5 ms·

The possibility of changing the rules of the game once it's started can create moral hazard. For example, if people believe that the govt will use taxpayers' mo

The possibility of changing the rules of the game once it's started can create moral hazard. For example, if people believe that the govt will use taxpayers' money to reimburse funds that were not FDIC protected, then they won't be careful about picking their bank. And it's a lot of money (e.g. 30% loss on $200bn is about $600 per US resident household). But I'm conflicted, because: - the federal administration doesn't seem to care about moral hazard or changing the rules of the game retroactively (e.g. handouts to people who borrowed lots of money whilst they were enrolled in college) - banking is necessary for companies to operate, and it doesn't seem reasonable for every business to become expert in managing counterparty risk - bank regulation seems to have failed, and that's a responsibility of govt - it's almost impossible to be neutral about this; if you're a founder/CEO you aren't going to feel you did anything wrong by choosing SVB; if you're a random taxpayer you are going to feel any obligation to pay some west coast companies because their bank failed.

scarface74 4y ago
While I saw first hand what happened in 2008 and afterwards I said “fuck it” and let my three underwater properties that were combined worth a quarter million less than I owed go and did “strategic defaults”, I can’t imagine running a business and having my funds spread across enough banks to meet the $250K protected amount and still try to run payroll and meet all of my other obligations.
- professoretc 4y ago
  You don't necessary have to have all your funds spread out enough that every account is under 250k; you just have to determine how much you are willing to risk. E.g., if you split your funds between two banks, if one of them goes under, you lose 50%. Your risk threshold determines how many splits you need; only if it's 0 do you need to keep every account under 250k.
  - scarface74 4y ago
    My risk threshold for cash is $0. So yeah, it would be split across however many banks. Of course I don’t have all my positions in cash and I take into account the necessary risk/reward equation into account. But then again, I would never work for a non public company where part of my compensation comes from “equity” and I sell/diversify all my after tax RSUs within 6 months after that vest. So I’m very risk averse about holding positions in any company I work for
    - isignal 4y ago
      You can just buy short term us treasuries instead of trying to spread out 250k everywhere.
- trogdor 4y ago
  You don’t have to do any of that. You can purchase insurance for excess deposits.
nuclearnice3 4y ago
> And it's a lot of money (e.g. 30% loss on $200bn is about $600 per US resident household). This calculation really put it in perspective. CEO of HN asks that every family in America send his friends $500.
- deleted 4y ago
  [deleted]
- axlee 4y ago
  I don't even understand why he would even make that comment in good faith in the first place. They are not asking for risks to be socialized, but they are asking for their "deposits" to be safe and the depositors to be "whole". Well, sounds like a lot like socializing the losses, unless there is a magical way to make the depositors whole without burdening the taxpayer.
  - xupybd 4y ago
    There is a risk in using a bank. The risk should be low and it's normal to assume your money is safe in the bank. This incident proves it's not. The tax payer didn't take on this risk so why should they have to cover the losses?
    - NonEUCitizen 4y ago
      It is not normal to assume your money is safe in the bank beyond the FDIC insured amount. A lot of startups have highly compensated (higher salary and/or more stock options than engineers) CFOs -- what are they doing?
      - Shish2k 4y ago
        > A lot of startups have highly compensated CFOs -- what are they doing? Cocaine, mostly :P
    - jimnotgym 4y ago
      Indeed I have read countless times on hn that it would be very risky to keep more than the insured amount in a bank. Sounds like YC should invest more in mentoring their portfolio companies to manage their treasury correctly.
benmccann 4y ago
> And it's a lot of money (e.g. 30% loss on $200bn is about $600 per US resident household). I'm not sure where you got this number, but it's different than what I've seen. Yes, SVB had $200B in deposits, but it had $15B in unrealized losses. The FDIC is probably contributing $12B as roughly 6% of deposits were insured. That means the gap is probably $3B if the government is to step in, which is very different than the $60B you're suggesting. If these instruments can't be held to maturity then the losses may be greater as many of them are illiquid and would have to be sold at a discount, but the government has the liquidity to avoid that.
- rahimnathwani 4y ago
  You're right, the gap is likely much smaller. I did a quick calculation based on: - $200bn deposits (on which we agree) - press reports that Jefferies and hedge funds are offering to buy claims at up to 70c on the dollar (suggesting 30% loss)
  - DennisP 4y ago
    Apparently the offer from hedge funds gives them a substantial profit.
- deleted 4y ago
  [deleted]
- nuclearnice3 4y ago
  Does the FDIC work like that? I imagined they would sell assets for the insured. And then sell more for the uninsured. If that process didn't cover the insured, they would bring money. In this case, the insured are well covered by the assets, so the FDIC won't bring money. We have a $12B difference of opinion here. Although, more generally, I agree from initial reports the assets - deposits gap does not seem to reach 30%. We should know more tonight and Monday morning.
- chernevik 4y ago
  The FDIC will pay off insured deposits from bank assets. Those deposits get first call on the assets. The FDIC only chips in if those assets aren't enough.

