermediary as some sort of multi-bank-account system or whatever), but regardless, even if that is the worst way to do it in the world, the point is that that's not the individual sellers' fault, and they shouldn't be punished for it. Again, as I mentioned in my comment, the position that "Well individual Etsy sellers should really do a financial analysis on the host platform's bank, quarterly, to account for interest rate changes, and if they independently conclude that that bank is unhealthy, they should pull their store off Etsy and... ???" is a bit hard to swallow, and I'm not sure if a world we really want to create.
> It's hard to dredge up deep, deep wells of sympathy
This, by the way, is why ordinary Americans are suffering while the billionaires are winning and laughing at us. They have us fighting with each other for scraps. $120k/yr after taxes doesn't go very far at all for a family of four. Kids eat a lot of food! Sure, it goes roughly twice as far as $60k/yr does, and, saved wisely and not spent on yachts, cocaine, and girls, provides a bit more of a financial cushion in case of a calamity like the one we're in, but SVB's CEO made $4.8 million last year, which, budgeted by a regular American, is enough for several lifetimes. A software dev making $120k/yr, he is not.
Have however much sympathy you can muster for software developers who, yes, have more than you do, but don't lose sight of the bigger picture.
We could break the system if we wanted to. Were software engineers to unionize alongside the contracted employees, it would provide a front that would make it basically impossible to operate startups without dealing more fairly. You can't run a business that has a building without someone collecting the trash, sweeping the floors, and keeping the whole thing from falling down. Worst-case scenario, fouhders decide to try and operate with-from-home employee teams to decrease contractors needed, and then the engineers win anyway.
... It won't happen because we don't want it to. But it could.
Especially for the startup end of things, where we are aiming to disrupt other businesses.
Should we have a strong safety net, so that people who lose their jobs due to market disruptions or executive mismanagement do not suffer? Absolutely. And if it's currently inadequate, by all means let's improve it.
But I think it's wrong to try to protect jobs through government subsidies to industries where execs made bad choices. Which is exactly what a lot of people are apparently asking for when they're asking for depositors to get retroactive free deposit insurance here.
We can absolutely be a society in which checking accounts are a pit of snakes which must be navigated by executive savvy and wit. It’s just going to be a much poorer one. The point is not to “protect jobs in Silicon Valley” per se, it is to maintain banking infrastructure as the sort of thing that just works (or gets urgently fixed) so that the entire economy can continue to rely on it, vs. entering a lower-trust regime where a checking account may as well be a stock portfolio.
The FDIC already exists to make sure checking accounts aren't a pit of snakes for 99% of the population. The entire economy can continue to rely on it just as it always has.
Does this mean that rich people have to be more careful managing gobs of cash? Yes, but that has always been the case. Treasury management is a thing that exists both as a thing people do professionally and as a service you can buy.
I understand that some people are young enough that they have either not heard about bank failures or did not feel like it applied to them due to being in a period that was very good for banks. But they are and they do: https://www.fdic.gov/bank/historical/bank/
You mean, personal savers and very small businesses can continue to rely on the banking system. That’s not 99% of the economy.
Young people hear plenty about bank failures - specifically as a success story for big government, a problem we solved, such that depositors are secure these days.
I recognize that startups are in a bit of a weird place where they might have a lot of money to manage before they are sophisticated enough to have a big finance team. If only there were some sort of entity specialized in dealing with their unique needs… oh wait.
Yes, that's why I said "99% of the population", not "99% of the economy".
But the economy's also going to be fine here. Most businesses with a lot of money understand that bank failure risk is just one of the many financial risks to manage. To the extent a startup wants to have millions of dollars but not hire somebody competent to manage that money, them's the breaks.
The same thing would be true for startups that don't take security seriously, for example. I feel bad for the founders here, but no worse than I would for one who experienced hackers getting in and stealing the data. Even if they had hired "sort of entity specialized in dealing with their" security needs. Picking a bad vendor happens, and if you bet your company on a vendor choice in a vital area, well, sometimes those bets don't come out like you hoped.
> Most businesses with a lot of money understand that bank failure risk is just one of the many financial risks to manage.
This is a poorer world than the one where it’s not, is my point.
What are you even supposed to do here, open accounts at 40 different banks when you get a $10 million check? That’s pointless silliness. Is this really what we want entrepreneurs to be spending their time on?
Oh no! A person with $10m in cash might have to put forth a little effort to take care of a vast amount of money! Such horrors have rarely been contemplated.
I understand that some see startup founders as delicate smol beans who are too uwu soft to have to actually do some work. But I have been told repeatedly that these people are genius future titans of industry, backed by the most financially savvy people on the planet. So I think maybe they can handle it?
If somebody is in the incredibly privileged position of being handed $10m in one go, but is also uninterested in managing the money, then I would expect them to hire a part-time CFO. Or at the very least to split the money up and put it into two different banks, which in this case would have resulted in no payroll disruption and the safety of 90-100% of their money.
I feel like you're conflating "a person" with businesses, who have a number of people downstream of their bank accounts. They really aren't very similar to wealthy individuals with large bank accounts.
Having said that, as I've been reading about this for the first time over the past couple days, I have become a bit less sympathetic to companies with very large deposits at a single bank. It does seem that there are mechanisms, like "insured cash sweep", that good financial officers should have been taking advantage of. But I still have uncertainty about this and want to read more about it.
But I think the general point of the other commenter in this thread is a good one: a company with, say $2M to $10M in cash deposits should ideally be able to access banking services easily and with negligible risk. This is not an enormous business size! It's better for society for it to be possible to run businesses like that without having to fear big surprises in the financial system killing you on a random Friday.
The "person" here is the founding CEO with a $10m check I was being asked to have empathy for. To the extent that we are instead talking about proper businesses, you have a point, but I have a different response. A real business that just keeps $10m in cash sitting around in one spot like some teen's first checking account is grossly lacking in treasury management.
> should ideally
Sure. Ideally, we should all live in the Big Rock Candy Mountains. [1] But back here in reality, companies have to manage all sorts of risks. If they don't want to hire a professional finance person and don't want to avail themselves of services that solve their problems, then that is a choice they can make. It's just not the taxpayer's job to kiss their boo-boos and make it all better when their gamble doesn't turn out so well.
It is totally possible to have an economy and public policy based on seething contempt for entrepreneurs. It's probably the case that a majority of voters would prefer to be a little worse off as long as the tech-bros they hate are a lot worse off. I just think this is an ugly, self-defeating basis on which to run a society.
>which in this case would have resulted in no payroll disruption and the safety of 90-100% of their money.
Why would it have resulted in that? We've already established that any amount above $250k in one bank may as as well be vaporized already, you just don't know it yet.
I am an entrepreneur from a family of entrepreneurs. I have started multiple companies, one of which was venture backed. I like entrepreneurs just fine, so peddle that nonsense elsewhere.
> Why would it have resulted in that?
Because our modern regulatory regime is pretty good.
If you have your money in two bank accounts and have reasonable capital reserves, you'll be able to make payroll from one of them. So the short-term problem is solved. In your example, you've got $5m to work with.
The expectations I'm seeing for that are on the order of 50%. So a week later, you're back up to $7.75 million to work with, with more to come in as assets are sold. Maybe you get everything back, maybe you take a haircut. The estimates I'm seeing are in the 0-20% range, so you end up with $9-10 million back over time.
And that's just the FDIC. Functioning businesses have income that they can use to pay salaries or as justification for loans or selling equity. They can also pursue acquisition by somebody who was lucky or smart enough not to have high egg/basket ratios.
So in the end, maybe we end up with a few failed companies, but it's not a systemic risk, and it's the sort of object lesson that helps people understand why they need to take cash management seriously beyond a certain level. That surely will suck for some people, but that's how capitalism works.
It is possible that it'll make some kind of realpolitik sense to stabilize the startup scene, but I sort of doubt it. During the housing crisis, the federal government bought up sufficient stock to stabilize American auto manufacturing not because they particularly cared about the jobs that would be lost or the ecosystem of supporting industries that would be damaged as a result of loss of major manufacturing, but because auto manufacturing is one of America's national security concerns... The factories and skill sets that create trucks can create APCs, jeeps, and tanks if a hot war breaks out.
I'm not exactly sure off the top of my head what the similar defense necessity story is for Silicon Valley.
Are you for real? There is an AI arms race with China, for one. There is critical innovation across all segments happening in Silicon Valley, including defense.
That would be a good argument for bailing out a Raytheon or a Microsoft, companies that have a record of success in delivering on complicated software technologies, but not the average Silicon Valley startup.
Framed another way, we're asking for the government to take some ownership of their stewardship of banks. The Treasury, the Fed, the CA gov, and the ratings agencies all gave svb passing grades. svb appears not to have done crypto speculation.
The svb ceo asked congress to weaken Dodd-Frank. If that's a bad idea, then congress should say no; that's their job.
Apparently banking over trivial amounts of money ($250k isn't even one month's cash use -- ie payroll and health insurance -- for a 15-ish person sfbay company) requiring significant work to make that cash unlikely to just disappear is no way to run a country.
The cash was always unlikely to disappear. It's just that even unlikely things happen sometimes.
If doing decent treasury management is too darned hard for rich people to do, I don't think that's a problem for the government to manage. Beyond the obvious expedient of using two or three banks, which would have solved most problems for most companies here, there are a number of obvious market-driven solutions. E.g., https://www.difxs.com/ or https://www.g2.com/categories/treasury-management
Yeah, this is some ideologically driven smearing of people who are literally like I want to stick my seed round in a checking account and not have that disappear. For what it's worth, I'm not rich; I'm like a hundred-thousandaire. (And not affected, though friends are.)
Disappointing to see someone like you gloating that a bank screwed a bunch of small business customers. From reading your writing, I doubt you'd cosign "basic economic services like a checking account are use at your own risk" in almost any other area.
Ah yes, my crazy ideology of "people should generally experience the consequences of their actions, especially when they're doing very well".
I get that you want to be able to be handed millions of dollars and have somebody else take care of that for you. Who doesn't want that? I just don't understand why you think it's the job of poorer people to subsidize you if you take a risk with those millions and it doesn't pan out.
> "basic economic services like a checking account are use at your own risk"
I in fact don't cosign that; I've been very clear that I support mandatory FDIC insurance with its current very generous limit. I also support the FDIC's resolution process where they immediately pay out the $250k and then work hard to quickly pay a large portion of the remainder. That's a giant level of risk reduction.
But if somebody is rich enough that they have millions in cash and haven't bothered to take basic precautions like "use two banks", I don't think that's a problem such that (much poorer) taxpayers should be obliged to make it all better. If it happened to a friend I would feel bad for them personally, of course. But not so much that I would be calling for a government bailout. Capitalism works because risks yield both gains and losses. People who don't like that should manage their risks.
Taxpayers are not on the hook for any deposit losses here. From the statement: “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
You know that not only startups use SVB right? Farmers and wineries do as well. And either way this is the economic engine of America - in its accounts lays the next trillions of dollars of GDP. It is unbelievably stupid to not find a way to make them whole for a black swan event.
Let's say a small farm or winery employees 20 employees and pays them an average of $50k a year. Holding three months of payroll alone will be over the FDIC limit, let alone other money they'll need to buffer all of their other expenses.
I have two good friends who own and run wineries in France. Both of them are relatively successful, but neither of them have anywhere near 20 employees, for the simple reason that they can't afford to. The majority of the work is done by family members.
There's always the option to release founder equity in exchange for more investment. If the startups were viable before, they're most likely still viable now.
Already picked up some great deals and next week is booked dense.
Nailed it. If people get whatever short term vengeance they're looking for, the contagion will cause a whole lot of collateral damage to people who aren't in tech.
If you're claiming that startups are so systemically important that they need special protection, then you are also saying that they are so systemically dangerous that they need much more aggressive regulation.
If you're a small or medium sized business and you just saw SVB evaporate and depositors take a substantial haircut, why wouldn't you open up an account at JPM on Monday and never again bank at a regional bank of SVB's size?
SVB was undone by a bank run, not because they were doing anything particularly risky. Something like 1/4 or 1/3 of all their deposits tried to exit on Thursday - no bank can survive that given how fractional reserve banking works.
If you are a small business who has way more than $250k but only has time to manage one bank account and lack the need for more sophisticated treasury management, then yes, I would absolutely say you should put it in the least risky bank. Or you could take the wild step of not putting all your eggs in one basket.
The bank run was the proximate cause of the failure, but they also made some big bets and lost, making them vulnerable to the bank run in the first place.
The end point of every business doing “treasury management” to keep all their accounts under 250k is that the FDIC ends up insuring all the money anyway. The only difference is lot more of it goes to fees for money managers and banks, and starting/running a business is a lot more complicated.
What’s the point? Either set a limit that can’t be skirted by maintaining multiple accounts or guarantee the same amount in a single account.
It’s one component of it, clearly. That’s pretty much what IntraFi does—while they don’t open an account with every bank, they have thousands of banks in their network and claim to be able to maintain FDIC insurance for up to 160 million.
If FDIC wants it to be possible to insure that much, they should cut out the middlemen and financial engineering requirements and just insure deposits of every business to that amount. If they don’t want to insure that much, then IntraFi and other similar services should be illegal.
> If they don’t want to insure that much, then IntraFi and other similar services should be illegal.
Why though? The "$250k per bank" rule is clearly a feature of the system, not a bug. If the FDIC wanted to have the insurance limit be across all banks, that's how they would've structured the rule.
But they didn't, because their purpose wasn't to provide unlimited protections to corporations from bank failure, it was to limit the impact of any individual bank's failures and decrease the likelihood of bank runs.
The current rule does this effectively, and encourages larger businesses to diversify their assets while also providing significant downside protection to many individuals and small businesses.
> If FDIC wants it to be possible to insure that much
FDIC doesn’t want to insure that much against a single bank failure. Encouraging diversification of large balances helps the FDIC’s goals, since it reduces the impact of single bank failures and reduces the possibility of single failures turning into broader economic collapses without increasing the cost to the Treasury of a single bank failure, which is an efficient way of promoting the purpose for which the FDIC exists.
If the deposits are insured, a bank failure is far less likely in the first place.
It might be efficient for the FDIC to require complex and expensive financial engineering just to keep operating capital safe, but it's hostile to businesses, especially small ones, and is out of reach for many.
> It might be efficient for the FDIC to require complex and expensive financial engineering just to keep operating capital safe, but it’s hostile to businesses
The FDIC exists to protect against a general collapse of banking like the one that preceded the Great Depression, not as a generalized subsidy to business.
Nope. The FDIC's main concern is with individual bank failure. If people spread their money out among many banks, then they have lowered both their risk and the FDIC's risk.
If you'd like to argue that the FDIC should go further so as not to subsidize people with shit-tons of cash, I'm certainly open to that. But the increased regulatory complexity might not be worth the total risk reduction, so I'd want to see some math. I suspect it's mainly a red herring, though, as I couldn't find any sign that Intrafi is a particularly large business.
Yes and now think about the implication of all the SMBs flowing their cash out of their regional banks all at once. And if you have anything more than a few employees, you definitely have an account over $250k because that's still an incredibly small business.
I understand you have a fear of contagion risk, but I don't see many signs of it. I think this mainly happened because SVB had a depositor base where a big chunk was tightly knit and prone to herd-like behavior. Most companies just aren't a) in the red, b) letting millions in cash sit around, and c) lacking in treasuring management capacity.
But if there are a ton of regional banks who took advantage of laxer regulation and had balance sheets in as poor a shape as SVB, then I am fine with some of them failing too. It won't be anywhere near the problem that 2008 or the S&L crisis was, and we'll end up with tighter regulation for those banks next time around.
You don’t see any risk of contagion? We have a fractional reserve banking system. If even a small percentage of depositors try to withdraw all at once, that can bring down any bank.
Right now, everyone in the country with uninsured accounts is being incentivized to pull those deposits and pull them fast. We don’t know how things will turn out, but there is obviously a major risk of contagion.
As with the other person, I understand that's a thing you're imagining. I'm just not seeing much evidence for it. It is a possibility? Sure. But not one I see as a major risk. And from what financial regulators are saying, I don't think they see it that way either.
You're not seeing it because banks are generally closed over the weekend. This is like sitting in the eye of the hurricane and saying that everything is fine because it's not windy yet.
For the third time, I understand people have this belief. But restating a belief without adding evidence doesn't convince me you're right. If anything, it's the opposite.
We could be in the eye of a hurricane. Or we could be in any of the non-hurricane locations on the planet. I think the latter is more likely.
Now that we know a second bank is being taken over, yes, a verdict is in. But I think that says more about having a second failure than the situation we were discussing.
I would argue that holding long duration treasuries in a rising rate environment and capitalizing before marking to market are two very risky ways to run a bank.
> I would argue that holding long duration treasuries in a rising rate environment and capitalizing before marking to market are two very risky ways to run a bank.
Not to mention doing so when you know that most of your customers' businesses are incredibly sensitive to interest rate hikes, in part because you have explicitly marketed to that market for years.
That's a very odd way of stating "here's a sector that will be badly hurt if the contents of their checking accounts disappear with an unknown timeline and percentage recovered."
By that rubric, you could perfectly well claim that your accountant, laundromat, and lawn care companies are systematically important, because they'd fire their employees if their checking accounts disappeared.
Sure, so I'm saying those things are not systemically vital such that they should be exempt from the consequences of their market choices.
You're the one claiming there will be contagion here. I don't think that's the case. If a bunch of unprofitable companies with bad treasury management go under, I think the rest of the economy will be fine. Companies go out of business every day.
If you are claiming that tech is somehow special such that contagion will harm the wider economy, as was the case with mortgage-backed securities in 2008, then any taxpayer-funded bailout should be a one-time deal that goes along with enough regulation so that contagion is no longer a risk in the future.
The issue is whether checking accounts at chartered banks are “market choices” for which there should be “consequences.” The banking system is so regulated because when we lived in that world, it was a bad time, and collective action to make banks reliable was in everyone’s interest. If we are back to “stupid depositors deserve what they get” then what exactly is bank regulation for?
Bank regulation's job is not to create a magic world of unicorns and rainbows. It's to a) keep regular folks from losing their shirts due to the shenanigans of the rich, and b) to prevent systemic risk that could harm the wider economy.
Banks make money through risk. Sometimes those risks work out and people make money. Sometimes those risks don't work out and banks fail. This is capitalism 101, and to the extent banks are capitalist enterprises, there's no way around it. Government's job here is just to limit the damage.
If you want banks to be perfectly safe, then you are arguing for government-chartered, not-for-profit, non-capitalist banks. These are things that exist, but we don't have them here in the US. We could, if you really want people with millions in cash to have someplace perfectly safe to park their money, you can certainly argue for their creation.
No, you explicitly used the word contagion: "If people get whatever short term vengeance they're looking for, the contagion will cause a whole lot of collateral damage to people who aren't in tech."
In which case, since you're not claiming contagion risk, I return to my previous point that there is no reason for taxpayers to bail out rich people who took a gamble and lost.
What contagion? How is this going to spread to the rest of the US that isn't actually dependent upon any of these startups or this bank? No other banks have yet popped up with similar risk exposure so its not a systemic issue like 15 years ago and startups are not that big a part of the US economy.
SVB was the sixteenth largest bank in the US. When businesses see that their money isn't safe in the sixteenth largest bank, they're going to cause bank runs on all the smaller banks as they attempt to move all of their money to the top three or four.
> No other banks have yet popped up with similar risk exposure so its not a systemic issue like 15 years ago and startups are not that big a part of the US economy.
That doesn't matter in the slightest. Companies don't do deep evaluations of the financial risks of their banks (as clearly evidenced by what's happening right now). They'll flee from what they perceive as unsafe into what they perceive as safe, regardless of balance sheet realities.
> they're going to cause bank runs on all the smaller banks as they attempt to move all of their money to the top three or four.
One of the primary issues being discussed is the insured limits at banks, and the uncertainty on whether depositors can be made "whole" (it's unclear whether people saying that mean 100% or something close to 100%, so I'm putting it in quotes, some people are being really loose with their terms in this thread). Why the fuck would people, given that context, ever move "all of their money" to only the biggest 3 or 4 institutions and increase their risk by consolidating in exactly the same way that caused the current problems? If anything this is a potential boon for the many smaller banks as they can gain additional depositors as people wise up to their risk exposure.
I can see the logic of that, "Let's act irrationally together and force the government to bail us out next time we make a run on our own bank." Or they can act rationally, distribute (manually or through existing methods) their cash across multiple banks so that their risk exposure is lower and they don't have to depend on the government maybe, possibly, bailing them out. You know, the thing they'd have done if they'd hired financial managers in the first place (which obviously they didn't, or they hired incompetent ones).
I'm not saying they should act in the majority's interest, I'm saying they should act in their own interest. Mitigate their risk by managing their capital properly instead of hoping ("Hope is a poor substitute for strategy") that things will work out. It's irrational to act in a way that, if a failure occurs, requires someone else to bail you out when they aren't legally or ethically required to bail you out. That's operating on hope, not strategy.
I don't think that's likely. Most banks have about half of their deposits FDIC insured because their depositors have low balances. SVB only had 3%. Most banks are unlikely targets for a bank run as a result.
The top four banks are too big to fail and WILL be rescued, as happened in 2008. Bank of America or Citi failing would be the end of America as we know it. That's why everyone will move to the bigger banks. Which is obviously not what we want. But it's what will happen if you leave depositers out to dry because it's a smaller bank.
People saying that depositors need to be ratfucked reminds me of a guy writing about living through the great depression. First he knew about it was one morning when his dad showed his mom the paper with a headline about the stock market crashing. And saying 'good that'll teach those guys'. Six months later his dads tailor shop went under and his dad never had stable employment after that.
that's a lie. and if there is contagion it won't be stemmed by bailing you as a depositor out, we will need that money elsewhere to shore up the system. good luck to you
Simply put, I think this kind of attitude is based in economic resentment. There's a whole part of the US that hasn't seen much benefit from the unbelievably successful startup world.
I remember when people used to go build something useful themselves instead of complaining about the success of others. Why don't we try to get back to that kind of culture?
It's more than not seeing a benefit, there's many parts of the US where people rightly or wrongly blame tech salaries plus remote work for pricing them out of being able to afford a home and other basic life necessities. Of course the situation is more nuanced than that in reality but tech workers have a tendency to show up in once reasonably priced areas, buy up houses for cash and drive around in fancy luxury cars, which doesn't help the perception.
There's also a perception that much of this money is coming via proximity to wealthy financiers and 15 years of ZIRP rather than true hard work.
GP's point was that they have no conception of that, so it affects how they think about things, and their proposed solutions. The fact that the situation they have no conception of happens frequently, even near them, means that their proposed solutions are likely to be inapplicable.
I would also like to point out that it's perfectly okay to simultaneously take pleasure in an industry being culled of precisely what you described, while also feeling bad for some of those who may lose their jobs as a result. Ain't nuance neat?
> But this is their house catching on fire and all of their money just vanishing through no fault of their own.
You can choose to hold money in multiple banks. There are services that will happily set up laddered CDs across many institutions for you to diversify exposure and maximize insurance.
To use your tortured analogy: if my neighbor's house burned down, and he didn't buy fire insurance... I would be sad, but I don't exactly think it's my problem (or the government's) to pay to make him whole.
> If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.
I know we all like to believe we control our own destiny. Tiny little inconsequential-seeming choices wobble startups between success and failure every single day. Having a good product is such a tiny piece of it all.
I keep seeing this and I’m sorry, it’s just silly. My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in? CDs don’t work — my job is to spend that money in the next 18-24 months, not save it.
Edit: And the people saying the “CFO” should have done better…at that point, one person is probably still founder, CTO, CHRO, CFO, snack buyer, and janitor combined (been there).
> My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in? CDs don’t work — my job is to spend that money in the next 18-24 months, not save it.
You just ask your bank to place the money using IntraFi. You can get a little more interest by locking up some of the money on a 9-12mo ladder, which makes sense if you have 18 mos of runway.
If you have an unanticipated expense or opportunity and need to spend some early, it's a small penalty to get the money out-- usually 6 months of interest, so as long as the probability of having to spend a bunch more is low you're ahead.
Venture capitalists provide banking advice to the companies they fund, and this isn't on the list of things most mention. Now we're reminded why it's a best practice.
I think it's hubris to think that you can have tens of millions of dollars and can ignore vital things with it (account security, systemic risk from counterparties, etc).
> My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in?
Your first priority should be to assure the safety of wherever you put it. Whether that is diversification to the point where all the funds are insured or inquiry into the finances of the institution where you plan on putting all the eggs, or a mixture of lesser diversification and diligence, it should be done.
> my job is to spend that money in the next 18-24 months, not save it.
Well, your first job is to make sure that money is still there when you need to spend it, otherwise, you aren’t going to be spending it.
Remove the single point of failure in having one bank. Put the money not needed for day-to-day operations into short-term liquid government-based financial instruments like t-bills.
If you still think the risk is too high, pay the premium for CDARs or insurance.
It is not about removing all risks. It is about making it acceptable. If your primary bank fails, you can manage it like any other strategic business risk.
The risk of a top 20 bank failure is small compared to the myriad other existential risks being managed by a new startup. We still don’t know if this new failure will even result in depositor losses (though for some reason HN is full of people who seem to want them). I looked at the FDIC database and it seems depositor losses are quite rare.
It would be great if VCs would provide simple cash management services to their fledgling investments, though.
Exactly, I do not want anyone to lose money, but the government should not step in and cover the haircut that may or may not happen. The insured limits are plastered all over the account when you open them. If you find them unacceptable, then solve the risk they impose.
Thus, an easy prudent solution is to have a second bank, likely a "too big to fail bank", with emergency funds to cover the day-to-day until you can roll over to money locked into time-based investments or the system has worked its course on the first bank.
In my personal finances, I have done that in housing deals going above the insured limit by immediately moving money into government-based financial instruments. Then as appropriate, I transferred that to my preferred investments and risk profile. If I, as a layman doing a once-in-a-decade housing deal, can manage it, then a startup can.
> It would be great if VCs would provide simple cash management services to their fledgling investments, though.
It was dirt simple to just use IntraFi. You just say you want it, and sign the form. If you want a little more interest income, you do some cash flow planning and check the box for laddering.
You do have to know it exists, though. Remember the CFO at this hypothetical startup is probably really good at Python, not treasury management. And later on if you need something like a revolving AR credit line, you can’t use your IntraFi balance to collateraize that.
OK, but one of the whole points of why you take venture money is to leverage experience and best practices. Our VCs introduced our bankers and suggested things we should do.
"Find 40 banks" Sadly, that's your job now. Alternatively, I could imagine more VCs from now on will stop giving out the whole round in one wire. They'll start wiring money only in small traunches. You'll legally have claim to the whole $10M, but will be moving to a "just in time" system so you can make payroll. Or we could raise FDIC limit, but politically, that sounds untenable right now.
Which is what's being done. Insured amount going out on Monday, dividends based on liquidation of assets going out over time. The fire is being managed, it's not like nothing is happening here. People are just pissed that the government and FDIC are doing what they've said they would do instead of something more, which was never promised.
People are worried about what this means for confidence in regional banks.
The prudent thing to do right now is to pull your money out of your regional bank and move it to a GSIB and call it a day. This endangers regional banks and concentrates deposits into the large players.
You can stand your moral ground here or you can risk a string of bank runs and systemic collapse. It might not even make a difference anyways with how slow we’ve been to act.
On the flipside, moral hazard is a real problem too. Setting the precedent that your regional bank can do whatever and you'll be just fine isn't great, either.
Yup. The federal government should get a dividend out beyond insurance ASAP if the bank is not acquired. They say "next week", but it should really be Monday or Tuesday.
And it's OK even to incur a little bit of risk/uncertainty when doing so.
But this is different from bailing out all the depositors 100%.
Yup, and presumably they're a lot less worried. :)
If you use multiple banks, you have a higher risk of experiencing a bank failure, but it has less of a consequence on your operations, liquidity, and viability if it should happen.
Here, it's more like losing access to the amount of that is above $250k for some time, and maybe losing 5-40% of that amount forever. So, (0.1 * x - 250000) * 0.4.
So if you use IntraFi to place across 10 banks, and you have $10M, maybe you lose $300k.
It is a risk... but there's plenty of ways to lose a few percent of your working capital that are out of your control.
If you want to further reduce the risk, you could do additional things (e.g. buy some T-bills).
Making bad treasury management decisions is not "no fault of their own". If people want to make the case for a taxpayer bailout, they should start with something like, "Look, we know we fucked up by [not paying attention to something important|taking a risk we thought we could get away with|getting high on our own supply], but we're humbly asking for help."
If somebody's house catches fire because they cheaped out on the furnace and the didn't get homeowner's insurance, I'm going to feel bad for them. They have some Kubler-Ross time ahead for sure. But unless they're family, I'm not taking them in.
> But this is their house catching on fire and all of their money just vanishing through no fault of their own.
Inquiry into bank finances, diversification across banks, etc., are all available options. Maintaining large uninsured balances at a single bank without doing those things (or doing the first, but not taking appropriate actions thereafter) is a choice.
I am not opposed to reasonable government action to mitigate ripple-effect harms given the externalities, but the idea that the startups involved have no responsibility here is misguided.
If only we could centralize the investigation of bank finances and judgement of whether they are healthy enough to use into some sort of agency, staffed by domain experts, with the power to demand relevant documents and shut down unhealthy banks. Nah, that would never work, let's just make it the depositors' responsibility.
It's more a demonstration that their house was always built on other people's largesse, and at the whim of those who hold the real power in the system (the money to invest) their opportunities can evaporate. A bank run doesn't happen without individuals deciding to go bearish and concluding that their own big-money dreams are really worth more than whether strangers they haven't met get a paycheck tomorrow. Something we've seen a lot of as of late it seems.
Maybe building an entire society on a drastically slanted gap between the wealthiest and the least wealthy is actually super unstable and prone to failure?
> I would also like to point out that it's perfectly okay to simultaneously take pleasure in an industry being culled of precisely what you described, while also feeling bad for some of those who may lose their jobs as a result. Ain't nuance neat?
Absolutely. What's surprising to me is the absolute lack of that nuance on HN. It's all just BURN IT ALL TO THE GROUND over the last few days.
Yes. We're absolutely not interested in seeing the US government bail out banks yet again, especially not banks that just happened to get fucked by their "safe investment strategy". I really have no idea why you are surprised.
But what you're saying here is unrelated to the reality of the situation. Yellen has already said there will be no bailout of the bank. A bailout would be something that rescues equity holders. What people are talking about here is making sure depositors don't lose their money.
Yes, but plenty of people are calling for going beyond that.
And it's not clear to me that other banks would be excited to pay higher insurance premiums to bail out Silicon Valley Bank's customers here. If you see something otherwise, please let me know.
I don't see "depositors" as a special class of people at all. They're equivalent to shareholders to me. They all poured money in and expected dividends.
The true reality of the situation is that these people lent their money to the bank. To bail them out is equivalent to bailing out shareholders.
Depositors don’t put money in a bank expecting profits!! Yes they might get interest, but the main goal is safe storage of easily accessible money. Where exactly do you expect people to put money if not a bank?! And do you really expect, and want to live in a world where there is such an expectation (due to unreliable financial institutions), the average startup founder to spend time hedging bank risk?
Not to mention that depositors can get their money back without taxpayer money being used. That’s the whole point of the FDIC stepping in. SVB’s assets have value and can be used to give money back; if another bank buys SVB, odds are depositors will get the vast majority of their money back. It’s not a bailout if the government is not spending money and I don’t know why even a positive, non-bailout outcome seems to be viewed unfavorably.
> the main goal is safe storage of easily accessible money
Absolute bullshit. If that was the goal, banks would be 100% solvent at all times. Every single dollar people ever deposited in the bank would be sitting there in the bank's safe.
That's NOT what happens in practice. Banks simply cannot bear to watch a huge pile of money just sitting there safely doing nothing. So they do fractional reserve banking. People deposit 100 dollars at the bank, the bank stores like 10 dollars only and then loans out 90 dollars to anyone in need of cash. Then the bank literally lies to people's faces when they provide a statement saying they have $100 in their "account" when in fact they only have 10 dollars with $90 being tied up in outstanding liabilities and therefore exposing them to risk.
Anyone who "deposits" money at a bank without expecting profits in return has been fooled twice. Thrice if they tolerate "administrative fees" for the "service".
> And do you really expect, and want to live in a world where there is such an expectation (due to unreliable financial institutions), the average startup founder to spend time hedging bank risk?
I understand the mechanism that occurs in reality, but also in practice the average person puts money in the bank primarily for storage. If you ask someone why they have a bank account, odds are the answer is not “to make money”. They do it because it’s commonly held financial advice that this is better than putting cash in a box under their mattress (not just for returns, but for safety and ease of access). It is not fair to lump these people in with shareholders, in terms of profit expectation, and say they have just as little right to their money back.
But perhaps this is a learning opportunity for me. I’m sure you have a stash of money somewhere for paying bills; obviously you need relatively quick access to this stash. You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it). Where are you putting these stashes? (I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.)
And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay. They can either charge a fee to hold your money or try to make money off deposits. The latter is obviously riskier, but the former is on average worse for consumers (they lose money by having money..?). If you would rather not pay money to have someone hold it for you, fractional reserves are a necessary construct.
Edit:
> Looks like we live in such a world already
Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
> in practice the average person puts money in the bank primarily for storage.
> If you ask someone why they have a bank account, odds are the answer is not “to make money”
> They do it because it’s commonly held financial advice that this is better than putting cash in a box under their mattress (not just for returns, but for safety and ease of access).
Well, that's the problem. People actually believe this "your money is safe at the bank" common sense. Tell them otherwise and they treat you like you're one of those tinfoil hat crazies. Maybe they'll believe otherwise when the banks fail and their money is lost.
> It is not fair to lump these people in with shareholders, in terms of profit expectation, and say they have just as little right to their money back.
Sure it is. They loaned their money to the bank. They exposed themselves to the risk that the loan would not be paid back. That they were ignorant of what they were doing does not somehow excuse them of their culpability.
> I’m sure you have a stash of money somewhere for paying bills
I have exactly $0 in my personal checking account. All expenses are paid with credit. Then I pay the bank off in full the second money enters my account. Any and all remainders are immediately invested until $0 remains.
> You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it).
My emergency fund is about the only thing I keep in a bank account long term. In several liquid investment accounts in different banks. With full knowledge these banks could flop at any moment.
> I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.
In my country, bank accounts are insured up to some amount per bank per our social security number equivalent. Therefore, when that amount is exceeded, I spread them over multiple banks. If money accumulates to the point I can buy real property, I immediately do so instead of leaving it at the bank.
It's a pretty simple algorithm.
> And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay.
Or they could charge you for the storage service instead. Maybe if banks were in the storage business it'd actually make sense to pay them a single cent in fees. They're not, so it doesn't.
> Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
Yeah, and everyone just keeps on believing in banks. Positive outcome for them, not for society as a whole.
I guess your system works, but I hope you’d agree it’s quite the hassle! It also seems you’d be ok with paying fees for pure money storage, though hopefully you can see why the average person would hate such a setup.
I think from your POV that banks are horrible, thinking that even depositors should lose their money is in fact a defensible argument. So I concede that your view is one I can respect despite disagreeing.
But in my view, banks are a useful fiction because of the utility they provide (specifically easy storage of and convenient access to money). Even if a person can buy property to reduce bank risk (again, a super inconvenient workaround!), I’m not sure I want _businesses_ to be doing so, especially in light of the likely resulting impact on property values. I acknowledge a system relying on banks indeed has risks, but to me that’s a stronger argument for better regulations and protections to mitigate the risks than it is an argument to dissolve the system and lose its benefits.
I also concede that this fiction is convenient. I oppose it mainly because I completely distrust the current bank based implementation of it. Technology that obsoletes banking has yet to be invented. I thought cryptocurrencies would change something but they turned into stocks instead. Even worse: they literally reinvented banks on top with all of the downsides and none of the benefits. There's also the fact they don't solve secure storage: nothing stops some criminal from holding you at gunpoint and forcing you to irreversibly transfer cryptocurrencies to their wallets. Nothing stops them from kidnapping people and emptying their credit cards and bank accounts either but at least society manages to make the bank absorb some if not all of those losses. My country launched a central bank electronic transfers service and every day I see news of people irreversibly scammed out of tens of thousands.
Real property solves that problem best. The criminal can't take you to the government office with a gun to your head and force you to sign over the property to him. Property is also what capitalism is all about: actually owning stuff. Engaging in it keeps the fabled "you'll own nothing" dystopia at bay.
I do expect interest payments from any money of mine that's not in my physical posession. Checking accounts don't pay interest so I don't use them. They're just a temporary register for my "pay bills" and "invest" operations.
I don’t know where you’ve been banking for the last ten years or so, but I wish I did — interest payments on liquid deposits weren’t a thing for a long time. And startups don’t “invest”, they only “pay bills”.
I'm brazilian so I use brazilian banks. Some of my banks pay me interest on liquid accounts. I don't allow money to accumulate in the accounts of those that don't. I also spread my investments over as many banks as possible: my accounts are independently insured for up to some amount. I also move money off of the banks as soon as humanly possible by buying real property instead. I don't trust them.
You bet. My father did too. It's one of many reasons why he was highly successful in responsibly managing the money of every institution he was ever put in charge of.
They're not shareholders, they are creditors, by definition. That's why bank statements have a little "CR" next to the balances. In a bankruptcy, shareholders get wiped out first, then creditors start taking haircuts... it's worked this way since forever.
Did you read the title of this thread? No one is arguing about bailing out a bank. There is a difference between bailing out a bank, and ensuring customers of said bank who did nothing wrong gain access to their money. Yellen is saying this exact thing. For some reason people like yourself are unable to differentiate between the two.
"People like myself" are tired of watching banks wreaking havoc and suffering zero consequences for it. Their "safe investment strategies" failed, they're not solvent/liquid enough to pay back their customers, they're getting literally liquidated in a desperate attempt to raise enough money to make everyone whole again. And yet people keep depositing money into these things as if it's not a systemic problem.
I make it a point not to differentiate between the two. Bailing out a bank's customers is bailing out the bank. By all means, liquidate the bank and distribute that cash. People are already commenting down below that it might not be enough. If it's not enough, tough. They made a bet and they lost. Consider not using a bank next time.
Alot of people are rightfully upset because the banking industry cannot seem to get its shit together.
Why do so many banking/financial crisis's keep occurring ?
Why are executives not being put in prison for ruining so many lives ?
> Why do so many banking/financial crisis's keep occurring ?
This one, AFAICT, happened because the government greatly restricted what banks could do with their funds. One of the only options available in large volumes is a government instrument subject to risk from the Fed raising rates rapidly.
> Why are executives not being put in prison for ruining so many lives ?
I hope people only get put in prison for breaking actual laws. And if the SVB execs broke laws then yes, they should go to prison. But I haven't heard it alleged by anyone that they have.
> This one, AFAICT, happened because the government greatly restricted what banks could do with their funds. One of the only options available in large volumes is a government instrument subject to risk from the Fed raising rates rapidly.
So the solution to just let banks do whatever they want? A bank that is prevented from taking excessively risky action becomes insolvent, and your answer is to allow them to take even more risk? The Fed has been signaling for a year that rates are going to keep rising, it is eminently predicable what that means to professionals in the industry. Hubris at its best. Have you even heard of Glass–Steagall, or have a basic understanding of the last 100 years of economic theory?
> I hope people only get put in prison for breaking actual laws. And if the SVB execs broke laws then yes, they should go to prison. But I haven't heard it alleged by anyone that they have.
A laughably naïve thing to say in more than a few ways.
This is the community that claims that it will save the world. While it behaves with such shortsightedness that it can’t even save their piggy bank. Should it be trusted with more money and power (that the bailout gives)?
There's another layer to this: many of these bullshit startups are in crypto, which spent the past 5+ years undermining trust in centralized banking and the Fed. Now this world is crying out for a bailout. It's just so rich. Like why would I want to support a16z's businesses in a time like this?
You're begging for money from the government to compensate you for your own personal failures. I think you need to re-read your Nietzsche if you think this makes the people saying no to that corrupted by ressentiment.
They're just trying to help you overcome your shackles of dependence on the sweet teat of Uncle Sam. Get some bootstraps and climb out of this hole on your own merit!
It's just that rather than them failing because their product was bad or they're working on a bullshit idea, they might fail because their bank failed? And not some fancy crypto bank, a regular, government-regulated bank? Even if you want to see the startup space fall, that's a rather unsatisfying way for it to happen. It's not a SBF moment.
I think that sentiment is directed against a strawman that doesn’t really exist. The reality is that startups with “no real business” just fail after burning through investor cash and nobody gets anything.
I think this mostly comes from the PayPal mafia sort of attitude: libertarian when it helps me, bail me out when it helps me, start a bank run when it helps me.
There was a time when tech did seem like a better business movement. Certainly better than the financial sectors, or heavy industry, or pharma. But then we let Thiel and Musk become the face, with Sachs and Calacsnais (or however you spell his name) become their media toadies, and we got fucked on the PR front.
We need to reject these guys a bit harder. Thiel's bank run was unnecessary. He should have picked up the phone and got the numbers from SVB instead of destroying an institution that's so helpful for small founders. Founders are now more dependent on Thiel and his ilk, and less independent.
Yes, it seems that the antisocial defectors are going to win in the short term and may have more power in the long term. Any suggestions onto how to inject some discipline and long-term thinking into this?
I am not smart enough to have a full solution, but I think part of it must include some honest examination of all the players here, including the big ones whose mere opposition has a chance of crushing new founders. So a lot of that has to come from other established players in the space. Maybe being a little bit less eager to hop on to rounds led by these folks. Use soft power at a minimum.
But what do I know, I'm just a nobody in the space! Others who have more power, wealth, and wisdom will be able to handle this better. (And I should point out that I don't absolve SVB of their errors here either, it's just that I think their errors are more about miscommunication about a bad situation of their own doing that had a clear solution ).
