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This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid ass

This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid asset is greater than the value of the deposits outstanding when I am trying to make payroll next week. What's the liquidation value of that illiquid asset? What games have been played to "mark to market" said illiquid asset? If you want to mark it at liquidation price (likely 10 cents on the dollar or less for a large portion of this stuff) then you might have a point that is relevant to the average person but at the same time my statement about all banks being insolvent by design would be technically true instead of practically true if you did that.

gruez 4y ago
The difference is that if a bank is solvent but illiquid, you can find a buyer to assume the deposits and the depositors will have access to all their money ASAP. If they bank is both insolvent and illiquid, then there's no way that could happen. Either the depositors have to take a haircut, or the government has to bail them out. I agree that both cases would cause a crisis that might cause a company to miss payroll, but the latter case is obviously worse than the former. The best analogy I can think of is having your server explode and having a backup, and having your server explode and not having a backup. Sure, both cases will result in downtime, but the former is obviously preferable to the latter, and it's not exactly "a distinction without a difference for pretty much everyone except [computer] nerds".
- ars 4y ago
  Another difference is that if they are solvent but illiquid they would not have too much trouble borrowing money to cover short-term liquidity needs. If I'm not mistaken that's one of the services the Fed offers.
- snapplebobapple 4y ago
  You are arguing from the perspective that the mark to market is correct and perfectly or nearly perfectly knowable when that is not the case pretty much all the time. This bank was solvent according to the regulators until the day or a few days before it was taken over and yet could not find a buyer or raise capital. Why was that? It is because the accounting allowed to determine solvency allows hold to maturity and no marking to market on nearly perfectly knowable assets like MBS and this bank held a significant portion of its assets as loans to startups and warrants in same startups that are all basically valued on hopes and dreams and swing in value by a huge margin on market sentiment changes without necessarily changing the value they have to be marked at on the bank's books. I agree in the finance nerd sense there is a large difference, but for practical purposes for the average depositor there isn't really any difference.
  - gruez 4y ago
    I'm not sure what you're exactly arguing for here. I agree that "mark to market" might be non-trivial to calculate (although that's questionable for MBS, which are bond-like instruments that you can calculate the market value of based on current interest rates), and that regulations allowed their balance sheets to deviate from the actual market value (ie. ground truth). However, that doesn't change the fact that to "the average depositor", there's a material difference between being worth more than your liabilities and being worth less than your liabilities.

gruez 4y ago

The difference is that if a bank is solvent but illiquid, you can find a buyer to assume the deposits and the depositors will have access to all their money ASAP. If they bank is both insolvent and illiquid, then there's no way that could happen. Either the depositors have to take a haircut, or the government has to bail them out. I agree that both cases would cause a crisis that might cause a company to miss payroll, but the latter case is obviously worse than the former. The best analogy I can think of is having your server explode and having a backup, and having your server explode and not having a backup. Sure, both cases will result in downtime, but the former is obviously preferable to the latter, and it's not exactly "a distinction without a difference for pretty much everyone except [computer] nerds".

ars 4y ago
Another difference is that if they are solvent but illiquid they would not have too much trouble borrowing money to cover short-term liquidity needs. If I'm not mistaken that's one of the services the Fed offers.
snapplebobapple 4y ago
You are arguing from the perspective that the mark to market is correct and perfectly or nearly perfectly knowable when that is not the case pretty much all the time. This bank was solvent according to the regulators until the day or a few days before it was taken over and yet could not find a buyer or raise capital. Why was that? It is because the accounting allowed to determine solvency allows hold to maturity and no marking to market on nearly perfectly knowable assets like MBS and this bank held a significant portion of its assets as loans to startups and warrants in same startups that are all basically valued on hopes and dreams and swing in value by a huge margin on market sentiment changes without necessarily changing the value they have to be marked at on the bank's books. I agree in the finance nerd sense there is a large difference, but for practical purposes for the average depositor there isn't really any difference.
- gruez 4y ago
  I'm not sure what you're exactly arguing for here. I agree that "mark to market" might be non-trivial to calculate (although that's questionable for MBS, which are bond-like instruments that you can calculate the market value of based on current interest rates), and that regulations allowed their balance sheets to deviate from the actual market value (ie. ground truth). However, that doesn't change the fact that to "the average depositor", there's a material difference between being worth more than your liabilities and being worth less than your liabilities.