A family member noted to me yesterday (after being frustrated by the coverage and reading the regulatory requirements from the Fed) some stuff that is being poorly articulated by these articles.
Even under Dodd-Frank and prior to the Trump deregulation, SVB was in trouble and acting badly - and regulators probably wouldn't have caught it, nor would SVB have broken the law.
They had to do stress tests this year anyway. But that wouldn't have caught onto the fact that they parked deposits from (now forgiven) PPP loans into treasury bonds in a hold-to-maturity account (thus hiding the asset risk on paper, something that isn't illegal but is suspicious that they did to a degree beyond anyone else apparently), and it wouldn't get over the fact that the Fed's own guidelines for computing asset risk told them to only take into account a 1% rise in the Fed's interest rate (it actually rose 3%!).
Point being, deregulation (real or advocated for) didn't cause SVB to fail. It would have failed anyway. The actual data they base things on is bad, and the bank was nigh criminally mismanaged.
> hey had to do stress tests this year anyway. But that wouldn't have caught onto the fact
> the bank was nigh criminally mismanaged
For sure this was a crime. It's being reported [1] that executives were aware of the risk and continued to purchase higher yielding assets.
From the article:
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.
Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.
In order to avoid a $36M hit, they literally bet the bank.
I wonder if any of this figured into their Chief Risk Officer's decision to leave the bank in early 2022.
Those are two different things. I didn't say we need less regulation. I said that the deregulation that happened over the last few years is irrelevant.
More regulation doesn't help. More of a bad thing is still bad. Better regulation helps. We need to question why the regulators didn't see this coming.
Exactly. It's also unfair to say VCs and depositors should have noticed the problems when regulators didn't see them either.
Banking has been a quasi-government-operated industry since 1933, and even more so since 2008, and we need to make sure that the government does not dodge blame for the failure of SVB. Government regulators are supposed to prevent this kind of thing from happening, and they didn't prevent it. You can't as deeply involved as the government is in banking and not be complicit in the outcomes of banking.
People will try to blame "lobbying" for this but let's be honest, even if regulators were looking at every bank in the US with a microscope no matter how many deposits they held, those regulators probably would have missed this. Hey, government bonds are a great investment! Duration risk is sneaky.
Who caused that duration risk to actually manifest as a real problem? The Fed! The same people who are supposed to run the banking system in a stable way have contributed to the instability of the banking system by trying to squash inflation. If the Fed hadn't raised rates so much everyone would be praising SVB for doing so well.
People have an impression that banking is a private industry and the government comes in to bail it out, when really the government was involved the entire time. If we don't understand that, we won't be able to actually fix the problems.
This particular type of response blows my mind... "They were hiding their behavior... Therefore we don't need regulation."
When regulation fails, we update it to cover what we learned. When someone hides from regulation, we update the criminal codes. Regulation's goal is to steer behavior, not be a Minority Report for balance sheets.
That's not what I said, or meant to imply. What I meant was firstly - depositors being made whole, investors losing everything, and management (hopefully) going to jail is the kind of response we want. Bad banks should fail, and the job of regulation should not be to protect banks or people who own equity in the bank itself. It should protect customers and society.
The second point that needs to be refuted, loudly, is that this is the Trump administration's fault for lowering the reporting frequency for smaller banks - what should really be scrutinized is what those requirements actually are and how they can be improved.
So, I push back some on the depositors being made completely whole. Customers are choosing to put their money in the bank, and their putting money in the bank is what is allowing the bank to take the risks. It's not like depositors are completely faultless here. I'm all on board with the selling of the assets being used to make depositors as whole as possible, but anything the current sale price the assets couldn't cover, I don't see why depositors should be made whole.
What you say is true, but the point remains that the limits imposed by the government only work if some depositors (large ones) bear some risk of losing their deposits. The limits may simply be moved up to $2 million or $5 million for certain kinds of banks, but the rules imposed by VCs and related investors require companies to concentrate all their business with one bank; this increases risk and needs to be outlawed (this kind of sweetheart deal is one of the reasons the bad managers at SVB piled up so many deposits). The VCs share a good deal of the blame here. There needs to be some incentive for multimillion dollar depositors to both evaluate risk and to be able to reduce it.