> Silicon Valley law firms are now making lists of individuals who resigned from boards last week, because they didn’t want to get stuck with the liability, and VCs who catalyzed SVB’s bank run, so they can advise clients to never do business with those people/firms again
There aren't that many libertarians in tech compared to other areas, in my experience.
The difference is that some of the libertarians are very noisy about their politics, whereas most people in tech don't make that much public noise about politics.
When you combine that dynamic with The NY Times deciding that it has to denigrate tech as an industry and take it down a few pegs (a literal mandate from their editors!), the jerks gain prominence, and tech looks the worse for it. And I would say that the PayPal mafia's sins aren't so much being libertarian as just being awful people that are super easy to hate. For example, musk calling that one guy a pedo, or taking pleasure in firing people.
This assholery has now become synonymous with tech, but it is completely counter to my experiences in tech, but maybe I've just been lucky.
That’s an insane argument to make while using the tech that came from SV to make it.
“Sustainable” businesses are not how American economy differentiates itself in the world, what you’re asking for is to crush the way of life yourself used to in America, to make your own life substantially worse.
It’s nonsensical, bitter, and petty. If that’s the argument you want to make, grow up.
People in general who are not good at something or didn't find success in that field, in order to feel their salt's worth have 2 options - either build something that's far greater than what they are not good at, or disparage what they you are not good at. The latter is a lot easier.
This is confused in many ways. The only people who care about “mass surveillance” are tech insiders. It’s incoherent to be mad about fake business models and too much money being made at the same time - if startups are stupid then VCs are losing their shirts (and if we hate them, then we should help them do it even bigger and faster). If Silicon Valley is an engine of runaway wealth inequality then objectively speaking, the business model works. Making things people want generates profit, which is always and inherently evil according to communists, and enriches investors/executives/employees faster than the average person, which according to anyone who is committed to “income inequality is bad” also makes the world worse.
First of all, even if the company you work for goes bankrupt, you're very likely to still receive your salary, as debts to workers are the highest priority in any bankruptcy case. So the risk to workers' livelihoods is being way overblown. Of course, if a substantial amount of your compensation was company stock, you may lose a lot on that, but that is par for the course with stock.
Second of all, the purpose of having a limit to FDIC insured deposits is to limit the government's liability in case of bank failures to small-ish depositors. A company thag has millions of dollars to deposit also has more responsibility to evaluate the bank they are depositing in. Perhaps they shouldn't keep money in the bank in the first place, but find other uses for them.
Note that the true FDIC insurance limit is much larger than the 250k that usually gets cited - since there are various facilities for business accounts which can take that up to a million $ or more (multiple signers on the same account, multiple types of accounts). Should be plenty for most startups to pay their employees' salary outright, even without going bankrupt.
I'll probably get my next paycheck or two, but I'll lose my job. You're pretty clearly saying here that I should lose my job, along with many other people, because of the bank at which my company's cash is stored.
> Perhaps they shouldn't keep money in the bank in the first place, but find other uses for them.
I work at a small startup that's raised five million dollars. Not a huge amount of money, but obviously losing all but 250k would be extremely damaging. You're talking about concepts of fiscal responsibility here, but then you're suggesting that businesses should deploy virtually all of their cash and keeping close to nothing in reserve. Our founders are extremely fiscally prudent and purposely keep a very low burn rate, which is exactly why that money is in the bank instead of being used elsewhere.
You do not have a right to a job at the taxpayers expense. We all feel for you and are rooting for the workers but no one has an inmate right to others money. Especially when the right being demanded is size figure salaries.
If you were to lose your job, there is a standardized insurance that kicks in that all Americans get.
You are demanding special, better treatment at the tax payers expense.
Look, everyone on this forum is going to be affected by this. I myself was laid off a few weeks ago due to the tech bubble.
It's still not right to demand other people's money and act entitled. We all get it's hard out there right now.
This is a red herring though. Your company isn't losing 4.75 million. They're likely going to lose 0-10% of that.
The actual question is should tax payers give a company that has ~4.5 million in cash and is worth some multiple of that some free money? And that should be an emphatic no.
The company is unlikely to lose all but $250,000 as SVB (reportedly)still has plenty of assets it’s just some of the bonds they hold are under water due to interest rate rises
You should question why $5mn was kept in a normal bank (with an unusual customer profile) rather than being placed in money market funds etc., or why the company didn’t insure the funds above $250,000
I'm not sure your founders are as "extremely" prudent as you claim them to be. For example, couldn't they have spread their funds throughout more banks instead of putting their eggs in one basket?
So anybody who raises money should put a max of 250k into any given bank? My CEO should spend his time managing 20 different bank accounts?
I just think that if we look at it from the big picture - what's best for the country/society/etc. - that we're collectively much better off if a business that puts its money into a decades-old, reputable financial institution can count on it being there the next week.
(Also I do feel like I should clarify that I'm using my company as a kind of general example... I have no idea where our money is stored and I'm on paternity leave at the moment so just going to hang out with my new kid and hope this all works out).
My CEO should spend his time managing 20 different bank accounts?
No, that's silly, and it's not standard practice for a business to have more than 1-2 accounts per country. Anyone here claiming their companies actually did that is just trying to earn internet points for something they didn't actually do.
It's absolutely not believable that guys on here are claiming that they founded "multiple startups" and had 10-20 bank accounts (or more) because they were hedging the risk of bank failure. It would be like someone saying they had 10-20 computers at home because they were worried about their CPU failing. It's so remote a risk that it's not something you fuck up your finances to hedge.
A finance dept is absolutely not going to put up with the BS and hassle associated with maintaining more than 3-4 active bank accounts (checkings, savings, and one or two interest-earning accounts such as a cash sweep that might not be covered by FDIC insurance), because there is a large time and financial cost to constantly moving money around to pay the bills. This practice also replaces the extremely small risk of bank failure with the much greater risk of embezzlement, misplaced funds, delinquent payables, and lost receivables.
The only way to safely store money in excess of the $250k threshold is through government bonds, with the selection of terms based on the forecasted liquidity needs of the business. The other options suggested here (like sweep accounts) aren't any better than FDIC-insured accounts, because in most cases the alternatives aren't insured at all.
There are services that will spread balances across tons of accounts. The problem is that YC made people keep all their startup's money only in SVB instead of spreading it around.
YC doesn’t make you keep your money anywhere, they don’t even suggest any place or even say anything about startup banking (unless you were to ask one of the partners for advice). Even a cynical take would suggest they’d prioritize their portcos who launched banks for startups (like Brex), but even still in my experience they haven’t even done that.
According to Ankit Parasher, Co-Founder of YC-backed fintech start-up SALT, “SVB was the default bank for any international start-up expanding operations to the US. It was a stable bank and most VCs recommended it, so the impact of SVB failure is expected to be even larger than just Indian SaaS companies and YC-backed start-ups.”
Even still, YC doesn’t give any recommendations on bank account that I’ve seen. For ourselves, we had to do some corporate clean up before YC and while they connected us to the right lawyers and provided basic review, it was really just between us and our lawyers. For wiring the money, they just ask you where to send it.
SVB is no doubt popular, but YC makes no recommendations on any banks whatsoever in my experience
But is that a good thing for society? Adding a rent-seeking middleman that doesn't actually contribute anything except a technical workaround for an issue that can be solved directly by the governemnt?
It's called risk management, it costs money and it's something anyone running a business should be familiar with. Don't run your company like a multimillion dollar lemonade stand.
From an insurance perspective, why is it ok to guarantee payment to 20 x $250k but not $5mm? From a payout perspective the amount is the same, is it just the single point of failure risk?
Do you think most entities socialize the cost of their finances by just dividing up millons to billions between infinite banks and customers of this bank are the only ones not doing this? This seems unlikely. What you are proposing would obviously cost more money in practice else it would make no sense for you to propose it.
Lets take it another way. Why not limit FDIC insurance such that its harder to stack them and derive more benefit?
Sure, if we change the limit of FDIC so it's harder to stack that would make sense. e.g. coverage is per entity not per account.
But that's not what people here are suggesting. People are suggesting to divide the funds so that it's all covered. That it was irresponsible of companies NOT to do that and hence they deserve not to get the full deposit amount back.
EDIT: yes it'll cost more money to split today. But it's a waste. The extra cost doesn't go to the FDIC or tax payers, it just goes to a middleman. So then why not just raise the FDIC limit? (or change the rules so you can't split it)
You are oversimplifying their argument. People are suggesting that people use more than one bank or make a service that involves using more than one bank not necessarily infinite banks. It isn't necessary to choose between zero risk and existential risk. You can with only modest effort achieve moderate risk.
the math is still the same though, just different degrees. If we (as tax payers) are ok with insuring 3 accounts (as an example) x 250k each, why are we not ok with insuring 1 account for 750k?
Are you really suggesting they open up 20 different bank accounts? And not only pay the monthly account fees but also pay a bookkeeper to upload statements for all 20 banks into the accounting system? And have appropriate controls on all money movements? And float money between the accounts each time payroll or some large expense is run? And follow the financial results of all of those banks in order to find signs of weakness?
Id rather be in a world where businesses don’t have to spend so much time playing games with their bank accounts and just trust that their money is safe, which is why the fdic needs to guarantee the deposits.
That sounds like just another cost of doing business.
Companies RAID-stripe the data on their hard drives, they can pay somebody to spread the risk in their finances.
(At a certain scale this eventually becomes inevitable. Google actually has a huge real estate and finances arm precisely because they have the kind of money pool that is impacted by things like nation-state failure and changes to the tax code in 50 states).
What about my cash sweep account?
So, here’s the good thing about the cash sweep account: the assets held in the cash sweep account aren’t bank deposits or on SVB’s balance sheet—they’re held by a third-party custodian. So our understanding is you should be able to recover 100% of the funds there, regardless of what happens to the uninsured deposits at SVB.
Apparently they did that on purpose to be better able get a view on the activity of the money they poured in. Someone on a different thread is pointing to the levers VCs had in SVB for this exact purpose.
Exactly. If you’re forced to use SVB because of your founders, you don’t have a recourse on the bank.
But there is also a risk question that companies are responsible for that I see is glossed over. No, you shouldn’t have to spread your business accounts to limit them to 250k. But you must know it’s not insured above this, just like a money market account is not a guaranteed rate of return or even guaranteed against capital loss.
I’m just spitballing, but for example what was the rate on a “money market” checking at SVB versus other larger national banks? If it was much higher, it immediately indicates higher risk in a business checking account at SVB to get those rates. You can see this way back with the old junk bond / Lincoln Savings fiasco of the 1980s, or with 2008 MBS, or CD accounts in early 2000s.
Would you suggest that every small business in the US with working capital over the FDIC limits do something like this? It would be a massive waste of resources. FDIC insurance exists to stabilize this part of the financial system.
There is a risk question that companies are responsible for that I see is glossed over. No, you shouldn’t have to spread your business accounts to limit them to 250k. But you must know it’s not insured above this, just like a money market account is not a guaranteed rate of return or even guaranteed against capital loss. Have lines of credit with alternate banks, or insurance on that additional money.
Or, just like when the market tanks, you suck it up and get back 80% of your capital on deposit because you couldn’t foresee a money market checking account could lose capital even though it’s spelled out on EVERY SINGLE statement and offering letter from the bank.
Yes, I would definitely suggest and recommend for businesses to not have a single point of failure for something as important as their working capital.
Yes, that is the letter of the law. The intent, given that the FDIC emerged from the Great Depression, is to prevent bank runs.
Most banks with a large retail deposit base are immune from bank runs. SVB is unique in that it didn’t have a large retail deposit base yet also had a bimodal customer distribution (financially sophisticated VCs and later-stage startups/enterprises and early stage startups which have the financial sophistication of your local auto mechanic).
No acquiring bank will want to touch SVB because of its lack of retail deposits - the risk of account holders fleeing at the earliest opportunity is very high. That forecloses one of the FDIC’s main tools for resolving a bank collapse - especially one of this magnitude.
So we have a very unique situation here: a large mostly commercial bank that, unlike most large commercial banks, has a bunch of mom-and-pop level customers.
I don’t know what the solution is, but hopefully it will go in the direction of minimizing impact on these small businesses.
You get your last paycheck, sure, but you still lose your job which is definitely a threat to workers lively hoods.
It's even more of a threat if the whole sector you're employed in suffers simultaneously, as it becomes difficult to continue to be employed in that sector.
I say as a person who’s been laid off twice and worked for a company that went bankrupt — why is that my problem?
Why should you get my money?
(In the case of the company I worked for which went bankrupt — we were a fintech startup with a truly innovative and fantastic product. Our management made three bad decisions which led to our demise. Two were technical and would have been recoverable, the last was a strategic move which ultimately proved disastrous.)
Exactly. I got a letter from my last startup Thu at 11pm telling us they had no cash for payroll tomorrow and we were all laid off. Poor planning along with super-lean cash flow broke my employer.
This is no different. For example, how many business checking accounts are backed by money market funds to get a little interest on them? Clearly states in offerings that rates aren’t guaranteed and you could even lose capital. Same with the $250k FDIC limit - clear risk with zero forethought from these employers of hedging it with lines of credit, payroll/business continuity insurance, etc.
Those are things “slow” companies do, not move fast and break things companies do (sarcasm intended - I have worked in R&D in both types multiple times).
It's because there is a cost associated with this insurance. It's not a bottomless pit of money, as FDIC pays out using the funds it collects from the participant banks and receives no funding from the government (https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...). I think it should be possible for the bank to get better coverage, but they should be paying much larger premium if they want insurance up to 250mm instead of 250k.
I also think that similar to "FDIC insured" labels in bank branches, FDIC should require posting "13% of deposits are FDIC insured" to help assess risk for those clients that have uninsured funds.
Why is the government involved beyond that limit in this case? Could it be they want to give the average person peace of mind while retaining the flexibility to handle a restructuring however they deem best?
If things get dire enough, the government can intervene to protect workers in various ways (unemployment benefits, emergency housing, government employment - there are many options).
No need to prop up the middlemen with free insurance.
Unemployment insurance is already available. California and all the west coast states at least will also give free insurance in many cases. There is little risk to being unemployed especially for a short term while employees slowly get their money back after the asset sales.
I don't really see the big problem here.
Svb still has substantial assets. In the coming weeks, they will be sold and solid portions of the money returned. If companies have to temporarily furlough people, they will still get a reasonable wage that most Americans live on.
> The DIF is funded mainly through quarterly assessments on insured banks. A bank's assessment is calculated by multiplying its assessment rate by its assessment base. A bank's assessment base and assessment rate are determined and paid each quarter.
Not sure if that's going to cover the haircut that depositors are going to take with respect to the difference in SBC's asset values at liquidation. There is surely going to be some gap and the question is should the taxpayers be on the hook for that gap to make the depositors whole.
Because it minimizes harm and stabilizes the economy. There are benefits to providing safety nets to people who didn’t have a hand in their own misfortune. Specifically those people get to continue providing value. The modern economy is not zero sum. Work creates value, it is in everyone’s interest to stabilize productive workers.
The owners of the bank aren’t being bailed out. The FDIC is only paying back depositors. That is the working class. This bank doesn’t just cater to big bad VCs.
When depositors lose their savings through no fault of their own the whole system comes crashing down. That won’t help blue collar workers.
> So the risk to workers' livelihoods is being way overblown
If this were 2015 I would agree. But it's 2023 and thousands of software engineers are already struggling to find work after layoffs. Companies shutting down en masse because of SVB will soften what is already an employer's market for talent.
This may hurt specific founders and VCs a lot, but total damages (in the form of a softer market for engineers) may hurt the average employee more, even if they aren't directly affected.
> Perhaps they shouldn't keep money in the bank in the first place, but find other uses for them.
If this is the position you want to take, that's fine, but you need to own the consequences of that position. The point of the FDIC is that you don't have to worry about the credit-worthiness of your bank before deciding to do business with them. If that's not true anymore, then I'm pulling every dollar out of my local bank and giving it all to Goldman Sachs. Everyone else will do the same, and now you've destroyed small regional banks and make the biggest ones even bigger and more powerful. Was that worth it to "own the techbros"?
There's something the airline industry does where they don't compete on safety. They're all safe. You don't want banks to start competing on safety; they should all be safe.
No normal bank is safe without government backing.
Banks are inherently vulnerable to bank runs, because they work with money across different time intervals. For example, a hypothetical small town bank might turn checking and savings accounts into mortgages. If everyone decides to withdraw their savings all at once, the bank can't call all the mortgages due. So if everyone panics all at once, banks will fail. So we try to regulate the risks taken by banks, and we provide government-backed insurance. To be honest, the last-ditch "insurance" behind most banks is sovereign power.
It has been a long time since companies have lost money in bank failures. Everyone has gotten complacent.
The failure of SVB means that a great many people are suddenly seeing new risks. Come Monday, I expect to see lots of companies moving funds. And lots of banks hold government bonds that have fallen substantially in value because of the rapid changes in interest rates.
I will be very happy if we get out of this with few bank failures.
My first suggestion would be as T-Bills. I've asked a lot of questions on HN in the past few days about this, and I'm still not sure why it was not standard practice. Why people in position of authority trust bank deposits after 2008 I do not understand.
>My first suggestion would be as T-Bills. [...], and I'm still not sure why it was not standard practice.
Corporations have always split their cash into cash and "almost-cash-equivalent" liquid assets (like Treasury Bills). E.g. one can read any random 10-k corporate filing and there will be a line item for short term assets like "T-bills" because companies like to earn interest on their excess cash. The corporate treasurer is responsible for managing that mix.
But a company still needs working cash in the bank account for payroll and to pay vendors. The smaller startups may have not have enough excess cash to bother with splitting some of it into T-bills.
> a company still needs working cash in the bank account for payroll and to pay vendors
I also don't understand this. Why can't the working cash be a loan from the bank secured on the T-Bills? Then the depositor bears essentially no risk because they have no net balance with the bank. Essentially, why can't companies' working cash be overdraft? That way it's the bank that bears the risk rather than the companies. That's the whole point of the bank!
I guess one downside is that the bank will apply higher funding charges for that kind of arrangement. Well, the depositors should suck it up. You have to pay a price for resilience.
I guess there are other fine points of corporate finance that I have yet to grasp, but I'm learning a lot from the comments on HN. Thanks for your reply.
Loans are not made from deposits even now. But you may well be right that there are operational details that make my idea impossible, I don't know. HN seems to have some people with understanding of corporate finance, so hopefully they'll be able to educate me.
I think there are a variety of products reducing cash risk to zero. Something like t-bill positions for overdraft protection might be one such.
But notice that it's not in the bank's interest to provide them or push them if they do. They would rather you trust them and provide them the cheap float.
That thread seems to be insinuating that startup executives were offered mortgages in return for keeping their treasury as deposits in SVB. If so that sounds like a massive violation of fiduciary duty. (I don't have any concrete evidence of this and I'm just going by one Twitter thread I've read, so take with a mountain of salt.)
the issue is that startup founders might have a lot of implied wealth based on the equity they hold and money raised but a "mainstream" bank is going to look at that equity, assess it as non-liquid and highly speculative and reject any loan applications
svb was more likely to extend personal loans to startup founders because -- in theory at least -- they better understood startup finance and they were incentivized to provide good service to prospective customers of their more business focused activities
No they don't, because the banking system is fractional reserve. Pretty much every bank has more outstanding loans that deposits (even if part of those loans is to the government).
Thanks, I think there's something faulty in my understanding of terminology. By "deposits" I was understanding "deposits backed by holdings at the central bank".
The original question I was trying to answer was "If everyone gets cash from loans, who'll be the depositors putting cash in the bank to be loaned?". I just don't think that question is well-posed. A bank creating a loan requires new cash deposits of only R x loan_amount, where R is the reserve requirement. For making payroll this ought to be almost nothing.
> By "deposits" I was understanding "deposits backed by holdings at the central bank".
Ok. That would be reserves. But it's not like some deposits are backed and others are not (leaving aside the existence of different kinds of deposits) - what you have is a total amount of deposits and a total amount of reserves.
Yes, I understand that. But I don't understand why we couldn't have a system whereby, to cover payroll, a bank creates a loan to each company every payroll day, transfers cash to the (FDIC insured) bank accounts of employees, and then liquidates some of the company's T-Bills over the next couple of hours or days to cover it. That seems like a way of making sure everyone's paid without companies having to risk > $250k balances at any time.
Uneducated in this space, but why don't we see more T-Bill ownership transfer?
I owe vendor $100k. I transfer $100k of T-bills. They are paid cash equivalent, no?
The obvious thing that comes to mind is I am guessing there is some lockup of those t-bills maturing? Wouldn't this make sense for the Fed (Or some government entity) to be the broker+last resort to allow conversion of t-bill to someone else at a cost of breaking the term?
Even though the t-bill itself would still exist until maturity on the Fed's side and now company A is able to always guarantee payment transfer.
What I want is irrelevant. Yes, there are companies (banks) and instruments that I use to help manage cash. I know that every time I have too much cash in one bank account, I am at risk. It appears some companies are learning this only now.
I managed cash flow of my business through 2008. I worked through the recessions in the 90s and 2000s. When I was young, I worked for an employer who had seen banks fail in the Great Depression. He taught me not to trust a single bank. Nobody should.
Yeah, it would be nice if we had a well regulated financial system.
From what's been reported, SVB had money tied up in mortgage backed securities and T-Bonds (not bills) which take years to mature.
T-Bills are different than T-Bonds. T-Bills mature in weeks up to 1 year (4, 8, 13, 26, 52 week terms). They're a good way to assign your money you can't risk (like next month's payroll) while still earning interest on it and having access to it when you need it.
No, SVB invested in long term T-Notes or T-Bonds, not short term T-Bills. T-Bills have much less interest rate risk, because they have a maximum 52-week term.
It absolutely does. You should have 3 months of cash in the bank always. The rest should be in cash equivalents or short term investments. This is why most company’s with payrolls like that have a person called a “Treasury Officer” who manages all that and makes sure the bank accounts are funded adequately. They should also spread that around between banks to ensure that in the case of an issue with one facility there are other facilities or lines of credit to cover short term needs.
Anybody with more than $5 million in the bank should have someone dedicated to managing that money. If you don’t, then you’re not running a business properly. Startups like to skimp on important things like that and they shouldn’t. Any CFO with basic skills should be doing or arranging this depending on the size of the company. That’s literally their job.
Exactly. Even a business checking account with interest is backed partly/fully by money market funds. Those ALL come with offering sheets clearly spelling out returns aren’t guaranteed AND you could lose capital.
It’s simply poor money management by the employer to assume you can toss $1M-$5M in a business checking account and have zero risk. It’s not a personal account and it is clearly over the FDIC limits.
Anyone with $250K net worth knows there is risk here. Even my 80+ mother who is NOT finance savvy knows about this $250k limit and manages her life savings in different money market accounts to limit her exposure.
Multiple banks. There's one thing called counterparty risk and any firm with millions (or more) of US dollars in cash should have a function just to take care of this. But it seems a lot of tech firms' CFOs were sleeping at the wheel if it indeed transpires that all these firms were keeping their money all in one bank.
> even if the company you work for goes bankrupt, you're very likely to still receive your salary
Spoken like someone who has no experience with bankruptcy. The rule of thumb used to explain this to an unsecured creditors, before this happens, is -- dude, you might get 10 cents on the dollar. Employees are rarely made completely whole.
> as debts to workers are the highest priority in any bankruptcy case
Secured creditors have to get paid first. Then after quite a few other priority claims (attorneys, trustees must be paid, domestic support, etc.) employees are paid.
> So the risk to workers' livelihoods is being way overblown.
If the company you work for suddenly goes bankrupt, you're much more concerned about finding yourself unemployed in a not-great tech job market than collecting your last paycheck.
Don't forget how systemic this is. If your company goes bankrupt, it's likely a lot of similar tech companies also went bankrupt.
I'm sad to hear that, but by all accounts you should be able to receive your salary on Monday, when at least $250k should become available to your employer (though hopefully significantly more).
Sure, but the actual amount should be significantly more (a comment around was saying that any account secured with two signatures is ensured up to 500k, for example). And, it should be enough for the mid-month payroll of a 25-person team, which is the kind of company GP was talking about.
> Like a whole lot of people here, I've worked at startups for my whole career. People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money because our CEO used a well-reputed bank?
Cynicism reigns supreme on social media right now, and HN comments are a type of social media.
There is also a deeply engrained “us versus them” mentality baked into a lot of the anger. The SVB scenario has more people identifying the “us” part as taxpayers (who would presumably foot the bill for backstopping losses) and the “them” part as VCs and investors.
Interestingly, if this was rephrased as an “Ask HN” post where someone was concerned about their next paycheck because their startup’s bank failed, I suspect the sentiment would be completely reversed. The more relatable the story, the kinder the comments.
I get what you’re saying, but how many well-intentioned startups have imploded and ran out of money the day before payday due to some unlikely risk? Lots (I was in 1-2 of them). Should we also try to salvage them?
“Well-reputed bank” is not the same as zero risk money management. Look at the fine print of every one of those business checking accounts and you see there is clearly some risk, including loss of capital if you’re over the $250k limit. Everyone who has a retirement account in money markets at a “well-reputed bank” knows about this risk, so how can we let the CFO slide on finance risk management that was clearly their most important responsibility? Business continuity insurance, lines of credit, investor infusion, etc. Debt sales, etc. There are ways to get around an unexpected cash crunch.
But there’s no excuse for not knowing the risk and expecting a $1M checking account to work like your personal checking account. This was the CFOs job at every one of the companies that is now in a crunch.
There's also the modern 'anti-capitalist' crowd that nebulously always blame everything on 'capitalism' while also unironicaly enjoying, you know, owning private property, choosing their own jobs and investing in stocks, while at the same time distrusting government. Because we don't actually need to implement Marxism or state ownership or any other alternative economic system, we just need to not capitalism. Or something. I'm sure they're loving all of this.
Why should taxpayers pay for all of it? It's not like SVB had $0 in assets. Liquidation will hopefully cover enough to keep the lights on at smaller companies with uninsured deposits. The big depositors like Roku might lose something.
Lest we forget that even TARP was actually a net profit for taxpayers.
Very little of these discussions have anything to do with serious policy debate. They're a prism through which the whole site† filters their preexisting beliefs about venture capital and the startup industry. When you internalize that, it's much easier to look at an 800-comment third- or fourth- order HN thread about SVB and just nope out. There are no stakes to these threads. They're just here because the community needs to vent its reaction to the news and its valence.
† (50% of which is outside the of the US, and a majority of which is people who don't work for "big tech", which ironically isn't much at all directly impacted by SVB)
As a long-time tech person and someone who has started multiple companies, including one venture-backed one, I'm happy to explain why I think uninsured depositholders should not have their losses subsidized by taxpayers.
One, anybody with a bank account has heard about the FDIC and the FDIC insurance limits. Presumably anybody smart enough to raise millions of dollars know that if part of something is insured, the rest is uninsured. There are in fact good systemic reasons both for the FDIC to exist and for the limit to be high for individuals but low for companies.
Two, the tech industry, especially the VC-funded end, is forever crowing about the power of the marketplace. How regulation stifles valuable innovation. How government intervention is a problem, not a solution.
Three, among startups, market-driven disruption is practically a religion. Startups destroy existing companies all the time. Quite often it's an explicit goal, where startup X lists existing players A and B as companies whose lunches will get eaten because they are making bad choices.
Four, there has been endless puffery and chest-thumping among VCs and tech startups how their genius justifies pocketing billions and billions of dollars when times are good. Best and brightest, incredibly hard workers, blah blah blah. Including a special tax exemption for VCs, because they're just such amazing financial wizards.
Five, startup go under all the time. Which, having experienced it, definitely sucks. But when a startup goes under due to bad choices or bad luck, that's the game.
So when I put this together, I firmly believe that startups with bad treasury management should not be subsidized by taxpayers. If we're so smart and amazing that we get to reshape segments of the economy, we're smart enough to follow basic financial advice like "don't put all your eggs in one basket". If we choose to play the game that might make us rich, we should not suddenly complain about the rules when we lose.
In practice, the likely outcome here is that depositors either take no haircut or a modest one. Anybody going out of business because of that was already on the edge. And that will be partly because their investors will not see them as worthy of a bridge loan or an accelerated next round.
Which, again, sucks for the people involved. But it's not a problem for taxpayers to solve. If we're going to spend billions of dollars on improving the safety net, I think startups are way, way down the list of priorities.
This was back when A rounds were much more modest in size. We put it in one of the largest and therefore most highly regulated banks, the ones that now have to meet Basel III standards. If we'd had more money, we would have put it in 2 banks. A solution that would have been enough for almost everybody here, as the main thing causing a risk of not making payroll is the way the FDIC is locking up a good chunk of the uninsured funds while they sell off SVB's assets.
> Two, the tech industry, especially the VC-funded end, is forever crowing ... there has been endless puffery and chest-thumping among VCs and tech startups
When you find yourself cheering for collective punishment you should know that you are absolutely the bad guy.
I am not in fact arguing for collective punishment. I am arguing for people experiencing the consequences of their choices. The paragraph you quote is about their ardent insistence on being allowed to make those choices without interference.
Are those employees of companies whose business model is "driving artists out of business by large-scale copyright infringement and automated drawing based on it?", for example?
That looks to be an unlikely scenario, but let's indulge it.
Can capitalism be pretty harsh on workers? Sure. 1-2 million people get laid off or let go every month, and it's been that way for a long time: https://fred.stlouisfed.org/series/JTSLDL
Does that suck? Speaking from experience, yes. Should the federal government subsidize startups and/or their funders to save a few thousand jobs? Absolutely not.
If we want to spend billions on a better social safety net, let's do it for everybody, not some unprofitable companies whose investors don't see them as worth saving.
Normally I'd think that an unfair point. We can't generally expect workers to evaluate the financial soundness of their employers. But we are talking about startups here. Everybody going in knows that most startups fail. Hopefully everybody has an exit plan.
Because it's a problem requiring graduate-level finance knowledge? Because it's so difficult that even the professionals find it challenging? Because the companies that go under were often working to hide that even from other sophisticated players?
If you think you can reliably tell the financial soundness of companies, don't post here about it. Go trade their stocks. You'll either make a mint or you'll have a very valuable lesson.
The text I quoted applies to a tiny number of people, few or even none of whom might actually be caught in SVB (as they may have managed to exit first!). But unless I'm misreading it's being used to justify that the harm was deserved by a vastly larger class.
There are lots of ways for a startup to die. If you have $2m cash do you really want to manage (2/0.25) bank accounts, adopt all that administrative overhead, just to reduce your probability of death by bank failure, when possibly the added overhead may increase your overall probability of death because now you are distracted and unfocused on the things that are far more likely to kill you?
> If we're going to spend billions of dollars on improving the safety net, I think startups are way, way down the list of priorities.
This is first order thinking which increases systemic risk by undermining trust. The probability of future bank runs goes up.
> Three, among startups, market-driven disruption is practically a religion. Startups destroy existing companies all the time. Quite often it's an explicit goal, where startup X lists existing players A and B as companies whose lunches will get eaten because they are making bad choices. > Four, there has been endless puffery and chest-thumping among VCs and tech startups how their genius justifies pocketing billions and billions of dollars when times are good. Best and brightest, incredibly hard workers, blah blah blah. Including a special tax exemption for VCs, because they're just such amazing financial wizards.
You're making broad generalizations about a large group of heterogeneous agents. You're also using language that's full of moral judgement (revenge, disgust) instead of focusing on stuff that matters to the economy or to everyday people.
> But it's not a problem for taxpayers to solve.
Why not? Taxpayers exist to fund things that are thought to be in the public good. And isn't it a lack of imagination to think that taxpayers are the only way to solve this? What about clawback of executive compensation or shareholder dividends?
I just love that all the people who have discovered treasury management this week think that a) the only way to do that is keep $250k in n accounts, and b) that even if that's what people did, it would be so incredibly burdensome.
If startups want to take on bank risk, great. If they don't, also great, and there are many ways for them to do that. They are allowed to manage their risks as they see fit. If they can't, that is not a problem for taxpayers to solve. I get why some people here are pitching "socialism, but only for would-be billionaires", but I promise it's not a winning proposition in the wider world.
> If they can't, that is not a problem for taxpayers to solve.
You haven't made the case that the cost doesn't justify the reduction in systemic risk, let alone the immediate economic fallout of otherwise good businesses going bust. To make that case you would first have to outline what the cost would be, then you would have to explain why that cost is too high relative to the benefit. Both of those steps are missing in your argument. No attempt has been made to quantify the cost or the benefit.
So far it sounds like a moral judgment. They made a mistake (in your opinion), they as a group have tended to be be arrogant, therefore they deserve to suffer the consequences. I don't care for moral judgments, they are uninteresting. Explain it in terms of costs and benefits to the economy and to people.
I don't have to make the case. The status quo, developed over literal centuries of bank regulation, is generally to let depositors take a haircut. Because depositors having skin in the game is an important check on the risk levels at for-profit banks.
If people want to argue for infinite free deposit insurance for the rich, they're the ones who need to make the case that the increase in moral hazard and increased taxpayer burden is worth if for the public to take on.
But if there's some sort of support-the-businesses goal in here, I think it's better to just argue for a government corporation that's a non-profit deposit-only bank that takes no risk and pays no interest. Then, if you're correct that there are a large number of safety-seeking people with millions in cash who just want to focus on entrepreneuring, they'll have an option that has zero failure risk.
I expect if we created that, though, it would see very little use, because people are happy to take risks when they think they can get away with them. And quite a large number of people are apparently also willing to ask Uncle Sugar for a bailout when their gamble doesn't come up like they wanted.
> The status quo, developed over literal centuries of bank regulation, is generally to let depositors take a haircut
Only if you go by common wisdom pre-Great Depression, which helped cause the Great Depression. But the opposite lessons have been learned since. That's why the FDIC was created in the aftermath of the Great Depression. It's the basis of the Nobel Prize winning Diamond–Dybvig model which inspired the TARP in the GFC which actually returned a profit to taxpayers. If depositors have too much skin in the game, it creates the potential for a bank run, which benefits nobody and harms everybody.
> increase in moral hazard
Which is where regulations need to come in. That's the bargain. You get FDIC guarantees, and I get to regulate you. It's a better bargain than the old wild west of bank runs and financial collapse.
Anyway, depositors as agents aren't good mediators of a bank's risk. There are too many informational asymmetries for that to be a good mechanism to rely on.
I am not saying we should rely on it. I'm saying rich depositors having some skin in the game is a valuable component of a for-profit banking system. And it's hardly ancient thinking to suggest that financially sophisticated players should use a little of that sophistication when picking a bank. You could read Bair's "Bull by the Horns" for somebody who understood the 2008 crisis very well but had big concerns about the moral hazard that bailouts create.
If the rich really want a risk-free bank, I'm all for the government creating one. No loans, no interest, no profit, just deposits and withdrawals, unlimited guarantee.
But I expect that won't happen, because the rich don't actually want pure safety. They want to privatize the gains from risk and socialize the losses. And the more they come to think that's achievable by, say, hysterically encouraging bank panics, the more we'll suffer for it.
The moral hazard that the GFC bailouts created mostly pertained to bailing out shareholders and executives, not bailing out depositors. Let's be careful to make this distinction.
There is some marginal added moral hazard from guaranteeing deposits, you are correct, but I believe this should be counteracted by regulation, executive compensation clawback laws, etc. We have learned from the Great Depression, the GFC, Diamond-Dybvig, that the systemic risk of bank runs isn't worth the marginal reduction in moral hazard from not guaranteeing deposits. If you don't have trust and confidence among people (and businesses, not just the "rich" in the abstract) that their money is safe in a bank, then all you need is social media panic and you can cause a financial crisis for no reason. This is a risk especially now in the age of social media.
The $250k amount was implemented because they thought it was enough to stop these kind of bank runs. After what we saw with SVB, we need to update our model of reality. $250k was proven to not be enough.
Taxpayers won't pay for anything. If there are any losses, it'll be socialized amongst other banks. I don't see the issue. The alternative of risking more bank runs seems a lot worse.
Approximately any business with this much cash has a rich person running things. So yes, let's stick with "the rich" as the group of interest.
Socializing the losses among other banks is not getting paid directly by taxpayers, but the money comes from somewhere. Making good banks cover bad banks just creates new moral hazard.
The basic notion of our current system is that for-profit banking is a generally good business and that we just need to limit systemic risk. Your thesis is apparently that for-profit banking is essentially unsound. That's not an argument for a bit of fiddling with the regulations. It's an argument to end for-profit banking.
Which, personally, I'm all for. Many people are claiming they just want their bank to be a utility, a magic mattress to stuff their money in. In which case, let's make banking deeply boring, and put the hundreds of billions per year in profits to better societal use.
> Making good banks cover bad banks just creates new moral hazard.
This misses something crucial. Socializing the losses among banks reduces the incentive for the industry to pursue lobbying efforts that are misaligned with the general public. It also directly refutes the wrong narrative that has been floating around that it's going to be poor little taxpayers bailing out the fatcats yet again.
> Your thesis is apparently that for-profit banking is essentially unsound. That's not an argument for a bit of fiddling with the regulations. It's an argument to end for-profit banking.
I disagree. Many industries need active government involvement to align them with the public good. Absent regulations and oversight, factories would be dumping waste in the street and rivers. Are factories "essentially unsound"? Just because we need government involvement to remove the "essential unsoundness" of factories, doesn't mean that I think it would be good for all factories to be shut down.
If you eliminate the FDIC, guess what, banks will still be profitable, just like they were in the 19th century, and just like factories would be profitable if we eliminated all environmental oversight. Only we'll get a terrible financial crisis every so often.
> So yes, let's stick with "the rich" as the group of interest.
Let's not. If we are talking about systemic risk and economic contagion, using the word "businesses" is better because it makes it clear what would happen if we follow your prescription. If we use the word "rich" (which many would assume to mean "rich individuals" since that's the context this word is often used in), we're playing rhetorical hide the ball with the consequences.
> Socializing the losses among banks reduces the incentive for the industry to pursue lobbying efforts that are misaligned with the general public.
That's not true. Individual banks will push for lower regulations because their execs want a chance at fat profits that they get to take a slice of. Just like SVB did.
>It also directly refutes the wrong narrative that has been floating around that it's going to be poor little taxpayers bailing out the fatcats yet again.
It does not.
Here the taxpayers are not directly bailing out anybody. But they are backstopping it, and have increased the risk they will have to to directly pay in the future. And they are indirectly doing so, because anybody with a bank account, which is basically everybody, is going to be paying more for loans or getting less in interest. If you'd like to hear an actual banker explain that, last night's Marketplace had a segment talking with a regional bank CEO where she talks about why she's not happy with having to pay for somebody else's losses.
I agree with you on this, but I'm thinking more as a matter of perspective. HN is just not a place where I expect to see vicious, anti-tech backlash given the demographics.
Perhaps it’s an anti-SV backlash? Seems misguided as a lot of the places that you’ll want to work at 5-10 years from now are probably depositors at SVB. I think we all have an interest in a trustworthy financial system so rooting for depositors to get wiped out seems particularly short sighted.
I think the demographics are changing, more so in higher visibility articles, but generally too.
I think the best part about HN has always been the comments discipline. People generally only respond when they have some knowledge (not just “I watched a YouTube video).
Except among left wing circles where tech has become synonymous with fascist. Most of the people I've seen calling for depositors to lose everything are leftwing of the woke variety.
Of course both right and left seem to ignore that bailing out a bank and backing up depositors are really very different policies an different issues.
Over 50% of startups fail. If you factor in acquisitions as failures, the number is closer to 90%.
HN has been around awhile and has been a hotbed of the same starry-eyed startup dream for a couple generations of young people getting on the carousel now, so I guess I'm not terribly surprised if the attitude "welcome to the club, we would print you a t-shirt but our printer startup went out of business" shows up around these parts from the folk who have been on the ride awhile.
There are a lot of folks who read HN who had their dream crushed for a lot stupider reasons.
ETA: that is something I'd like to see more of here though. There's a lot of folks who have been through a bust cycle and survived it and even stayed in the industry. What kept you going? How did you come out the other side? Was it as scary as it feels when you haven't done it before?
Spoiler alert (18:30): It was entrepreneurship that turned the economy around. Not fed policy.
SVB put their deposits in US Treasury Bonds. Commonly regarded as the safest investment vehicle there is. Then the fed raised interest rates, completely screwing over this strategy. Then VCs panicked, like sheep.
So now we're in a situation where the most successful startups in the innovation sector are at risk of being wiped out while the US economy is being guided toward recession to cool inflation. Go watch that talk- then tell me you really think its a good idea to let it all burn.
US Treasury Bonds are one of the safest investment vehicles, IF you match the interest and maturity to your liabilities. You cannot go and buy bonds that will mature and give you 1% per annum in 10 years when you have a debtor awaiting payment in 90 days. That's the huge risk mismanagement SVB did.
Having said that, I don't think startups will suffer big time - but they were the ones also who created the bankrun fueled by VC panic. However mismanaged SVB was, given enough time they had enough resources to turn this around.
This needs to be sticked at top. It’s not that hard to build a Treasury ladder with three month bills. This is not complicated and you don’t need to be Warren Buffett to figure this out.
One thing to remember about your last point is that the startups and VC’s that DIDN’T cause the bank run are the ones that will be hurt by this. So if anyone is in here thinking “they shouldn’t have tried to withdraw their money, thereby creating a bank run, if they didn’t want to lose their money!” You have to realize that there two separate groups of people here: the ones that withdrew their money and caused the bank run, and the other ones that didn’t cause the bank run and lost their money.
That said, I don’t blame anybody for causing the bank run. If I had a reason to believe that my personal bank might not be able to give me my money if I didn’t get it out right now, there is zero chance that I would leave my money there to vanish just to avoid causing a bank run for other people. Morals break down when my life savings and livelihood are on the line.
So what you're saying is the bank made investments based on a whole lot of assumptions. These assumptions were quickly invalidated by US policy changes and then the bank lost everything.
