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.
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.