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It's different in a lot of ways. The most important one that you've missed is that banks don't need to have enough liquidity to cover customer deposits, but the

by vkou 4y ago

It's different in a lot of ways. The most important one that you've missed is that banks don't need to have enough liquidity to cover customer deposits, but they do need to have enough assets. If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps. SBF has neither liquidity nor assets sufficient to cover its deposits, because most of his assets was a pile of worthless fartcoin that he printed for himself, but pretended that it was worth billions. And because he was not properly audited[1], his equity wasn't immediately liquidated to cover the gap, when the gap could still be covered. ... Also, reserve requirements have nothing to do with this particular failure case. They have everything to do with issuing loans, and the rate at which money is created (inflation!), but this wasn't a failure caused by issuing loans. [1] It's weird how VC due diligence seems to go out the window as soon as their money starts funding a hot new crypto scam. It's almost as if they are playing a heads-we-win-big, tails-we-lose-nothing-but-our-investment game...

oldgradstudent 4y ago
> If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps. That's how it's supposed to work. We've all found out in 2008 that's no longer the case. The FDIC took over and sold or liquidated a few hundred small banks and a handful of medium sized banks. The big ones were considered to be too big to fail and were bailed out. The shareholders of these bing banks did not lose everything, and even the subordinated debt was payed (e.g. Citi).
- vkou 4y ago
  > That's how it's supposed to work. We've all found out in 2008 that's no longer the case. 1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were. 2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out. 3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments. The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.
- arcticbull 4y ago
  So bail-outs weren't grants, they were loans, and the loans have been repaid netting a massive windfall to the government over over $100B with many more billions to come, a ton of jobs were saved and it's hard to argue that they were at all a bad thing. [1] This is coming from someone who at the time thought the bailouts were a bad idea. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
  - oldgradstudent 4y ago
    You're describing just a small fraction of the unprecedented Citi bailout. They decided that Citi must not be allowed to fail. https://www.nytimes.com/2018/08/06/books/review/james-freeman-vern-mckinley-borrowed-time.html https://www.nytimes.com/2018/08/06/books/review/james-freema... This was a massive intervention in saving a failed bank.
    - arcticbull 4y ago
      Yes, massive interventions took place - but if that's not a sign that you should be confident the US government will stand by the dollar I don't know what will. The bank was saved, nobody lost deposits. Regulations prevent this from happening in the future. However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists. I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina. tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008. This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things. [1] https://twitter.com/dril/status/473265809079693312 https://twitter.com/dril/status/473265809079693312

by vkou 4y ago

oldgradstudent 4y ago

> If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps. That's how it's supposed to work. We've all found out in 2008 that's no longer the case. The FDIC took over and sold or liquidated a few hundred small banks and a handful of medium sized banks. The big ones were considered to be too big to fail and were bailed out. The shareholders of these bing banks did not lose everything, and even the subordinated debt was payed (e.g. Citi).

vkou 4y ago
> That's how it's supposed to work. We've all found out in 2008 that's no longer the case. 1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were. 2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out. 3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments. The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.
arcticbull 4y ago
So bail-outs weren't grants, they were loans, and the loans have been repaid netting a massive windfall to the government over over $100B with many more billions to come, a ton of jobs were saved and it's hard to argue that they were at all a bad thing. [1] This is coming from someone who at the time thought the bailouts were a bad idea. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
- oldgradstudent 4y ago
  You're describing just a small fraction of the unprecedented Citi bailout. They decided that Citi must not be allowed to fail. https://www.nytimes.com/2018/08/06/books/review/james-freeman-vern-mckinley-borrowed-time.html https://www.nytimes.com/2018/08/06/books/review/james-freema... This was a massive intervention in saving a failed bank.
  - arcticbull 4y ago
    Yes, massive interventions took place - but if that's not a sign that you should be confident the US government will stand by the dollar I don't know what will. The bank was saved, nobody lost deposits. Regulations prevent this from happening in the future. However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists. I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina. tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008. This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things. [1] https://twitter.com/dril/status/473265809079693312 https://twitter.com/dril/status/473265809079693312