Yes, absolutely let it all burn. They risked it all on their "strategy" and lost. Why should they get bailed out in literally any way? I don't see the government showing up to bail me out when my "strategy" gets me liquidated, why the hell do these banks deserve that treatment? Let them face 100% of the consequences of their choices.
This is the second completely detached from reality statement you have made. The US government requires that banks spend 90% of their deposits on tbonds so that they can continue to fund the process of money creation.
The strategy is mandated by regulation post 2008. The mistake svb made was buying 10 year instead of 3 month. Hard to explain that one other than the fed said inflation would be transitory and it wasn’t.
> The mistake svb made was buying 10 year instead of 3 month. Hard to explain that one other than the fed said inflation would be transitory and it wasn’t.
So what you're saying is the bank made investments based on a whole lot of assumptions. These assumptions were quickly invalidated by US policy changes.
Depositors lent their money to the bank. They took a risk by trusting a bank to manage their money for them. The bank took their money, invested it and lost it all.
It didn’t lose it all. About 90% is still there as assets and is being sold as we speak. The liquid assets have been sold already, so 50% will go back to the depositors next week.
Of course but the point still stands. If it lost it all we’d all be in serious trouble. It lost ~10% and there’s a nonzero chance depositors will be made whole anyway (with zero taxpayer money involved).
There are hundreds of billions in assets owned by SVB. The accounts with grocery assets likely contain companies that will be future unicorns.
What is there to burn? A large bank will likely purchase the assets/debts outright, the shareholders will get screwed, and the depositors likely be made whole. There's no bailout in that scenario
If your strategy is keeping money in an FDIC insured bank account the government will absolutely bail you out. You have a guaranteed bail out up to the deposit insurance limits and a high-probability bailout for close to 100% of your funds through FDIC resolution.
Something tells me you don't understand the difference between the bank, its shareholders, and its account holders. Unless you just think its peachy that a bunch of businesses lose everything because their bank made some actually not all that risky investments and some people got spooked. This isn't 2008.
> Something tells me you don't understand the difference between the bank, its shareholders, and its account holders.
I understand the "difference" fine. I just refuse to believe there actually is a difference. They're all the same to me: people who lent their money to the bank so it could be invested and pay them dividends.
> Unless you just think its peachy that a bunch of businesses lose everything because their bank made some actually not all that risky investments and some people got spooked.
Why, that's exactly what I think. Looks like that "not at all that risky investment" didn't bring the outcome everyone expected. Oops. Looks like the free market screwed them over again. Such is life.
I suppose it's fine if they manage to liquidate the bank's assets and recover some of it. If they really insist on recovering it all, maybe they should liquidate the bank manager's personal property as well. As long as they don't see even one cent of taxpayer money, it's moral.
Because of secondary effects. It's not like SVB failure is limited to just depositors and start-ups. Which means way more damage than just the nominal amount lost.
By design the feds wanted to increase unemployment and salaries. Problem solved? I'm not trying to be mean or condesending. But who would / should the unemployed / wages come from? What sector?
It turns out that you can make everyone unemployed and it won’t fix the supply/labor shortage created by a lack of immigration and supply chain disruptions. The fed is using a hammer to fix a chipped vase because it’s all they know what to do.
I strongly agree. The feds do not have the tool set to fix the problem on inflation. 50% of inflation is opportunity by companies testing new price points.
We are in a pickle I don't think we are ready for what's to come in the future. I feel there will be a lot of pain in the future for the “little guy”
In 2008 and 2020 they had all sorts of special acquisition funds to do targeted support, now when the little guys is screwed suddenly they don’t have anything but raising interest rates? Like not even targeted interest rates?
You know what I think? This is just like any other time in history the labor class started getting too big for its britches. We are being told to go back down and stay there.
And that’s a really stark reality now that might change someone peoples support for government.
It's likely startups only exist to begin with due to low federal interest rates. It is obvious that if those rates are low investors will look elsewhere. Startups are one of those elsewheres. Now that rates are on the way up, there's no need for investors to risk their money on startups anymore. So startups no longer have one of the pre-conditions for their existence. Namely, free investor money literally pouring in and paying for all their expenses.
Such is life in the free market. Looks like the US government disrupted you. Doesn't mean the US taxpayer has to bail you out.
This is the exact lack of nuance that OP is talking about. Do you understand what is actually happening here? A bank is going under and potentially taking a ton of startups with it, not because of any poor decisions or lack of legit business model by the startups. It’s purely due to an internal implementation detail of the (until now) we’ll respected bank that holds their money.
I swear if it was called “generic bank” instead of “Silicon Valley Bank”, we wouldn’t be seeing all of these knee-jerk “good because they’re bad” responses.
> Do you understand what is actually happening here?
Do you have an actual argument that falsifies what I've said? I'm all about owning up to my mistakes but right now I have no reason to believe I'm being stupid. I thought stuff like this was going to happen the second I saw the Fed raising interest rates to combat inflation. Looks like time proved me right.
> A bank is going under and potentially taking a ton of startups with it, not because of any poor decisions or lack of legit business model by the startups. It’s purely due to an internal implementation detail of the (until now) we’ll respected bank that holds their money.
Yeah sure. A "minor implementation detail" of the bank... Honestly, this isn't even the real issue at play here.
It's really simple to me. People put their money in the bank. The bank couldn't bear to watch the pile of money just sitting there. So it "invested" the money. Then it lost the money. Then they went under. Now everybody is losing their minds and the bank is getting liquidated in an attempt to make everybody whole again.
I'm sorry but I just don't feel any sympathy at all. It's not the first time a bank fails but people never learn not to trust them.
> I swear if it was called “generic bank” instead of “Silicon Valley Bank”, we wouldn’t be seeing all of these knee-jerk “good because they’re bad” responses.
Nope. I say the exact same thing every single time some bank-like institution fails: we warned you. When it's some crypto exchange, everybody here on HN gets a kick out of it. Now that it's some startup's bank, I'm supposed to feel sorry for them? No.
> Do you have an actual argument that falsifies what I've said? I'm all about owning up to my mistakes but right now I have no reason to believe I'm being stupid.
There are two key things that I think you're misunderstanding:
1) the bank didn't lose the money. A lot of it is locked up in long-term securities that would have to be sold at a loss to access the money now. But, at maturity, all of the money would be paid back. The money is there, but it's illiquid. A bank with the same investment but more liquid assets would have no problem
2) The investors are going to get screwed, and the depositors will likely be made most of the way whole. This is without a government bailout. Given that the assets are there, I'd be surprised if a big bank didn't gobble them up for the goodwill of future tech unicorns.
I'd be upset if there was an investor bailout. I'd question why we needed a depositor bailout. I don't think either are necessary or going to happen
> 1) the bank didn't lose the money. A lot of it is locked up in long-term securities that would have to be sold at a loss to access the money now. But, at maturity, all of the money would be paid back. The money is there, but it's illiquid. A bank with the same investment but more liquid assets would have no problem
Also known as being literally insolvent. They can't pay back what they owe. People have bills to pay tomorrow, so nobody really cares that the money is gonna be there 10 years from now. Peopld want their money, and the bank can't pay it back. They might as well have taken the money and thrown it into a black hole.
> 2) The investors are going to get screwed, and the depositors will likely be made most of the way whole. This is without a government bailout. Given that the assets are there, I'd be surprised if a big bank didn't gobble them up for the goodwill of future tech unicorns.
I suppose it's moral as long as not one cent of public money is used to pay anyone off. That includes "backstopping" bank runs or whatever it is the Fed does. That also includes literally any measure that could conceivably increase inflation which is an indirect way of making us all pay for it.
Also known as being literally insolvent. They can't pay back what they owe.
No, insolvency is a legal and accounting term indicating that liabilities exceed assets. If assets and liabilities are equal, but the liquidity of those assets did not match the term of the liabilities., that is illiquidity, not insolvency.
That being said, the CFPI said in its order shutting down SVB that the bank was both illiquid and insolvent so it appears that their assets, even adjusted for value at maturity, were not sufficient to cover liabilities. And that's probably why the banks they reached out to about taking over SVB Thursday night did not.
> They might as well have taken the money and thrown it into a black hole.
It entirely depends on the circumstances, and those circumstances are extremely important to this discussion. A bank with sufficient liquidity wouldn't have a solvency issue holding these assets - they would exist and be paid out in time, and nobody would no the difference but the bank's accountants.
That is extremely important because it means the money exists - it was not lost. That makes purchasing SVB viable for a bank that can handle the securities' long maturity. That would not be the case if they head actually lost the money.
> That also includes literally any measure that could conceivably increase inflation which is an indirect way of making us all pay for it.
I would encourage you to read about Spain's economy during the late 1500s. Specifically, why they were advertising across Europe to convince Jews to move to Spain - you'll get to learn why the Jewish banker stereotype exists (racism meets fiscal policy meets religious doctrine) and see an interesting example of how a society changes with proto-moderm banking introduced.
In my experience, most proponents of "inflation is theft" propose financial systems that fail to account for critical problems that were addressed in modern finance so long ago that they've been mostly forgotten
> In my experience, most proponents of "inflation is theft" propose financial systems that fail to account for critical problems that were addressed in modern finance so long ago that they've been mostly forgotten
Sounds interesting. Please elaborate on these problems. It's definitely gonna be a lot more interesting than discussing a failed bank.
As far as I'm concerned, the main problem solved by banks is the exponential growth problem. They solve it by providing credit, enabled by depositors. Entire nations and empires were developed by this scheme. Especially in the 1500s, the age of european colonialism.
> Sounds interesting. Please elaborate on these problems. It's definitely gonna be a lot more interesting than discussing a failed bank.
Lol, fair. In the 1500s, Christians and Muslim were barred from giving loans with usury (interest), so there was no financial incentive to give anyone but friends and family money. The European aristocracy was either Christian or Muslim (Portugal and Spain for a while). Essentially, if you weren't already well connected to the rich, you couldn't access capital.
Jews didn't face the same religious restrictions, and they were barred from many other jobs in society, so they often fell into the role of bankers where they lived (since they could charge interest and make money). These banks facilitated wealth transfers between the wealthy and people with few means and connections. It resulted in economic booms (and there are plenty of legitimate criticisms of exponential growth), but it spread the wealth to people who wouldn't have otherwise had access.
And that's the double edged sword: loans can facilitate wealth transfer from wealthy to folks with limited means, but doing that causes inflation.
Rich people have since found tons of ways to manipulate the system, and we've added layers of regulation that are supposed to make that harder. Some of that has worked, and some of that has failed. But, I do think that inflation is a necessary side effect of preventing capital from being hoarded in walled gardens
>It's likely startups only exist to begin with due to low federal interest rates.
This is true for some startups. Not true for others. There’s some nuance. Painting them altogether loses the nuance.
> It is obvious that if those rates are low investors will look elsewhere. Startups are one of those elsewheres.
I agree.
> Now that rates are on the way up, there's no need for investors to risk their money on startups anymore. So startups no longer have one of the pre-conditions for their existence. Namely, free investor money literally pouring in and paying for all their expenses.
Again, some investors won’t spend as much of their money investing in startups. You talk as if it’s just a single on/off switch.
> Such is life in the free market. Looks like the US government disrupted you.
We’re talking about the startups here. The government “disrupted” the bank. And through no fault of their own, the startups get “disrupted” as a second order effect. My main point and the reason that I felt I should respond is this sense that I get from your comment that somehow startups deserved to lose their money because they kept it at the bank. As if that was the morally just conclusion.
> I thought stuff like this was going to happen the second I saw the Fed raising interest rates to combat inflation. Looks like time proved me right.
Yes. Everyone understood that “stuff like this” would happen. I’m positive that you didn’t know that specifically SVB would go under in such fashion. Without using hindsight bias, what should a startup have done with this knowledge that “stuff like this” would happen?
> Yeah sure. A "minor implementation detail" of the bank... Honestly, this isn't even the real issue at play here.
I said “internal” not “minor”. And I mean, yes it is the real issue at play? It’s what caused them to go under? And was absolutely not something that any reasonable person would expect to know about their financial institution…
> It's really simple to me. People put their money in the bank. The bank couldn't bear to watch the pile of money just sitting there. So it "invested" the money. Then it lost the money. Then they went under. Now everybody is losing their minds and the bank is getting liquidated in an attempt to make everybody whole again.
Missing nuance that they invested in something that is seen as about the most safe thing you can invest in, but they DID mess up with the duration. Again, this is something that the bank messed up that no reasonable(non-financial industry) person could have seen coming. Sure, the bank deserves some blame for this, but the people that kept their money there could not have reasonably seen the risk.
> I'm sorry but I just don't feel any sympathy at all. It's not the first time a bank fails but people never learn not to trust them.
“Don’t trust banks”. Ok. Got it. Now what? Without using hindsight bias, what should a startup have done with $10million? Keep it under their mattress? Invest it in something more risky than treasuries?
> Nope. I say the exact same thing every single time some bank-like institution fails: we warned you.
Noted. Now what?
> When it's some crypto exchange, everybody here on HN gets a kick out of it. Now that it's some startup's bank, I'm supposed to feel sorry for them? No.
You’re comparing losing your money by gambling on something with no intrinsic value, in an unregulated market, that was built primarily as a means of subverting oversight, with keeping your money in a highly respected, highly regulated, FDIC insured bank.
That said, I hope people weren’t HAPPY that crypto HOLDERS lost their money.
> We’re talking about the startups here. The government “disrupted” the bank. And through no fault of their own, the startups get “disrupted” as a second order effect.
Same thing. It's still disruption even when it's indirect. Perhaps they should have chosen to minimize their exposure to that risk. For whatever reason, they didn't. Now these are the consequences.
I don't want to hear that they're getting any government help whatsoever. By all means liquidate the bank and then distribute the money. If that's not enough to pay them back... Tough luck.
> My main point and the reason that I felt I should respond is this sense that I get from your comment that somehow startups deserved to lose their money because they kept it at the bank. As if that was the morally just conclusion.
Let me make it clear then: that's exactly what I belive.
Banks are not the "risk free safe haven" people make them out to be. People treating banks like that are a huge problem that I wish would be fixed. One way to fix it is by destroying the illusion that you're "safe" despite all the risks the banks are exposing you to. The easiest way to destroy that illusion is to have people actually lose their money when their bank fails.
Therefore, that's what I wish would happen.
> I’m positive that you didn’t know that specifically SVB would go under in such fashion.
I know with absolute certainty that any given bank could literally flop at any given moment if enough people tried to withdraw their cash at the same time. The only reason why it doesn't happen often in practice is the government will literally print money and "inject liquidity" into them to stop a total economic meltdown from happening. I'd rather they didn't and just allowed banks to fail.
> Without using hindsight bias, what should a startup have done with this knowledge that “stuff like this” would happen?
Not keeping money at the bank would be a start. At least use many independent banks so you're not exposed to the stupidity of any one bank.
> And I mean, yes it is the real issue at play? It’s what caused them to go under?
If we're talking about the bank's failure, yes. It's not relevant at all if we're talking about the startup that relied on the bank to hold their money for them.
> And was absolutely not something that any reasonable person would expect to know about their financial institution…
Well, I sure as hell do expect to know everything my bank is doing. After all, I'm putting my money in there and they're "managing" it. One of my banks sends all clients a detailed written report about their accounts and investments every year. Others don't so I ask the manager what they're doing with my money instead. I will literally pull my money out if I don't like the answer. I've done it more than once.
> Missing nuance that they invested in something that is seen as about the most safe thing you can invest in
That's intentional on my part. What they "thought" or "intended" to happen doesn't matter at all. "Everybody thought" mortgage backed securities were a safe investment back then too and that common sense doesn't count for shit when everyone is getting wiped out.
> no reasonable(non-financial industry) person could have seen coming
> but the people that kept their money there could not have reasonably seen the risk
Sure they could. Literally every bank exposes you to the risk of their fractional reserve banking. The problem is they don't because they don't understand the nature of banks and what they do. People think it's just "their money at the bank".
That's ultimately what I want: for people to start seeing government and bank screwups coming. Telling them does nothing so maybe losing money will.
I think this is the sort of stuff that should be taught to everyone in schools.
> what should a startup have done with $10million?
> Invest it in something more risky than treasuries?
What do you think banks do when you deposit $10M in them?
> You’re comparing losing your money by gambling on something with no intrinsic value, in an unregulated market, that was built primarily as a means of subverting oversight, with keeping your money in a highly respected, highly regulated, FDIC insured bank.
Those two things are pretty much the same scam to me. One is "respected and government backed", the other isn't. Maybe the government should start backing the proto-banks we call exchanges too. Wouldn't that be funny?
> That said, I hope people weren’t HAPPY that crypto HOLDERS lost their money.
Sorry to disappoint you. If you think this comments section is bad, you should see how gleefully the HN folks cheer when the "crypto bros" get fucked by some whale dumping on the market or something.
Putting the money in SVB rather than another bank can be seen as a poor business decision by the startups - yes, they may have be forced to by their VC backers, or they may be just following the crowd
But reality is SVB isn’t a normal bank and it had the highest percentage of deposited funds that weren’t covered by FDIC amongst US banks
You say I'm "ridiculous" and "detached from reality" yet the economy pretty much screeched to a halt when the Fed rased interest rates. The money stopped flowing freely, the massive layoffs began... Now we have literal banks failing. Yeah.
Nothing screeched to a halt. Money stopped flowing as freely as it once did. The layoffs are relatively massive, but the companies involved are still enormous organizations. Things have slowed down, and things are fraying at the edges, but the economy is still largely fine. This is the intended outcome of the present monetary policy.
I'm just a Regular Joe, and I have saving and chequing accounts at two banks in case there's an account discrepancy / disagreement with one, I still have some funds I can pay bills with until things get sorted out. Stuff happens:
Exactly this point. Every single offering brochure on those business checking accounts notes the FDIC limit. If they’re interest checking accounts, they are money market backed and clearly state no guaranteed return rate or even guarantee of capital. Heck, even my not savvy mother knows to keep her money market retirement accounts in different banks just like you describe.
How can we possibly allow the CFO of these companies to get away with not managing finance risk, no matter how small. That was their only job, to manage finance risk. No business continuity insurance? Lines of credit with other banks? Convertible instruments that could be sold on Monday AM to raise cash? So many other ways a CFO can manage cash and risk but did not.
SVB had no Chief Risk Officer for much of 2022 at all, which they failed to disclose. The previous one left in a hurry after selling $4m worth of stock, along with the CEO.
We're not talking about SVB: we're talking about the customers of SVB.
If you're a not-small company (many dozens of people, which a few million in assets), why would you put all your financial eggs in one basket? Even if they're generally well-run, any institution can be hit with 'bad luck' like ransomware by some zero-day.
Just by having (say) one-quarter of your assets at another institution it makes sure you can make payroll and pay your bills for some period of time while things are sorted out at the 'primary'.
The issue is it wasn't pension money. It was VC money, that's money intentionally being gambled in high risk endeavors. It's not right for thr tax payers to bail out rich VCs who gambles their money.
On the flip side, I also have worked in startups much of my career, and think I and people like me should be paid for our work. I think we should help the startups out, bail them out, but without helping the VCs. I think what that means is the startups effected should get their money back, but the VC owned shares of the company then become government assets that can be sold in the future to offset the cost of the buyout.
It's simply not right for government money to bail them out, but fornthe VCs to profit from it years from now.
Edited to add:
In the end the point I'm trying to make is that it's not right for us to take money from average non-rich Americans to pay back VCs (rich americans) who gambled their money. If the bailout comes from people that earn more than 500k a year exclusively then I'm all for it. But taking public money that was taken from a single mom who is barely getting by to do so is wrong.
> It was VC money, that's money intentionally being gambled in high risk endeavors.
The high risk endeavor does not have anything to do with the bank where you deposit the money raised. Here, it does not matter if the source of money is a VC or another.
This is a foolish take, because it ignores the thousands of workers who distinctly aren't high rollers. It's hard for me to see the moral difference between 'public workers pension fund' and 'workers trying to feed their families, who happen to work at a startup'
I also work at a startup. I have for much of my career.
I said in my OP that my view is that the startups themselves should be bailed out, saving jobs like yours and mine. The VCs should then forfeit their shares to the US govt, to be sold later, to offset the costs of the bailout.
A run on the bank is a social phenomenon, and "VCs" aren't a singular monolith that acts in concert. The "VCs" didn't want this to happen any more than others.
Regular depositors under $250k also benefit from the upside of their "gamble". Yet we protect their deposits regardless because we want to reduce the systemic risk of bank runs.
Right so when you say "But they benefit from the upside. It's their gamble, not ours." ... Your first sentence is talking about the deposit, then you switch the subject matter and start talking about a VC's equity in their investment? Everything you've written in this thread sounds like morality-laden, anger-laden, fist in the air kind of stuff, where you're criticising your own confusion and using loaded terms in order to push a point. Nothing well reasoned. I'm done here.
> The issue is it wasn't pension money. It was VC money, that's money intentionally being gambled in high risk endeavors. It's not right for thr tax payers to bail out rich VCs who gambles their money.
Putting your startup's funds in a FDIC insured bank isn't exactly "gambling".
It is if you have funds over the FDIC limit. There are services that take care of that for you, there are many standard practices that exist to protect against this, all were ignored.
I dislike these populist, low resolution takes that use rhetorical devices ("gambled" instead of "invested") to try to persuade but are otherwise void of well-reasoned analysis and are more about criticising one's own confusion.
If you want something to be justifiably upset about, it's the carried interest loophole.
You've learned wrong, VC is by definition a category of investments and you attempting to relabel it as gambling is an attempt to persuade via rhetorical device rather than via sound argument.
"Limited partner", someone who invests in a partnership without having day-to-day management control (IIRC). In the case of VCs, many of the limited partners are pension funds or other giant players who want to invest a small fraction of their assets in higher-risk, higher return securities. (The LPs probably have other assets invested in lower-risk, lower-return assets.)
I second your point and add: what's at stake here is not just SVB's customers, but the reputation of the entire US Banking system.
The shareholders should lose all of their investment, that is a no-brainer, but the depositors should not lose 1 penny, and their funds be available on Monday morning.
Here's an overlooked deadline: 6:00 PM EST, that is when Sydney (Australia)'s stock market opens. If that opens a lot lower, it will be the start of a free-fall cascade of stock markets worldwide.
So, we have less than 5 hours as of this writing for an official FDIC/Federal Reserve statement.
> but the reputation of the entire US Banking system
Agreed. Advanced economies work because there are things you can take for granted, and you gain efficiencies from that. There are plenty of countries where the currency collapses every decade and banks don't work well. None one looks up to them, no one aspires to start a business there, and they're not leaders in anything other than maybe a commodity. They're places smart people leave.
>>People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money
I got no dog in this fight(as I'm an Indian, and stay in India). But I guess what they are saying is they don't want to be paying for it. They just want whoever is responsible to make somebody else pay for these problems.
So bailout is ok, they just don't want to pay for it, and may be find other people(VCs, other billionaires) who can invest/bailout that bank on their terms.
> People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money because our CEO used a well-reputed bank?
I'm in the same position as you but this is a terrible take.
No one thinks we deserve to lose money or jobs.
They simply do not believe that other American taxpayers who likely make less than you should have to spend their hard earned money (or risk having it devalued by printing) in order to bail you out.
And they are broadly correct.
It is wrong to demand other people's money due to your own misfortune, especially when the misfortune is a lost business or job, versus something more existential. The reality is that most tech workers will be fine.
> People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money because our CEO used a well-reputed bank?
If you want to be paid by the government, you should be aware that salaries are significantly lower, and perks are non-existent.
The government regulates banks and provides deposit insurance to to 250K.
The whole point of deposit insurance is to prevent retail bank runs by the general public.
Beyond that, it is the job of your CFO to manage risks, including the risk bank failure.
The last large wave of bank failures happened barely over a decade ago. These things happen.
Also, it sounds like your company will lose at most a fraction of its deposits.
> They [shareholders] deserve nothing, because that's what you should end up with if you own stock in a company that goes bankrupt.
During a bankruptcy creditors get paid first, and investors are only allowed access to what is left after creditors are paid off. Hopefully a company declares bankruptcy before their total liabilities becomes larger than their total assets, otherwise creditors cannot be paid in full.
Bank bailouts were largely done so banking services are not disrupted. As valuable as SVB was to startups, it's small potatoes to what 2007/2008 bailouts prevented. "Too big to fail" clearly doesn't apply here.
HN has grown a lot and there are much more people who are not necessarily from SV.
In the real world, if you live in SF, work in startups doing what you like, get paid well, not trapped in 9-5 etc.
That's elite and nobody will ever feel sorry for you. As a general rule every guy should always expect nobody to feel sorry for them, but this particular set of circumstances and the area of the country where they unfolded scream 'millionaires problems' to those roaming in the interwebz.
At the expense of taxpayers. That is the crux of the argument.
People are stressing the 250k FDIC requirement which is Federal and thus equal for everybody and it's one of the very few things that is equal for everybody across the land regardless of you living in Mobile, AL or San Jose, CA.
People are against the extra-insurance/safery-net/bailout being awarded to everything based in NYC and SF because everything in NYC and SF is supposedly too big and too important to fail. In this case it's not even failure but a minor inconvenience because as it stands the money is there, it's only tied up.
First of all, the FDIC has always arranged to make depositors whole when banks failed. This is why there weren’t massive runs on bank checking and savings accounts in 2008.
Second, CA gets the least back in federal spending per dollar of taxes paid, and NY is close:
The regions most upset about federal safety nets are also the ones that benefit the most from them.
Third, it is not a minor inconvenience when $10M’s of investor money from a fundraising round gets permanently lowered to $250K (no “bailout”) or if a startup stops making payroll for 2 years (upper bound of the time range the FDIC has proposed).
> > Second, CA gets the least back in federal spending per dollar of taxes paid, and NY is close
State by State statistics are irrelevant considering that people who are getting up in arms are small business owners and entrepreneurs who will never receive a bailout because considered not structurally important or not big enough. And yes on a percentage basis there are more of them in flyover America, but just because flyover America States get more federal funds doesn't mean that contractors for such goods and servies are based there at all.
Plus a contract with the Govt. for a good or service to be provided is way different than a bailout. In one instance it's the Govt. acting as a customer, in the other it's the Govt. coming to the rescue to save businesses from bad outcomes.
> > Third, it is not a minor inconvenience when $10M’s of investor money from a fundraising round gets permanently lowered to $250K (no “bailout”) or if a startup stops making payroll for 2 years (upper bound of the time range the FDIC has proposed).
On a systemic level it's a minor inconvenience because the name of the game of a country is to build cool products and services in order to consume them, somebody else will have a try at building a cool product or service and those who were banking with SVB will still have all the means to consume them (which in the end is what really matters) thanks to the FDIC
And besides, get real, 99% of people will never see 250k lump sum being credited on a bank account they control (either corporate or personal) , much less a 10M lump sum which is 99.999 percentile territory, which brings me back to my OP point:
Nobody will ever feel sorry for people who live in the 'top right' area of the chart of life. Or they will but there should not be absolutely any money involved. As an example people will feel sorry for a fighter jet pilot involved in an accident during training even though the guy spent his whole life living the dream flying above the cloud and the sound barrier.
This is the state of the art. Plain and simple. As evidenced by the honors given to the fallen pilot and the insults and spits thrown in the direction of those who are receiving the bailouts.
Call it a reasoning defect, logical fallacy, whatever, I don't care. It's the state of the art, as evidenced by people reactions. So if you are so disturbed by other people indifference, stop (or alternatively never try) raising (and dealing) money but get a cool job giving you mad emotions and away from the limelight of the financial press and the corporate board room, that way you'll never have anything to worry about as it pertains to pitchforks and social hatred.
It’s more subtle, because these startups exist due to VC investment. Those VCs probably recommended and even set up their portfolio startups with SVB accounts. And a high percentage of these companies were heading to failure due to the nature of these ventures. I’m not so sure taxpayers should be responsible here.
Why don’t VCs double down and make their investees whole? They’re the ones who bankroll and believe in these ideas, and stand to make 1000x profits in their successful exits.
I wonder how much of this saltiness -- both on HN, reddit, and mainstream media -- is due solely to the name of the bank.
If the headline was "California Regional Mutual Bank and Trust fails" (I made up the name, I don't know anything about banking, don't nitpick the terms) it surely would have still been newsworthy because of the size of the bank, but I suspect there would be less vitriol around the situation with the Silicon Valley connotation removed from it.
If your startup doesn't survive having only 50% in the bank account for one week and then 80-90% in the following weeks (appears to be the most likely outcome without any government money) it likely isn't viable to begin with (in a normal, non-zero interest environment). I think the believe that startups have to always be on the brink of bankruptcy is misleading because it worked in the last decade of endless money and in winner-take all industries. At this point I believe that "Blitzscaling" is a zero-sum game and that most value is created by non winner-takes all companies that grow steadily. It seems analogous to aerodynamic friction, the faster you try to go the less far you will be able to go with a certain amount of energy/money
This is a strange strawman argument. The GP and parent comment you responded to are specifically referring to this sentiment:
> “Depositors shouldn’t get anything beyond the insured $250,000”.
What startup normally only has $500,000 in the bank?
Anyway, cashflow can matter a lot. For instance, people that sell stuff on etsy might not be paid on time because of this. That creates a lot of customer uncertainty.
Also, I can imagine a lot of B2B startup customers are looking for second sources all of a sudden.
The person you’re replying to is referring to a well-founded rumor that depositors will receive 50% of the uninsured deposits beyond the 250k minimum this coming week and that SVB has assets worth at least 80% of all deposits, which will be recovered in time.
No. People don't want you to get special treatment. Your firm should have insurance to cover the deposits over 250K, or split the money across several banks. It didn't as such it should deal with the consequences. Which are it may not get all of its deposits back.
When a building company, building my house goes bust. The government doesn't step in to get someone to finish building it. When I order goods from a company and it goes bust, the government doesn't step in to ensure I get my goods.
> just because of their choice of financial institution
There’s a moral hazard to all choices made in business. Making a choice based on insufficient due diligence is a hazard. Chasing higher rewards at higher risk is a hazard. Are you saying the government should indemnify businesses for their choices?
My understanding is that SVB avoided some restrictions placed on other banks. It’s not clear to me the why’s and wherefor’s of this but there are only two options. Either malfeasance on the part of SVB, or ignorance/risk-taking on the part of the customers.
The scahdenfreude I believe comes because it’s assumed many customers would be from the “this time it’s different” school of business, in which case there’s a lesson akin to caveat emptor begging to be learnt.
> People here are effectively suggesting that I shouldn't get my paycheck and that the company I work for should lose most of its money because our CEO used a well-reputed bank?
I am suggesting that your CEO not adequately insuring the companies bank deposit is negligent. If your CEO does not insure your HQ against fire, and it burns down, should it be bailed out by the government just so that you're not out of a job? Or is it not their fault that the CEO didn't use a "well-reputed landlord with adequate fire suppression?"
The proper call should be to increase FDIC insurance to 10mil or something then. It is incredibly unfair to be saying that depositors here deserve to be made whole because they are startup companies that somehow matter more to the economy.
Everyone agrees that shareholders and bondholders should we wiped out. Everyone agrees that deposits under 250k can and will be made whole due to FDIC. The disagreement if there is one is the 250k+, why should there be an exception just because these are tech startups?
I absolutely agree the FDIC limit should go way up.
> The disagreement if there is one is the 250k+, why should there be an exception just because these are tech startups?
That's not what I'm suggesting, nor is it what I think most people who think depositors should be made whole are suggesting. In basically any bank run scenario in which depositors had behaved reasonably (which is like 99% of companies putting their money in banks), I would support depositors being made whole. Regardless of the specifics of the situation, I think the upside of maintaining our collective faith that bank deposits are safe is much larger than the downside of whatever needs to be done to achieve that.
The anger is coming from citizens who are being asked to bail you out when they are already stretched to their financial limits and any such idea will surely make inflation go up.
Sorry to hear about your situation I really am. I'm personally in the camp that we as a collective country have made bad fiscal choices knowingly or unknowingly. It's time to start paying for these choices and stop looking to others else we drown in these bad choices.
I'm beginning to wonder if a lot of the posters to these kind of thins are just young. When I was 25 I thought I had well-reasoned and insightful opinions, and I certainly had forceful opinions. But I had no depth of knowledge in things like finance and politics, and thus, had no way of knowing how much I didn't know. A few years ago I watched Ian Shapiro's lectures on "Politics in the Modern World" (a course from Yale, developed from a request to help explain the rise of Trump). I realized that I thought I had insightful opinions, but really it was just rubbish because I had no understanding of political science, recent history, or even different forms of government and their different failings.
I also felt differently about money when I was 25, because obviously I didn't have any. There was no way I could have any, because I had only been working for a few years (and junior devs were paid a lot less in those days). It seems like it would have been easy to be jealous of rich people at 25. Or just jealous of startup-employees who, judging by HN posts (/s), are all making 400k/year. In fact, I think some HN posts have claimed junior dev salaries more than what I was making after 20 years in the industry, which I could see might lead to some jealousy. Particularly if combined with a lack of perspective.
I think I lean towards you, but what people are actually suggesting is that these startups shouldn't be bailed out when they went with a bank with super-high promised rates, while they of course knew their deposits over $250k were uninsured.
I haven’t heard anything about high rates being the primary thing drawing people to SVB. The trap seems to have been giving startups access to credit that other banks would not provide, but only if you agree to do all your banking with SVB. That, and also several big VCs that required their portfolio companies to bank there. These things are what herded everyone into the building before it caught fire.
This was a rare event when, for once, elites would learn that it's possible to do everything right and still fail catastrophically due to systemic factors. This has been the case for the majority of people over the past decade. The only reason regular people accepted their own situation over the past decade is that they thought "rules are rules." But no, rules are not rules, it turns out. Only plebs need to take the consequences of silly or unjust rules. The elites are immune to unjust rules. When a pesky inconvenient rule affects the elites, it can simply be waived away.
Why did I have to learn my lesson about the flawed system and the acceptance of tough luck, but politically-connected people didn't?
What we have today is a 2-class society.
It's the word of law above all... Unless you're politically connected; then suddenly the word of law yields to common sense.
It comes from the way lower class Americans are treated. The hardship that might be ahead for some otherwise extremely rich and privileged people is actually far less than befalls tens of millions of lower class Americans every single day, and choosing a “move fast and break things” bank is actually a far less “unfair” reason than, say, the circumstances of your birth. The vicious, lifelong message from mainstream society to those most in need has always been “nobody owes anybody anything, that would be socialism”. That’s why those people are angry to see people far better off receive help just because “not doing it would be unfair and hurt them”.
The problem is that the valley culture wants it both ways. It is a largely libertarian, rules-breaking environment. They want to ignore laws and decry regulations while at the same time having the government step in and bail them out whenever anything goes against them.
I, too, have worked for startups much of my life. Sometimes you show up for work one day and the doors are locked because the place is done. It is part of the deal. There are lots of reasons this can occur - hey, we just couldn't close another round, the economy hit a speed bump, etc. 2008 happened. Worldcom and Cable and Wireless just declared bankruptcy and they were our lead customers. etc. It is part of the startup cycle.
If something like this this had managed to kill AirBnb, Uber and Lyft before they did the damage they did, the world would be better off.
YEARS of disinformation about "Personal Responsibility" and not a lot of critical thinking in the interim. I'm not specifically talking about the parent comment.
Your point is sound and seems obvious to me. I also spent several years studying and fighting coordinated inauthentic content its effects on the brain. Whether coordinated or not, hearing the same message over and over again gets internalized such that it becomes reflexive to parrot.
What happens when you give every single high school senior $1000 scholarship to read Ayn Rand? What happens in a society when hyper-capitalists, their politicians, and their media narratives leave no room to consider things that are beautiful and human? What happens when STEM education starves all of the humanities of oxygen?
If it isn't this, I don't know what it is, but we're all about to find out.
It's coming from the same system that probably led you to work at Startups your whole career. High risk for high reward on a lightly regulated capitalist system. If your CEO or CFO put all the money in one risky bank, it was bad financial management.
Is this correct then? : SVP gives easy credit to VC friends. VC friends use that credit as investment in startups who are told they must use SVP. So money moves from magic-money-printer -> SVP -> VC -> Startup -> SVP. Then SVP takes those deposits and invests it elsewhere. Now they are making money from loan to VC and reinvestment of those same monies that are deposited back.
So a bank like SVP seems designed to enable VCs with easy credit to de-facto control an important (and balooning) niche of the economy and by their control over the beauty pageant of which startup idea gets money (and PR) they also control what kind of technology becomes dominant. (For example, these VCs share significant credit/blame for creating the surveillance tech. They share blame for creating an engineering culture that must serve full throttle growth business models. etc.)
Is there a social graph of SVP and VCs involved? Are these people pals, friends, "effective" ideologues, etc.?
> VC friends use that credit as investment in startups who are told they must use SVP.
Maybe, but I was talking specifically about startups themselves being given loans by SVB then requiring the startup to bank there. But I am sure investors also pushed startups to SVB... if your investor (who maybe is highly invested in SVB ... ) says "you should use this bank" are you going to say no? The pressure is immense.
> Is there a social graph of SVP and VCs involved? Are these people pals, friends, "effective" ideologues, etc.?
I use an FDIC-insured bank. My deposits are under the limit for insurance. I don’t care about its deposit base or asset allocation because that’s the point of deposit insurance: to make retail depositors feel secure.
On the other hand, a CFO with millions in cash is a professional whose job is to manage corporate risk. A competent CFO needs to account for things like bank failures, which do happen.
If you raise $1.2M… you're going to tell me it's not worth your time to frigging walk to 5 banks and open accounts to make sure that money is safely stored?
For something you can't afford to lose, you sure fon't seem to be treating it that way.
Yes. If you manage $1.2M you need to be smart enough about managing it, or have some smart people advising you. I don't manage $1.2M yet I know there's a limit on FDIC insurance. If you manage $1.2M and you don't know that, maybe the people who gave you $1.2M made a mistake.
Sweep accounts are fine, but I’m not sure I’d bother with credit ratings. SVB’s was basically as high as possible even for a few hours after the run started and before they closed:
> When was the last time you went over their deposit base and asset allocation?
A few times but only for a short time and a small percentage of the capital. Was already a full grown adult in 2008, have good memory, and are still licking many old lion financial battle scars...
It wasn't risky as long as prime rate stayed super low.
But that rate has been creeping up for months now.
SVB was too small to qualify for risk assessment under the revised banking rules. So they could get away with money in volatile securities that were very interest rate sensitive.
That said, SVB seemed very solid until Thursday morning.
Only because people weren't asking the right questions.
It's like driving into a parking structure and seeing exposed rebar. It might still be standing now; but if you're smart, you need to find somewhere else to park.
As it was explained to me, the Fed increasing interest rates impacted the value of the bonds held by SVB. As that value contracted SVBs was eventually in trouble.
No. Due to the previous crisis, is one part very well regulated. Here is what should happen...The emphasis below on unlikely is mine...
"A: In the unlikely event of a bank failure, the FDIC responds in two capacities."
"First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank....
...In some cases—for example, deposits that exceed $250,000 and are linked to trust documents or deposits established by a third-party broker—the FDIC may need additional time to determine the amount of deposit insurance coverage and may request supplemental information from the depositor in order to complete the insurance determination..."
"Second, as the receiver of the failed bank, the FDIC assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. If a depositor has uninsured funds (i.e., funds above the insured limit), they may recover some portion of their uninsured funds from the proceeds from the sale of failed bank assets. However, it can take several years to sell off the assets of a failed bank. As assets are sold, depositors who had uninsured funds usually receive periodic payments (on a pro-rata "cents on the dollar" basis) on their remaining claim."
> The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits
> While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are
exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as
a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom
line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital
shortfalls in case of rising interest rates, deposit outflows and forced asset sales.
"The liability issue: extreme reliance on institutional/VC funding rather than traditional retail deposits.
...While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales. [Note: This chart appeared in our 2023 Outlook in a discussion on risks related to deposits, rising rates and quantitative tightening]..."
Their SVB Private subsidiary, which is an ordinary consumer bank (people deposit money, bank buys bonds and writes mortgages) is still in good shape and will probably be snapped up by a bigger bank in the next few dya.
I agree there are a lot of poorly thought out populist arguments for not making depositors whole. I for one prefer HN to not converge into another social forum like Reddit that has a lack of critical thinking in discussions.
I’m getting paid below market rate, I’m the sole provider, and I have two children in preschool. So while you chortle over “tech bros,” I’m looking at the end of my family’s healthcare and financial stability.
When everyone around you looks like an asshole, you might be the asshole.
And I wish you absolutely the best in finding a new job. Your salary will be paid even if the company goes bankrupt, and while times will be hard, I have no doubt you will find something.
I am, indeed, an absolute asshole. But then again, my post only said something about finding it funny, not that I'm not an asshole. Nor does it preclude people participating in the clown show from being clowns.
This comment sounds very harsh on first reading but I'm having trouble finding anything actually incorrect about it ... I just pray this doesn't hit the wider economy.
It overlooks everyone who is just starting out, everyone employed at these companies that isn't making techbro salary like the receptionists, custodial staff, QA, workers on visas, whatever.
Simple fantasies for simple minds, no different than lazy racism or any other form of bigotry.
Indeed, for that extremely minor part of companies that about noone on HN has ever cared about, except when it becomes practical to use them, it's troublesome. But since there still exists hundreds of billions of dollars ready to be wasted on bullshit endeavours,I have no doubt they will all find jobs soon in the next cloud cat feeder startup.
Your mind immediately equating good old schadenfreude with lazy racism is indeed telling, but I'll refrain from saying anything, Americans have never been excellent at either context or nuance.
In any case, schadenfreude typically falls into one of three categories: justice, rivalry or aggression. The OP sounds like they are experiencing the justice aspect- that these people who contribute so little are now enduring hardship.
The problem is that "these people" is just another lazy stereotype- it is just another form of aggression; equating everyone who is hurt here as "easy jobs that can easily be replaced" is not unlike assuming everyone living in a ghetto neighborhood is a thug.