scarface74 4y ago

While I saw first hand what happened in 2008 and afterwards I said “fuck it” and let my three underwater properties that were combined worth a quarter million less than I owed go and did “strategic defaults”, I can’t imagine running a business and having my funds spread across enough banks to meet the $250K protected amount and still try to run payroll and meet all of my other obligations.

professoretc 4y ago
You don't necessary have to have all your funds spread out enough that every account is under 250k; you just have to determine how much you are willing to risk. E.g., if you split your funds between two banks, if one of them goes under, you lose 50%. Your risk threshold determines how many splits you need; only if it's 0 do you need to keep every account under 250k.
- scarface74 4y ago
  My risk threshold for cash is $0. So yeah, it would be split across however many banks. Of course I don’t have all my positions in cash and I take into account the necessary risk/reward equation into account. But then again, I would never work for a non public company where part of my compensation comes from “equity” and I sell/diversify all my after tax RSUs within 6 months after that vest. So I’m very risk averse about holding positions in any company I work for
  - isignal 4y ago
    You can just buy short term us treasuries instead of trying to spread out 250k everywhere.
trogdor 4y ago
You don’t have to do any of that. You can purchase insurance for excess deposits.

nuclearnice3 4y ago

> And it's a lot of money (e.g. 30% loss on $200bn is about $600 per US resident household). This calculation really put it in perspective. CEO of HN asks that every family in America send his friends $500.

deleted 4y ago
[deleted]
axlee 4y ago
I don't even understand why he would even make that comment in good faith in the first place. They are not asking for risks to be socialized, but they are asking for their "deposits" to be safe and the depositors to be "whole". Well, sounds like a lot like socializing the losses, unless there is a magical way to make the depositors whole without burdening the taxpayer.
- xupybd 4y ago
  There is a risk in using a bank. The risk should be low and it's normal to assume your money is safe in the bank. This incident proves it's not. The tax payer didn't take on this risk so why should they have to cover the losses?
  - NonEUCitizen 4y ago
    It is not normal to assume your money is safe in the bank beyond the FDIC insured amount. A lot of startups have highly compensated (higher salary and/or more stock options than engineers) CFOs -- what are they doing?
    - Shish2k 4y ago
      > A lot of startups have highly compensated CFOs -- what are they doing? Cocaine, mostly :P
  - jimnotgym 4y ago
    Indeed I have read countless times on hn that it would be very risky to keep more than the insured amount in a bank. Sounds like YC should invest more in mentoring their portfolio companies to manage their treasury correctly.

benmccann 4y ago

> And it's a lot of money (e.g. 30% loss on $200bn is about $600 per US resident household). I'm not sure where you got this number, but it's different than what I've seen. Yes, SVB had $200B in deposits, but it had $15B in unrealized losses. The FDIC is probably contributing $12B as roughly 6% of deposits were insured. That means the gap is probably $3B if the government is to step in, which is very different than the $60B you're suggesting. If these instruments can't be held to maturity then the losses may be greater as many of them are illiquid and would have to be sold at a discount, but the government has the liquidity to avoid that.

rahimnathwani 4y ago
You're right, the gap is likely much smaller. I did a quick calculation based on: - $200bn deposits (on which we agree) - press reports that Jefferies and hedge funds are offering to buy claims at up to 70c on the dollar (suggesting 30% loss)
- DennisP 4y ago
  Apparently the offer from hedge funds gives them a substantial profit.
deleted 4y ago
[deleted]
nuclearnice3 4y ago
Does the FDIC work like that? I imagined they would sell assets for the insured. And then sell more for the uninsured. If that process didn't cover the insured, they would bring money. In this case, the insured are well covered by the assets, so the FDIC won't bring money. We have a $12B difference of opinion here. Although, more generally, I agree from initial reports the assets - deposits gap does not seem to reach 30%. We should know more tonight and Monday morning.
chernevik 4y ago
The FDIC will pay off insured deposits from bank assets. Those deposits get first call on the assets. The FDIC only chips in if those assets aren't enough.