Frank was on the board of Signature Bank, that should tell you a lot about how useless Dodd-Frank was. The Biden admin had 2 years of total congressional control to overturn Trump's rollback of these supposedly amazing regulatory requirements.
Government encouragement of risky behavior due to bailouts is the problem, not deregulation.
I think it's reasonable to say that both things are bad. We need more stringent regulation and we need to stop bailing out bad actors. I can't fathom why the government voluntarily dialed FDIC insurance up to infinity for this particular bank crash - the rules around how FDIC insurance should work are extreme clear.
Either the government wants more control over the market, and failing banks that require bailouts does that or they're just receiving so much money under the table from these people it behooves them to bail them out.
I think stopping the bailout is in effect mostly enough "regulation" on its own. Anything else requires very good analysts watching this stuff and enforcing the regulation. From what I've seen, the government is very bad at enforcing most of their regulation. They're unable to do it with firearms, and they're unable to do it with the financial industry.
Dems had the Senate and House. Stop with the gaslighting. If you want to let them pull the wool over your eyes over and over and blame the guy that's been out of office for 3 years for their failures, I guess you kinda deserve what you get.
If you don't have 60 seats in the Senate, you don't control it under current rules. 41 Senators is all it takes to declare a bill filibustered and dead.
These rules are a severe perversion of the intention of a filibuster. They absolutely should be undone, but both parties are too afraid of giving up power when they have less than the majority. It's obscene and a perfect illustration of American politics.
I’d be fine with the preservation of the filibuster if it was a true filibuster. Make the people who want to stop the bill stand up in front of the Senate and the world and make their case, indefinitely, until something gives.
Now it’s just a cheap veto with no meaningful short-term cost.
The argument that I've heard is that a speaking filibuster results in inability to pass other bills through the chamber. So we can at least get other bills passed, but also some bills which can't be voted on would be able to get through because it's so easy to block things. I'm not sure which option is better.
Halting all Senate activity should be a consequence of of the filibuster. It increases the negative consequences of using it, something that is desperately needed. Right now there is basically zero cost to filibustering anything, so it happens all the time and tons of legislation isn't even proposed for debate since it's not the worth the hassle when senators know bills will just be filibustered anyway. If using what is supposed to be an extreme tool came with more consequences senators would (hopefully) reserve usage for more extreme legislation. If using the filibuster angered other members of your party who have worked hard to move bills through the legislative process there would be a lot more pushback to using it every time there is a day in the week.
The 1972 2 track rule has made it far easier to sustain a filibuster since there is little to no pressure from other minority members to compromise or just move on. The 2nd track allows just enough bill movement to prevent backlash from more moderate members.
The House used to have a filibuster rule in the 1800s. They finally got rid of it exactly because it ended up blocking everything... then restored it... then got rid of it again.
With the more than 20 years, and continuing, of Republican overrepresentation in the Senate, control by the Democratic majority is impossible. What needs to happen is making D.C. and Puerto Rico States of the Union and get rid of the Electoral College. Only then will the federally elected actually represent the voters.
Imagine being a manager of any business, and when something goes wrong on your watch you say "Hey! Remember, that guy that was the manager 3 years ago? Yeah, it was his/her fault." How do you think that would go for you?
I do find it slightly entertaining you let these people spit in your face, place the blame on others, and then just accept them laughing at your blind faith in them.
I think you're also mistaking my dislike for a certain group, and presenting a strawman argument trying to conflate that with support for another group.
Even under Dodd-Frank and prior to the Trump deregulation, SVB was in trouble and acting badly - and regulators probably wouldn't have caught it, nor would SVB have broken the law.
They had to do stress tests this year anyway. But that wouldn't have caught onto the fact that they parked deposits from (now forgiven) PPP loans into treasury bonds in a hold-to-maturity account (thus hiding the asset risk on paper, something that isn't illegal but is suspicious that they did to a degree beyond anyone else apparently), and it wouldn't get over the fact that the Fed's own guidelines for computing asset risk told them to only take into account a 1% rise in the Fed's interest rate (it actually rose 3%!).
Point being, deregulation (real or advocated for) didn't cause SVB to fail. It would have failed anyway. The actual data they base things on is bad, and the bank was nigh criminally mismanaged.