The effects and scope of harm of the stereotype may be different, but both come from the same mental state of mind- these people are other, they don't live like I think they should, and they get what they deserve, despite the fact that the "they" in the sentiment is not representative of the people harmed by it.
Your company is the equity holder. You loosing last months paycheck is no different than what happens in the rest of the country any time an employer declares insolvency.
Also, I don't think people in SV appreciate how much rancor and resentment their behavior has generated in the last fifteen years.
> What would happen if this happened to an employer's bank in Indiana?
Literally the same thing would happen, and people wouldn't be making such a big deal about it being a handout to greedy convenience store owners who didn't perform exhaustive diligence on the bank up the street.
Sounds like people cant distinguish between bad actors and actions and the technology sector at large.
It also sounds like they can't distinguish between their own failings (in terms of personal behavior and bad government) and the failings of businesses.
Another thing to mention is that US Dollar is still world's reserve currency. Bailout (or government aids) could lead to unpredictable things. Last time Bitcoin was invented... This time I can't really imagine what would happen. Since entry barrier to Finance has became very low... Even I myself, became decentralised finance expert... I can't really imagine what would happen if this thing can't really managed well....
How is it your money? It's not a taxpayer funded bailout, the FDIC is just going to forcibly liquidate SVB's assets and pay back customers to the extent possible with those proceeds.
FDIC receivership is not my money, it’s all self funded. Any bailout beyond that is taxpayer money. As a voter (and a guy who pays taxes) it is my money. I have a lot of opinions about how that money should be spent.
A bailout beyond FDIC receivership is simply a payout to VCs. SVB’s resolution will be a solid measure of much political clout they have.
That didn’t have an investment grade rating, where $250k comes out of taxpayer coffers Monday morning, and where everyone has unemployment insurance? Yes.
The assets of the bank should go to your company first. But the public purse should not be opened.
> isn't coming out of taxpayer coffers. FDIC insurance premiums are paid by the banks
Fair enough. The FDIC is funded by premiums but backstopped by the Treasury. There is no private insurance function that pays out at this scale the next business day.
I just don’t understand why folks on the internet are so passionate about the depositors being hit by this. In terms of avoiding moral hazard they are about as far down the list as possible, and bankruptcy law supports that.
First stock holders get wiped out (common then preferred), then debt holders (folks who have lent money to SVB won’t get their money back), only then would it hit depositors - and in the case of a traditional bank it usually wouldn’t hit them hard since most funds are FDIC insured.
I can imagine being incensed about stockholders and debt holders being made whole, if that were to happen - since then people would learn the wrong lesson here. But nobody think that’s going to happen.
If depositors aren’t protected, then it’s going to have a lot of downstream impacts (people won’t make payroll, and employees who have no responsibility won’t get paid). And again, it’s not like folks who chose were gambling with a shady bank to get high interest rates, in many ways SVB was considered the least risky and most conservative bank to use as a startup. At least that’s why we chose it.
The C-suite paid themselves millions of dollars via bonuses and stock sales right before insolvency. Executives got paid. What’s to stop future bankers from running the same playbook? (We can debate that this the stock sale was premeditated/signaled months in advance, but the stock had already declined 80% from its 2021 peak and they surely knew about the tough liquidity position months ago — external observers drew attention to this back in January).
Note, one of the SVB executives was the former Lehman Brothers CFO in 2007, just one year prior to that institution’s collapse in 2008. What did he learn, exactly, besides how to get out in time?
So the play is to use funds on me as the manager instead of depositors. Then depositors get covered and I, the manager, keep my earnings.
It’s not that we punish the depositors but the scheme is set up that depositors suffer.
Imagine the mob stole all that money. It’s not punishing the depositors to not pay them back. The mob punished the depositors by stealing.
If I don’t buy homeowners insurance and some arsonist burns down my house, I’m out $100k to rebuild. Is it punishing me if the government doesn’t bail me out? The government isn’t punishing me, the arsonist punished me.
If we want government coverage then we should enact laws to cover this kind of thing and raise taxes and fees accordingly. We can’t enjoy the benefits of low regulation when it makes us money and then ask for coverage after the fact. After we’ve reaped the benefits of no regulation.
What I’m saying is that the management are in no way impacted by what happens to depositors, these are separate issues.
If you want to stop mismanagement like this don’t repeal banking regulations and instead regulate banks properly, that has nothing to do with that the fed decides to do for depositors to stop contagion and ripple effects in other industries.
And what I’m saying is that managers knew this and paid themselves with funds that could have went to depositors. Depositors have the same right to be made whole as any other victim of a crime.
The government has fdic and insures up to $250k. That’s what our taxes paid for. If we wanted to insure depositors for greater amounts, we would have paid more taxes.
This was an eyes wide open situation. Depositors could have managed their large sums of cash better. They didn’t, choosing to save money. Now it sucks.
Another analogy would be that if a couple skipped life insurance and leased a Porsche. And now the wage earner has been murdered and the remaining spouse is asking the government to pay for their dead spouses wages, while still driving the Porsche.
This wasn’t a crime, it was a bank run because this bank apparently wasn’t great at managing risk and the risk free assets they bought are not as safe as they used to seem when they bought them now that rates have risen substantially, it could (and probably will this week) happen to other banks like First Republic. If the fed dithers today that seems a lot more likely.
EDIT - seems Signature bank has failed as well today, and the Fed has decided to guarantee deposits at both.
>If I don’t buy homeowners insurance and some arsonist burns down my house, I’m out $100k to rebuild. Is it punishing me if the government doesn’t bail me out? The government isn’t punishing me, the arsonist punished me.
The distinction here is that in this metaphor, the bank managers are both the homeowner and the arsonist.
I didn’t say that? I asked, what’s to disincentivize executives if the Fed backstopped all depositors money, now and perhaps in perpetuity? (Forgive me if I misinterpreted your position here. I have also edited this post for clarity.)
Which plan exactly? Yellen specifically said they have no interest in bailing out the bank itself and only care about depositors.
> “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said on Face the Nation.
> “But we are concerned about depositors, and we’re focused on trying to meet their needs.”
I think there’s confusion in this thread, as some are advocating that depositors be made fully whole, and some are interpreting Yellen’s comments to mean that’s what will happen.
Other laws, which have nothing to do with depositors and how to treat them. I’m confused as to why you think these two issues are linked.
I would hope these execs are prosecuted and any bonuses clawed back but that would be under the purview of a different agency (sec) not fdic, and is not an immediate concern, whereas a massive financial shock and 100s of companies closing due to lack of funds is.
I think the implication is that if you make depositors take some of the risk then they'll be more proactive in their oversight of their banks' executives. I'm not sure how realistic that assumption is in practice though ...
I’m not a lawyer, but it’s unclear to me - a random internet observer - that anyone performed anything illegal. It strikes me more as a bet gone colossally wrong, basic human mismanagement, capitalism in action, etc.
Aren't the execs in this case losing the vast, vast, vast majority of the money they old in the bank? I haven't seen anything that makes it seem like they're getting out of this unharmed, and especially not at anyone else's expense.
I also don't know how refusing to make depositors whole would disincentivize bas behavior by execs, anyway? Seems like two unrelated issues.
The depositors may have been able to borrow money at excessively favorable terms. For example, the bank lending money to businesses that otherwise would not have been lent to, or lent to at a higher interest rate. Or home mortgages for the business’s employees at lower rates, subsidized by the bank’s mismanagement (taking excess risks).
Actually, yes. Absolutely. Maybe with enough punishment these depositors will stop stuffing the accounts of these fat cats full of cash for them to "invest" and lose everything with.
How many global economic meltdowns do we have to go through before people learn that banks are literally the root cause of so many of society's problems? Depositors aren't being punished enough if they're still buying into this system. They keep feeding the beast and complaining when it eats them.
Every bank exec is a fat cat to some extent. People and businesses need banks no matter what, and they shouldn't be required to do exhaustive due diligence on every bank. This is the whole purpose of regulation; everyone benefits from oversight.
> People and businesses need banks no matter what, and they shouldn't be required to do exhaustive due diligence on every bank.
They're already required to do KYC/AML due dilligence on normal human beings. Why shouldn't they be required to do the same for the banks they trust their fortunes with?
I think the argument is that if I can start a bank and depend on the government to make my depositors whole in the event of a failure, then I can act/invest in a high risk manner to get more yield, while also paying me and my executive team millions in the process. If or when things hit the fan, my depositors are paid, I am paid, and the investors are the collateral.
I don't see how that's relevant. The leadership team at SVB undoubtedly made a bunch of dumb decisions and they deserve to be raked over the coals for that, but there's no need to make the unsupported claim that the executives were looting the place a few days leading up to the collapse.
We can't replay history, but maybe if they had a CRO, they would not be in this mess. They had time to set bonuses, they had time over the past few years to lobby for looser regs, but apparently a CRO was just too much bother.
Fake news. The largest bonuses paid were $140,000 to managing directors, which is just bankerese for VP. Bonuses were already scheduled to be paid and earned for work done in 2022.
The very first line should tell you how little the article author knows how it works:
> Greg Becker used prearranged stock-trade plan to sell shares
He didn't "use a prearranged plan", a plan went into action and sold the shares. Becker had already filed paperwork to sell those shares at that specific time.
To my recollection, that was 10% of his shares. Becker wasn't planning months in advance on the bank smashing into a wall precisely a few days after he sold a measly 10%.
You’re making this sound like some Ocean’s 11-level heist, and then discounting the premise you’ve created as being absurd.
It doesn’t have to be that complicated. Perhaps he saw that the bank was in trouble and made a decision to sell shares when the company was at a 52 week low. His calculus could just be: “with the information I possess, this price could go a lot lower.” He may not have foreseen an insolvency event, or perhaps he knew it was a risk and he sought to hedge it. Or maybe he just sold it randomly at a low price … because.
I would strongly assume that require not only the cooperation of more than just him but also many people including those who had no real gain for doing that.
Even if both the CEO and CFO conspired to hide this, more than just them would know about the trouble and them conspiring to do this. Those individuals would now have no reason not to whisteblow immediately.
I find conspiracies, especially non-governmental, about large organizations incredibly hard to believe because of how difficult they would be to pull off.
Depositors are protected exactly as any other depositors and there are solutions to the protection ceiling. Like insured cash sweep.
That VCs forced the small companies to operate in less safe way and gave them bad advice is 100% fault of these. I do not know why it was so, but this really seems like the case of "we want benefits of minimal regulation and getting better protection then everyone else gets from the goverment".
It does rubs people wrong when you are all about disruption and regulation bad, but first thing you do in case of failure is governmental bail out for large accounts.
The $250k is the protection floor, not the ceiling. The FDIC guarantees that $250k, but SVB has assets well beyond $250k per account.
The FDIC is in the business of protecting depositors. So it will pay out the floor immediately as a matter of course, and then will continue to use the tools it has available and the remaining assets of SVB to pay out more — perhaps 100%, perhaps some amount less — to depositors.
It will be less than %100, because of the unrealized losses on SVB's bond portfolio. Regardless of the amount, there will be delays in returning those funds as FDIC liquidates.
> just don’t understand why folks on the internet are so passionate about the depositors being hit by this.
I think most of America can’t even imagine having over $250k in an account. So people with this much wealth asking for a bailout is literally rich people asking for coverage because they did something dumb (banked with a bad bank, didn’t account for risk, didn’t insure, didn’t manage funds).
It’s not hate so much as it’s apathy and surprise as the ask for money. It’s like those millionaires who wept because they lost money with Madoff and they wanted the payout for all their earnings they had “made” over the years.
> So people with this much wealth asking for a bailout is literally rich people asking for coverage because they did something dumb
Not people. Businesses.
SVB, to my knowledge, mostly consisted of businesses with some well-off individuals mixed in.
If we want to punish rich people for the crime of being rich, SVB is likely a bad battlefield because zero-ing out its customers will almost entirely hurt employees who are generally not wealthy.
I don’t think we should punish the rich for being rich. But we should reward the rich for being stupid (ie, not managing cash risk).
These companies with cash flow issues have rich investors. YC and other VCs. They have ways to deal with this loss in the private sector. Or they can go out of business.
Depositors aren’t being zeroed out, they will just maybe take a haircut. I do hope FDIC finds a way to unfreeze at least meaningful fraction by tomorrow so payroll/etc can be met.
> It’s like those millionaires who wept because they lost money with Madoff and they wanted the payout for all their earnings they had “made” over the years.
Are you genuinely making this comparison or projecting what this looks like to the average American?
The people who will be hit hardest by this aren't "dumb" depositors of SVB, they're employees and businesses that "banked with a bad bank".
Blame the cowardice of the VCs that triggered the bank run and the arrogance of the bankers at SVB, blame to a lesser extent the businesses that banked with SVB maybe, but don't tell me "serve's 'em right" for the employees who face furlough or layoffs.
Not really. If you have 25 employees, you probably need $75-150k to make payroll every two weeks.
You would cover this through rotating receivables through accounts. And you’d likely have multiple accounts to avoid the $250k threshold.
My local bagel store owner talks about this and has different accounts for different purposes. And he banks with some national level bank and still splits money across accounts.
It’s not a good idea to have large amounts of cash sitting in single accounts.
If you have two employees then you don’t need much cash in an account at all.
Almost everyone in America works for a company with over $250k in their coffers. The point isn’t making depositors whole for the sake of uberwealthy individuals, it’s for the sake of ensuring that companies are able to pay their thousands of regular employees.
That makes a big difference though. The risk of losing 10-20% (or even of getting back the full 100% but only after a few months) with no reward for the risk taken would be enough to drive depositors away from regional banks and into the mega-banks.
If deposits aren't backstopped quickly, it won't be startups taking the main brunt of this - it will be other regional banks that see bank runs.
This cannot be said enough times. FDIC insurance is only the absolute floor on recovery. SVB depositors might (might!) face a haircut, but it’ll be one worth of the name.
> If depositors aren’t protected, then it’s going to have a lot of downstream impacts
If depositors with deposits above the FDIC insurance limit _are_ protected then there will be nothing stopping this from happening repeatedly in the future. Depositors that exceed the FDIC insurance limit should be taking a haircut so they learn to do better risk analysis of their bank or purchase auxiliary deposit insurance on their assets at a bank or both. VCs/investors in the companies whose deposits exceed the FDIC insurance limit should take a bath for pushing one specific bank with bad risk management. (How this fact escaped VCs/investors is beyond me. I'm not a risk manager or investment manager by any stretch of the imagination but even I would recognize that investment in long-term near-0% bonds would have nowhere to go but down.)
>If depositors with deposits above the FDIC insurance limit _are_ protected then there will be nothing stopping this from happening repeatedly in the future.
The fact that is stopping this - is the fact that only people who are earning money on risky strategies - shareholders - are being wiped the first.
Depositors are NOT investors and do not earn a premium on successful risky bank strategies.
This bank run happened based on fear of the scenario we are now in. No bank can withstand a bank run due to fractional reserve ratios.
If the depositors lose big then that will increase this fear going forward.
In other words, if all depositors are covered there is no longer a substantial fear of a bank run elsewhere. That’s how it stops it from happening again.
When Netflix started sacking animators and animation studios to use AI startups instead, there are downstream impacts.
When bookstores shut up shop because of Amazon there were downstream impacts.
When Dell and HP lay people off because it's hard to sell against Azure and AWS, there are downstream impacts.
You're going to have a hard time arguing that the sector responsible for disrupting others' live deserves special consideration beyond what already exists - FDIC plus liquidated assets with a likely haircut - particularly when those companies appear to have been mismanaging their own money.
> > I just don’t understand why folks on the internet are so passionate about the depositors being hit by this
Well if you want to go down to the nitty gritty of it, depositors are competitors for stuff, especially in San Jose and San Francisco where every square inch of stuff (any stuff) is super-expensive.
The ones complaining and taking time to argue against any involvement of govt. in SVB are people and institutions who didn't hold any funds in SVB but think or have reason to think that their competitors do
> people won’t make payroll, and employees who have no responsibility won’t get paid
This gets repeated over and over, but just like depositors have the highest priority to a failed bank's assets, so do employees of any failed company.
So, if a company goes bankrupt because it can't access funds stored with a bank, first stockholders would get wiped out, then debt holders, and only then employees (when talking about salaries already owed - of course, the company can fire staff to try to avoid bankruptcy).
It gets repeated over and over again because if SVB money is locked up for weeks/months while they unwind positions startups won’t be able to make payroll.
So they will use cash flow or sell assets. The biggest risk is large coordinated layoffs affecting the job market, but there are other ways the government can intervene to protect individuals if that gets too dire.
Depositors are senior creditors. Junior creditors should be wiped first, but if there isn’t enough money to pay senior creditors then it makes sense they will get back less than par.
I just don’t understand why folks on the internet are so passionate about the depositors being hit by this.
I'm not at all passionate about the depositors. I dislike them but understand that screwing them would ripple across the entire world. I dislike banks and corporations but having many/most suddenly bankrupt would not serve me.
Simply because "depositing" money at a bank is not supposed to be a safe operation. You're lending money to the bank. There is risk involved. If the government made it look like there's no risk, then someone is paying to offset that risk. I don't want to be the one paying for it.
If the lesson you want corporate depositors to learn is that in the United States, any dollar beyond 250K in an account can evaporate overnight, than be prepared for a lot more bank runs in the immediate future.
The lesson is to mitigate this risk with insurance, account structures and other things.
I think the lesson is also don’t bank with banks doing shady, dumb things. And that’s a valuable lesson that people with over $250k should already know and not need to be taught.
Being at the top of the line in bankruptcy proceedings is the law. So they shouldn't be generally subject to lessons from the government that go beyond that...
Nobody is saying that depositors shouldn't be at the top of the line. They're saying that if there's not enough money to pay back even them, the goverment shouldn't jump in to make up the shortfall (beyond the $250K it has insured).
Because the bank has more than enough assets to payback at least 70-80%. Are you suggesting that money should be appropriated by someone just to teach them a lesson?
No, but I understand the phrase “be made whole” to mean that depositors should not face the risk of losing that 20-30%. They should take some “hit” as OP put it above.
Why do the rules keep changing after the game has been played? And why does it seem to always favor people who are already wealthy beyond imagination? The rules were 250k insured. If you had excess deposits, additional coverage could easily be purchased.
I am not sure why you think the 250k limit is the end of the road in what is an extremely complex process. The 250k is so that depositors can be paid out quickly while the rest of the process gets going, which could take months or years.
In SVBs case the 250k payouts will only account for 5% of the deposits. SVBs assets, while hampered, are still substantial. What do you propose is done with those assets?
“The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
No one who knows what they're talking about is objecting to the bank's remaining assets being distributed between depositors. But there's talk of taxpayer money being used to make depositors 100% whole regardless of how many assets remain, and I think that's where the controversy is.
Everyone has always known that $250k is the max that's guaranteed to be given back to you, and the idea of the government paying back more out of taxpayer funds because a lot of VCs gave their startups bad advice rubs people wrong.
Y Combinator, in their petition, says that they want at least small business depositors to be made completely whole, without any caveats about how many assets are left. The only way this works is with taxpayer funds.
> Small business depositors at Silicon Valley Bank should be made whole. Regulators need to conduct a backstop of depositors.
Deposits in a bank are not assets that you can pay out to shareholders in bankruptcy. it doesnt matter how you've organized your balance sheet internally, those liabilities come first or you arent a bank.
> “Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
I think the common sentiment is depositors should not get any more than whatever the remaining assets are worth.
And I think the prominent people asking the government to bailout depositors are worried about only getting 75% of their deposits back, because the remaining assets might not cover all of the deposits, or it might take a while to recover the deposits.
Yes, but "worth" is a complicated concept here. What's probably going to happen is that a big bank like JPMorgan is going to buy the remaining assets at 100% book value, and the depositors are going to be made whole out of that. That's not their current market value if sold at fire-sale prices, but banks have the time horizons to hold those assets to maturity and not worry so much about their market value. The stability of the US banking infrastructure is worth more to JPMorgan then haggling over a few billion dollars of lower rates bonds
I do not think there is reasonable pushback on this. If a private company like JPM wants to do it, great!
The issue is with using government money to repay depositors beyond what they would otherwise get from the FDIC floor plus liquidation of SVB assets. I am not saying it should not be done (it probably should to avoid forcefully consolidating all banking at the big three), but that it should be a subject of hard questions and a serious discussion. My 2c.
You’re missing the point. There’s no need to liquidate the bank or do a fire sale.
Assuming there was no malfeasance and the assets are as described on the books, the bank just needs liquidity so it doesn’t have to fire sale.
Also worth pointing out that every bank likely has the same problem trying to move treasuries from 1-5 years ago right now. The financial big heads should be trying to figure out how to make such a “safe investment” actually safe again.
The source of the problem is liquidity, not the problem assets. But providing this liquidity when needed has costs. That money should not have been spent by government. Here is a simpler example:
A person deposits $1000 at a bank at 1% interest. Bank buys 10-year treasuries yielding 3%. Rates rise, treasuries drop and the person suddenly wants his $1000 back (say, because he can get 4% at an MMF with checkwriting privileges). Bank can sell those treasuries at $950 and eat the $50 loss. Or use own money. Or get a loan.
But this is not simply "the bank just needs liquidity". It sure does, but no one is willing to lend the bank money at a lower rate, so based on the original price and the current state (rates rose + the customer wants his money back) the bank will be short those $50 that went to the t-bond seller who can now buy the same bond back for $50 less.
> not their current market value if sold at fire-sale prices
Fire sale means the selling of the assets pushes their value down. This is not that. It’s insolvency; the assets were and are worth less than their book value.
> stability of the US banking infrastructure
Speaking anecdotally, New York is surprised and the Bay Area scared. This is a local problem. Not a systemic one.
> Fire sale means the selling of the assets pushes their value down. This is not that. It’s insolvency; the assets were and are worth less than their book value.
As has been repeated many times, the bank was never and is not insolvent.
Yes, it was, as declared by its regulators. Its balance sheet balanced. But its liabilities were worth more than its assets. If it weren’t insolvent, SVB could have borrowed at the Fed’s discount window. It couldn’t.
They might if they’re buying more than the assets (i.e. credibility of the whole sector), but the hole is probably too big for even JPM to take it alone. Maybe the top 4 split it between themselves?
It's definitely possible. assets = liabilities + equity. Well, SVB equity has already been wiped out to zero, so that's money JP Morgan doesn't need to come up with to make the value of the assets (i.e their securities) equal their liabilities (their deposits). It could theoretically be worth it to JPM to buy SVB to (a) in one fell swoop take over the biggest startup-focused financial institution, and (b) calm systemic risk fears.
Your attitude is flippant and ignores massive risk. Was it meant to be sarcastic?
Due diligence. Risk. Opportunity costs.
JP Morgan is probably re-evaluating their own assets right now with the assumption that what happened to SVB might happen to them also in a few weeks/months.
But why? What purpose does that serve? It's hardly even inflationary, the value was basically destroyed, so the Fed conjuring replacement money doesn't seem like such a bad thing. Shareholders will still be taking a major loss, and they are the ones who ought to be held responsible, so it makes sense. You can't fault depositors for not doing thorough diligence on a 40-year-old bank with a good reputation and it doesn't make sense to punish their employees for it, especially in a cooling job market with uncomfortably high inflation.
Suppose an immigrant is starting a restaurant, and has to pay up front to some suppliers that have been in business for 40 years for kitchen equipment. And the supplier goes out of business, and the money is gone. And the immigrant has no more time or money to hire a lawyer to submit a claim to recover it.
Is there a federal bailout waiting for the immigrant? Or the immigrant’s employees who might also be family members?
> What purpose does that serve?
The purpose is to show we are playing by the same rules. And that somehow, it is not always the poorer, the more uneducated, the ones born to the wrong parents who do not get bailed out.
What if the restaurant employs 5 people? 500 people? 50,000? 5,000,000 people?
Sometimes it actually pays to evaluate breaking a policy if the harm of following it is larger than the harm of coming up with a different decision. How much does the US Treasury expect to lose in tax revenue if SVB’s customers are stuck with frozen accounts or the assets are sold at too steep of a discount just to get them resolved quickly?
The use of bailout here seems to be using a tainted term to spread taint to the victim. The restauranteur is a depositor. His assets can be very nearly made while so long as there is no fire sale on the bank assets. The “bailout” is really just providing sufficient liquidity to keep the bank working. It’s only insolvent so long as it has short term liquidity issues.
> Is there a federal bailout waiting for the immigrant? Or the immigrant’s employees who might also be family members?
Why shouldn't there be? As long as they weren't utterly reckless up to some reasonable standard, IMO they should be. This has the same empty tenor as arguments against student debt relief on whatabout/fairness grounds.
> The purpose is to show we are playing by the same rules. And that somehow, it is not always the poorer, the more uneducated, the ones born to the wrong parents who do not get bailed out.
Two wrongs don't make a right. I get that you're bitter. So am I. Doesn't mean we need to fuck over a bunch of people who are not at all at fault and possibly trigger systemic economic problems, contagion, recession, etc.
But where does it stop? When I lent my friend $100 dollars when we were 16 and he never paid me back, should I have been bailed out too? If not, why not? If the government bails out people/businesses every time something goes wrong there will be a lot more risky investments.
No, because your friend isn't a tightly-regulated institution whose proper functioning is integral to the core of our economic and financial system, and as a "client" of your friend you have no reason to generally expect that your friend will be trustworthy.
And yes, I do think we should have some kind of public fund to help victims of theft and fraud. I can think of many worse uses of my tax money.
You could say the same about any government-provided taxpayer-funded service that benefits people in times of need. This is literally what our taxes are supposed to be for.
>You could say the same about any government-provided taxpayer-funded service that benefits people in times of need.
But certainly not every need should be the taxpayers responsibility. Government safety nets should have positive return on investment for individual citizens. Increasing the cost to the individual without increasing the benefit threatens to delegitimize the entire endeavor.
Why would I ever want to expand the scope to include restaurants, student debt, or business risk if that scope has no benefit to me?
If I don't have student debt, a restaurant, or a corporate account, it just becomes crony capitalism and extortion from my perspective.
A lot of people feel that the purpose of taxes is not to socialize the cost of people's mistakes, but rather provide services where all sides see net benefit.
Preventing thousands of job losses and helping small businesses stay afloat during crises that they should not reasonably have to expect does have a positive return on investment for taxpayers.
It is absolutely valid to interpret this incident as a regulatory failure and the failure of our legal system to enact sufficient penalties on those responsible, leading to some amount of moral hazard, which means that problems like this might arise again in the future.
But you are also arguing that, in general, spending taxpayer money to help businesses and individuals ride out random crises and catastrophes is not a good use of that taxpayer money. I and I think most sound-minded economists would disagree with you, on a purely mechanical cost-benefit basis.
>Preventing thousands of job losses and helping small businesses stay afloat during crises that they should not reasonably have to expect does have a positive return on investment for taxpayers.
Why do you say this with such certainty?? I am for efficient government and savings to the taxpayer, so I would absolutely support such a measure if I agreed.
Just because the government provides help, it is not given that it will ultimately be positive ROI for the taxpayers. What is the payback period here and when can I expect to see the savings on my tax bill going down? If it takes 50B to make depositors whole, how many jobs will be saved, how long will it take to recoup that from taxing those jobs, and what will the profit in excess of cost be?
Reasonable people would agree that 1 billion to save a single job would never pay itself back, so clearly there is a threshold somewhere. No economist would refute that one exists.
People seem to assume or treat it as an axiom that any help the government provides is a net positive investment, independent of cost or analysis.
The idea that this is known or calculated here is absurd. We don't know what % the deposits will be written down, How many jobs that will cost, or how successful those companies will ever be at generating tax revenue.
I am not strictly opposed to aid in a crisis. It is clear that in some cases government action saves the taxpayer money. For example, a cheap medical treatment might prevent lifelong government disability payments, with tax savings that vastly outweigh the initial cost. That does not mean that every medical treatment at any cost translates to tax savings.
There are also questions of moral Hazzard and incentives, but I put those secondary. Regulations can and should be fixed, independent of how we respond to this crisis. However, that does not factor into question of if an account holder bailout is a profitable venture for the taxpayer.
Does this make sense and do you understand where I am coming from?
> Why do you say this with such certainty?? I am for efficient government and savings to the taxpayer, so I would absolutely support such a measure if I agreed.
I'm not certain, but my life experience and limited formal training in economics suggests that it's a possibility at least worth considering, and I have a strong positive prior on it for many circumstances.
> Just because the government provides help, it is not given that it will ultimately be positive ROI for the taxpayers. What is the payback period here and when can I expect to see the savings on my tax bill going down? If it takes 50B to make depositors whole, how many jobs will be saved, how long will it take to recoup that from taxing those jobs, and what will the profit in excess of cost be?
This is literally why government agencies like the BLS, Treasury, et alia exist and hire economists and statisticians to address such questions.
Whether or not Congress listens or allows them to do their jobs is another story.
> Reasonable people would agree that 1 billion to save a single job would never pay itself back, so clearly there is a threshold somewhere. No economist would refute that one exists.
Sure, see above.
> People seem to assume or treat it as an axiom that any help the government provides is a net positive investment, independent of cost or analysis.
I don't. You don't. Ignore the people who do.
> The idea that this is known or calculated here is absurd. We don't know what % the deposits will be written down, How many jobs that will cost, or how successful those companies will ever be at generating tax revenue.
The FDIC does. They had a pretty good idea about this on Friday, too, even before they put the bank up for sale.
> I am not strictly opposed to aid in a crisis. It is clear that in some cases government action saves the taxpayer money. For example, a cheap medical treatment might prevent lifelong government disability payments, with tax savings that vastly outweigh the initial cost. That does not mean that every medical treatment at any cost translates to tax savings.
I am proposing that this is one such scenario, where both the costs and benefits are relatively easy to quantify, and that on its face we should expect it to be net positive.
> There are also questions of moral Hazzard and incentives, but I put those secondary. Regulations can and should be fixed, independent of how we respond to this crisis. However, that does not factor into question of if an account holder bailout is a profitable venture for the taxpayer.
This seems backwards to me. Moral hazard and (lack of proper) incentives are the root cause. If you don't like the government needing to step in to help people, then you should consider these your top priority.
Thanks for the productive discussion. I think I got my general point across but I want to make a couple clarifying comments.
>This is literally why government agencies like the BLS, Treasury, et alia exist and hire economists and statisticians to address such questions. Whether or not Congress listens or allows them to do their jobs is another story.
Most policy and politics isn't decided on the basis of financial ROI, even when it is available. I think it should be more of a central driver. Basically nobody is making serious arguments that student loan forgiveness will lower taxes. Same with SVB. Im sure the FDIC has an idea of what the deposit write-down is, and maybe the total number of employees at those companies. They have no idea what the long term impacts and ROI would be. Even the founders of those companies don't know if they will be successful and the total taxes paid over the future lifetimes of their corporations. If you think this is simple and known, we simply disagree on the facts.
>This seems backwards to me. Moral hazard and (lack of proper) incentives are the root cause. If you don't like the government needing to step in to help people, then you should consider these your top priority.
I think I could have been clearer here. I'm saying moral hazard and incentives are secondary when deciding if account holders in this specific instance should be made whole.
I agree fixing the root issue is probably a more important problem, but again separate from what to do with the account holders.
By way of analogy, if you have a car crash on a dangerous road, what to do with the car and how to fix the road are separate questions. Maybe the ROI on repairing the car is bad so you write it off, but it still makes sense to fix the road so you don't have more crashes.
> You can't fault depositors for not doing thorough diligence on a 40-year-old bank with a good reputation
The 40-year-old bank with a good reputation was offering deals that were too good to be true, like 4.5% APR on a savings account (other high yield savings accounts are at 3.5% right now, and those are online banks that achieve those rates by having minimal overhead). Naive startup founders aside, the VCs should have known better than to think interest rates like that were coming from a bank that was playing it safe, and for them to now be asking for the taxpayer to make up the difference between the bank's assets and their startups' deposits is weird.
They knew they were advising their startups to put all of their money into a high reward system, but we're supposed to believe that they didn't realize that was also high risk?
The VCs put money into a startup and encouraged them to engage in risky banking practices. If these startups succeed the VCs get a payout, if they fail they get nothing.
A taxpayer-funded bailout of the depositors is socialized risk, privatized reward. Why should the taxpayers stand for that?
This is like arguing that we shouldn't pay for housing for the homeless because rich property developers are partly to blame for the housing crises in many cities.
The bank became a crypto onramp/offramp and also counted a bunch of web3 stuff to not draw down their deposits.
That we can't let crypto-ponzi involved stuff infect the real system and get bailouts is a general sentiment over this that makes sense. $250,000 per account is what we are mandated to compensate Circle legally and to go beyond is people who stayed out of crypto subsidizing the crypto ponzi scheme ecosystem.
USDC can probably maintain $1 from the crazy amount of slippage from people losing their keys anyway.
> And I think the prominent people asking the government to bailout depositors
Anyone spouting this kind of rhetoric isn't helping matters, but in any case when it comes to this situation there are really well-defined mechanisms for making depositors whole without bailouts.
The reason is because there are countless scenarios in the US economic system, where people/businesses fail cause of no fault of their own, but they are told tough luck that's the free market at work cause these people are simply unconnected or their failure is deemed unimportant. It's why the finanical bailouts left a bitter taste for anyone paying attention, and why gov't action here is immediately scoffed at.
Except this is the opposite of what happened in 2008 with bailing out the banks. Then, the banks got public money to remain solvent. Here, the bank is taking the hit and the government is ensuring the depositors get their funds back. In 08 people were kicked out of their homes and banks were propped up with public funds. Here, the depositors are being made whole and the bank is going out of business. The salt is your typical 0 knowledge hot take.
It’s absolutely in the interest of the greater economy to have a functioning banking system backing high risk/high reward activities like Silicon Valley. And charge the risk appropriately high fees, of course. SV has been a very bright spot in the economy for several decades now - through thick and thin.
If anything, it’s a lesson about how assets should be accounted for in corporate statements. It’s also a statement that the perception of SV is a little sour and could use some reflection. Maybe look for ways to better engage the rest of the community and figure out where resentment stems. (I’d guess calling large swaths of the US “fly over country”, charging high prices, and other consumer feedback involved.)
Tangent: In decades of socializing in NYC and the Bay Area, I've only ever seen the term 'flyover country' used by people complaining that the coastal elites look down on them. Never once heard the term from an actual coastal elite.
And I live in “flyover country” and hear it plenty and it is a fact of life and business here.
Look, when corporations like Amazon look for a new HQ they head to places like NYC. They say it’s because of the larger labor pools there. And it’s even valid to an extent - Arizona keeps getting semi fabs because they already have semi fabs and labor. The opposite would be looking for some location with the characteristics to grow over time into the location a company wants and making the expanse a long term project. Population characteristics absolutely can change on the scale of decades.
Edit-Just to put a point on this. “Flyover country” is undeveloped country. It’s cheaper to develop. If you want to build a huge fab in the middle of nowhere it’s going to cost little more than the costs of supplies and labor. And there’s always a way to get labor if the price is right. Do it in NYC or SF and you’re competing with all the other current/future uses of that land and it’s going to be expensive. Probably going to face zoning restrictions.
What I’m saying is if SV had a history of developing economy outside of the coasts there might be less salt. Denver’s kind of a good case in point. It’s seen a huge tech influx. There’s probably less salt towards tech/SV there than elsewhere. And if not, the reasons may be informative for anyone looking to better the image of SV. But living there is also sky high-and maybe it’s time to look for ways to move on to cheaper pastures.
There. Now its correct. Rephrasing something does not change its nature.
The 2008 bailouts were done with that excuse too. They were 'too big to fail', and it would 'affect everyone' so that they were bailed out to 'help' the main street.
> It’s absolutely in the interest of the greater economy to have a functioning banking system backing high risk/high reward activities like Silicon Valley.
It is. And its totally against the interest of the greater economy to bail out those who screw it up by taking great risks. Its against the interest of the greater economy to bail out those who didnt take any risk either. Because it socializes the risk while privatizing the reward. That's why people hate bailouts.
All those startups and wealthy entrepreneurs put their money in the wrong bank. The wrong bank was shown as the best bank through a lot of fallacies, ranging from groupthink to obligations pushed on startups by VCs. Nobody came up and tried to raise awareness about how bad this setup was. Those who tried to do it were unheard. Those most affected from this, the rich VCs, all the SV funds, tech ecosystem top dogs, 'thought leaders', investors, are the ones who created this environment and caused this to happen.
Now, when the cows are coming home, asking for a bailout is socializing the risk while privatizing the profits.
The only exception can be made in the case of the state taking a ginormous amount of ownership of everything that it bailed out and not sell its shares out until it milked its money's worth to cover its bailout amount plus an above-market profit rate from that investment...
> Its against the interest of the greater economy to bail out those who didnt take any risk either. Because it socializes the risk while privatizing the reward.
In the first sentence you say there is no risk being taken by a group, and in the second sentence you imply there is a risk being taken that a group should not be bailed out of. Could you elaborate? What non-risk taking risky group are you taking about here?
Are you arguing that the depositors were also risk takers here? What were their options to mitigate that risk besides not use a bank?
The public has an interest in enabling high risk ventures, BUT, this must happen through a well designed mechanism that sustains itself. Like how I explained in my comment later: Through the taxes levied for that reason, through insurance fees charged to fund that mechanism and so on.
But none of these apply in this case. High risk decisions were made by all of these actors, including most of the depositors, while privatizing all the profits. The very CEO of the bank is a libertarian and he publicly advocates that government should disappear. All the depositors are either part of the VC crowd, or startups that are practically controlled by those VC crowd. And most of the money (ironically) still belongs to that actual VC crowd indirectly because those VCs control the startups that they gave those funds to.
So basically it was all privatized profits until the risky decisions came home and suddenly a need for socializing the losses came to being, causing even the die hard libertarian CEO of SVB to start publicly demanding that the govt. should bail them out, in a public display of total lack of principles. (then again Ayn Rand did the same).
Yes, the depositors were also risk takers. They took the risk of trusting that high-risk bank that lobbied for watering down regulations for more profit. They took the risk of trusting the VCs who forced them to put their money in that bank. Non startup/VC related clients took the risk of putting their money in that bank for reasons ranging from higher gains to groupthink. Those were decisions taken by them. The public cannot be expected to save them from the consequences of that risk taking without getting back its money's worth. And no - the return cannot be 'a more lively startup ecosystem'. The expected return can only be money. That the public so desperately needs for repairing the society.
There's a marketing angle to calling yourself "Silicon Valley Bank."
This is just the ugly side of that marketing playing out.
Meanwhile, the FDIC is required to do whatever is less costly to the FDIC insurance fund. There really isn't a lot of choice in the matter from the government's perspective.
Because if a normal business goes bust leaving customers out of pocket, it’s usually only a small percent of the customers “wealth” (and often insurance will cover it).
If someone’s bank goes bust they can loose a much larger proportion of their wealth. Often causing them to go bust, causing more bankruptcies and job losses.
Governments act as insurer of last resort for most bank defaults, because the confidence of the banking system and money is integral to the countries existence.
What it says though, is that bailing it out is off the table.
Which has an effect on the investors outcome, hence help depositor better, or at lower cost.
It's an investors, depositors, and tax payers dilema.
The brightest and only fair outcome would be that a private funds/bank aquires SVB. That way everyone is made whole at the expense of nobody. A very unlikely scenario given nobody would touch a beyond help entity with, potentially, liabilities turning out greater than the overall assets left. Intengible assets may save the day, still a bit of hope there.
“ Janet Yellen said on Sunday that the US government was working closely with banking regulators to help depositors at Silicon Valley Bank but dismissed the idea of a bailout. […] “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
“But we are concerned about depositors, and we’re focused on trying to meet their needs.”“
She is saying the bank will go out of business, and any people who owned stock in it will lose all of that money, hence the difference from 2008. And then continues on to say that _depositors_, i.e. the people who had savings accounts there, will be helped (although she notably didn't commit to 100%).
I think we should assume that they are going to be making the advance deposit earlier in the week rather than later, and it will be as large as they can possibly make it.
Well put, can pull the "capitalism" at the expense of few to many yet "socialist" when conductive for mostly a few, but not many times.
I still think they will get away with bailing out several banks that will otherwise fall hence the system. Via means that adhere to whatever rules were put in place.
The problem is that we don't yet know what the "rules" will be in this case, and a lot of commenters are getting out over their skis assuming that tax money is going to go into the bank accounts of SVB depositors or something similar.
SVB explicitly argued that it was not capable of risking systemic failure and on that basis gained an exemption from Dodd-Frank rules that would have prevented them from failing to hedge against interest rate risk that took them down.
We literally have Dodd-Frank rules built up over the last 15 years to prevent these things from becoming a systemic failure.
I get that people are still squeamish about 2008. But our banking system is quite different today compared to back then. We built up these rules so that we wouldn't have to bailout banks in these situations anymore. That's what the entire damn point was.
If it doesn't work, then it doesn't work. But I for one am more than willing to test out these rules... at least for the next few weeks... to see if they actually work. If they don't work, then we strengthen our regulations over the next 10 years. If they do work, then... success.
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We absolutely shouldn't just hit the bailout button before understanding this problem. 2008 + Dodd Frank was supposed to prevent this from being a systemic cataclysm.
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What probably needs to happen is for Thursday's bank run to be undone. Issue a clawback so that the $46 Billion that escaped on Thursday and punish those who bankrun / collapsed the bank in a panicky stampede.
That's far, far more fair than a bailout. Redistribute the money in a more fair way, but accept the risk that SIVB made for itself and its community.
How do you expect Dodd-Frank to prevent every regional bank depositor with half a brain cell attempting to move their deposits to a big 4 first thing Monday morning?
Do you understand the consequences of that? If that happens, dozens and perhaps eventually hundreds of regional banks will fail and many many more depositors will be out money.
Do you understand how crap SIVB's books were? 50%+ held to maturity? Long dated 10Y and 30Y bonds? A complete lack of a Risk Officer from April 2022 through January 2023?
If there are other banks as poorly run as SIVB, they probably do deserve to collapse. But I also don't expect there to be many banks with that level of stupidity.
At Silicon Valley Bank, we're basically looking at a bank, whose Risks were completely slept on during the entire period of the fastest rising federal funds rate in the last half-century. (Or really, the position of Chief Risk Officer was vacant for this entire period). I assume the other banks had better risk management.
If the banks books are solid, they should survive a 25%ish decline in deposits, which was roughly the level of SIVB on Thursday.
I don't expect a 25% decline across the industry however. The knock-on effects will be smaller. With a smaller "shockwave" of runs, combined with stronger bank fundamentals, I really don't think we're looking at a big domino-effect 2008-like collapse here.
There is zero precedent for clawbacks from on demand accounts at a regulated financial institution. This isn't even a "capital B" Bankruptcy, so I have doubts clawbacks would be legal.
That would also throw gasoline on the fire as people cease to trust even withdrawn money as whole. It's now in your interest to get your money out of any bank showing any weakness as early as possible.
Clawback SVB money Monday and we'll have a run on First Republic Tuesday and possibly 20 other institutions by the end of the week until we get to Ally and that will empty the FDIC piggybank.
Which is why the cooler heads at the FDIC try to make all depositors whole. Hopefully they can find someone to take SVB's assets on in HTM valuation and maybe some government equity in exchange for ownership. (Remember the government made money on its equity deals in 2008).
Dont confuse the issue. No one has a problem with creditors getting as much of their money as possible by selling assets. The problem is that SVB's book value of assets is far smaller than the debts. Imagine their value on a firesale.
the creditors then take a haircut. It's basic bankruptcy.
What people oppose is taxpayers absorbing the losses beyond $250 000 as promised, and there's a very good reason for this: its another example of privatizing profits and socializing losses. In other words, it encourages risky behavior because they're gambling with the house's money.
Some argue, and they have an excellent point that if SVB's creditors aren't bailed out it could trigger a contagion. Thats a formidable risk. However, we already did mass banking sector bailout less than 15 years ago and it turns out all it did was incentivize irresponsible behavior.
Hallelujah, parent's comment is a straw man. I've been vehement against taxpayer money being used to make depositors whole, but nobody is saying they shouldn't be paid out of the assets of the bank.
I'd also be in favor of the feds helping to orchestrate a bailout by getting purchased by another bank/banks, or doing whatever it takes to get depositors access to as much of their money as quickly as possible.
But all this does is incentivize "if you're going to blow up, make sure you threaten the whole economy so you can use hostage tactics to get a payout." The feds wouldn't be doing shit if this were some small bank with no contagion risk.
And the political cronyism of this, on both sides, is nauseating. There was a tweet thread by a startup founder from Ohio, basically making the argument "I'm a small business owner from middle America Ohio, not some fat cat Silicon Valley tech bro." To be clear, absolutely nothing against her for posting this (on the contrary, she actually sounded pretty amazing with how she founded her business), but it sucks that she has to play this "Hey, I'm in your tribe too, I'm not a member of that evil other tribe" in order to curry favor with the political class to get a bailout.
To be completely open, I wouldn't even be opposed to bailing all the depositors out if strict conditions are placed that disincentivize playing with house money
I haven't come up with a way to do this [1], nor has anyone else. So, we're back at square one: I can't bail you out with out encouraging destabilizing destructive behavior.
[1] well I have, but public executions for economic crimes are unconstitutional.
>What people oppose is taxpayers absorbing the losses beyond $250 000 as promised, and there's a very good reason for this: its another example of privatizing profits and socializing losses. In other words, it encourages risky behavior because they're gambling with the house's money.
But by not bailing them out, you're punishing the depositors, which I wouldn't exactly characterize as "gambling with the house's money".
> If a bank is giving depositors unparalleled benefits to bank with them [1], alarm bells should ring.
>[1] benefits include interest rates above average or offer to finance your start up.
Can you be specific? Which parts of SVB's offerings were suspiciously generous? You mention interest rates, so I checked their archived page as of feb 23 and found that they were offering 4.5% for their money market account. This seems roughly consistent with market offerings[1]. You also mentioned "offer to finance your start up", but is that really supposed to be suspicious? That's literally one of a bank's primary functions.
>Let me be blunt. The last place I'd do my personal banking is the local bank of a region who's mantra includes: "move fast and break things".
This feels like something that's only obvious because of hindsight. You could easily make an equally compelling case that you shouldn't bank with banks from new york, because that's the financial capital of the US, and it's the evil bankers that caused the 2008 financial crises.
> Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
Easy, pay out $250K per account, then distribute the rest pro rata based upon closing balance from when the fed's took over. If they have to wait because assets need to be liquidated then sucks to be them. I'm sure they can get their money faster if they agree to a haircut.
> “This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
Money to depositors for amounts greater than $250K is a bail out. They have no right to that money from the Feds.
> Generic screeching against the tech world. I get the schaudenfreude, but this will not hurt big tech and VCs as much as tens of thousands of small businesses, and the people employed at them. Some billionaires will be upset at some relatively insignificant losses, while hundreds of thousands may lose their jobs.
On the flip side, there's nothing special about many of the customers being small businesses, or startups, or big businesses, or really anything else. There's established rules for FDIC insurance and that's what we should be following.
It is completely insane to allow innocent depositors to lose their money especially when the government clearly would have no problem coming up with the funds to backstop depositors since this is an isolated incident. This bank being located in a tech hotspot is incidental and I am sure some non-techies are swept up in this as well. Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SVB 10-k filings and calling up SVB’s board of directors to ask them how they plan to manage interest rate risk?
FDIC limit should be way higher anyway (when was the last time it was raised?) but if we allow depositors to lose money it will quickly cause a stampede to the handful of huge banks and drive smaller regional banks out of business. That’s why other bank stocks are also plummeting right now. Is that what you want?
If an enormous earthquake strikes one region causing billions of dollars of damage but you live on the other side of the country do you complain about the federal government spending your tax dollars to help those people rebuild?
For the record I believe SVB shareholders and debt holders will get wiped out, as they should.
> Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SBV 10-k filings and calling up SBV’s board of directors to ask them how they plan to manage interest rate risk?
Making a sob story about a 70 year old granny doesn’t change the facts.
And she wouldn’t take a $750K haircut. She’d get $250K guaranteed and her share of the remainder which is not going to be zero. Probably much closer to 80+% of the balance above $250K.
> If an enormous earthquake strikes one region causing billions of dollars of damage but you live on the other side of the country do you complain about the federal government spending your tax dollars to help those people rebuild?
If it’s going to be done with funds not allocated or aligned with FEMA then damn straight I’ll complain. Society does not have infinite money. If they want to increase funding for something then we have a process for that.
So you’re saying the government (taxpayer) will get back 80%+ of the funds it uses to backstop depositors. Isn’t that a small price to pay to avoid a total collapse of the local and regional banking system?
Did these banks all make the same stupid decision as SVB? Unlikely but maybe. More likely though is the risk that people get spooked over SVB customers losing their deposits (even just 20%) and decide to move their money away from smaller banks like SVB to huge banks like Citi, Wells Fargo, etc. Personally if there were a chance I'd lose just 10% of my balance I'd make the switch, it's the only rational thing to do if other depositors are taking a haircut elsewhere. It's not going to collapse the entire banking system, just the local/regional one, which you see is already starting to happen.
I fail to see how burning most of grandma's life savings (and other innocent people who probably never experienced a bank run before) and allowing the collapse of regional banks is somehow better than backstopping depositors now and making much tighter banking regulation for smaller banks going forward to prevent this from happening again. Do we want the nation's banking infrastructure to consist only of 3 or 4 enormous banks or do we want the options that a lot of smaller local banks who are able to cater to the specific needs of their communities provides?
I don't think that's how the FDIC insurance works. I was under the impression that the 250k is after liquidation, the last resort. Anyway, SVB was really leveraged so I'm not sure how much of their asset book value is recoverable.
> FDIC limit should be way higher anyway (when was the last time it was raised?)
In 2008 it was raised from $100K to $250K. The increase in the FDIC limit has actually outpaced inflation since its establishment in 1934, when it was $2500, which is $56K inflation-adjusted today.
>the government clearly would have no problem coming up with the funds to backstop depositors since this is an isolated incident.
If you start bailing out banks which take risks, then the incidents become less isolated
Once you're handling millions of dollars you absolutely should be looking into counterparty risk when you deposit funds. Baffling that people are arguing business owners should do no due diligence on a bank or take no insurance.
NO! Checking and savings accounts are NOT separately insured! The FDIC is $250k per bank, per depositor and per ownership category. Ownership category = single account / joint account / trust account / mortgage escrow account/ (10 more obscure categories).
As a regular person, you get $250k for your checking and savings together, and your spouse gets $250k for theirs, and then you get another $250k for jointly owned accounts.
> Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SVB 10-k filings and calling up SVB’s board of directors to ask them how they plan to manage interest rate risk?
That is simply awful financial management. You can be extremely unlucky and have it happen the day you get your deposit, but that seems like an annoying edge case which is unlikely to happen in the real world.
In my jurisdiction across the pond, investment funds are the easiest method to manage the account insurance risk. They need to be legally and economically separated from the broker you are managing them through, so if whoever you are brokering with goes bankrupt, you still own them. You can access them with a new broker after a bit of hassle.
If you want low-risk, pick funds investing in government-backed bonds. High-risk choose stock market-based index funds.
Now the only thing counting towards the $250K limit is whatever you have in the brokerage account between transfers. Easy peasy, your risk of a bank collapse is zero and you have the money available within a couple of bank days notice.
I think the idea is that millionaire grannies should be advised to split their cash across four accounts, or buy bonds, or some other sensible thing, rather than just keeping bank deposits.
Have we yet deviated from FDIC rules? I don’t think so, even with what Yellen says. My limited understanding of the situation is that the assets to cover everything is there, they’re just tied up in long-term treasuries.
From the FDIC’s site:
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
For simplicities sake, let’s just assume 100% of the assets are actually there, but it’ll just take varying years for everything to mature. So, what’s next? FDIC finds a buyer for the assets, perhaps a private bank or a a pseudo-government body who has the ability to wait till maturity, and in the meantime, everyone gets all their deposits. That’s not a “bailout”, and is following the rules.
Magically using billions of federal money to hold assets to maturity is a bailout. If hypothetical JPMorgan is willing to pay for the (ie) bonds $20B, but they "support" $25B of deposits... that $5B is a bailout. Even if in 10 years those bonds would be worth $25B.
> So, what’s next? FDIC finds a buyer for the assets, perhaps a private bank or a a pseudo-government body who has the ability to wait till maturity, and in the meantime, everyone gets all their deposits.
Yes, that's happens in the ideal case. However, due to the rise in interest rates, the market value of SVB's assets is likely lower than $175B at the moment; so it might prove challenging for FDIC to find a buyer for these assets at the required price to give everyone their deposits back. Even well-capitalized entities that have the capital to refund depositors now and the ability to wait till maturity will not pay the face value for these bonds, as they can get a better return by investing that money somewhere else (such as treasuries).
That's true, I should've said that the market value of SVB's assets is likely lower than their deposits at the moment. Of course we don't know for sure, but if the market value of assets exceeded deposits, they wouldn't have had to close down.
This is short sighted. If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars. This is a federal problem.
It makes sense to make depositors whole, they’re innocent here. It doesn’t make sense to make SVB whole for managing their risk poorly.
It does not make sense to let bank shareholders profit from having an implicit guarantee of federal taxpayer funded bailouts.
The bank’s owners have to pay $x for buying FDIC insurance of up to $250k per account per person. If it actually costs $y > $x to insure for more than $250k, then that is quite a windfall for the bank owners at the expense of federal taxpayers.
There's no moral hazard if we pay out depositors and let the bank fail. The big "problem" in 2008 was that the bailed out banks were made whole with equity injections and then continued to grow. (Although the government did quite well on those investments).
SVB is dead. Shareholders are getting zero. The losses are not being socialized. But because we don't want a bank run on every regional bank, let's make depositors whole.
Why even bother with the fiction and payroll of the FDIC and a $250k limit and FDIC insurance premiums if there is always an implicit taxpayer bailout?
Obviously that insurance costs something, and the moral hazard is that both bank owners and depositors of banks with lax standards get to financially benefit from lower costs due to all federal taxpayers subsidizing their risk.
Anytime taxpayers give money, they are tilting the incentives such that the risk of the loss being bailed out is now going to be underpriced, because it will be assumed a bailout is coming.
If the goal is to have no depositor in the US ever lose any money, then the government should just give everyone an account they can transfer money into and out of. It will earn no interest, and no bank owners will profit from the taxpayers’ subsidy.
The moral hazard is that if depositors know they'll always be made whole then they'll keep their deposits in riskier institutions and therefore executives who are taking on undue risk will win at the expense of the insurance provider. (I think this is probably what lotsofpulp was saying in a different way.)
The general public doesnt care about the shareholders. For the public, a bailout is a bailout. By lending money to that bank, depositors took a risk and participated in the bank's business. It was NOT a state bank. It did not pay any taxes, fees, or anything else to the public's treasury more than the $250k per account insurance. If it did, you would be right - everything could have been rescued to the order of that insurance. But there is no such insurance over $250k.
> make depositors whole
It seems that the big money people affected by this chose this nonsensical, archaic term to use in place of 'bailout' so that people wont react. It really doesnt work and it looks way, way nonsensical.
I’m with you that we shouldn’t make a habit of spending taxpayer dollars to make depositors whole. We should have better regulation so this couldn’t have happened in the first place. Banks should be required to manage their risk better.
But in this particular instance taxpayers should want to invest in trust in US banks and dollars until regulation is corrected.
> We should have better regulation so this couldn’t have happened in the first place
We do. SVB lobbied successfully to exempt itself from the Fed’s stress tests and Basel III, both of which test assets for interest rate risk and would have caught this problem.
And if it does. And sets new standards it leads to massive moral hazard and potential of even bigger and even worse failures in future. Why not run a ponzi scheme as bank if in the end tax payers or fed ends up making everyone whole. After you have spend years making money from fraud. With your depositors happily participating in as they have zero risk.
Yes, surely using the government to let private businesses run roughshod on the uninvolved public will prove that we are sufficiently exploitative to guarantee your money’s safety.
Don’t worry world, when push comes to shove, those who had nothing to do with it will bear the responsibility!
> If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars. This is a federal problem.
I fail to see how the government doing exactly what the law says and what they've always said they will do makes people lose trust in the US.
Why would doing the exact same thing as many, many previous times - here's a list https://www.fdic.gov/resources/resolutions/bank-failures/fai... - suddenly make people and companies all over the world lose trust in US banks and eventually US dollar, if that didn't happen in all the many previous times when depositors weren't made whole (beyond the limits insured by FDIC) after a bank failed?
> If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars.
Good. That's exactly what should happen. It should happen every single time, repeatedly. People should have to learn the hard way that banks and the government cannot be trusted.
These are the consequences of their irresponsibility. They should not get to avoid those consequences just because "banks and USD are important" or whatever excuse they come up with. If the US really is all about the free market as it claims, it should allow these banks to fail and everyone who trusted those banks to lose. Customers lent their monet to this bank and they lost. Allow them to face the consequences of their actions.
no. absolutely not. these are smart greedy people playing the game for their own benefit. they knew the rules. if they lose they eat the losses just like anyone else.
it is all the bailouts and insider dealing that kill confidence in the dollar and the banking system. enforcing the rules increases confidence.
> Money to depositors for amounts greater than $250K is a bail out. They have no right to that money from the Feds.
No. The feds aren't giving anyone fed money, they're selling SVB's assets and giving the people they owe their own money back. There isn't enough money to give everyone 100% back, so they won't be getting 100% back. There's no extra government money making anyone "whole". They're just winding down the assets so they don't all get stolen like FTX.
Extra money is precisely what Yellen is proposing. The government will backstop the depositors to prevent a run on every other non-SIFI. This is the right move.
I don't get this comment at all. The post you're replying to literally says the bank has more assets than 250k per client. I read somewhere the insured amount is around $8B whereas the bank's assets are at least 20x that. Where should that money go if every client gets capped at 250k?
They have more than $250K per client but not the full value.
Each account should be allocated MIN(balance, 250K). Then the remaining should be allocated pro rata. So if one is still owed $1000 (ie the balance was $251K before the collapse), then that account’s share of the remainder is: $1000 / (sum of all remaining balances owed)
The haircut per account is only on amounts beyond $250K.
I think the depositors should get a bit of a haircut if selling the assets don’t cover all deposits. For example, 5%. If it’s more than 5%, then the government steps in and pay for the rest.
5% seems like the right balance between the two extremes.
Companies and people should pay a small penalty.
At the same time, we shouldn’t rock the financial system further. We need to have confidence in the system.
After this, the government should make new regulations to prevent this scenario from happening again.
For those wishing to just follow existing rules exactly as is, bear in mind that a contagion will likely reach your personal finances.
Government steps in and pays the rest? No, change the laws if this is the case. Why special treatment to help out but in any other scenario where tragic financial mishaps of regular folks you are given a pat on the shoulder and “good luck”. Pretty sure they have a write off tax wise for any additional loses.
5% is still going to cause bank runs elsewhere. No one is going to stay at any bank where they might take a 5% hit.
Make the depositors whole and let things calm down. Then, at leisure, on a case by case basis, claw back a few percent to cover the moral hazard of people getting better loan terms or whatever.
> 5% seems like the right balance between the two extremes.
No it's not. If they get a single cent above the bank's remaining assets (after administrative costs of the FDIC action), I don't think I will be the only one losing any remaining trust in the system.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Yes, issue for the depositors is how long it might take. Digging through the closed banks history at the FDIC is fascinating - https://closedbanks.fdic.gov/dividends/
Sometimes up to ~75% of the funds is paid out within weeks of collapse, but for some banks it’s only 10 or so percent. Most of the time it seems to end up with over 90% being paid out (sometimes it’s 100%), but the payments can come over ten or more years!
Often seems to be one within weeks, one in the next month or two, and then the payments seem to start coming every three or so years.
Well, if depositors can wait 10 years, they will absolutely get 100% back. The assets are worth more than the deposits right now if they aren’t sold in a fire sale.
The problem now is that startups need the money quicker than 10 years. But to sell everything now means a giant haircut.
The $250K is the FDIC covered limit. Amounts greater than that are not insured by the Feds. If the bank fails, the Feds ensure that depositors get at least $250K per account.
If SVB is insolvent than customer deposits are not worth their full value. The phrase “making all depositors whole” would be the Feds covering the difference. Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
> If it were the latter then bailouts happen all the time without bank failures or FDIC takeovers (all transfer > 250k).
This has nothing to with bank transfers. It’s about deposit insurance.
> Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
This isn’t correct. SVB has assets which are still worth something, even if they are less than their total liabilities. Unsecured depositors are first in line for that money, and the $250k fdic insurance limit has nothing to do with it.
As others have pointed out, those assets are not liquid. And selling many of them on short notice, will cause all other kinds of problems. Takes time and you wont get the money equal to their current valuation.
> Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
It's my understanding that FDIC considers $250k the minimum they'll cover and they can (and have) cover(ed) higher through raised premiums to other banks.
This situation isn't a handful of big individuals losing some of their money and the majority being insured under FDIC, the bank's customers is mostly small and medium businesses which have lost all of their money.
I hate bailouts and think we should allow more failure but it would be a horrendously bad idea to let a bunch of businesses fail under no fault of their own.
They'd likely be looking at multiple tens of thousands of unemployed individuals near instantaneously along with accelerated layoffs at unaffected businesses as clients disappear overnight / businesses get spooked.
One of the strangest misconceptions I've seen on HN and in general is some variation on the incorrect theme of "all the money is gone except the FDIC insurance".
The last I saw from Moody's was they're expecting "eighty-something" percent recovery rate, assuming no bailout or rule flexibility and no last minute forced merger.
This isn't like FTX where all the money is gone and ha ha you're not getting a penny of it back, ever. The SVB situation is a hyper regulated industry and the regulators flipped out when the asset ratio dropped below 95% or something like that, and as such, there will be inevitable expenses of a total shutdown, so figure everyone below $250K gets 100% back via insurance and everyone else gets $250K plus whatever was above $250K paid out at probably around eighty five percent when its all said and done (this is a guess although Moody's usually isn't all that wrong).
Historically when smaller banks collapsed (my hometown bank for example back in '08) the regulators semi-forcibly merge the small bank into a large bank and there's zero loss, you're just magically now a customer of some out of town megabank. The big bank eats the loss in a wink-and-nod agreement where the big bank gets some future favorable regulatory treatment in exchange, semi-informally. The problem with SVB is it is, or was, huge. So finding a huger bank to merge with will be tricky to impossible. Which was kind of the point of regulation intended to keep competition higher by making lots of small banks instead of few large ones.
The worst case outcome according to the last I saw from Moodys was big depositors will take maybe a fifteen percent haircut over $250K. The propaganda claims, of course, that all the money is gone and its 1933 again on Monday morning and the usual workers of the world unite stuff. But its not really THAT bad.
Idle speculation I've seen in chats that the solution to SVB being way too f-ing huge to merge with anyone is a forcible separation followed by a forcible multi-merge. So each 1/4 of you will be new customers with 100% rate of return of JP, BoA, Citi, and WF respectively. (off the top of my head those are the four largest banks by assets, I could be wrong) This is just internet chat nonsense I wouldn't plan on it. Although it is an innovative solution to having a "too big to fail" bank failure.
There's some of this, for sure. But there's an equivalent screeching from the tech finance world[1] demanding a full government guarantee. That ain't happening, and I think it's appropriate for the fed to make that clear.
FWIW: the dirty secret here is likely that there's a bunch of internal dealing going on as regards SVB. They were The Startup Bank for some reason, it's not random. And my guess is that we'll discover that a whole lot of big venture players turn out to be extremely exposed[2] to an SVB failure. A lot of VCs are probably losing their shirts here.
[1] Jason Calacanis's caps lock has been stuck down since Friday.
[2] Or worse. Genuine fraud has turned up in previous FDIC seizures. But no evidence exists right now.
I agree with you. I listened to the usually fantastic All In Podcast yesterday. Usually, I find the content very interesting but yesterday I felt like all four of them were all about protecting their little world.
To me, it sounds like SVB cut a lot of corners and SV customers enjoyed advantages of some of these cut corners.
I am deeply sympathetic to people who may not get paid for a while, or have their startups go under. That said, there are precise laws covering what the FDIC can and can not do. I think the general public is tired of very connected people and companies getting special treatment.
There is certainly a danger of contagion, of regional banks taking a hit, by being compared to SVB, but that does not change my opinion, and I certainly will not stop doing business with two relatively small Credit Unions in my state.
Amusingly Thiel himself seems to have been out of SVB. He's being fingered[1] as the "cause" of the bank run and lots of people are asking if he shorted the stock.
[1] Somewhat unfairly. I mean, the guy's an outrageous jerk, but from the evidence at hand it genuinely looks like he recognized the problem with their balance sheet before everyone else, got himself out, and told his companies to do the same. And he was right. That's not fraud, that's good faith financial analysis.
"I get the schaudenfraude, but this will not hurt big tech and VCs and much as tens of thousands of small businesses, and the people employed at them."
It's good for those "businesses" if VC and Big Tech are unharmed because were it not for VC investment and Big Tech acquisitions, these "companies" would have no money to pay the people who "work" at them.
Legitimate businesses that can pay employees from revenues and generate profits are generally not SVB's customers. They can use normal banks.
Arguably a "job" that depends on interest rates being "zero" and investors writing checks cover payroll is not something anyone should be relying on longterm.
"Generic screeching against the tech world" is a red herring. Perhaps it is easy for "tech" companies to dish out hype but difficult for them to accept any negative commentary. The question that must be considered is whether the "tech" company's so-called "business model" really is one. Arguably these "companies" never had a successful business model and never found one, if they remain reliant on VC, SVB and Big Tech. Intermediaries, surveillance, data collection, advertising services, all purely parasitic activity. If this is not something the world really needs and is willing to pay for, entities like SVB and their customers will burn out or fade away.
Big Tech fans commenting on HN have used the phrase, "The market has spoken" in the past to foreclose any debate on the merits of the so-called "tech" industry. Well, here the market is speaking.
can’t people buy private insurance for their deposits above the $250k threshold?
if you buy an expensive house or car you generally pay a lot more to insure that asset. not sure why people don’t think of buying insurance on their bank deposits in the same way if you find yourself in a situation where you need to hold much more than $250k in one account for whatever reason.
But even if you’re an individual holding million in cash (and for whatever reason it is not invested), it isn’t exactly difficult to open 10 checking + savings accounts and putting $250k each. In fact that is the prudent thing to do.
Yes, you can buy it. It's very common at wholesale banking levels (credit default swaps are extremely commonly used to cover counterparty risk). Also credit insurance is available to anyone.
However, the simple option here is to put money into short term govt bonds, there are ETFs like SGOV that make this extremely easy.
Even more ridiculous is that you are getting 4-5% yield on them.
This is what is so crazy about this entire saga - people should not be parking millions upon millions at a bank earning no interest when you could be getting 4-5%+ - regardless of solvency issues.
It is frightening to me people don't seem to understand this. It's absolutely basic money management. It would be more understandable when interest rates were basically 0 and you wouldn't get any yields from bonds. But that isn't the case and hasn't been the case for a long time now.
Now clearly SVB were offering perks for doing this, but say you had $100m parked there, are those perks really worth $5m/year? People should have been asking that. It's a whole team of engineers paid for!
And really offering personal perks to founders contingent on company money doesn't sit completely right with me, unless the founder owns 100% of the equity which most do not. It's one thing offering perks as goodwill but putting convents etc on company money for personal perks is suspect to me.
>It is frightening to me people don't seem to understand this. It's absolutely basic money management.
It isn't frightening to me, because the trust people put into banks' reliability is a testament to the fundamental strength of the American financial system. I'd rather have that than the opposite, where everyone is hyper-sensitive about everything and even refuse to use banks at all.
That said, there is no excuse for Roku, for example, to have more than $400 million in uninsured funds at SVB. That is fundamental malpractice on the part of its corporate treasury, CFO, and management.
I am fairly sure that the FDIC does not want people to need private insurance for bank deposits. This is a big sign your banking system sucks and is expected to fail badly at least some of the time, the avoidance of which is why the FDIC exists.
And, yes, opening ten checking accounts is difficult and inconvenient.
Then maybe banks should be required to have private insurance for accounts with balances above $250k? More conservative banks would pay very little for insurance while banks that take on more risk would pay more for insurance.
They can insure it, however the banks explicitly don't want all those deposits (beyond what the law requires) to be insured because they don't want to pay the insurance cost. If you want that insurance, it's available, but of course it's not free.
The Fed wants to enforce fractional reserve lending, therefore they won’t permit a Narrow Bank (which takes deposits and holds them solely in treasuries). If the government provided unlimited insurance for deposit accounts, the thought goes it encourages excessive risk taking on the part of financial institutions.
Long story short, you’re caught up in monetary policy. To mitigate these risks, you can use deposit accounts that sweep across multiple banks to get the cash insurance you need, and your finance/treasury department can invest the rest in short dated treasuries (which are backed by the Federal Reserve with no limit, and are considered risk free) or money market funds which contain only these same securities.
> The Fed wants to enforce fractional reserve lending
Maybe the fraction should be made larger than 0%? Or maybe bailouts should come with more strings attached including actual penalties for executives and board members?
> The first $250k per depositor is automatically insured and then after that they have to pay premiums per account.
No, the banks have to pay premiums to FDIC for the insured amount, period. They have to pay premiums for these first $250k that get insured; it's "automatically insured" because they don't get a choice, but that insurance costs a market-price premium out of which all the potential payouts come.
Do you think the $250,000 limit was an accident? Someone tripped on a keyboard and that’s how the provision capping the insured amount came to be in the law?
“Only six months after the creation of the FDIC, government leaders realized the initial $2,500 limit was not enough to effectively support the banking system. So, on July 1, 1934, the FDIC limit was doubled to $5,000.”
i can open a bank account in 2 minutes on my phone
it certainly isn’t alone an excuse if you are wealthy enough to even worry about the limit.
most wealthy people probably have dozens of accounts for this reason alone. I read an article just yesterday about how Giannis (NBA star) opened 50 bank accounts to put $250k each years ago.
The issue here is not about whether the government should seize SVB assets rather than return them to depositors. Hopefully no one is arguing for that.
(The issue is about what the government should do -- if anything -- about (1) shortfalls depositors may face; (2) delays depositors may face in accessing the funds that do remain.)
>The government will use the bank assets to make customers, not owners, whole.
The reason SVB is in receivership is because they don't actually have the ability to make all their depositors whole. Any scenario where uninsured depositors end up with all their money back is likely to be a bailout.
> The reason SVB is in receivership is because they don't actually have the ability to make all their depositors whole.
No, SVB is in receivership because they can make their depositors whole right now. They have most of the assets, it’s just that liquidating them immediately would result in losses far greater than SVB can afford, but that’s what a bank run demands.
The feds can take over, make depositors whole now by funding deposits from federal funds, while taking on SVBs assets and liquidating them on a timeline that maximises the value, ideally a value that covers all depositor funds.
In effect the feds provide a loan to SVB depositors, backed by SVB assets. Which is far better than either forcing the FDIC to actually payout the insured amount, because depositors get their funds, and the fed avoid having to handover cash to SVB to keep them afloat. Meanwhile shareholders take a bath, because their shareholding value drops to zero.
A fundamental component of finance valuations and rules is time.
Saying that the fed should stretch out the timeline of asset sales so as to ensure they mature into their valuations doesn't align with how things work. Time value of money is a thing, if we consider even moderate inflation for instance, the cash you can get today is worth less in the future. In order words if SVB assets are worth $100 today, it makes no sense for me to hand them $100 in cash today while I wait a decade for their bonds to mature, just so I can sell them for $100 again.
That is before we get to the fact that the fed is not in the business of managing investments for random failed businesses.
If some knight in shinning armor takes a look at SVB assets and deem them worth some future value that would justify the current need for cash, they'll buy the bank. So far it appears no such knight has emerged.
> it makes no sense for me to hand them $100 in cash today while I wait a decade for their bonds to mature, just so I can sell them for $100 again.
I know the Fed and Treasury are different entities but holding a bunch of bonds to essentially themselves is the best case scenario. They would hold both ends of the transaction: the money from the bonds and the bonds themselves (obviously ignoring the fact the liquid money is likely 'at work' somewhere else).
The risk at that point to the Fed is limited to only the US financial system failing entirely. 'They' can afford to hold the bonds even in perpetuity because they have no real responsibilities to anyone beyond providing stability.
I am not an economist but the risk of either asking for the cash from the Treasury or otherwise doing 'money-magic' to transform the bonds into liquid cash should be basically zero. They would just be fronting themselves money at a 0% interest rate, no one else would be exposed to that 'loan'.
Someone else smarter in economics may have to step into explain why this is wrong or bad.
This is not a typical liquidity squeeze. The scenario you are talking about is where liquidating some assets all at once would crash the market and so to capture the value a sale needs to be made over time.
The treasury and agency mbs markets are plenty deep enough to handle this liquidation. The issue is that the value of the holdings have dropped. That’s a solvency issue.
I’m boldly assuming that interest rates will change in the future. There’s no denying that SVB have fucked up, but equally it’s possible they would have survived if a bank run hadn’t occurred, and they had sufficient time to unwind their bonds, and raise needed capital to cover their inevitable losses.
Or maybe they would have managed to limp on long enough for interest rates to drop just low enough for their bonds to recover enough value to be sold without bank ending losses.
But who knows. There was a bank run, facilitated by VCs, which ironically, is now going to really hurt the very VCs that fanned the flames. Now we get to see how SVB gets unwound, who gets fucked, and who ends up picking up the tab.
By now all the liquid assets are already sold. The question is what about the loan book. The most interesting development would be FDIC making offers to the top 5 banks which they can’t refuse, which is what I’m personally hoping for.
In many cases the loans are to depositors (and the debt is questionable). The just thing would be make depositors without debt with svb whole first, ofc there is no system of fairness in finance.
Ideally they would, which is what happens to some banks in 2008. Unfortunately the banks that stepped in and bought failing banks got very badly punished, because they also inherited a whole bunch of liabilities far beyond the failing bank’s deposits, liabilities the purchasing bank didn’t expect and ultimately cost them substantial amounts of money.
If FDIC wanted another bank to buy SVB and make depositors whole, they would almost certainly also need to guarantee some sort of firewall against any liabilities beyond the deposits. Presumably the purchasing bank would want some ability to pick and choose exactly what bits of SVB it buys, and which liabilities. Leaving the remainder with either the feds, or some shelled out SVB entity. But who’s knows if that’s a path FDIC want to go down.
bull. shit. if their assets actually could be liquidated for full cover over time than any other bank with plenty of reserves would be happy to buy them. that didn't happen, so we know for sure their assets are not worth what they claim on any timeline.
The last time a bank bought another failing bank, they also ended up buying a whole load of extra problems that made the total deal very costly.
No bank is going to want to buy SVB unless there’s a clear and substantial profit to be made (which their obviously isn’t), or there’s some guarantee that the purchasing bank doesn’t get held liable for any of SVBs historical misbehaviour.
Right now, I suspect that every bank capable of purchasing SVB is taking a “wait and see” approach. There’s no risk to them if SVB and their depositors get fucked. And there is substantial upside to waiting and seeing if the FDIC is going to try and setup a sweetheart deal for another bank to takeover. So why would any bank move early?
that is a lie. the amount of money involved here is not that much. it would be very easy for a larger bank to swallow if they believed in the long term value of the assets.
the real thing is that SVB had an iconic brand, tons of business relationships, and very skilled and well connected employees, and yet none of that intangible value offset the hole in their balance sheet. that is the real indicator of just how bad it actually is.
Not in today’s environment. My Citi savings account pays 0.12% interest despite fed funds being at ~5%. Big banks don’t need more deposits, they can’t even make enough on their existing deposits. They especially don’t need to get involved in another bank during a bank run.
that's the thing. SVB has a loan portfolio paying much higher interest rates. but if that loan portfolio is to a bunch of companies that are going to go bankrupt, then it isn't worth anywhere close to what it is on the books at.
the game here is very simple: SVB loans money to cash burning startups and they keep that money in SVB accounts, so it looks like they have cash, and it looks like SVB has deposits, but all of that is created out of thin air by SVB giving loans to companies that couldn't get them from a real bank. If those companies actually take the money SVB loaned them out of their SVB account, then the scam collapses.
Ok, maybe that's true, maybe it's not? We don't know yet. Is that worth the collapse of the regional banking system in this country even if that is true? I'd prefer to have choices with my money, not just Citibank, Chase, and Wells Fargo.
One thing I don’t get. People are making a few claims:
1) anything beyond 250k is a known risk, you should’ve spread the money around.
2) why should tax payers be on the hook for more than the 250k amount? The companies took the risk and lost.
But if everyone spread their money around and kept each account less than 250k. Then in effect isn’t everyone insured for everything anyways?
Imagine there is a service that seamlessly took your total amount and spread it between various accounts for you to keep each account balance less than 250k. Now the totality of bank deposits are in effect all 100% insured. How is this now different from insuring all deposits regardless of size besides adding a middleman?
Not for FDIC. 10 people each with 1mm in 10 different banks. If FDIC covers the entire amount when 1 bank fails, they pay 10mm. If all 10 people spread 100k across 10 different banks and 1 bank fails, FDIC pays 100k x 10 which is still 1mm.
This whole saga has exposed the shocking financial illiteracy in this industry. There are laws and procedures about how to handle the situation. Banks fail all the time and the FDIC disposes of them all the time.
Depositors will get their insured money on monday. The FDIC will then dispose of all the banks assets and return the proceeds to its creditors, that is depositors.
Calling for the government to guarantee all deposits unconditionally is exactly calling for a bailout. Calling for the government to follow it's own laws and procedures as usual is redundant.
I think there’s a shocking lack of political literacy at work here because any action that could be perceived as a bailout by a layperson will be an albatross around the neck of any politician that supports such measures. Several of the VCs who spent Q4 of last year gloating about layoffs are now saying the sky is falling - so they aren’t exactly a sympathetic group. You can belly-ache about populism or whatever but that’s why you’re seeing tepid responses from Washington.
For the record I hope SVB gets taken over and depositors are made whole quickly but I think as an industry we are overestimating our political capital.
Yep, the politics of this are terrible as well. Tech leaders like Sacks have spent years trolling people and making themselves as odious as possible and now they're crying for a bailout, while still being as odious as possible and blaming the government for this.
But apart from the politics, even something as simple as Garry Tan calling for the government to guarantee all deposits is simply calling for the government to break its own laws.
Normally HN has some of the best quality comments on the whole internet but the amount of FUD and just plain wrongness in this topic is surreal.
The truth is: the bank’s risk management was done by a couple pigeons: one to peck ‘buy long duration’ and the other to peck ‘approved’. There is no other bank like this. Spillover risk is zero. The folks who are shouting about systemic bank run are talking their books (Ackman please shut up now if you’re reading this)
It's coherent to think the FDIC shouldn't put in more than $250,000 per insured account and also that if funds in excess of that are available without FDIC participation that they should all go to depositors.
People implying other things probably don't really understand how banks work.
The flip side is also true: people claiming that unless the government provides a bailout, depositors above 250k will be wiped out.
There’s a procedure to handle this, including dispersing the assets:
“The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
Let's stop pretending this bank was an arbitrary choice. This bank was corrupt, it took overblown risks by design for years including even lobbying for lax regulation.
The VCs whose money those startups are built upon, have connections to this bank. This entire back acted like some VC venture, with explicit design of taking the risk of zero return.
0 dollars should be given to depositors. Absolutely zero. These griefters learned how to use the common people as meat shields. It's the CFO of Lehman brothers. Let the VCs who supported this lose their investments and be forced to raise money now. If those businesses are worth something, investors will buy them. Let the VCs who gave bad advice be wiped clean from the investment. Their choices led to this.
Are people seriously arguing for $250k and not a penny more, regardless?
I thought the argument some were making is that depositors should be guaranteed up to $250k and then get a proportionate share of whatever’s left (which is not zero!)
> "This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
From the broader public's perception, you're splitting hairs. The gov - at taxpayer's expense - *are* ______ing* depositors with deposits over $250k. Depositors who are well aware of the limits of what's covered. Depositors with more advisors than most taxpayers have bank accounts.
Capable and well educated people made poor decisions. Why is The Nanny State the solution? Again??
* call it what you want, but it's special treatment of the very well to do.
> The FDIC is not supported by public funds; member banks' insurance dues are its primary source of funding.
> When dues and the proceeds of bank liquidations are insufficient, it can borrow from the federal government, or issue debt through the Federal Financing Bank on terms that the bank decides.
We are still currently at "using premiums" and moving into "liquidating bank assets".
Premiums aren't paid by the banks. The banks aren't printing money. The premiums are paid by those using the bank. The sleight-of-hand wording is great for swaying preception but it an unacceptable deviation from transparency.
It's like the saying "...paid for by a grant from the Federal Government..." Nah. It was - one way or another - paid for by taxpayers.
There's a middle ground here that few people seem to have.
1. There should be no bailout.
2. The bank had a ton of assets and those assets still belong to the depositors.
3. The depositors shouldn't necessarily be made whole beyond their $250,000 insured amount, but denying them the bank deposits is also wrong. Getting 80 cents on the dollar for their deposits seems completely fine for example, or whatever that number turns out to be based on remaining assets.
4. Nothing is deserved to the bank owners/shareholders. If there happens to be more assets than there was deposits, then this money can go to owners/shareholders.
FDIC will unfreeze a non trivial amount of depositors funds by Wed or Thursday. They sold a lot of assets Friday. I’m personally not predicting huge job losses. There are lots of war chest sized balances in SVB that it doesn’t matter if they take longer to get made whole. So if they effectively unfreeze say two million per account or 45% whichever is larger on Wed/Thur and then balance in a couple of months I think Job losses will be minimal.
The word "bailout" is a distraction and red herring. For example, FT and Yellen use it as a weasel word here.
I notice several articles and threads derailing into conflations of semantic arguments around what a bailout is with specifics of the topic.
This is a trend (and, I suspect, tactic) on other topics and it only serves polarization. Try to not fall into this trap. It can be possible to call it out in a way which does not further derail the conversation.
(Saying it's a trend does not mean it's merely a recent thing BTW)
For anyone interested, the All-In podcast did an excellent job covering this on Friday. Particularly, David Sacks stressed this would not be a bailout, but merely backstopping deposits. SVB did nothing illegal or wrong, so it is not an Enron situation.
It's been awful. Everyone on Reddit is so hopelessly confused about the issue that they can't even complain about it right.
"No bailouts!"
Nobody has been (seriously) talking about them. Shareholders in SVB are toast 100%. Debtors too probably.
"We should nationalize banks that fail!"
That's basically what receivership is. We just don't call it nationalizing because the government just wants to make depositors whole and then get their hands out of the pie.
"We need more (or less) regulation!"
The FDIC stepping in right now - where it appears the bank is solvent but can't satisfy liquidity requirements - is exactly when it should. SVB as a business failed but (it appears) depositors are being made whole by the sale of the banks assets. The system appears to have worked while also not cutting the bank prematurely (nobody seems to be complaining that SVB wasnt in major trouble).
> Appropriate them, and leave small and mid businesses hanged to dry?
Yes this is exactly what I support should happen. The remaining assets can of course be used towards depositors (even beyond $250k FDIC insure). But beyond that, tough luck. In our American systems thousands, millions of people and small businesses fail and the answer is "tough luck". Their failure is too small for anyone to care. But when big banks fail government helps them, which is how this is seen as. If you have more than $250k in a bank account sitting somewhere, you're objective not destitute and you objectively do not need tax money to help you out any further. So, yes "tough luck".
This is not depositors fault, but it's also not tax payers fault. A bailout is a bailout. If depositors are bailed out, it is still a bailout.
>“Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
To me such statements feel like - either you are with me or against the humanity. Of course, the government should not gobble the money that belongs to the depositors and the fund should be distributed fairly to the depositors post liquidation. But making whole the deposits through the tax payers money will not be right. This is a business failure and what is insured is only what is guaranteed to be paid back. That is the risk business take when they engage in such transactions.
Individuals who had more than $250k sitting in bank account must be well-off and prudent enough to decipher the FDIC insurance limit.
>Depositors shouldn’t get anything beyond the insured $250,000
My understanding of what I’ve seen people mention is that depositors shouldn’t get more than the insured 250k from the FDIC insurance fund, not that bank assets shouldn’t be used to make depositors whole.
This sentiment doesn’t come out of nowhere. There have been a few panicked and very angry VCs on social media effectively calling for an immediate and retroactive increase in the limit for FDIC-insured funds.
Essentially there are some folks that want the government to step in to make depositors whole will leaving bank assets to be divvied up to make investors whole.
Some folks see this crisis and immediately jump to “how can I take maximum personal advantage?” It is those people that are creating confusion and pushback wrt the FDIC’s involvement here.
The financial illiteracy is the most disturbing thing here.
Commentator can only rail against "the tech world" in this instance if they've failed to grasp that supporting large depositor here this isn't a tech world issue but a financial system issue. And that goes with a generally decline in how knowledgeable the average HN commentator is.
At this point, large bank deposits are implicitly guaranteed and if one pulls that away, the world's financial system would likely fall apart. You can argue this system is terrible and talk about how to change but no one who knows the impact of this stuff want "1929 on steroids" and neither is anyone with power going to implement it.
Uninsured assets are what they sound like: uninsured. That's why companies typically hold a minimum amount of their assets as cash, and the cash they do hold isn't typically concentrated in one place. Credit risk is a huge aspect of financial management. If you don't manage risk you get losses. The "small business" sympathy campaign is typical of situations like these (pretty much touted in every bank failure) to justify public spending for private losses. The public doesn't get profit from company risk (particularly for tax dodging/low employment tech companies), it should not be expected to take the losses.
Clarifying the answers to the two misconceptions: 1) “Depositors shouldn’t get anything beyond the insured $250,000” and 2) “This is a bailout”
FDIC pays out the $250,000 insurance to SVB depositor accounts. FDIC recoups those costs from the SVB assets, and then pays out depositor account holders as much % as possible from liquidating the remaining SVB assets. It sounds like the latter will be disbursed in several increments as the assets are liquidated. All of that assuming no buyer by Monday.
If there is anything left after depositors are made while, then that might go to shareholders.
>“Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
Did the depositors (we're talking companies here) not know that the FDIC limit was $250K? If they did, why didn't they hedge accordingly by opening accounts at other banks? Was this not an unreasonable expectation of a company to do?
If I did the same thing, would I expect the government to cover the difference between the asset sale value and the insured amount?
Maybe the solution is to explain in plain terms what's going to happen. In other words, how much money there is, where it's coming from, and where it's going.
What are these assets? I'm assuming they include the loans that will be called in. When a bank calls in its loans, do they have immediate access to the money, or do the customers in turn have to sell their own assets to pay back the loans?
On the other hand, if the bank had sufficient assets to make their depositors whole, how did they fail in the first place?
Isn’t the entire point of having hundreds of banks the idea that competition will give customers choice, and that they can choose to bank with anyone based on their own risk tolerance?
Depositors are consider investors in banks. 250K and below will be insured by Feds. Anything above will be considered like civil forfeiture that will be given to debts with higher seniority. Salary and bonuses of staff will take the highest seniority. Then secured loans. Depositors will likely get a portion of their remaining money just before shareholders. This is very well established principle. You can go checkout how much depositors in Lehman Brothers gotten their money back.
If it was, then actual shareholders would recover at least $250,000 from their investment. As it stands, shareholders are poised to recover pretty much nothing.
“This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
Except shareholders suffered massive or total losses in 2008, such as AIG or Washington Mutual, despite it being a bailout. A bailout means all depositors are made whole, not the shareholders.
Pretty sure shareholders of bailed-out banks[1] weren't destroyed. For example JPM is up 155% since it's 2007 pre-crash high. That won't be the case for SIVB shareholders.
I've coined a new term for this: "All ideology and no idea."
It's a the perfect opportunity to be angry at a group; in this case "tech bros", VCs, and anyone attached to Silicon Valley. Hey, it is right there in the name of the bank!
Perhaps I can address your point about “generic screeching” against the tech world, by noting that the criticism here is often specific and direct. Not generic.
The usual suspects have been trying to frame it in terms of the regular old startup workers that will be affected.
But what about these entrepreneurs, the taxi drivers who were completely fucked by the onslaught of Uber and Lyft using financial engineering to lose money on each ride and undercut their livelihood:
And so on. We would also like to see social media held accountable for the harms done to children and communities and for our existing laws against anti-competitive behavior and collusion to be enforced against search and software platforms.
The chutzpah of the Silicon Valley influencer crowd over this weekend has become seriously fucking unbearable.
My feeds are full of sociopathic libertarians calling for government to make sure they never suffer any consequences for their failure to adequately manage risk?
Many of the people expressing this frustration are in favor of having the government heavily involved in preventing this kind of thing and helping if it ends up happening.
But if we’re going to regulate let’s fucking regulate.
To the tech people unhappy with screeching my reply is that there is nothing special about your humanity here. Your lives aren’t more important than the lives of the children of employees at the Carrier plant in Indianapolis, or the workers at the Amazon faculty on Staten Island.
If your values system only applies to you and your friends it’s not much of a values system.
I find it ironic that you mentioned taxi drivers, since many were initially collateral damage, and then moved onto drive for Uber or Lyft.
I would say that medallion holders, those with enough capital to pay the almost million dollars a license was running for around 2010, were the ones getting screwed. And if you ask me, I would compare them to whomever invested in SVB. Those will not get their money back.
Just click the link, that's exactly who the article is about. In those specific cases they aren't moving on to Uber and Lyft because they're dead.
They didn't have enough capital for the medallions in hand of course, these were mostly immigrant strivers who worked and toiled and deeply tapped their entire network of friends and family for down payments and were heavily leveraged for the rest.
Then Silicon Valley VC's purposefully made it impossible for them to compete using a massive wash of cheap capital.
What's that you say? The free market is tough, and they should have been able to adequately understand the risks? What can you do if they put their money into something and it didn't pan out right? The game has rules right? No take backs.
Regardless of what these articles may say, the vast majority of medallions are owned by private companies, not independent contractors. Drivers need to be licensed, but medallions are associated to cars, not necessarily people. And this is not a new phenomenon at all [0]
Effectively, Uber and Lyft did more damage to companies than individuals.
Companies that also speculated with the medallion prices by the way, as most were bought and sold privately, not by governments. How do you think they got to cost a million bucks in NYC back in 2013?
What’s the substantive difference between the people in this industry who got fucked and the startups and their employees who might get fucked next week that makes you (or the SV online community at least) care about one and not the other.
Tech companies aren't buying scarce titles that weren't mean to be speculated with. They are bank customers. That is the main difference.
That doesn't mean we shouldn't be concerned about those who lost their jobs because highly speculative investment companies went under, but it is clearly not the same.
Why should I care more about a startup worker who doesn’t get a paycheck next week than a taxi driver who can no longer feed his family because of new market entrants or a laid off machinist in an industry struggling to compete with subsidized overseas labor.
Make it simple I’m dumb and think each of them has the same claim on human dignity and a financial safety net.
I just did. Not sure what else you want me to say.
If you think that putting money in a reputable bank is the same as gambling a few millions buying government licenses from private hands, then I don’t know what to tell you.
SVB investors aren’t getting their money back either.
Also, this has nothing to do with globalisation. You are mixing things up. And again, kind of ironic that you would blame cheap overseas labour, while sympathising with immigrants driving taxis around NYC. Pick a lane, mate.
Regarding the VC-fueled "onslaught" on the regular old taxi drivers, perhaps you are too young to remember what life was like before Uber and Lyft? Before those companies gave literally millions of people around the world the ability to just up and have a job, with very little hassle? Which obviously has its own issues.
But then wait. Zoom out. The former system did too. The new companies disrupted the absurd, customer-hostile, worker-hostile, cartel-like monopolies those legacy industries had evolved into. Did you ever try getting a taxi in any US city besides Manhattan — not even the rest of NYC — before Uber? It was expensive, frustrating, and completely lacking in integrity.
I remember calling taxis to go the airport in SF before Uber existed and nearly missing my flight on multiple occasions because the government-granted taxi monopoly I ordered from the day before just never showed up at 5am, and oh by the way the company is closed at 5am, so wouldn't answer the phone, but would still try to charge you and tell you you missed your taxi when it showed up and hour late while you were cussing them out the entire drive to the airport in your own car so you could pay the airport parking monopoly absurd rates so you didn't miss your flight. Yep, I want that system back.
Taxis were absolutely terrible before Uber, and they only benefitted taxi companies, the banks that financed them, and then maybe in some cases taxi drivers. Frankly, fuck those old taxi companies. Good riddens.
This is the nature of disruption. Entrepreneurs have a negative experience with an entrenched industry, have a lightbulb moment, raise some money (or not — that path actually exists, though it isn't often discussed here), disrupt the often terrible old industry and create a new market, dominate the new market, and then often stop innovating and focus on keeping out competitors and protecting their rents. Then the cycle repeats.
The disruption cycle existed before Silicon Valley VCs got involved. It is happening right now to Silicon Valley-fueled (and -fueler) Google and (Silicon Valley-fueled) AI LLM chatbots. Google once seemed unstoppable, and suddenly people, including apparently Google, think it's vulnerable. It happened with the iPhone and Nokia and Blackberry! Yet no one will stand up for the poor candy bar phone designers, or soon the poor AdWords salespeople, because something much newer and ostensibly better has come along.
It's literally a tale as old as time, though like any historic cycle it is on increasingly shorter timelines. Protectionist, rent-seeking, and in some cases full-on colluding legacy industries merely try to keep their grip on the market through their own forms of financial and political engineering rather than seeking to innovate on their own.
So the quaint pastoral notion of the innocent taxi companies being obliterated before terrible Uber came along is just flat out wrong. They knew that they were rent-seeking, they knew they could innovate, and they just didn't fix it. Even after Uber came out, for many years they sought — are still seeking? — to defend themselves rather than create a better customer and worker experience.
As for, "if we’re going to regulate let's fucking regulate," that is actually what gets us the entrenched industries described above. Which "we" might collectively agree we want in some cases. We just need to be aware of what the second-order and beyond consequences of that regulation are likely to be. If we regulate in response to this, it is might result in the mega banks taking over smaller ones, continuing the consolidation and obliterating more local banks like SVB.
Or perhaps what you are saying is let's establish regulations where we place the depositors' rights above the rights of the banks? Where we separate investment banking from "consumer" banking again? I agree. And also, good luck with that! It also has second-order and beyond consequences which also could suck. Careful hat you wish for.
> Did you ever try getting a taxi in any US city besides Manhattan — not even the rest of NYC — before Uber? It was expensive, frustrating, and completely lacking in integrity.
Yes, lots of times and you’re overstating it substantially. The only reason Uber was cheaper was that they were heavily subsidizing each ride. Once they stopped that, amazingly, prices rose to match or exceed cab fares.
The specific area where Uber was better was that many cab companies would illegally refuse service to black neighborhoods. Uber deserves credit for breaking that but these days I’m hearing more anecdotes about drivers skipping pickups so I’m not sure that’s permanent.
One day someone may come on this message board and say:
Perhaps you are too young to remember what life was like before SVB failed? Before banks were made to be more responsible with depositor money so people wouldn't be hurt, and before the sociopathic fake-libertarian culture of Silicon Valley elites was finally dead and buried along with a few of their Tahoe cabins and a couple companies that advanced innovation by tricking people into ordering food from existing restaurants on fake websites?
I remember, they will say, how there was a bank that was so dominated by cronyism and collusion that they were forcing companies all from one very narrow sector to keep large uninsured balances in one bank while they bet all that money on long-dated securities for some inexplicable reason.
Remember how the bank got people to go along with this insane plan by giving the people with fiduciary responsibility for these company treasury decisions mortgages, even when the banking market in general had deemed them too high risk?
Wow that was crazy. Anyways they died. This is the nature of disruption. Entrepreneurs have a negative experience with an entrenched crony-driven legacy industry, have a lightbulb moment, and then build banks that don't do shit like that.
So the quaint pastoral notion of the innocent startups and VC podcast hosts being obliterated by the terrible negligent actions of the government is just wrong. They knew they were mispricing risk and they just didn't fix it. Even after their bank failed they sought -- are still seeking? -- to defend the status quo rather than realize a justified loss and create a better and safer banking experience.
I look forward to reading these comments in the future.
Just for reference I've been building on the web since about 1994. It's a lovely perspective that makes it much easier to realize just how fundamentally full of shit all these guys are on this topic today.
> advanced innovation by tricking people into ordering food from existing restaurants on fake websites?
Just want to point out that what you are describing is called a "ghost kitchen", and it’s a bizarre and terrible idea that never made any sense in the restaurant environment, because the existing storefront could barely keep up with the original orders, let alone having to use a separate menu with different ingredients and preparation style to keep pace with to-go orders. Whoever it was that came up with this idea really needs to take a step back and see how disastrous the idea has been for retail food establishments.
I agree with you, except for the comment about Libertarians. Let me assure you, as a member of the Libertarian Party, that we don’t in general like or support government bailout of special interests.
I 100% agree with you about the chutzpah level being really annoying! I also like your comments about the groups of workers adversely affected in the past.
> My feeds are full of sociopathic libertarians calling for government to make sure they never suffer any consequences for their failure to adequately manage risk?
Not sure to whom you’re referring, but they’re not libertarians.
I mean literally nobody is a libertarian by the dictionary definition, there aren't any on the planet. It's just a word people use to describe a value system where governments only help people like them and everyone else gets fucked.
Please explain why Roku had half a billion dollars sitting in a checking account and how we rectify that, and 119.5 billion other problems, without yet more money printing that affects everyone.
Move fast and break things, banking edition. Can I sign something somewhere to opt out of responsibility for these kind of things?
This is why direct democracy can't work for long. The average voter has a hazy and sometimes downright broken model of reality. I don't know how else to describe someone who wants to get back at Facebook by ganking the paycheck of some engineer at a 10 person startup.
These are start ups and people with connections to VCs who get free money to do all kinds of moonshot businesses. Start ups are basically pet projects of rich billionaires.
The majority of people in the world don't have those connections or opportunities, so there's definitely hate.
This is facile and representative of so much of the internet. Our ears our closed to each other, we cherry pick the weakest arguments, or ones that aren’t made at all.
No one seriously thinks there’s only $250K/client available. People are saying the same thing you are, just gleefully.
It also heads off the big risk, additional bank runs.
If depositors see strong signs of support they won’t run. They may very well be saving other banks without even having to deal with them with this move. No bank can survive a bank run beyond a certain point.
Seriously, it’s like a lot of people think the depositors should only get back $250k, and giving them back what remains of the rest of their money is a bailout. It’s not, it’s what the FDIC always does.
Isn't you company responsible to insure its own assets above the FDIC deposit limit? I guess personal responsibility only applies to poor people not corporations.
Framing bailout with a different word like 'make whole' does not make it not a bailout. The bank played with those people's deposits and screwed it up. Rescuing all the deposits would just exonerate the bank of all its wrongdoing and set a bad precedent. "There are no repercussions for bad business management".
Per capitalist philosophy, the bank should sink, along with whatever deposit was in there - "Buyer beware". If you dont agree with that principle, it means that you are not subscribing to capitalism, but to social democracy in which capitalist principles are overridden by socialist principles to protect the public. And the moment you go that way, you open the door for questioning a lot of the setup that rules the modern economy.
> Per capitalist philosophy, the bank should sink, along with whatever deposit was in there - "Buyer beware".
Why do you think that? There is no axiom of "capitalist philosophy" that says "when one party screws up all parties must maximally feel the pain".
There is a framework for unwinding these sorts of things. Depositor agreements as well as the relevant regulations and laws regarding business agreements and contracts are all part of the "capitalist philosophy".
> Why do you think that? There is no axiom of "capitalist philosophy" that says "when one party screws up all parties must maximally feel the pain".
That was a capitalist business in which the depositors were LENDERS of that business with the understanding that the business would use their money for profit making activities and give them an interest rate and other returns in the process. Along with whatever investment scheme the bank was providing for its clients.
Those depositors could have chosen any bank in the US, and most of them have the power to choose any bank in the planet. But they chose SVB for what it provided. It was a business decision. They chose the highest yields by choosing this risky bank.
And now that the risk taking caused a crash and burn, the rest of the public who did not take those risks cannot pay for the sunken bank or its mega depositors. They all took risks, its their burden to bear. Profits cannot be privatized and risk socialized instead.
> There is a framework for unwinding these sorts of things. Depositor agreements as well as the relevant regulations and laws regarding business agreements and contracts are all part of the "capitalist philosophy".
Precisely. And the limit is $250,000. The government is responsible with bailing out that amount by law. Not the rest. Doing otherwise not only bails out risk taking depositors who took a risk while keeping all the profits - it also reduces SVB's liabilities and risk and props up its value. Its an indirect bank bailout too.
Laws and regulations that protect the players in an economy come from socialism. Not capitalism. In capitalism, 'buyer beware' is the rule and those who take risk and screw it up are left to sink with their bad choice. You live in a social democracy created by imposing socialist practices on capitalism.
If the laws said that "Up to $1 billion of each depositor account can be bailed out", yes, it could have been done. But it doesnt say that. And any such bail out of such mega deposits by using public money is a middle finger given to everyone who did not take such risks.
> Precisely. And the limit is $250,000. The government is responsible with bailing out that amount by law. Not the rest.
You seem to be assuming that there are no assets available to match to the depositors above the $250,000 per account. The legal framework doesn't prohibit additional amounts over $250,000 from being made available to the depositors and as far as I can tell the assets are available to do that.
> You seem to be assuming that there are no assets available to match to the depositors above the $250,000 per account
I dont assume that. Since the bonds they have lost their value, there aren't enough assets to match the deposits. The size of the haircut was dependent on what the market would decide to offer when those were sold. The bailout prevented that from being needed.
> The legal framework doesn't prohibit additional amounts over $250,000 from being made available to the depositors
Legalese doesnt change the nature of the event. The law allowing arbitrary application of the limits means that there is no limit, or worse, the limit depends on who is being bailed out. And that's exactly the message that was sent: If you are big enough or you can pressure the government to bail you out, just screw around with other people's money and gamble. If you win, you will win big. If you lose, the losses will be socialized.
I find your comments very hard to follow. You seem to be conflating depositors and investors, liquid assets from illiquid assets, taxpayer dollars from FDIC insurance funds, and so on.
I was trying to make a small point that if the FDIC unwinds the assets of a bank in a liquidity crisis and the resulting cash exceeds the $250,000 limit for the depositors, then the depositors should get also get that additional money (side note: I think employees are even higher on the creditor list than depositors). You seem to be saying that the depositors should not get anything because "caveat emptor" and that would be a bailout. Then who should get that money?
I don't know if the cash value of SVB assets will satisfy the $250,000 insured deposit value or not, I haven't followed the story closely enough. All I'm saying is that any excess that is available should be distributed to the depositors and doing so is not against "capitalist philosophy".
If you want to focus the conversation on the scenario where the cash value of the assets turns out to be insufficient to cover the insured deposit amount, then we could dig into where any additional money is coming from (FDIC insurance fund and ...) or what the moral hazard of making depositors, never mind investors whole might be.
I was just trying to sort out those scenarios a bit for clarity.
Think of in terms of the same sneering contempt we've seen from Silicon Valley towards middle America. Except the idea that Silicon Valley taxpayers should contribute to bailing out anyone else would have been seen as laughable, middle America hasn't been earning multiples of Silicon Valley, and middle America hasn't been censoring everybody else, or monetising privacy abuse/destruction of youth mental health on a scale never before seen in human history.
It will hurt silicon valley extremely hard. It already is, paychecks won't be coming, trust is gone. Silicon valley was seen as brilliant but now is a joke.
Ironically most small to mid non tech businesses will be just fine.
” Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
“This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
If the bank had sufficient assets to make all depositors whole the FDIC wouldn’t have stepped in. It doesn’t.
I assume, then, you agree uninsured deposits ought to take a haircut proportional to the shortfall?
If so, you have the same position as all the “salty” posters.
This actually makes a ton of sense, lets not forget that a bailout in this term is really pointing towards saving the bank itself, and its shareholders. There is inherent risk in equity investments, and it likely should have to suffer for its poor decisions.
But when it comes to depositors, I think it makes a lot of sense to make them whole, especially in the case of SVB where the bank likely has pretty close to enough assets to cover the liabilities (deposits), but its tied up in such long term investments that it could take a long time to get it out.
But moreso, when we invest in companies, we deep down know there is a possibility of the investment going to 0. We often don't think when I put money in a bank it can go belly up, this would obviously hurt the trust in our banking environment if depositors not made whole.
Did they help depositors that lost money in the last 500+ bank collapses? Why do they get special treatment? The government has laws and rules the depositors are insured up to 250k. Either they liquidate and everyone takes a hair cut. Or they wait till the bonds mature and can pay them out. But the government should not relieve anyone past what is legally available.
Yes, in the case of large retail banks, the government did help. In 2008, the federal government purchased stock in several banks in order to recapitalize them. One could argue this was a starker example of moral hazard than letting the bank fail, but making depositors whole.
I don't agree. There are many instances where using a boutique or smaller institution is better for your business to run.
My company used to bank with Bank of America. It was awful. They seemed to have no concept of how to work with small business or a tech startup. We moved to another bank (not svb) and it's been a much better experience.
Only leveraging the giants of a given industry is not good for innovation nor specialization.
It does seem as though larger banks can only work with entities that fit inside their self-described personas. If you do not align exactly with one of their personas - good luck.
At least that is what I have seen here in Canada, I imagine the US is very similar in that regard.
Yes, there is safety in size. But operational capabilities of companies using the big banks would be cut as well.
To draw an analogy, should every business owner with physical goods only sell and distribute their goods through Amazon and/or Walmart? Yes, their size provides many benefits, but also has dramatic costs to their business and impacts how customers are served.
This is a very strange take. You’re arguing for the consolidation of wealth into a few giants? These giants then in turn will own a significant portion of the economy, will be subject to far less competition, will stagnant any given area based on what they’re willing to invest in or what they’re not (as a service and in the economy), make them extremely capable of owning politicians and setting the directions of the country, and enable few to gain the experience and opportunity that comes with going up the banking ladder because few seats exist.
Local community banks make it far easier for farmers and coffee shops to get loans. Local community banks keep money locally and grow locally. The consolidation of banks is a problem to avoid, not desire.
Wait so, you're in favor of the bank being bailed out here?
The phrase "too big to fail" doesn't mean it's impossible for it to fail; that's not a thing. It means the govt/public feeling obligated to bail it out when it does fail because the public thinks they're so dependent on it that they're worse off of they let it fail.
The government, as we saw in 2008, won't allow those banks to fail. That's literally what "too big to fail" means. If the government doesn't have the ability to keep such banks afloat, then we have worse problems.
By ‘afloat’, do you mean, “keep the depositors whole” or “keep the bank operating” or both?
A lot of confusion centers around the assumption that any bailout will be for the bank’s operations, not for the depositor’s deposits. That’s perfectly valid confusion - historically it’s been the latter! - and the FDIC isn’t willing to talk about deposits yet, either.
We do not know what specifically they are going to do. Helping depositors may just mean expediting the recovery process even if there is a 10% haircut. It could mean something else. The government forced the sale of countrywide and other companies so this would be no different.
Also the term "too big to fail" comes to mind. Isolated risk vs systemic risk. Which one is it now? We can have opinions but Yellen may have more informed data about the gravity of the situation. It does make sense for governments to intervene in systemic risks such as this and covid.
It makes sense that they’ll make depositors whole before even thinking about the rest. From the top of that page:
“ All depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
Yes? Most famously when IndyMac failed they retroactively raised the insurance limits.
It’s almost certainly not going to come to that in this case as the normal fdic playbook will work but the federal government has a history of taking action when extraordinary bank failures happen.
You let one bank collapse, OK. If the collapse causes other banks to collapse then it's bad. When WalMart, Costco can't transfer money to fill shelves, people go hungry. When people can't get their wages, they go hungry.
Then the laws need to change and a solution for the future must be made. We can't keep bending the rules when the laws don't work out for this one entity but when the little guy is in the same position he’s on his own. We need a system that's fair across the board. Increase fdic insurance add optional insurance options. Call it a day.
Alternately, recognize that Capitalism is chaotic and prone to collapse. Then require risk management be updated accordingly AND use something like Socialism for when that chaos and risk are unacceptable.
And then don't mix the two.
Basically the (idealized) Democratic Socialism of the Nordic governments.
Food for thought:
David Graeber in Debt: The First 5,000 Years asks if Capitalism might be intrinsically unmanageable, so therefore prone to collapse. He notes that every economy in history experienced a debt crisis, requiring intervention (eg revaluing currency, revolution).
FYI, I'm not an economist, so I'm not aware of anyone making the specific case that Capitalism is chaotic and so therefore will eventually collapse (aka chaos theory).
>What Alan Greenspan, the former Federal Reserve chairman, and a staunch defender of free markets, actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.
>The case for nationalization rests on three observations.
>First, some major banks are dangerously close to the edge in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.
>Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.
>Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
... >Still, isn’t nationalization un-American? No, it’s as American as apple pie.
Or we could just go with CBDC give everyone government paid 0-interest account at central bank. With zero risk to lose the money. As it could truly be cash equivalent while being there.
Then if people want more they could get account somewhere else, but fully carry the risks from that.
When my business gets a new order, and needs $200,000 loan we don't have to buy the raw material, we need short loan of 1-2 months from the bank. The bank uses your deposits to make that loan.
Isn't this just exactly what the FDIC is? The vast majority of people do not have more than $250k in deposits sitting in cash. More than that sitting around in cash wouldn't be a prudent financial decision anyway, since putting that capital to work (even in very safe investments), would yield a better return.
Those that are below $250k are taking effectively zero risk. The worst case scenario is possibly losing access to funds for one business day before the FDIC returns deposits up to the coverage limit.
This is, of course, without playing games using sweep accounts or other instruments.
How many businesses have less than 250k though? I’m surprised that the insured limit isn’t higher for businesses. Depositing your money in a bank doesn’t feel like it should be a risk/reward decision, like investing in the stock market
This speaks to my latter comment. You can use sweep accounts to increase protection, money market accounts which have different risk profiles, T-bills backed by the USG, etc.
That said, it's all a tradeoff. Increasing FDIC insurance coverage means decreasing the yield on savings accounts, since banks fund FDIC and wouldn't take a cut in profits for it. Not sure what the optimal outcome here really is.
All of the money the bank gives out comes from deposits or shareholder capital. The bank isn’t the mint; it isn’t allowed to print money.
The way that banks expand the money supply is by providing the illusion that all my money is there and available while at the same time being loaned out to someone else.
Fractional reserve banking means that banks don’t have all their deposits in hand. It does not mean that they invent cash for loans.
(The distinction here is less obvious in a digital world, but it’s quite clear if you think about how it would work if physical cash was used)
I’m inclined to agree, this kind of special treatment is fairly ridiculous, depositors in other bank failures with funds over FDIC limits have to wait for fire sales to recover, which can take years in some cases.
I’m not sure exactly what Yellen is proposing (I only subscribe to print FT so no access), but it seems like special treatment for the well connected on Sandhill Road.
It's not particularly unusual. The FDIC has generally arranged things via sales and capital injections so that the bank owners get ruined while the depositors, insured and otherwise, get just about every back. If they did otherwise, no one would bank at local banks.
What is unusual is the Treasury secretary making public comment about it. But this is a unusually large bank failure and a rather critical moment.
The response to this crisis has been very telling. No one I meet wants Big Tech to be saved or has any good response when asked about Silicon Valley. The response is one we would expect for a group of people that have enslaved us rather than liberated us. Made us miserable rather than delighted.
I see two waves in Silicon Valley. Wave one was actual innovation, computers etc. Wave two was rent-seeking conmen fueled by zero interest rates and privacy thieves.
This seems to be a core argument for those in opposition to shareholders getting liquidated bank assets vs depositors, but I don't really understand it because it seems to be kind of arbitrary. So there's fdic insurance, that's nice, but why does that mean anything regarding whether depositors or investors should be made whole first? The more important and real question is which option has what outcomes in terms of future investor behavior, or future depositor behavior?
If it's a question of rigid legality that also doesn't make sense to me, because from what I remember from 2008 was the government's legal options were incredibly widespread.
My guess ( I havn't looked at is the last ones ) is that the majority of deposits were well under 250k, and that hundreds of thousands of jobs weren't on the line.
Also, you are talking about a major banking collapse if people start thinking that their deposits aren't safe. (a lot of people will start pulling money, even if under 250k). There are so many irrational people out there...
edit: I guess somewhere in what I said was confusing, I was referring to past fails where most deposits were likely well under the 250k. NOT SVB where the vast majority were well above that threshold.
>About 37,000 customers accounted for nearly $157 billion or 74% of the bank's assets with an average account size of over $4 million
So it seems the opposite is almost true, because the accounts are valued so high with generally more flexible account holders, they're able to move swiftly
GP is talking about the majority of accounts, and the number you cite is a percentage of funds. If 98 people have an account with $1 in it and one person has an account with $102, then 51% of the bank's assets are in accounts > $100, and the vast majority of accounts have $1.
I would expect larger accounts to make the percentage of deposits in accounts with > $250K to be higher than the percentage of accounts with > $250K because that's how numbers work.
No one here actually reading the thread, all assuming you’re talking about SVB and not (as the parent says) previous bank failures.
To address your actual point: we don’t know whether WaMu depositors had a lot in uninsured accounts, probably not as much as SVB, but we do know that all depositors were made whole when JP Morgan Chase bought the bank — from assets WaMu already had, not the FDIC’s pool. Even senior creditors received some amount back!
I'm going to copy-paste a good chunk of my answer from an earlier thread. (Original: https://news.ycombinator.com/item?id=35101797) - the article "The Demise of Silicon Valley Bank" wasn't on the front page long, probably because it was slightly dry and didn't provide any new hot take angles. But it did give out actual numbers:
> As at the end of 2022, it had 37,466 deposit customers, each holding in excess of $250,000 per account -- and -- The bank does have another 106,420 customers whose accounts are fully insured but they only control $4.8 billion of deposits
So SVB had only about ~150k banking customers. And of those, less than 40k are actually affected by this debacle.
-- -- -- --
The numbers are being mixed up, it feels. Only 3% of total deposits are covered witn the guaranteed FDIC insurance. The rest are spread across less than 40k depositors. And the average (not median, but plain mathematical average) amount on those accounts appears to be $4M.
I am stating for prior fails, the number from SVB was that only ~3% were insured. Which was my point, that in the past, there wern't as many e(a)ffected (and they (uninsured) could have received special treatment for all I know).
With this place the majority were over 250k. Something like 97% or something. It was a big bank for businesses. Why they were bizarrely keeping such large sums in one bank account I don’t understand. Roku had almost $500 million there.
Apparently much of the money was in long-term treasury bills, which is only perfectly sensible if you believe you will not have to access that money for 5-10 years.
Not in any meaningful sense if you are only looking to park the money safely and hold to maturity.
Buying 3 month T bills won't pay much, but it will pay more than the interest SVB pays on your checking account balance and importantly is backed by the full faith and credit of the us govt.
Bailing out the owners is obviously completely out of the question, but why bail out the depositors beyond the guarantees they knew they were getting at the time?
Funny how language is being used to frame all this. For depositors it's made whole, not bailed out, when of course it's no less a bail out.
Because businesses need to be able to pay their employees, because the banking system as a whole relies on trust to function.
And because we're not really bailing out depositors. The FDIC is just doing its best to make sure depositors take precedence over bank shareholders, which is as it should be.
Sure, you could let Roku lose a half billion dollars, but it's not their fault SVB couldn't meet its obligations. They didn't invest in the bank. Placing your money in a bank should not be a gamble.
Businesses need to pay their employees from the money they have not from taxpayer money. If a business loses that money because their banking partner lost the money, taxpayers have no obligation to help (beyond the 250k)
Can the banking system learn from this and improve? For sure it can and that would benefit everyone. But we cant retroactively change the rules. In fact you can argue that people would vote more pro-legistation if something like this was allowed to fail like it should and that would protect more people in the long run.
And yes if an insurance fund pays for it then I am all for it. Someone other than the taxpayer has to foot this bill thats all.
The only way taxpayers avoid footing the bill here is if the FDIC can sell assets to cover 100% of deposits in a very short timeframe, or if another bank comes in and agrees to cover the shortfall.
In any other scenario, if businesses with deposits in SVB lose some material amount of their cash, people will be getting laid off, prices will increase for some goods, and some companies will fail. All of these things negatively impact taxpayers.
It's not clear to me what the better outcome here is, but this is going to affect everyday people either way.
Neither of the first two are happening, and in any case, would result in losses by another name (because the assets are likely not worth 100% of deposits, and any buyer would have to adjust their business to eat that shortfall).
There is no evidence that your doomsday set of "any other scenario"s would be any more destructive than bailing out companies that are evidently poor at managing their risk, and - as startups - are at a generally high risk of folding in the future anyway. Such a bailout constitutes a headfirst dive into the sunk cost fallacy. Are the people who lose their jobs more or less likely to have a network that will help them find a job, compared to those who will lose the taxpayer-funded services cut to pay for a bailout? Are the startups in question actually producing anything of material worth to the average American's budget? Frankly: do we care if these businesses fail? Maybe some of us would be happy to see them go away?
I quite literally said in the message you're replying to "It's not clear what the better outcome is here" so I'm not really opining on what's preferable. It doesn't change the reality that this is going to impact "regular people" in the end whether it's intentional and direct in the form of a bailout, or indirect in the form of layoffs.
To your questions: The companies you'd prefer to see shut down almost certainly will outside of the zero interest rate environment we've recently excited. But there's quite a big difference between businesses running their course and dying, and them rapidly laying off employees alongside one another because they just lost much of their runway. Mass layoffs create a sudden oversupply of candidates and strain the system, making it more difficult for those laid off to find new jobs.
While I'd prefer businesses not die for "random chance" of having chosen the wrong bank, my concerns here are not for the companies themselves. I'm much more worried about the downstream impact of employees who will go without wages or systemic failures of other banks if we can't regain confidence quickly.
I maintain that you're privileging the economic wellbeing of privileged tech workers, who have the resources to weather unemployment (and their communities and municipalities who are likewise situated, recognizing the effect of this mass layoff), over the workers that this bailout is now going to effect. There's a multi-hundred-billion-dollar hole in the Treasury balance sheet which is now, ultimately, going to be filled with SNAP cuts, and job skill development cuts, and public transit cuts, and cuts to all the other low-hanging discretionary fruit that help keep life in the bottom two quintiles of the American wealth ladder viable. They get hurt, because the people at the top are incompetent.
I've said (roughly) in another thread, I would rather have well-off people get hurt alone or alongside poor people, rather than poor people alone. When well-off people get hurt, problems are more likely to get fixed. What we've seen is proof positive of the assumption of influence and reach that underpins this notion, but in the most cynical way imaginable. They said: fuck you, got mine.
If you think this created a multi hundred billion dollar hole, then I’m not sure you’re following what actually happened here.
SVB had assets to cover most deposits, if not all. FDIC needs time to sell those assets, but depositors need the security of their cash now. FDIC pledged a larger portion of their pool, which is funded by banks, to cover withdrawals while assets are sold.
By most reasonable estimates, FDIC will recover at least 80-90% of deposits at no cost to anyone. This means that, at most, there’s a 10-20B hole to plug, if any at all. If needed at all, that hole will be plugged by a special assessment on other banks. Given the relatively small dollar amount, it’s my personal opinion that banks wouldn’t bother trying to pass down the fee, be that’s the primary way this would impact regular people.
> if businesses with deposits in SVB lose some material amount of their cash, people will be getting laid off, prices will increase for some goods
Why so necessarily? The first thing to happen is that their equity holders will take a hit. Only then will the other things you state happen. And if the equity holders take a hit, well, that's exactly why they're equity holders.
Losing deposits means losing cash flow to fund runway. Many tech companies just spent the last year optimizing to get 18-24 months cash runway. If they just lost several months of that, they will need to recover it somehow. That will come either from layoffs or increasing prices.
Similarly, companies raise capital to achieve goals. If 10-20% of that capital vaporizes, the ability to achieve those goals will be harmed. Some companies will not achieve those goals, and may be unable to raise future financing.
We're talking about operating cash for these companies. The hit to equity holders is not the problem right now.
Of course my comments above refer mostly to venture backed tech companies, but that represents a significant share of SVB's clients.
> Many tech companies just spent the last year optimizing to get 18-24 months cash runway. If they just lost several months of that, they will need to recover it somehow. That will come either from layoffs or increasing prices.
Or by raising earlier than expected, as a down round? I don't understand why a solid company would be in trouble (though I'm not convinced that a high proportion of SV companies are actually solid).
> Or by raising earlier than expected, as a down round?
Raising down rounds will be lower on the priority list to layoffs. Most companies would vastly prefer to buy more time to grow into their next milestone than to admit they can't achieve it and raise at a lower valuation. We generally know this to be true, in part because we just watched it happen across the entire tech ecosystem over the last ~12 months or so.
Logically, it makes sense. VC backed startups operate on optics and momentum. Layoffs are recoverable, failing to hit goals is much less so (I'm speaking purely about optics here, not my personal preference).
> though I'm not convinced that a high proportion of SV companies are actually solid
This is likely accurate. But that's not necessarily criticism, most companies in their early days aren't "solid" (if by solid you mean default alive and/or having a path to profitability). SVB is overly exposed to these types of clients, which is why I think there stands to be a large impact here if depositors need to take a 10-20% haircut.
I hear you. Having run a venture backed startup myself, my opinion on how modern venture businesses work is...not at its highest point, to say the least.
At the same time, I really have a preference for people who didn't sign up for this kind of risk (I.e. most companies are Seed-Series B companies who understood the risk that the company might fail, but not the risk that their company had all their cash in one bank that failed), to not be laid off as a result of this.
Life is not fair! A lot of times bad things happen due to no fault of your own. That doesnt mean government should come bail you out. In fact I am bootstrapping a business and if you dont let this event kill all my competition I would call that really unfair.
Furthermore it is unlikely this will even affect anyone that is actually vulnerable like workers at Walmart for example.
There are plenty of workers at tech companies that are extremely vulnerable. It's an absolute myth that startups employ only 6-figure salary earning tech employees.
Regardless, you're not replying to a thread where anyone claimed that the government should bail anyone out. You're replying to a thread where I mentioned that taxpayers are going to foot this bill one way or another. Either because the government does bail out the bank, or because regular taxpayers lose their jobs in the fallout.
> Taxpayers benefit enormously from a banking system that isn't a crapshoot.
I wonder how many people here would be screaming the exact opposite if this was their personal banking account?
Yes, you can spread your money among multiple accounts. However, data shows it's exceedingly rare (1) an individual bank to fail (2) depositors to loose any money when a bank fails.
According to the FDIC list of failed banks [0], there have only been 17 bank failures in the past 5 years. It's been 9 years since a bank has failed without finding an acquirer.
To say this is something you must plan for is a bit of a stretch.
Taxpayers do have an obligation to ensure that I do not view my checking account as a risky loan to the bank... It is not a positive outcome for taxpayers if they no longer view their deposits as safe. $250k is also a ridiculously low insurance amount for any company with a non-trivial number of employees.
Why are you pretending that Roku would get $250k and not a cent more? They won't. The bank has plenty of assets, they'll take a 5% loss for their strategy of taking on counter party risk, not a 99% loss.
Everyone is going to be able to pay their employees, unless they're looking for a reason not to.
But if they were to get 100% of their deposits, even if the bank's assets would only cover e.g. 95%, it would be a bail out, wouldn't it? The government would step in and cover the difference with tax payer money.
Because that seems to be what some people are demanding, but they don't use the term bailout, because of the connotations.
But that's what everyone is talking about when they say the government "should make depositors whole", because otherwise they won't be getting their whole money back. And clearly nobody would say "I want the government to follow the known procedures, get your congressman on the phone today". They want the government to deviate from the known and agreed upon procedures: they want a bailout.
There wouldn't be any necessity to say anything at all if that wasn't their demand.
In Britain the protected amount is £85k per person per banking group, and it's universal that anyone with more than that splits it over accounts with multiple banks, taking care to make sure the banks aren't part of the same banking group.
Is it any different over there, albeit for the rather higher limit, in America?
The whole reason we're having this discussion is that it appears to not be universal for anyone with more than the insured limit to split deposits over multiple accounts.
But there's also a big distinction between the working capital required for a business and the size of e.g. a personal savings account, which is kind of getting lost here.
If your payroll is $1M every month then it may not really be practical to split deposits across many accounts.
Isn't the risk of bank runs increased without this assumption? If we're all consistently attentive and worried that we may not get our bank deposits back, then every minor hiccup at a bank could plausibly cause a run.
> Bailing out the owners is obviously completely out of the question, but why bail out the depositors beyond the guarantees they knew they were getting at the time?
The insured amount is absolutely guaranteed. However, it's still standard for a failed bank to make it's depositors whole.
I don't have sources, but data I've seen indicates of the nearly 600 bank failures since 2000, few, if any, have resulted in a loss of deposits.
----
Put another way. Most employees don't have contractual obligations to receive severance. However, it's culturally expected that businesses performing layoffs will offer severance. Those who don't risk people not coming to work for them.\
Same situation in the US. The USD and it's banking system is seen as incredibly stable and robust. When chinks start to form, it raises concern and people might start looking to bank in other currencies.
> “But we are concerned about depositors, and we’re focused on trying to meet their needs.”
I don't think "trying to meet their needs" is the same as ensuring they will "be made whole".
The biggest issues around people with uninsured accounts (the vast majority) is both how much and how long. This will be a mess if either the amount is significantly less than "whole" or if the time to be made whole takes months not days.
This is an implicit argument for de-privatizing banking. There is inherent risk of losing your uninsured money when you lend it to a private company. If all deposits were to be fully insured we’re talking public banking, or much worse, private for-profit banking that is fully de-risked by taxpayers, incentivizing execs to make arbitrarily risky decisions and, basically, freely take however much money they want from tax coffers.
> But when it comes to depositors, I think it makes a lot of sense to make them whole, especially in the case of SVB where the bank likely has pretty close to enough assets to cover the liabilities (deposits), but its tied up in such long term investments that it could take a long time to get it out.
If anybody gets an extra penny more than $250K from the Feds than that is by definition a bailout.
> But moreso, when we invest in companies, we deep down know there is a possibility of the investment going to 0. We often don't think when I put money in a bank it can go belly up, this would obviously hurt the trust in our banking environment if depositors not made whole.
FDIC insurance is not infinite. Not understanding that is no fault of the rest of society.
And who knows what perks, direct or indirect, those depositors were getting for having that cash at SVB?
Whether it’s stupidity or greed doesn’t matter. No hand outs.
Don’t you think there is a huge difference between the bank shareholders getting bailed out and depositors getting bailed out?
Let’s think about the risk of “morale hazard” in these case:
Bail out the shareholders: we can throw more money into the stock and never lose money! Risk free returns, I better pump this bubble up!
Bail out depositors: I feel safe having my money in a reputable bank! I can operate my business and pay vendors/employees, I can keep doing my job without interruption.
Bailing out one group makes them greedy, bailing out the other makes them productive.
This is not old testament judgement, this is a financial war and our gov has to use every appropriate tool to fight it.
> Don’t you think there is a huge difference between the bank shareholders getting bailed out and depositors getting bailed out?
Of course they're different. But they're both bail outs.
If my house burns down and I have $250K of home owners insurance, do I get the rest covered by the Feds?
> Let’s think about the risk of “morale hazard” in these case: Bail out the shareholders: we can throw more money into the stock and never lose money! Risk free returns, I better pump this bubble up! Bail out depositors: I feel safe having my money in a reputable bank! I can operate my business and pay vendors/employees, I can keep doing my job without interruption.
SVB, and banks in general, offer incentives for people to deposit money. It can be anything from account bonuses to non-monetary perks like access to other sources of capital. To say that depositors had nothing to do with the losses is extremely naive.
> Bailing out one group makes them greedy, bailing out the other makes them productive.
They're both greedy. Or stupid. Or both. Either way, no hand outs.
> This is not old testament judgement, this is a financial war and our gov has to use every appropriate tool to fight it.
The government does work solely for the depositors or investors of SVB. It works for all of us and we've established rules for when it is authorized to step in and provide both liquidity and direct bail outs.
Romanticizing a specific customer base does not earn them special treatment.
> If my house burns down and I have $250K of home owners insurance, do I get the rest covered by the Feds?
Not on your home, no.
But if it were your factory and you were responsible for a respectable percentage of the workforce being able to put food on their tables, I would hope a gov entity step in and try to reduce friction for getting the factory back on its feet.
And again, that reduced friction doesn’t need to be a check to you, it could simply be forced asset sale.
There is not much difference if you look at it from the point of view that one of those parties was just underestimating the risk they were taking (which is true of all bad decisions in life). I see no reason to bail out depositors over 250k
When you capitalize a bank with deposits, are you really an “investor” with expected risk/reward?
I am not for totally punishing someone who expects a near-zero return on a loan, especially when they made the loan with the expectation the borrower would help other businesses be productive.
We should not take for granted that value can be transferred through time for free and without any risks. When you give another party control of your money (including a bank) they make decisions on your behalf for which there are consequences.
> FDIC insurance is not infinite. Not understanding that is no fault of the rest of society.
I think we should really not forget that SVB hit duration risk on their assets that is almost definitionally not an issue for the FDIC. This isn’t “bank fell apart due to bad loans” this is “bank fell apart because money is locked away for 10 years but is basically guaranteed”.
> If anybody gets an extra penny more than $250K from the Feds than that is by definition a bailout.
I think this is naive. The FDIC or some government entity is in a pretty reasonable position to take on the longer duration assets that appear to have brought down SVB. If they hold those assets to maturity then everything is fine, and they can return deposits today if necessary because they don't need to sell assets to generate cash.
> If they hold those assets to maturity then everything is fine, and they can return deposits today if necessary because they don't need to sell assets to generate cash.
The federal government will be out of pocket by the interest rate spread if it does that. That is a bailout.
> FDIC insurance is not infinite. Not understanding that is no fault of the rest of society.
I hope you realize FDIC insurance isn’t even guaranteed to be $250k. The FDIC is funded by member fees and can only cover a very small amount of “insured” losses. If it goes beyond that, depositors would need a bailout.
It’s practically infinite precisely because if a bank goes under and you lose your checking account the entire banking system immediately collapses and there is a real bank run 1920s style.
I look at the FDIC and its ability to either pay or be bailed out to pay as an existential function of the State (US specific) and the inability to do so threatens its existence.
It’s not because the FDIC insurance is for the masses - everyday workers and waiters and taxi drivers and teachers. Lack of it can cause a revolution and actually destroy the economy whereas SVB will bring some companies down with it (unless investors take care of their portfolio companies) and VCs will send lots of Tweets and stuff.
The scale is extremely important.
But also we didn’t bail out Enron shareholders including regular folks who lost their life savings - this is more akin to that or something similar. VCs are professionals and sometimes shit happens and this time some of them got screwed (undeservedly) but screwed nonetheless. But it’s no different than the employees losing their jobs or when someone up and moves a factory - we don’t bail them out either and they also get screwed.
Low risk is not the same as no-risk. FDIC amounts will be returned and bank assets will be sold to cover deposits as much as possible. Outside of an investigation into any wrongdoing that should be the end of the involvement of taxpayers. VC firms should protect their investments or the government should get an equity stake or favorable loan terms for remaining balances. It’s really bad for the free market to signal that all banking is risk free for any corporation. If we are going to do that then just nationalize the banks and cut out the middle person.
As others have said, if depositors are bailed out, it's a bailout. Pretending that changing the definition makes a difference is childish.
Whatever the government decides to do, this makes the VC and startup industry look really weak and entitled, and knocks them down from risk takers building the future to the same status as a bunch of bankers looking for a handout.
There was an opportunity here for VCs with lots of clout, YC included, to come up with a private solution to backstop this. It would have shown independence, maturity, and that more government oversight and intervention is not needed. That adults can take care of themselves.
Instead they went whining to the government, made a petition, tweeted sadly, and whatever else. It's unbecoming of an industry that's supposed to be scrappy and have an appetite for risk.
Respectfully, I think you are the one playing with definitions. “Bailout” refers to shareholders. It refers to bailing out the institution, not it’s depositors.
We can talk about a depositor bailout if you want, but let’s not pretend it’s the same thing, not pretend it’s what the term “bailout” commonly refers to.
Multiple sources attest to the contrary - very consistently a "bailout" is taken to refer to any kind of financial assistance provided to a failing institution (not just to the shareholders). For example, Investopedia:
What Is A Bailout?
A bailout is when a business, an individual, or a government provides money and/or resources (also known as a capital injection) to a failing company. These actions help to prevent the consequences of that business's potential downfall which may include bankruptcy and default on its financial obligations.
All the major English dictionaries, and Wikipedia will tell you same thing.
To call this action anything other than "bailout" is to mince words, plain and simple.
Except that’s still not really what happened. The depositors are being made whole with a mix of SVB’s capital and funds previously paid to the FDIC by the banks, and pooled for related purposes. Taxpayers aren’t footing the bill.
It’s not meaningfully a bailout. Certainly, it’s different from 2008 in an important way.
Again, we can talk about “bailing out” depositors, if you really want to use that word, but let’s not be misleading.
Even if the transaction turns out to be cash-neutral for the government - or even provides a small profit, as with TARP - it is still providing very considerable resources in the form of liquidity, coercive muscle - and sheer gravitas.
It’s not meaningfully a bailout.
Tomato, Tomah-to.
In the same ways as if you go driving cross country with inadequate money in the bank (and inadequate insurance), and then have a major breakdown -- forcing you to ask your parents or your friends to wire you money -- they are unambiguously bailing your sorry ass out, even you promise to sell your precious vinyl collection that pay them back, once you get home.
We’re changing the (very well) known rules in the middle of a crisis and acting like we didn’t know what happened could happen, when we did. This is a bailout
The only reason you and others seem so desperate to redefine bailout so you can call it a bailout is because you want to attach the negative connotations to that word to “hurt” the people you want to be hurt.
Dispensing with all the hand-wavy, moral grandstanding about being "unbecoming", "mature", showing "independence", being "weak and entitled" etc etc... None of this is even remotely relevant, you'd be equally reasonable to tell us you wish startups were comprised of more handsome and charming individuals or that they should attend church more frequently.
In terms of discussing risk, startups should minimize all risks possible because their core risk is to find a business model and product that works. Putting cash into a bank account isn't a "strategy" nor is it an investment. Much like choosing to incorporate in Delaware, it's something you do because it's standard and adds no unnecessary risk to the business. It's not smart to try to get fancy with boilerplate company things–you have enough risk already.
Anyway, at the core of your argument seems to be two beliefs:
1. VCs had the capability to stop this from happening with private means (no)
2. People who start companies or work at them just generally deserve bad things to happen to them, regardless of how proximal or not the causes are of their misfortune.
I am biased because I've sacrificed years of my life and probably the vast majority of my potential earnings to try to build a good business. It's been the hardest thing I've ever done, no one's impressed by it, it's not yielded any financial benefits, it's harmed my personal and social life, and by all likelihood I'll never see any significant success. But I keep trying because I like our customers and my coworkers and I care more about the possibility of building something great than I do all the rest.
It's hurtful to chalk up the (potential) death of companies like mine to being "weak and entitled". Of all the risks to account for in building a business, having our bank accounts disappear overnight didn't even crack the top 100 of risk factors. Things like losing customers, failing to grow revenue, keeping employees happy, etc. are at the top; below that are changes to the market, competition, and the death of co-founders or myself. It's not possible to account for every conceivable risk.
Anyway, it looks like we'll get some help here so it's not over for us yet. On behalf of companies everywhere, I'd like to apologize that you've been deprived the opportunity to dance on our graves.
Bailout implies that the individual/business being made whole *should* have made decisions to prevent the situation from occurring in the first place. What responsibility did a SVB depositor have in SVB's decision to purchase billions of MBS in 2021?
If the depositor wasn’t ok with that (presumably public) decision they should have pulled out then. Or pulled out when treasury rates started ticking up and the writing was on the wall. Alternatively, they should have bought private insurance for their money or structured their money in multiple banks.
I can only partially agree to this, they did a lot of creative accounting and weren't hedging their interest rate risk. Do you really expect a retail depositor to understand fully the implications of a large bank not holding adequate interest rate swaps? This seems like the perfect example where government oversight is needed as not everyone is an expert in this
Yeah although it's strange to assume something is "not risky" when you don't what it is. If you're ignorant of what it is, and your money depends on it, that seems like cause to be worried and want to hedge the risk.
I know how much money I have at risk and how much is insured. It would be pretty irresponsible for me to not and just assume someone will step in and give me their money if I lose mine.
I'm personally a conservative investor, which means amongst other things I forgo notional returns by making safer investments. So it definitely makes my angry to see people that had a less responsible money management strategy get to participate in all the upside and not have to take the downside.
Its too much to expect from VCs, they are each trying to maximize their gain. Creating consensus and cooperation is very hard, especially in bad times. It's exactly why governments exist, In some cases a web of self interested parties will produce horrible results and central authority can be more effective.
This is fine, but when things are rosy the VCs and startups can’t claim that government regulation is communism and choking off their ability to do whatever they want
If you want the backstop if the government you have to be willing to play within its rules during the good times too
Indeed. The bank was trying to raise money and recapitalize itself several days before this and instead of investing, VCs panicked, told their portcos to withdraw immediately, and started a bank run.
The only comic thing in this entire tragedy is watching the fanatics who have been relentlessly preaching to others such dictums as “move quick and break things” and “only the paranoid survive”, extolling the virtues of “creative destruction” and repeating ad infinitum the Reagan quote "The top 9 most terrifying words in the English Language are: I'm from the government, and I'm here to help" cry out for government intervention, with seemingly zero self awareness in how it basically contradicts their entire world view.
That, the documented comments by short sellers for months about it being a trainwreck, the last minute bonuses and the dumping of stock on retail investors by insiders.
It's like all of the tech misbehavior packaged neatly up into one story.
The government and its institutions (The Fed) had a big part in this though. They flooded the market with cash, sold a bunch of bonds with low interest rates (lowest ever) to tons of banks that had to figure out how to manage that cash and did so by buying “the safest investment”, and then that same institution jacked up interest rates to the highest in 20 years over the course of 10 months.
So no, if the government and the fed would actually let the market set interest rates then this doesn’t happen. If the UST had to sell bonds at the real market rate for them then this doesn’t happen.
I’m not saying the SVB management is not to blame. Their business should go to 0. I’m just saying that the gov policy and erratic Fed policy caused this. The Fed is creating a lot of problems right now. They’re going to kill the patient trying to kill the cancer.
I am not a fan of the Fed, but it was created precisely to stabilise the banking system due to a huge number of bank runs (that happened before it was created).
I think the only consistent libertarian position on this would be to concede that bank runs are totally normal (and welcome even) aspect of a capitalist system and they should never be bailed out or depositors compensated as it would be rewarding irresponsible behaviour (both by shareholders AND depositors).
I think it's common to take people you disagree with and put them in a mental bucket labeled "other". Then, you can see people opposed to all government intervention, bucket them as other, and see people who think depositors deserve to be made whole, and conclude that there is some hypocrisy going on with the latter position, because different people you disagreed with thought different things.
I tend to be libertarian, but there are reasonable roles for government, and regulating banks and life insurers by forcing them to contribute to something like the FDIC and the state insurance commission (or whatever that life insurance thing is called) is legitimate even to most conservatives.
Stepping in to smooth out systemic problems is another valid function— like Reagan did with the air traffic controllers, like the FDIC does with bank failures, etc.
Anyway, I don’t think folks are asking for a handout. They’re just asking the FDIC to do their jobs more quickly than usual because so many businesses are tied up here. This is the reason there is an FDIC in the first place. I don’t think it’s unreasonable to ask them to smooth the process out to help meet payroll. None of this requires handouts— just proper management and metering out of the assets under consideration.
>Stepping in to smooth out systemic problems is another valid function
Whether you consider this problem "systemic" is political. Note that the FDIC insurance is not the point of contention here - it's whether depositors should be made hold especially if SVB's HTM securities are insolvent.
I could easily make an argument why student loan debt is a systemic issue in the united states - the government's guarantee of the loans as well as making them impossible to clear via bankruptcy has created both infinite demand (leading to higher tuition prices) and reckless loaning (due to the government essentially guaranteeing the loans). Why is this "systemic" issue unreasonable, while SVB is?
I don’t think depositors should be made whole if it can’t be done by a combination of managing the bank’s assets, and sale of depositors to other banks.
So, if you’re saying neither the Fed nor the treasury nor the tax payers should bail out depositors, then I agree with you.
One important aspect is that we may be embedded in a vicious circle of discontinuity events and smoothing. A broad expectation that smoothing will be applied after a discontinuity event will tend to make people more willing to accept the future risk of discontinuity events in their decision making.
Less risk-avoiding behavior regarding discontinuity events makes discontinuity events more likely. Then, when the next discontinuity event happens, if smoothing is again applied, it reinforces this expectation, which reinforces the probability of future discontinuities, etc.
For this reason, swearing off active smoothing could actually result in a smoother system, eventually (after the pain of transition, of course).
Eh, the depositors aren’t totally blameless here. On Thursday they conspired to perform a huge bank run on SVB, on Friday they succeeded, and on Saturday they were demanding the government and taxpayers make them whole by Monday. They deserve to get their money back and they eventually will once SVB’s assets are liquidated. But that’s not good enough, they want it now, and they won’t hesitate to make you pay for the expedience. I don’t like that.
I don't think it's fair to blame the SVB depositors for the bank run. Perhaps you can blame public figures (VCs etc) who catalyzed it. Once a run starts, though, it's in your interest to run too.
If you had >250k in SVB and you managed to get it out before it was shut down, you'd be pretty happy with yourself right now. If you run a business and have an obligation to share-holders, it would be negligent not to try this at least.
Yeah, I can’t blame them at all for joining an ongoing bank run.
I can kinda blame them for starting one because they did it so aggressively, but only a bit, because that’s just how internet banking works these days.
I can definitely blame them for demanding the taxpayers make them whole by 9am next business day.
Hey, good news btw. Great, actually. FDIC just announced all depositors to be made whole on Monday morning - and at no cost to the taxpayers either! The lag between the immediate payout to depositors and the eventual recovery of value from SVB’s remains seems like it will be covered by the Deposit Insurance Fund, i.e. the cost will be spread out to all banks.
Individual depositors don't need to conspire to reach the conclusion that in a bank run scenario, it is virtually always in each depositor's own best interest to withdraw their money.
The VC's obligation is to their startups... Its a completely rational decision to get your money out of SVB once you know others are thinking the exact same.
I’m not trying to sentence them to the guillotine or anything. I appreciate the strong incentives driving their actions. Even the desire for the government to retroactively insure their deposits is understandable, although I disagree. In the OP I said they’re not completely blameless; I should emphasize I also think they’re not completely to blame. (Except for the shrill, nigh-hysterical tone of their demand, and the extraordinary timeline they demanded. That one’s all on them.)
They are blameless is my point. The depositor has zero responsibility to evaluate the bank's balance sheet. Not ensuring the depositors are made whole will risk a run on all regional banks throughout the country starting tomorrow morning. We will then see a consolidation of deposits into the top 4, too big to fail banks; hardly a progressive outcome.
I understand your perspective, but I also want to impress on you that the way you stated it is going to hurt your chances of being heard with a lot of people.
The outside view on this situation is: shit happens to blameless people all the time and they mostly just have to cope, no matter how validly they insist on zero responsibility. The depositors are going to be made whole - starting with a lump sum Monday morning, some decent percentage by the end of the week, and almost all within a month. That’s what’s going to happen. “Make the depositors whole on Monday morning or the whole banking system goes under” is profoundly off-putting. It’s not because the outside view wants you to lose all your money, it’s because it looks like “getting a little back now, enough back soon, and most back eventually“ isn’t enough, you want to get it all back now. The outside view does not buy your claim of contagion because SVB looks like a weird and insular bank for a weird and insular group of buddy-companies, so it feels like you’re cynically doom-mongering to get what you want, and they already think what you want is too much (and especially too quick).
I’m not espousing these views, I’m trying to see all sides and get all sides seen. That’s how outsiders will see it, and they’ll probably be less polite about letting you know too.
The government's responsibility is to ensure the integrity of our financial banks. It isn't the responsibility of the depositor, nor are they capable, to evaluate a regional bank's (the 18th largest bank in the USA) balance sheet. The FDIC is not without blame; there should be regulation that the bank's bonds should have been marked to the market.
This is akin to blaming a patient for medical malpractice — "why didn't the patient choose a better doctor".
>The government's responsibility is to ensure the integrity of our financial banks
Correct. Thats why they shut SVB down. It is not the government's responsibility to ensure the deposits of every individual depositor.
>This is akin to blaming
There is no blame. The depostors money is lost*. That is a fact, an event that already occurred.
>why didn't the patient choose a better doctor
Just like with a hospital, they can sue SVB (well, not anymore). Some things just aren't fair. But "thing not being fair" does not mean "and now the government shall make it fair."
The law has always been $250K (or some other limit) since the FDIC was created, hundreds (thousands?) of banks have failed since, and sometimes the depositors were burned. Somehow VCs think they are special because they are "disruptive" or whatever but they are not. The other times depositors were burned it wasn't because it was their "fault" or not, that isn't part of the consideration.
Some of the depositors, not all. My employer didn’t conspire about anything.
When and how much money is returned is going to make the difference between life and death for some of these companies. And the difference between having a job and healthcare or not for a lot of people.
Don’t forget that this is happening to depositors / companies after weathering a pandemic and in a really shitty economies where things are already very challenging. Having additional cash flow problems and/or additional debt to service all the sudden may be the proverbial straw that sends companies and people into bankruptcy.
I’m sympathetic. I was in the hospitality industry during COVID, I watched a company that employs 60 people struggle to make payroll while 90% of their business was legally barred from operating for months on end with no clue when it would end. I saw managers and fellow employees giving each other loans, I paid for a coworker’s car repairs. I am not wishing this on you.
By this evening you’ll know if a sale has gone through; if so, everything is back to normal. Otherwise, the FDIC has 250k waiting for your employer on Monday morning, guaranteed. Even if that’s not a week’s payroll, for all but the largest companies that’s enough to get employees by for a week.
The money isn’t gone, just locked up in securities. By the end of the week some percentage of the account will be released - I’ve heard predictions of 80%, 60%, 50%, but even if it’s 20% that is still enough for almost any place to run close to full payroll and operating costs for a month. By the end of the month you’ll have 50-80% back, and you’re back to normality. Maybe the last 20% takes a year. It can wait. This isn’t the end! It’s scary, but it is not the end.
Depositors aren't a monolith. In fact, the depositors that _didnt_ "conspire to perform a huge bank run" are the only depositors which would require government assistance to make them whole.
Many commenters have argued that it is the personal responsibility of depositors to be on top of the health of any institution where they have more than $250k. An obvious consequence of that is that it's their duty to cause the largest possible bank run at the earliest possible moment.
This is exactly the statement that's required, given the confusion and irresponsible politicization of deposit insurance.
Shareholders lose 100%, depositors get 100% of their deposits back. It's a simple situation, and the former point (as opposed to the solution during the GFC) counteracts moral hazard.
If depositors get 100% back (I assume the government pays the difference between selling SBV assets & the deposits)...then what's the purpose of saying "FDIC Insured up to $250k"? It's a moot then isn't it? I don't need to go through the hassle of distributing my money anymore?
Edit: I read the article. Yellen says "“But we are concerned about depositors, and we’re focused on trying to meet their needs.”
She says NOTHING about depositors getting 100% back. It could be that they get the share of deposits back faster.
Depositors get deposits back because their deposits are wrapped up in SVB assets. Once those assets are liquidated they get what is theirs. This could end up being less that 100% if the assets end up being sold for less than the total deposits.
The FDIC insures that no matter what you are covered for up to $250k. Let’s say the bank had zero assets then all deposits would get their $250k and likely nothing else since there’s no other assets to sell and distribute. This could have been the case if SVB had larger losses or turned out to be cooking the books or something. But that’s not the case here. They have the depositors money, it just happens to be in illiquid assets that they could’t liquidate fast enough to cover the bank run withdrawals.
The purpose of the $250k per-person-per-bank limit is to encourage large depositors to spread their money among many banks, which reduces risk for both them and the system. However, it's not clear that this limit is really the ideal design.
In the financial crisis 15 years ago, the FDIC in practice guaranteed 100% of deposits. They had to in order to keep people from running all the banks. Since then, we've all been told that banks are safe now because of new regulations. Lots of people have become complacent and haven't felt the need to manage multiple bank accounts to stay within FDIC limits.
SVB's collapse has suddenly let everyone know that, oh, those FDIC limits do actually matter and if you are over them in any of your accounts you had better start moving money. Unfortunately, that's likely to result in runs on lots more small banks as everyone moves their balance in excess of $250k over to JP Morgan (the bank that definitely can't fail).
Sure, it's easy to say now that it's all those people's fault for not managing their risk properly. But not long ago, a $2.5-millionaire opening 10 different bank accounts to stay under FDIC limits would have been called paranoid. And in any case, stupid or not, allowing runs on lots more banks could at some point lead to large-scale collapse of the financial system, which would be bad for much more than just those large depositors.
So it may be in everyone's interests for the FDIC to once again guarantee 100% of deposits. (I say "may", I don't pretend to be enough of an expert to decide this!) And maybe the $250k limit should be rethought going forward, into some other sort of rule that encourages diversification without encouraging contagion when a big bank fails?
(Disclosure: I had an account at SVB, but it was under the FDIC limit. So I don't have any personal need for a "bail out".)
Of course if those banks are depositing to the same 10 banks then you're really protected at 10x...but, well much better than 250k? I'm going to guess it's called a "Sweep Program" but I'm no finance expert. I know of this because it's common for brokerage account to do this - as very often, you'll have more than $250k in cash if you're doing active trading.
You don't need the FDIC, lodge your money directly with the US government.
Let's say you earn your income 28 days before you have to pay out wages (for illustration purposes). You buy a 28 day Treasury bill which matures in time for you to make payroll. Even if they're paid into a bank account you're taking a lot less risk having money sit for a day than continuously. You also earn a little interest.
Yes, the limit seems especially poorly-suited to businesses.
Though, there do exist meta-banks that split funds across multiple other bank accounts in order to achieve higher FDIC limits. Maybe we'll start seeing more of these.
Otherwise, I think the FDIC needs to revise the rules.
I'm no startup CEO but I do trade stocks. I know many brokers, suck as Interactive Brokers will automatically move your money for you to different banks and your FDIC insurance is essentially $2.5 million while lookimg like 1 bank (https://www.interactivebrokers.com/en/accounts/sweep-program...)
In addition I use a service called Max My Interest where it will find me the max interest savings account, but also consider risk of bank failure so it's not all in one bank.
Consider time it takes to get your deposit back:
FDIC says depositors will get $250k back on Monday morning (pretty incredible turnaround actually).
For the rest, they will have to wait for assets to be sold.
> For the rest, they will have to wait for assets to be sold.
Actually, that's not completely true; FDIC also says that they'll pay an advance dividend to uninsured depositors next week. That likely won't be the full balance, but they'll get at least part of their deposits back before assets are sold.
The 250k is messaging to minimize moral hazard. You want banks and depositors invested in minimizing their own risk.
I'd guess hesitancy to immediately declare full guarantee of funds is also due to these concerns (although there may be other reasons as well). The sweet spot here maximizes the appearance of consequences while minimizing actual fallout.
The consequences are the reduction of billions in shareholder value, and we shouldn't be dumb about doing anything that reduces confidence in US banks. SVB shareholders will be down from like 60 bln mkt cap during the pandemic to a good fat 0.
> what's the purpose of saying "FDIC Insured up to $250k"
The FDIC guarantees up to $250k, but if additional assets are available beyond that, then those will be paid out to depositors as well. It's a floor, not a ceiling
Yes, the ceiling of the guarantee. If the bank has additional assets to be sold you can still receive more of your deposit back, but the government doesn't guarantee it.
The politicisation should be obvious from the "eat the rich" rhetoric currently floating everywhere on Twitter. The government is mostly concerned with the stability of the economy and preventing cascading bank runs, which this climate is less conductive to. That much should be obvious to a slightly keen observer.
While it's well and good in theory that deposits are capped at $250k, adhering strictly to that rule right now will cause cascading consequences much more serious than the price of this guarantee.
Sensible realpolitik right now is to guarantee the deposits to prevent cascading wealth destruction that will very much hit Joe Average, then adapt the system to prevent moral hazard and ensure that this insurance premium is collected in the future. There will probably be a way to recoup the cost of the guarantee from debt holders to SVB, but right now the real concern is putting out the burning crisis of confidence.
There will be a lot of political and financial pressure to value their HTM bonds at 100% because otherwise it will precipitate more runs on banks and more distrust in the financial system. And these are in fact the safest bonds in the world—they're going to get paid out, but the problem is that in 10 years, money isn't going to be worth as much as it's worth today. So banks don't necessarily want to buy them at full face value (because there are better things they could be buying), but in this situation, they're probably going to
And that haircut won't be fun for many but I think the balance sheet had them at around $200 billion in deposits with $175 billion in assets. Obviously the question now becomes liquidity but I think the sky is not yet falling (unless more dominos start to tumble)
I think Yellen is signalling the right approach, frankly. First, the balance between the bank's assets (its loans and the investments it made with depositors money, plus the bank's capital) and its liabilities, is such that SVB has enough holdings to cover nearly all of its deposits. The banks capital (that is its equity, and subordinated debt) should all go toward making depositors whole. That's what bank capital is for. The question then becomes how much of a hole is left in order to make depositors whole? It won't be that big a number, if you assume that the vast majority of the deposits will remain as deposits in whatever bank the Feds find to purchase the corpse of SVB - remember, that SVB failed not because it it had a huge mismatch between liabilities and assets, but because its depositors tried to withdraw all their money all at once - that is because SVB was put in a situation where it had to make good on all its liabilities in a 2 day period. It couldn't do that, because its assets were tied up in loans to other customers which couldn't be instantly recalled, and government bonds which couldn't be sold quickly enough without incurring substantial losses, and its own capital. It became illiquid overnight. But the actual delta between assets and liabilities may well be a few billion dollars, if the deposits are not all yanked out. For the Feds to put up that money as part of a deal to sell SVBs portfolio intact to another bank, makes good sense to me. The right people (investors in the bank) take the haircut, the depositors get their money.
ooc why is unlimited deposit insurance a bad idea? A quick Google search didn't have many results, except some brief articles about section 343 of Dodd Frank (which itself seemed limited in scope).
Normally, depositors have to have confidence the bank they choosewill handle their money competently and responsibly.
With unlimited insurance, depositors will simply choose the bank that offers the best terms.
Banks need depositor, so they will respond to what depositors want. In the first case there is pressure to handle money competently and responsibility. In the second, there is pressure to take risks to be able to provide the best terms.
But Moral Hazard seems more like a risk of Deposit Insurance overall, rather than just unlimited insurance?
Also it's not like FDIC is granted automatically, couldn't there just be much more strict capital requirement and risk limits in exchange for a higher protection?
(1) small depositors, in general, aren't in a very good position to evaluate the risk of a bank very well. So they won't be exerting much positive force on banks anyway.
(2) even if they could evaluate risk well they still wouldn't exert much pressure because that requires an organizing force (even if the aggregate amount of deposits is high)
(3) Understand that the FDIC is a nation-wide program and that the funds the FDIC pays out do not come from tax payers. They come from premiums paid by member banks. Banks get the money for the premiums by reducing the terms they offer depositors. That is, the banks directly, and depositors indirectly pay for the risk taken on by the banks directly and the depositors indirectly.
This breaks down at higher dollar amounts though because banks and depositors aren't really uniform, but at lower levels of money it's a good approximation. At higher levels of money, depositors and banks will apply increasingly sophisiticated measures to shift reward toward themselves and risk away. That is, they will find ways to work the system. At some level the insurance program becomes a way for more sophisticated players to profit less sophisticated players. A cap of $250K puts everyone at approximately the same level of sophistication and makes it harder to run some con at scale.
BTW, insurance for amounts higher than $250K is available. It's not that popular, though, because it's expensive. It's expensive, of course, because of the risk.
That all makes sense, though I would argue that many companies with an order of magnitude more than the FDIC limit aren't really that much more sophisticated, and certainly not enough to evaluate risk of catastrophic failure (as we have seen with SVB).
It seems then the logical alternative to insurance for these companies is to concentrate deposits at large, "too big to fail" type institutions. I'm not sure if that is something that would be good or bad for the economy as a whole, but definitely seems bad for smaller banks?
You're in spirit asking for a state bank, not modified private banks. Thats the only way you would get the 'result' you're looking for.
Many private banks with unlimited deposit insurance would simply play more fast and loose with your money because there's basically no risk. Why wouldn't you choose the bank that offers more % return on your money? You're totally insured.
The state insuring all deposits would effectively make it a giant bank (and it would eventually consume them all, on top of now having the power incentive to destroy them). If you're not aware of the flaws of state banks, look into China's banks if you're curious. 'Tofu Dreg' projects would be a good place to start. I think its obvious why we wouldn't want someone like Pelosi to be in charge of a state bank.
> Many private banks with unlimited deposit insurance would simply play more fast and loose with your money because there's basically no risk. Why wouldn't you choose the bank that offers more % return on your money? You're totally insured.
You overstate the case for moral hazard here. Most of the risk to the bank remains, even if the FDIC covers larger deposits than the normal limit of $250,000. 100% of a bank's capital remains at risk - that is the bank can lose everything it owns and its backers have invested in it, even if its depositors are protected.
And, if what I have been able to read about it is correct, SVB wasn't really playing fast and loose with depositors' money. Any bank can be destroyed by a drastic enough bank run, because a banks assets - it's loans to customers and investments it makes with deposits, are never completely liquid. SVB's situation was worse than that, since its non-loan investments (in the form of purchased bonds) were under water, but by all account, it wasn't by a lot.
If everything else stays the same sure. Bankers would get creative really quickly to put most of their gains somewhere else.
SVB wasn't necessarily playing fast and loose more than anyone else. They were just in a high risk highly liquid sector and had what wasn't high liquidity tied up in securities.
It’s literally a significant portion of America’s economic future you’re killing off, plus wineries, farmers, and VC’s pension fund holdings. It would be insane to let that just go boom.
Mass unemployment in tech is not in national interests. It will lead many foreigners to head home and start/join competitors and strangle future GDP.
You and your tax dollars depend on the USD being strong, and global trust in US banks. It's a worthwhile investment for taxpayers to make depositors whole to maintain that trust.
Capitalist society runs on free markets and good regulation. We let SVB bypass good regulation here, and that's our painful learning lesson that needs to be paid for.
> For the Feds to put up that money as part of a deal to sell SVBs portfolio intact to another bank, makes good sense to me
Honest question: why? I.e. why can't the capitalists invested in this business absorb the reasonable haircut? (I assume it's "reasonable" based on the information we have been provided with until now). Depositors (especially those holding more than 250k) were also investors, they were getting back more money than they had put in.
I make a clear distinction between depositors and investors. The holders of the bank's capital - it's equity and and subordinate bond debt, are at-risk investors, and should, as I said in my original post, take a 100% haircut (assuming the bank in fact has fewer assets than liabilities.) But a depositor - who probably was earning negligible interest for parking their cash in the bank - has a reasonable expectation that their deposit is safe in a regulated bank. And the government has an interest in assuring bank customers across the country that ordinary deposits are safe in regulated banks that are adequately capitalized.
SVB catered primarily to businesses - the last thing we need right now is every business worrying about where their bank deposits are. If they do worry, it may trigger more runs as they all try to move their funds to “safer” banks.
And then why shouldn’t be the whole banking system be nationalized? Businesses are capitalists by detonation (especially those based in the Bay), doing business comes with risks, managing risk is one of the basis of capitalism.
Accounts are worth money to a bank even with no balance. Likely if JPM or someone buys the bank people will continue to use those accounts. So yeah someone will fill the hole and their stock price will probably go up because of it
First, the balance between the bank's assets (its loans…)
Keep in mind those loans are largely being paid by SVB customers that are very likely scrambling to make sure they can pay their employees right now.
It’s pretty assured that more SVB loans will be defaulting in the coming weeks than if their depositors didn’t lose access to about half of their money.
The lack of understanding here about how banks work is astounding. Are these the same people who feel it's their God given right to "move fast and break things"?
Disruption is great. Too bad for the music industry. Too bad for journalism. Too bad for legacy taxi services, etc. Disruption is great, except when it happens to you?
Aren't we all here in the business of managing risk? Or, after a decade of cheap money, has it just become all lip service?
"It's not my fault!" [1]
This recession is going to be brutal, but it's been a long time coming. Thank God money is going to start having value again.
Disruption in the definition of Clayton Christensen as you’re likely using doesn’t apply to the failing of banks. Disruption is a theory about innovation and entrepreneurship. SVB didn’t get disrupted by some new player who leapfrogged how banking works- they made poor choices for a world where interest rates went up.
Having been a bank for 40 years with a great reputation, no one who held their money there expected a meaningful risk the bank would collapse. The same with AIG and any other major bank collapse for a long time player. Sure let those responsible have repercussions, but innocent account holders of America’s future trillions of GDP, investment funds holding onto the money of pension accounts, farmers and wineries shouldn’t bear the brunt of investments gone sour leading to a liquidity crunch.
Note that 3 VCs taking out their cash quickly allowed the bottom to fall out.
Yeah not talking about bank "disruption" in the classic/rigid definition of the term.
I'm more commenting on how the the general attitude of the tech entrepreneur (willing to take risks, to swing and miss, move fast and break things) has been cross pollinated over to the finance (DeFi, VC tech funds, crypto affiliated banks) to largely disastrous (but not wholly unexpected) results.
What really bothers me is that these "financial geniuses" walk and talk (and in the case of SBF dress) like typical typical tech entrepreneurs, but when push comes to shove they are just the same old reckless wall street sociopaths trying to privatize profits and socialize the losses.
Your classic tech entrepreneur had skin in the game, was willing to swing and miss, learn from their mistakes, and get up and try again. In a forum that claims to be full of "real" true-scotsman tech entrepreneurs, there seem to be a lot of people here that think/talk like wall street sociopaths.
I feel like the last 5-10 years are full of more and more of these "jumped the shark" moments in the tech space (Theranos, WeWork etc). Innovation is dead. Low hanging fruit all picked. In it's place is a new priesthood, full of grifters who preach innovation while robbing us blind and getting bailed out.
To your point about "40 year stable banks", yeah it really sucks that normal people are caught up in this mess. But something tells me that what happened at this bank is unique to the tech/disruption space/narrative I mention above.
Personally I believe the contagion will be limited to poorly run banks making bad/reckless decisions. I guess the next few days/weeks we'll know for sure if this is a limited thing, or a widespread problem.
There is crossover in finance with crypto web3 blahblahblah. But I wouldn’t conflate the larger innovation in tech with that. It and VR/AR have gobbled a lot of attention, but meanwhile we’re on the edge of what will be a total transformation in the next 10-20 years with AI. I didn’t think we’d be here in 2023 but it’s quite clear the rate of innovation is now insane. That’s just one area - just about every industry has tech running through it now in a way that wasn’t the case 10 years ago. A lot of it is quite boring so you don’t see it in the news, but that doesn’t mean it’s not happening or these companies are scam or worthless… far from it.
I don’t think SVB was subject to the SBF type person, or certainly it wasn’t the case their money was tied up in a blockchain. I don’t think it’s fair to call them grifters even if they fucked up by building a model for a pre inflation world.
I’m fine letting SBF et al go bust; it was pure speculation. But pension funds, hundreds of diverse startups, wineries and farmers don’t deserve to go down with one of the top 20 biggest banks. The domino effect is too massive.
Agreed, GPT etc. (I hate calling it AI) is going to be transformative and disruptive in the classic sense. And I too am surprised that we'd be here in 2023.
Agreed SVB wasn't subject to SBF type people. But I think that a lot of tech narratives/buzzwords get thrown around (Web 3.0, transformation, green economy, etc) when in actuality its just the same old sociopathic wall street behavior, dressed up in new jargon.
I've seen articles talking about how the SVB board knew something was up. Their risk committee met more than 18 times in 2022 (up from 7 in 2021). Yet they had no chief risk officer? [1]
And I agree, not fair when average people get caught up in this. Which is why I'm a fan of holding the people responsible accountable, so we can avoid a repeat of this in the future. Bailouts just encourage further bad behavior.
Good. Investors like Ackman and Cuban seem so concerned about payroll for tech workers.
The truth is that the vast majority of this cash was dry powder for acquisitions, staying liquid for new new investments, fresh VC money for advertising.
Isn’t it these same folks who remind us all the time that most startups fail? Why bail out an entire bank when 99% of its startup depositors wouldn’t have made it anyway?
If anything, taxpayers should be able to sit at the front of a new cap table with preferred position, like any other entity providing a bridge. But at that idea, I am sure they’d warn of government interference.
> The truth is that the vast majority of this cash was dry powder for acquisitions, staying liquid for new new investments, fresh VC money for advertising
Any sources for this? This seems like an opinion with nothing backing it up.
> Isn’t it these same folks who remind us all the time that most startups fail?
There is a big difference between a single startup being able to fail at any time and many of them failing all at once.
There's also a big difference between a startup failing because it doesn't deliver a product that people want and will pay for, and a startup failing because of "random chance" (in quotes because I can't prove that bank choice is a random distribution among startups, but it's not clear that it's a proxy for quality of founder or company)
Both Ackman and Cuban have called for measures beyond "protection of depositors".
Ackman: "What should the FDIC do? @FDICgov to guarantee all bank deposits by Sunday night before Asia open and call a time out. Run a process to recapitalize
@SVB_Financial while managing liquidation of UST and MBS portfolios ... Equity holders pre-recap are wiped out, bond holders are protected." [1]
Cuban: "The Fed should IMMEDIATELY buy all the securities/debt the bank owns at near par, which should be enough to cover most deposits. Any losses paid for in equity and new debt from the new bank or whoever buys it. The Fed knew this was a risk. They should own it" [2]
In a following tweet, Cuban claimed "this isn't a bailout" [3]. Their tweets, like many of the comments here, seem to be arguing the semantics of a "bailout". However, both Ackman and Cuban are calling for financial assistance from the Fed, which is absolutely a bailout, if only "partial".
There are literally stickers on the doors of every bank explaining that depositing money beyond $250,000 incurs risk.
These naive smol bean founders don’t struggle to figure out the most tax advantageous way to get paid, let’s not pretend they’re too stupid to read a huge sticker.
The VCs who advised them to behave this way, if you ask me. In my ideal resolution, the government does their own valuation of the startups, rescues in excess of insurance the ones that seem promising, and proportionally takes the VC equity in these companies that got special rescue consideration. If the investment is getting bailed out, the VCs who started this mess shouldn’t get their equity returns. They can invest again in the next round if they really believe their convictions.
Practically, the VCs should have made some bridge loans to solve the short term problems while we wait to see what comes out of receivership. Some did, and good on them for sticking with it in the hard times.
All investments have risk. This is one of the risks associated with meager yields - very rare but possible wipe out. If depositors were always guaranteed then what would prevent high-risk banks that promise huge yields but ultimately just rely on govt backstopping when they go under. Who pays the cost in that case? Even 'guaranteed' investments like cash or treasuries are not guaranteed, there are failure modes.
> Good. Investors like Ackman and Cuban seem so concerned about payroll for tech workers.
? The truth is that the vast majority of this cash was dry powder for acquisitions, staying liquid for new new investments, fresh VC money for advertising.
You seem confused. The "cash" you're talking about here is the deposited cash, which Yellen is saying will get funded. I think you're confusing that with bank equity.
First of all SVB should be left to fail. We should not privatize profits and socialize losses. We should have much more stringent regulation to prevent this from happening again.
Secondly people are conflating bailing out depositors with bailing out SVB. The bank took all the risk and had all the gains. The depositors did not have anything to gain here besides keeping their money safe. The depositors picked a reputable bank that has been around for 40 years. Their business should not fail because the failure in the bank and the government regulation.
Edit:
The ones who are hurting the most are not the VC's startup who told their startups to take their money out. It is those who didn't contribute to this problem. The depositors that didn't want to cause a bank run is the ones that will be hurt most.
The truth is VCs are terrified their investments in their startups are going to go to 0. That’s why the biggest most vocal people are VCs talking about this. So they are framing the “we need to make depositors whole” as if they care about small business when really they are just talking their own book.
The real solution is that VCs should give a loan to all their startups so that they can make payroll. Isn’t that their value-add? They should be the backstop for their investments. But instead they want the government to step in.
It’s another example of “socialize the losses but privatize the gains.”
Exactly, none of them are pointing out what percentage of the money that is currently tied up was going to be sent out as payroll for people making under 100k/year over the next 30 days.
If the Fed came out and said "We have reviewed all the depositors and their situations and we are funding 100% of payroll and basic operating costs needs for the next 90 days" The VCs would immediately come up with another reason why ALL depositors need to be made whole immediately.
Their goal isn’t to see a run on SVB. But to save their investments they all told their startups to pull their money which cause svb to collapse. Now they want the rest of their money safe which is why they want a bailout.
I get bailing out depositors. It's not like you have that many options with our current system. You have to keep your liquid assets somewhere, banks are the only option and they are going to do risky business with your assets. Maybe you should be more prudent when choosing your bank but it's not like you can avoid the risk or that depositing with SVB was caused by greed (at least I think not, correct me if I am wrong).
Long term solution is imo obvious as well: decouple deposits and lending business. You should pay for having your money in a bank and being able to conveniently operate it. The bank should not do any businesses with the money (maybe something like buying government T-bills should be permitted) and profit purely from providing services: safety, transfers, payments.
Loan making should be a separate industry. Gather capital, fulfill regulation and do business as it is today but not with deposits but with stakeholders capital.
In such a setup there is little systemic risk: bank goes bust? Shareholders lose the money. No moral hazard of "I will deposit in this risky bank and the government bails me out if things go sour".
Want to keep liquid assets conveniently? Pay for it. Want to invest in a loan making operation? Buy shares in a bank and accept the risk.
The current system forces depositors to accept risks of loan making business just because they need a place to keep liquid assets. It's not like they were asked a question: "hey, do you want us to risk your money or do you prefer to pay for operational costs of your account but we keep the money safe?". If the question was asked then it would be very easy to say no to any kind of bailout.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
“But we are concerned about depositors, and we’re focused on trying to meet their needs.”
It’s an insurance payout, not a bailout. If someone totals my car the insurance doesn’t say “well, that’s the risk of owning a car” and pay nothing. Insurance exists for these scenarios.
It's likely SVB has assets in excess of $250k per account. So if they are sold, I'd expect depositors to get at least $250k and possibly more, depending on how those assets are sold.
It only becomes a bailout if the government pays beyond the sale of svb's assets.
Depends where the money is coming from. SVB has lots of assets — clearly not enough cash on hand for a bank run but they have lots of assets. Once those are liquidized depositors should get as much of their fair share as possible.
The only depositors at risk at startups. All regular people are made whole. And they are getting ~50% of their holdings in the next week. Why are VCs clambering for a bailout? The system works as designed. No need to do anything else above and beyond.
Some people just want to see the (tech) world and the VC pyramid scheme collapse. This time, Silicon Valley has to help itself with this mess it created.
Some startups like Circle with large backers will survive, but others on the other hand need more than a miracle or a hero.
I would not want to see the chaos underneath in bookface right now and certainly the collapse with in less than 24 hours.
While I have no love for what has become "big tech", this really has nothing to do with their indiscretion or bad behaviour.
SVB was a financial institution outside of that sector which catered to that class of customer and regrettably took on risks that made them exceptionally vulnerable to interest rate increases. Add that with their clients mostly having uninsured deposits and belonging to one industry, and we're in this mess.
Im not sure how this is evidence of a tech or vc pyramid scheme, it's just a regrettable series of choices by a financial institution.
They also lobbied to become more vulnerable. Greg Becker the CEO worked to get regulations removed that helped them get in this position by removing public liquidity stress test reports and reduce the frequency of liquidity stress tests.
Depositors failed to do their due diligence, the bank offered 'sweet heart' deals to get customers. Depositors should lose their pants and have to wait for the FDIC to liquidate before getting any funds.
No one deserves free, unlimited, zero risk access to depositors. If you want to do that, you should buy bonds, short eurodollars as hedge, and get loans against the bonds. None of this is free.
Whether or not depositors get their money back, or even have access to it in a timely manner, I think one lesson for me is how important it is to have a contingency plan for banking.
It doesn't cost much to have a few month's (or even just a few weeks) worth of money at a second backup bank, but it could be a lifeline in the case of your primary bank going belly up.
Exactly! My personal finances are nowhere near as sophisticated as even a small start-up, but I make sure I have multiple sources of cash and credit just in case I lose access to one for whatever reason temporary or permanent (bank failure, fraud, forget password, etc).
It isn't too difficult: open up a second savings account, apply for an extra credit card, open a HELOC if available. I have to believe there is some similar basic things a business can do to be more resilient. Even waiting for guarantees insured FDIC funds can be a problem depending how long it takes.
PS: not trying to victim blame for companies who trusted SVB. This is just a rough reminder to be prepared for contingencies.
It isn’t too difficult for you as individual to open an account anywhere .
Startups don’t have that luxury it was and still pretty difficult to do banking as an early stage startup . There is a reason why there are only 2-3 banks specialized in this sector and everyone banked with them.
If you were a small startup keeping your money in SVB was the safest thing you could have done till last week. They were the largest by far and all your VCs recommended them and probably introduced you to them so you could open an account .
I have a hard time believing a business can't simply open a second checking account somewhere, assuming they have the cash and don't need any extra features. Maybe if it was a very early company. VCs and advisors failed their companies if this was their only advice.
Also "safest thing since last week" isn't super convincing! Maybe I'm just more conservative since I used to bank with Wachovia which failed in 2008.
As an engineer I am expected to have a disaster recovery plan. Sure it's unlikely that AWS goes out of business, but what if we lose access? Lose data? Ransomware? Businesses need to have some basic planning around this kind of stuff or else they run this type of risk unfortunately.
Again I hope they get all their deposits back. But they should hopefully be able to stay in business for a short time until the dust settles.
The irony as a fly-over-American is great. We are constantly and sanctimoniously told we have to move from our cities and towns to the Coastal regions. When toxic chemicals are spilled we're ignored, or worse - mocked. We're told we're financial burdens on the country.
But what we see is both coasts gambling with low interest rate money, getting rich off of fee leaching, and, when the gravy train slows down, causing a financial meltdown within 15 years of each other.
Don't kid yourselves. The tech boom was largely low interest rate fueled and, for many of your companies, a mirage.
I'm sympathetic to the tech mirage view generally. One piece I don't quite understand though, is why did tech so disproportionately gain from low interest rates when compared to other industries?
Is it just because the friction of starting a non-physical business is so much lower? I'm not quite satisfied with that as an explanation, because that provides a competitive advantage to tech vs other industries regardless of interest rate levels.
In 2008, during the global financial crisis, the German government declared that all deposits in all German banks will be guaranteed by the state. No limits. The official limit before was 100k euros:
> “The state guarantees private deposits in Germany,” Finance Ministry spokesman Torsten Albig said. A second ministry spokesman said the guarantee was unlimited.
Ordinarily in the UK, although the legal rule says £85 000 is protected per person per bank, in practice the government has typically paid all depositors in full up front even though it takes some time to recover the value of the bank's assets. Politically this is a good idea if it's affordable because even if many depositors are unsympathetic, it only takes a few good causes to make you look like heartless bastards.
Of course, the UK banks are obeying Basel III, whereas SVB had fought hard not to be obliged to obey similar US rules because they're less risky (and thus, less profitable when things go well...). Obviously the liquidity protections in Basel III wouldn't be enough to prevent a run this huge from overwhelming the bank, but the capital requirements may well have meant depositors were less likely to begin such a run, and would also surely make it easier to successfully liquidate the bank if that became necessary.
One reason to pay depositors (not shareholders, fuck 'em) is to shore up confidence in other banks. If I know I will get my money anyway, when I hear Local Bank might be fucked, there's less rush to withdraw my money, thus less risk of a run on Local Bank, thus they are less likely to actually fail. This is why FDIC exists, and why functionally similar (though very different mechanically) schemes exist in many developed countries.
If the US feels obliged to give SVB depositors their money anyway, the lesson is that you can't afford to have banks which will be so vulnerable, they all need to obey Basel III or equivalent (perhaps even more stringent) rules locally.
> “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
The headline is misleading and much of the discussion I’m seeing is based on that. Looking at the quote, there’s no mention of whether or not depositors will be bailed out.
This is a simple liquidity problem. SVB had the treasury bills and loan book to cover all the deposits. They just couldn’t access any of that money.
The FDIC should take on the bills and loans, and pay out the cash now. They will collect the entire balance eventually and they have the benefit of time and I imagine they’re authorised to hold assets like this long-term (or do a cash swap with the fed, they have plenty of long term bonds what’s another $100B). I have always assumed this is what the whole point of the FDIC and similar schemes in other countries. They foot the bill immediately and then spend time fixing up the mess but eventually reclaim it all back. It’s a bit like if you’re not at fault for an accident - the insurer pays you out now and then they deal with the at-fault driver and you’re not involved in that process afterwards in most cases.
According to the press release, SVB had $206B in assets and $176B in deposits. The math is simple: everyone should get their money back. There may even be some money left over for investors.
Having $1M in 10 years is the same as having $680k today, as you could buy 10Y treasuries that will pay out $1M
So saying "The FDIC should take on the bills and loans, and pay out the cash now. They will collect the entire balance eventually" is the same as saying "They have lost 30% of depositors money but FDIC should pay that 30% out of their own pocket"
> According to the press release, SVB had $206B in assets and $176B in deposits.
Those numbers are from December 2022. They had $161B in deposits prior to Thursday's $42B in withdrawals. And that $206B figure is somewhat fictional hold-to-maturity accounting. The $80B in 1.5% bonds aren't actually worth $80B at market prices.
They were shut down for being insolvent on Thursday ($950M in the hole). It's not just a liquidity problem.
The fed has no time value issues. In the latest press release it is obvious they are going to take ownership of the bonds and issue currency directly to cover all of the deposits. As I said, they had the assets and large government institutions are not worried about holding onto those bonds for ten years.
They would never have been able to sell enough to not be able to cover their deposits - that’s when regulators stepped in.
Silicon Valley is so connected politically, and many in the government are so dependent upon silicon valley campaign money, that I will be surprised if SOME kind of bailout does not happen. The people can rant about it all they want, but at the end of the day a politicians first job is survival, and bailing out the money folks is about survival. The rest of the country be damned.
At the risk of stating the obvious, she didn’t actually say anything that implies more than “the FDIC is doing its job” (helping depositors). There’s a lot being read into it that I don’t think is there.
I’m personally fine with US gov backstopping depositors (but leaving equity unbacked) for the specific case of SVB, but the ultimate question remains: if the US government insures unsecured deposits over $250k (even if no practical risk with long term assets on balance sheet as collateral), doesn’t this in effect create a precedent of no upper limit to FDIC insurance moving forward? So now taxpayers are on the hook for all bank deposits (thus, creating potential for more reckless behavior by regional bank CEO/CFO/CIOs). Isn’t that somewhat dangerous?
It's technical help and the ability to temporarily ignore certain laws to expedite the process of migrating customers to a new banking platform.
For example, KYC laws might require a signature from every director of a company to open a bank account... But when migrating an account from SVB to another bank, the government might allow that requirement be ignored for 30 days.
Or the government might allow existing SVB computer software and technical systems to continue to operate in certain cases where migration to a new bank is technically a long process.
I absolutely think that depositors should be made whole - and - they will.
At the same time, I think a lot of the VCs who systematically talked shit about government regulations while trying to shill crypto as a solution should very publicly eat crow. I won't lie: it will give me a great deal of personal satisfaction, but, it will also make any "bailout" (or, whatever you want to call it ) a much easier lift politically.
People may want to reconsider what a reputation actually is, because it seems SVB was not a good bank despite its reputation. I'm guessing they marketed to dumb money; people who won't look past some marketing and attached names (e.g. Peter Thiel) and assume all is good.
In general, I think more due diligence is needed, even with a good reputation. (e.g. look into lobbying efforts. if they are lobbying for weakened rules, they may be violating/doing something illegitimate already a la FTX).
Enron was reputable, for example. Different situation, i know, but the point is reputation is great, due diligence is better (i don't know what good DD would be in the Enron case, perhaps the fact they pushed a 100% buy in would be one of many red flags, for example).
I do think workers should be paid, btw. However, the c-level team/s that made the choice to bank with SVB aught to lose out because it was their bet that tanked the company (or otherwise hurt it financially).
The good news is that even in a worst case scenario of a fire sale, we are talking about a small percentage of uninsured deposits at risk (likely around 5% depending on how many deposits were successfully pulled over the last couple of weeks).
However, a fire sale is definitely not needed for all assets, and it seems likely given Yellen's comments that the government will provide some short term liquidity so that the fire sale of illiquid assets is not necessary (e.g. portions of their loan portfolio; their $7bn municipal bond portfolio; their $3.5bn of unmarketable securities (largely affordable housing projects...).
Honestly, in many ways the regulation worked. What our regulation didn't account for is that bank runs at the non-top 4 banks have become more likely in a interconnected world with "too big to fail" alternatives.
The $120bn FDIC Insurance Fund (self-funded by the banks and not the government) will definitively not even take a penny loss from this failure. That to me is the actual problem.
We are not protecting enough of the banking system with insurance. Should it be 100% of all deposits, probably not. Should it be up to $1mm or even $10mm per depositor, probably! Why should someone who sold their $750k family home yesterday be out any money just because they decided to deposit the money at their non systematically important bank? Or why should a non-profit that just completed their annual fundraising push for $1mm be out some of that money?
SVB "Fire Sale" Scenario Napkin Math
Note: Uses 12/31 numbers, but that should be largely inconsequential for determining the net liquidated cash value of a fire sale
“ Janet Yellen said on Sunday that the US government was working closely with banking regulators to help depositors at Silicon Valley Bank but dismissed the idea of a bailout.
Speaking with CBS on Sunday, the treasury secretary sought to assure US customers of the failed tech lender that policies were being discussed to stem the fallout from the sudden collapse this week. The Federal Deposit Insurance Corporate (FDIC) took control of the bank on Friday morning.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
“But we are concerned about depositors, and we’re focused on trying to meet their needs.”
In the aftermath of SilverGate and SVB demise people are rightfully (from their perspective) rooting for a shake-up at the top of the social pyramid.
I don't know if people realize but living in San Francisco and being at the helm of your own company with millions in equity funding is an extreme privilege.
Millions of things have to go right in order for that person to be in such position. That is the dream of many individuals who were not so lucky.
Now one thing goes wrong for them and there could be a turnover at the top, at least a shake-up, meaning other people will get to be in such extreme privileged position and the formerly privileged have to back down and go do something else instead. Something a bit less privileged.
Instead here comes daddy-government to ensure that everything is freezed in place with no shake up whatsoever.
And each and everyone of them has a slam-dunk case in a class action lawsuit against the board of the company they were employed.
Not to mention employees didn't have their savings in SVB so their net worth is not at risk, whereas it's the 'net worth' of the company which is at risk because it was all stored in SVB accounts.
Good, they need to convince depositors at all the small and medium banks to not drain their account Monday morning. Many banks have mud and longer term treasuries in their book and they’d be well under water if they had to mark to market which they would if forced to sell. The Fed has had erratic policy for a few years now and combined with the Gov flooding the market with cash and stims, all these safe places to park cash have suddenly been made into speculative investments.
We don’t need 1000 banks collapsing. Irresponsible fed and government need to own this and ensure deposits are safe. Selling everyone nearly 0 interest bonds and then jacking interest rates to the highest rates in 20 years over the course of 12 months is a scumbag move.
It is shockingly easy for a company to mitigate the bank failure risk.
1. Open account at Fidelity
2. Purchase brokered CDs in denominations <$250K in a ladder matching your cash flow needs (you have a cash flow spreadsheet, don't you?)
It's not like the risk of banks was a secret. Click on the "Risks" tab at the link above -- it's near the top of the list.
This strategy works for raises of up to several million dollars. If you've raised more than that, spend a bit of money on someone to help you set up a treasury ladder, which scales to any size of raise.
> spend a bit of money on someone to help you set up a treasury ladder, which scales to any size of raise.
This is effectively what you are hiring a bank to do for you, but with them determining over large sets of depositors what the cash flow needs are expected to be. The focus of your company isn’t building these investment instruments for your cash. Spending time on this is a distraction for most start ups.
Seeing all of the “screw them, they are VC’s & tech bros, they took a risk they own it” sentiment on Twitter makes me sad. It’s a hard realization of how little clue so many people have about so much of the way the financial system works, and who would actually be impacted by these losses.
Also seeing finance bro hot takes like, oh those companies took the risk and should have done due diligence on the bank. SIVB was given an investment grade rating by both Moody’s and Standard and Poor. What due diligence are founders scrambling to find product market fit supposed to do in their spare time that is somehow beyond those organizations?
>It’s a hard realization of how little clue so many people have about so much of the way the financial system works, and who would actually be impacted by these losses.
I think it's a little insulting to assume these people just don't understand the system. I think you have to nearly totally politically ignorant to not understand why people would feel this way. I don't know how you don't see the irony of complaining that ex-McKinsey founders shouldn't have to do due diligence on their bank, but that 18 year olds "know what they signed up for" and should have known that student loans were un-bankruptable. Many of the VCs who are now going hat in hand to Yellen are the same who opposed any sort of socialization. Why wouldn't that cause resentment?
I’ve noticed this tendency for at least a decade. People in general— even highly educated people in the media, government, and academia— are ignorant about economics and finance. There tends to be no nuance in much of the popular takes. I’m still quite ignorant, myself, but at least I can offer a bit more insight than: “capitalism: bad”.
I am curious, though, as to whether or not this general ignorance is new, or if it’s just that I’ve become more aware of it over the years.
Now people’s dumb opinions can be heard en masse. They can then even bubble up and get elected into congress. Before there was a muzzle by those who knew better who controlled the media and narrative. You can easily argue that gate kept all kinds of things that shouldn’t have been swept under the rug, but it turns out there’s a lot more dirt than coins under that rug.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
Those reforms were rolled back for medium sized banks in 2018 after lobbying from svb and others. Im not quite sure what to make of all this, except to be glad I live in Canada.
This is on the CFO and CEO to evaluate counter party risk.
If the founders had put all their money in FTX because they figured they could get a better FTX checking account than SVB was offering, nobody would bat an eye at their failure.
If depositors take a haircut, what incentives could smaller banks offer in order to remain competitive with GSIBs for business deposits? Higher rates seem like it would just increase risk.
Agree that for individuals they are great! But for companies with more than 250k in cash, I would think that the incentives to keep your treasury "safe" would drive you toward banks that you believe are too big to fail?
"WILMINGTON, Del. (AP) — Treasury Secretary Janet Yellen said Sunday that the federal government would not bail out Silicon Valley Bank, but is working to help depositors who are concerned about their money.
...
"
It sounds like they're trying to – and I think probably will – but it isn't a sure thing yet.
Resting in my armchair, I think they're trying to make deals with several other banks to absorb the SVB clientele. Maybe there's one bank that agrees to buy up a large chunk of the deposits and a couple smaller ones that participate as well. If there are multiple buyers, it spreads out risk and doesn't just give assets to a big big, and may help raise the price floor. The FDIC might cover the gap.
Yellen is suggesting they will, but there’s no details yet.
I don’t believe the FDIC has the legal authority to do so, but it’s highly possible that the treasury and/or Federal Reserve can cobble together some ad hoc legal justification.
There’s a lot of ways they can just do whatever they want.
It could be as simple as the fed purchasing a large long dated convertible note with very favorable terms from the new entity created for receivership and then turning around and selling that entity to another bank, now that the balance sheet is fine. Or the conceptual equivalent.
Yes, it's share holders who will realize the loss. Anyone owed money by the bank, ie depositors is now in a line to be paid as the FDIC sells everything and pays out the obligations.
Depositors will get a “special dividend” next week which is about 50% of their deposits. The other 50% will be coming as they sort out and sell the assets which would take a couple of months.
The 250k FDIC limit is just what they guarantee. If the bank has enough assets left they will pay over the limit to make depositors as whole as possible. Plenty of information on this topic in threads over the last few days.
The 250k will happen Monday and is not in question, the rest will come in bits via special dividends as they sell assets, it may or may not reach 100% of deposits over time.
If the fdic has any sense they’ll announce up front the exact figures though and announce it is close to 100% for depositors to make sure this is contained, ideally through a sale to another bank, if not they’ll have to run it. Bondholders and shareholders and svb employees get wiped out.
The bank has long term bonds that they loaded up on during the Covid interest rate lows. It's not possible for the uninsured depositors to get anything near 100% of their deposits since these bonds have lost much of their value. Unless there is a bailout, no depositor is getting anything near 100%.
75% of depositors had less than $250k on account and every one of these accounts will get all of their money tomorrow. The rest of the depositors will get $250k tomorrow and most of the rest of their money later.
The moment that the government guarantees or bails out deposits above the FDIC limit, taxpayers assume all risk over the entire banking sector and losses are socialized. That would be the official start of the end of free market economy.
There's a well traveled process to winding down a bank and recovering what is left for depositors. Let's not try to fix what isn't broken.
The Deposit Insurance Fund had a balance of $128 billion at the end of 2022, a tiny fraction of the $9.9 trillion of insured bank deposits in the United States.
Now, the FDIC is attempting to sell SVB in order to pay its uninsured depositors. At the end of 2022, more than 90 percent of SVB’s $175 billion in deposits were uninsured by the federal agency.
I thought most of the issues in 2008 stemmed from lessons learnt in the aftermath of 1929 which were either forgotten or were forcibly unlearnt (repealed) after decades of lobbying.
So, even if we do learn lessons, don't expect them to last very long.
>The FDIC, which took over SVB on Friday, has sought bids from interested parties during the weekend. The regulator is looking for a bank that has the financial wherewithal and management expertise to handle Silicon Valley Bank’s assets and customers, but not one that is so large as to be considered “too big to fail,” these people said.
>That means large lenders like JPMorgan Chase or Bank of America likely aren’t in the running, the people said. Even some large regional banks could find it difficult to absorb Silicon Valley Bank, which was the 16th-largest U.S. lender as of the end of last year. There are concerns that doing so could intensify regulatory scrutiny, even if a lender were to “rescue” SVB in an emergency sale, the people said.
I have a really dumb question. If my spouse and I have a checking account and a savings account at the same US Bank, does the 250K limit apply to the total of both accounts or each account separately?
Say we have 200K in checking and 200K in savings. Would we get 400K from FIDC or just 250K total?
The US has spent the last 15 years printing money to bailout mortgage holders. So no one who has had a mortgage or sold a house since 2008 can complain about a bailout, since they have received one...
Funny thing is, part of why SVB blew themselves up was they bought a bunch of long term mortgage backed securities paying low rates so now those securities have lost a ton of value if they were to liquidate them (which the FDIC will be doing shortly).
But I don't think the Fed engaging in QE constitutes a bailout.
It will be interesting to see who else is struggling as I doubt svb are the only bank that went long duration to try and eek out some yield.
Here in the UK there was a pretty explicit choice to watch medium sized (still huge for a mere human like me) banks fail but to bail out large ones. I guess that's fine from a short term, pragmatic sense. Not sure what it does for long term competition but c'est la vie.
I believe bailouts are usually kept secret as telling anyone (a) makes banks less likely to ask for one and (b) then causes a run pushing up the cost of the bailout. The conspiracy theorist in me wonders who has been given a below-inflation "loan"...
I think a 100% depositor recovery rate seems very likely here.
Interesting to think about future rules -- would they limit the 100% guarantee to banks who pass the >$250B protections thst SVB lobbied to remove for $50B-$250B banks?
There’s a theme of NEVER AGAIN comments in these SVB posts. Harkening back to 2008 financial crisis.
Doing your best to make depositors whole (maybe not 100%, but as much as possible) is not a bailout ala 2008. It’s generally not very controversial financial policy that prevents a financial contagion like 1929.
No 10 person company is going to split their 2.5 mil 10 ways to get insurance. And they’re not going to have the sophistication to manage that. Nor do we want to force small businesses to keep cash under mattresses or have to evaluate a banks balance sheet.
If you want to think of a bank account in those terms, then you expect a radically different financial system. Which is fine, but don’t expect such a system to exist in our lifetimes, or during the current crisis.
It’s not about “billionaires” (who don’t keep billions of cash sitting in one bank) but the company with a few million that needs to make payroll and pay vendors.
SVB is in receivership where depositors place very highly. Banking policy is not just about insurance. That’s just one tool.
Billionaires and VCs are going on Twitter and demanding a make whole government bailout. Is this the first time they are hearing about how the FDIC works?
I don’t think anyone is opposed to the system playing out like it’s supposed to.
The FDIC pays out $250k on Monday plus pro rata whatever cash is on hand. Then it starts selling assets. The treasuries and MBSs they can probably sell within days, those have very liquid markets. That will allow them to make another pro rata distribution. The loan book will take longer. But as long as public money isn’t used, no one will call it bailout.
1) why are the feds claiming they are going to 'help' depositors? isn't it more, like, no, you're just going to do what you're required to do by law?
2) shouldn't the FDIC deposit insurance limit be pegged to inflation? yeah, obvious, but. last raised in 2008 to $250k. seems like it'd be about $350k today.
3. Depositors that will fall under FDIC and made whole by this.
4. Depositors that will receive X% of deposits (likely under 100%)
5. Debt and equity with SVB
6. American taxpayer.
OK, I think every possible permutation of who owes who money has been explained in this thread.
I personally would like to see a legal mechanism where group 2 owes group 4 money. Not sure how that would work, but it would definitely give no one an incentive to run on a bank ever again if we could figure it out.
The way to prevent bank runs is to prevent banks from becoming insolvent in the first place. Making it illegal to take funds out of an insolvent bank is not the answer.
However, when/if a bank becomes insolvent, it seems archaic that one depositor should get 100 cents on the dollar and another 80 on the dollar instead of each 90 (assuming equal accounts, etc.) Your place in line shouldn't really matter, these aren't Taylor Swift tickets.
now there are lines withdrawing from First Republic. Question to those who know better... all my "digital" savings are with Bank of America and Chase (eight-digits) - these are biggest banks in the US. Should I be concerned?
These banks are too big to fail, so I would guess they will be net beneficiaries of the current panic. If you have 10x the FDIC limit, it's probably good to diversify, but it seems highly unlikely the govt would let either bank even come close to failing.
Most of the uninformed takes are from older accounts, and use talking points straight out of Twitter... and I don't think /g/ is particularly interested by VC startup banks lol.
I think there is a lot of confusion around bail-out vs bail-in. The Dodd Frank act 2010 rules out bail-out but opens the door for bail-in. In a bail-in uninsured depositors are unsecured lenders. It gets a bit complicated as rules are different between countries and are open to both interpretation and case by case modification.
AFAIK this isn’t a bail-in as there is no attempt to save the bank. As the bank is in receivership the depositors get a receivership certificate and by FDIC law depositors get paid first before lenders and equity. I think possibly before secured lenders but I’m not sure. In liquidation preference is everything. Given the assets, even at fire sale prices, depositors should get most and possibly all of their money back. That would mean any bail-out would be to help the banks other lenders. I don’t know for sure but I assume those would be other banks, so I guess it would be sold as an idea to limit contagion. I’m anti-bail-out. Depositors can borrow against receivership certificates to get some liquidity. Obviously they’d pay a time and risk premium for that but better than going insolvent. I don’t have cash in bank account above FDIC limits yet I still have multiple accounts in different countries. Basically applying backup rules to banking to avoid a single point of failure. If a bank freezes my funds for whatever reason I would need money to be able to pay a lawyer to get them unfrozen. I heard SVB would punish customers (with higher fees I guess) who banked with multiple banks so not only did SVB have a very high percentage of uninsured deposits the depositors they did tended not to spread the risk around.
Now bail-ins are a totally different matter. Deposits above insurance unsecured liabilities and depending on the jurisdiction can be anywhere in the preference line from in the front to near the back (still in-front of equity which will always get hosed). This is very different to most people’s perceptions as they believe the bank is holding their money in trust which would put them first in line. Effectively (afaik) uninsured deposit amounts are insuring the insured deposit amounts as their deposits contributed to pool of assets that get paid out in liquidation. One of the reasons for a bail in is continuity of operation, new equity is issued (the old ones are deleted) and instead of receivership certificates which holders can use to get loans on a case by case basis the equity can be traded making it easier and cheaper to free up liquidity. Since the new bank will be solvent the assets won’t need to sold at fire sale prices. But the other aspect is the mingling of uninsured depositors with other lenders really has the potential to drastically increase the size of the haircut depositors can expect. While many of bail-in legislations seem to have loop-holes allowing this (some countries state it more explicitly) it seems unfathomable that such a thing would be done as that would destroy the false trust that people have in the financial system. Unless of course all off-ramps from banks are closed and people are stuck choosing between a bad deal from one bank and a bad deal from another bank.
I like it, let capitalism work as intended by culling out the weak. They should have done the same with GM and Chrysler instead of bailing them out, we'd have a faster transition to electric today.
There's strategic reasons to have those companies beyond they employ a stack of people. The US sees the big auto makers through they eyes of a country that needed at one point to start manufacturing around 100,000 bombers to fight in a war.
Government sees industry with a different lens to the markets.
> The US sees the big auto makers through they eyes of a country that needed at one point to start manufacturing around 100,000 bombers to fight in a war.
The same companies that said they couldn’t make ventilators at scale when asked to? Bailing those companies out based on an old reference to WW2 was just good marketing, not some deep insight only the government is capable of.
They did make ventilators at scale. Covid's a bad example IMO, mostly because there was and is so much politics around the issue that there wasn't really a concerted push from government at the time. From the outside the administrations looked like it had to be dragged kicking and screaming to solve that problem.
Does anyone have any hard numbers on the risk of potential contagion in the banking sector? This is a rather large institution to go bust, and there is some discussion that a large percentage of their portfolio is composed of members that are over the FDIC limit. I also don't know how the Treasury mismatch can be solved - do you just tell creditors to wait for the maturity of the 10 year bonds to withdraw their funds and eat inflation when moving the assets to the Santa Clara bank? Ideally, if there is no risk of contagion to the larger financial system all of these firms can take a hike, but I don't know if that's known a priori. Yellen is just saying "we're not going to do that," but it would be helpful if there were some hard numbers or other reassurance that they know that the larger economy won't be affected (outside of these firms going bust for poor asset management).
A plan that soothes nerves about access to uninsured deposits—most of the bank’s deposits are sizable enough that they don’t carry Federal Deposit Insurance Corp. protection—could tamp down the crisis and limit any impact on the economy as the Federal Reserve focuses on combating inflation by raising interest rates.
But failing to swiftly clarify how SVB’s customers can access funds, make payroll and conduct business risks broader economic consequences and threatens to complicate the Fed’s monetary policy decisions.
“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Treasury Secretary Janet Yellen said in an interview on Face the Nation on CBS Sunday. “We are concerned about depositors and are focused on trying to meet their needs.”
Ms. Yellen declined to provide details on what federal policymakers are considering.
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In other words, it doesn't look like we know anything yet.
This is the statement from the Financial Times article -
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again,” Yellen said.
“But we are concerned about depositors, and we’re focused on trying to meet their needs.”
The FDIC ordered the closure of Silicon Valley Bank and immediately took position (sic - possession) of all deposits at the bank Friday. The bank had $209 billion in assets and $175.4 billion in deposits at the time of failure, the FDIC said in a statement. It was unclear how much of deposits was above the $250,000 insurance limit at the moment.
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Unless SVB had over 700,000 customers, quite clearly there is a mismatch between insured and uninsured customers.
So by Yellen saying “But we are concerned about depositors, and we’re focused on trying to meet their needs.” and at the same time saying there won't be a bailout she's effectively saying nothing. In this case those things are synonymous.
Until there are hard numbers on possible contagion and the steps that the Federal government is going to take to prevent that we won't know anything for sure.
MARGARET BRENNAN: For those depositors, about 85% of SVBs accounts were uninsured. And, as you were saying, a lot of different tech firms relied on them. Do you believe that depositors should be paid back in full? Will they?
SECRETARY YELLEN: Look, I'm not going to comment on the details of the situation at this point. I simply want to say that we're very aware of the problems that depositors will have, many of them are small businesses that employ people across the country. And of course, this is a significant concern, and working with regulators to try to address these concerns.
So that means (if the other numbers above are correct) that there should be approximately $150 billion in assets that are currently uninsured. The risk of contagion may be less than during the 2008 financial crisis if there is less counterparty risk (banks owing other banks assets and no one understanding who owns the underlying). There would be a problem to the extent that VC firms may go bust and this trickles up to hedge funds and larger institutions. That risk is hard to assess and asset holders have every incentive to claim that risk to be high.
I am not sure why you are so bitter but it’s important do understand that all you do is create more hate with comments like this. The only thing anyone is asking for is to protect the deposits of the people who bank(ed) with SVB. That is it.
Both you, op and others are being ignorant on this. Insurance payment or bailout is external money, this is making depositors whole using the bank's assets, not FDIC or government money. Tax payers are not making anyone whole as I understand yellen's proposal.
Nope. YC and other investors are explicitly asking for something beyond the normal process - no possible haircuts, no delays, $10M guaranteed, whatever. That can't be covered just by SVB assets. (It can be mostly covered. But that's not what they're begging for.)
And that's without getting into the question of whether they should be allowed to still reap the rewards of being a customer of a risk-taking bank for years before the event.
The solvency gap is minuscule and there are known buyers lining up. They will pay a premium to acquire the business of 40k companies (and whatever is left of the brand) and that capital (along with the assets) is ensuring creditors are made whole while shareholders get wiped. There is no bailout; people just seem to project 2007 onto a completely different situation.
Yes, the way I read this request (and Yelen’s response) the government’s “commitment” is meant to provide a floor for private offers so as to immediately address concerns, not as a primary path forward.
Please keep this subthread's context in mind - it starts with
> The only thing anyone is asking for...
And my comment is about what those people are asking for. They're claiming they're not asking for a bailout, while asking for a bailout. They are confused, or lying, or both.
When the government has to step in and use money to back things up, that’s a bailout. “Making depositors whole” can only be accomplished if the assets owned by SVB are bought for more than their market value, where the government is on the hook for the delta. That’s a bailout.
When a person doesn't want himself and every other ordinary person to be robbed by millionaires and billionaires, that is not "hate". That is not what "hate" is.
Founders drained the whole Bay Area of anything culturally interesting, tech companies all just did massive layoffs, years of shouting "learn to code" at every other profession, the world's art output fed into an AI meat grinder with "whoops sorry but also it's legally okay" to enrich a few VCs, but you can't imagine why someone might be bitter about demands to compensate their business mistakes from the public purse?
Define costs, specifically. What are the 'costs' of ensuring that depositors have their money, while taking over long-term SVB investments that the government can wait out? What are the 'costs' of tens of thousands of job losses? What are the specific 'costs' of significant centralization of banking, as any new VC would immediately require a start-up to move it's money to JPM or GS?
The cost is that we keep publicizing risk and privatizing gains. SVB took advantage of Trump-era deregulation to make more profit and now that they've screwed up they want help. The people who deposited money at SVB profited from those choices and now they also want a bailout.
Making depositors whole is important and should happen. Confidence in the banking system is important. A company that needs banking should not be subject to the same risk as a shareholder.
If depositors gained single penny of interest on their deposits. They should have been certain there is some risk. Including losing money above 250k. And they have less than zero right to cry when risk realises.
a bailout, would mean the bank and its shareholders would survive. Making depositors whole is about not having people lose faith in the banking industry.
SVB probably has enough assets to make most depositors largely whole, but it'll take time. Shareholders are going to wear a total loss. Which sucks for them but this is part of share market game.
I suspect cooler heads will not prevail. And there will be much silliness Monday morning.
This keeps getting repeated, but no, they don’t have enough assets to make depositors whole.
A bond that matures in 10 years does not make anyone whole. That’s like saying “I know I owe you money today, but don’t sweat it, I’ll get you the money in 10 years”. These arguments completely ignore the time value of money.
I didn't say totally whole, i said largely whole. Everyone will get at least 250K, and then probably something like 75-85% of what ever else they had relatively quickly and then who knows.
Exactly. Somebody has to eat the loss, maybe depositors, maybe the taxpayer.
And somewhere, someone (some many), was on the other end of those trades - or not on the other end of trades that should have been made, and has made a gain.
The first step would be to stop calling them Depositors. They are not and were never Depositors. That is what you have deposit boxes for...You do not have money at the Bank. You loaned money to the Bank. That is why they pay you interest on it...
Amazing the IMF has a misconception of how banks work in their “basics” explanation!
From the Bank of England: “[…] Where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.”
"...Transactions on deposit accounts are recorded in a bank's books, and the resulting balance is recorded as a liability of the bank and represents an amount owed by the bank to the customer..."
"...At the moment of deposit, the funds become the property of the depository bank...Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand..."
And your confusion is completely normal. An insidious action expressly used by the interested, in manipulating language for it's purposes. It has already been nicely addressed by Weinberg in his books.
That is why every dry desert urban development in the middle of nowhere, with hardly any water for hundreds of miles, is called... Watery Creek...That is why employees are sometimes called business partners, that is why private investments funds are in some countries called pensions, and finally the reason why creditors at banks are called depositors. To delude you into making you believe, you are or have more, than what you really are, or might have.
Sounds like this commenter is not just arguing that language is being used incorrectly in this situation, but that the standard language and definitions are themselves propaganda terms.
(Usually people are a little clearer about their intent to argue that.)
The value of the interest is not relevant to the truthiness of the concept. And zero is still a number, although some mathematicians might not agree...
Yes in the world of Finance, but the word has a different meaning, in the mind of said Depositors...The word is used by Government and Banks, as a misdirection into a false sense of security.
Says nothing real. For instance, will the rule for uninsured deposits be followed ? Or will there be a bailout for people with over $250,000 in deposits ?
Seems all it says is "there will be no bailout but there will be a bailout".
If people with over 250,000 in deposits are covered, the once again the the rich is allowed to avoid all risks for bad decisions.
> If people with over 250,000 in deposits are covered, the once again the the rich is allowed to avoid all risks for bad decisions.
I feel like putting your money in a bank should not be considered an obviously bad decision. The risk profile your bank takes on with your deposits is largely opaque to you, and it’s not feasible to expect every depositor to do due diligence on it. Even if you understood their portfolio you might not be able to understand the implications as market conditions change. It’s also not feasible to expect people to split up their deposit into multiple 250k accounts.
If you can have more than 250,000 in a bank account, you are rich. You should know and accept the risks you are taking. If you do not like the FDIC insurance laws, get it changed.
In 2008, people lost their houses and many their savings because they were not rich. And these people were not bailed out even though it was due to issues they had no control over. Most of these losses were a lot less than that 250,000 you have. But you are saying "because I have 250,000 I deserve a bailout, screw the people who are not rich because that is their fault."
Positions that claim depositors in SVB should not be made whole must be missing a whole lot of context.
There is a sequence of screwups here by the government and then by SVB which led to this, and it makes zero sense to have that impact depositors who manage the critical innovation infrastructure of the US.
The backdrop that led to this includes the government printing way too much money, which induced a ridiculous bull run and coupled with supply chocks caused high inflation. The Fed failed to react quickly enough partly for political reasons, eventually leading to a jarring about-face with the sharpest interest rate increases in decades.
Meanwhile the bull run led to an increase in deposits to SVB, which SVB needed to put to work and bought an outsized low yield 10 year bond which plummeted in value once interest rates spiked. This was indeed a poor decision by SVB and along with the drop in new deposits from the interest rate-induced VC slowdown pretty much sealed their fate.
Once SVB share price dropped 50%, depositors acted rationally to pull their uninsured funds. It wouldn't have mattered whether VCs chimed in or not, the bank run would happen regardless in a matter of days (there were plenty of red flags that the price drop exposed widely).
If experts in finance/banking didn't see this coming, why would small business depositors be expected to? If diversifying across regional and "too big to fail" banks were such an obvious issue it would have been baked into every VC funding agreement, but it wasn't (but I'm sure it will be from hereon).
Which startups/VCs bank with SVB is basically an arbitrary choice (in fact the standard one), so what would be the point of punishing large swaths of the critical innovation industry that happened to do something considered as the industry standard? Making depositors whole is not a bailout, it's a backstop for the inevitable crack in the economy that the aggressive/clumsy Fed induced.
If this doesn't get resolved immediately, the US can pretty much say goodbye to any form of long term dominance, economic, military or otherwise.
