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Banks have lost all excuses to be making money out of other people's deposits. If those deposits are guaranteed by the government, and backstopped by the govern

Banks have lost all excuses to be making money out of other people's deposits. If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them. There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd. Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.

ashwagary 4y ago
>If those deposits are guaranteed by the government, and backstopped by the government "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?
- Godel_unicode 4y ago
  Not sure why you’re being downvoted, that analysis is correct.
  - ashwagary 4y ago
    "It's not all tax payers, just all tax payers with bank accounts", which is basically all tax payers. Sounds like word games played by people in charge to have tax payer bailouts using two layers of obfuscation.
    - muzz 4y ago
      And also "people with bank accounts who don't make enough to pay taxes" like my grandma.
      - Godel_unicode 4y ago
        Yeah, the fees and lower interest rates from this will be pretty brutal for the poor. Not using tax dollars is actually pretty regressive.
        notfromhere 4y ago
        Most people get so little interest from their accounts that it is basically immaterial
        piyh 4y ago
        They only need to cover 20 billion or so for SVB? In the grand scheme of all banks, that's not a ton. SVB wasn't some FTX oops it's all gone level fraud. Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
        muzz 4y ago
        $20 Billion is roughly $60 for every person in the country It's more the state government budget for about 1/3 of the states in the union
        piyh 4y ago
        128 billion in the FDIC reserves as of December 2022. Better than letting more dominoes fall if you're trying to preserve that insurance pool.
        davidgay 4y ago
        > Yeah, the fees and lower interest rates from this will be pretty brutal for the poor. I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
        ashwagary 4y ago
        It's not only the earned interest on savings being discussed here, the OP was also including higher interest rates on the variable rate loans that most poorer borrowers qualify for.
    - deleted 4y ago
      [deleted]
    - om2 4y ago
      An assessment on banks costs shareholders of the bank, not accountholders. (Maybe it indirectly costs accountholders if banks lower interest rates on customer deposits, but these rates are generally not affected by a small short term shock). It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
    - wolverine876 4y ago
      More of the population lacks banking services than you think. According to a pre-pandemic report, IIRC, very large number have <$600 savings.
      - BlueTemplar 4y ago
        Being unbanked is on a whole other level : no cheques, no debit cards, savings vulnerable to theft...
    - nostromo 4y ago
      They’re spinning it because no politician or appointee wants to be on record as bailing out Silicon Valley, venture capitalists and Crypto. But the end result is the same: a tax on everyone to bail out Peter Thiel and friends.
- dkjaudyeqooe 4y ago
  > (indirectly bank customers) That's not a given since it may just reduce profits. Banking is a very competitive environment.
  - ashwagary 4y ago
    >That's not a given since it may just reduce profits. Banking is a very competitive environment. So the options are: 1. Banks eat the cost. 2. Banks take on more risk to cover the cost (putting the whole system at more risk). 3. Banks increase customer fees, interest rates, etc... I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented. Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers. If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
    - machina_ex_deus 4y ago
      4) Banks get their privileges revoked and they are no longer an oligopoly with privileges of being the only way to store dollars legally, and the only investment institutions who get to gamble their customers money while the government is insuring their loses but does nothing about their gains. The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money. Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
    - op00to 4y ago
      The last time a special assessment was required, the cost was 5 basis points of deposits. Would you notice a 0.05% increase in fees?
- wolverine876 4y ago
  > Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds? That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business). The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank. Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
  - polygamous_bat 4y ago
    > If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank. However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers. More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
    - op00to 4y ago
      The fee is not the same for all banks. FDIC assessments are based on risk. Riskier banks pay more, safer banks pay less. Would you notice a 5 basis point change in your savings account?
Montaque 4y ago
What's the point of cake if you can't eat it? You'd have to start charging for having the cake. The current practice of limited investment is reasonable and helps keep the system self funded without much in the way of account fees. It's not as if banks are investing the funds in the equity market. Appreciate I'm commenting from afar and without emotion but these failures are normal. This kind of chaos makes the system stronger. And I think most commentators can agree that this is largely a symptom of a swift increase in the repo rate shortly after significant bond purchases by SVB. There are lessons to be learnt but I don't think if you were sitting on the SVB board and were part of the decision to purchase these low risk bonds did you in any way think it would lead to this outcome.
- machina_ex_deus 4y ago
  They didn't have risk officer for months. They lobbied to repeal regulations. And I don't blame them, that's their incentives. At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders. even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%! This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment. You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse. It's just a matter of time before they blow it beyond repair.
  - om2 4y ago
    Why would customers being made whole (at the cost of wiping out all equity and possibly at some cost to other banks) affect the incentives of banks in this kind of situation? What would banks do differently if account holders could lose everything over $250k? If they are happy to “gamble with 10x leverage” then presumably they don’t care about impact to their customers. If bank management risked jail time that might change incentives but doing that doesn’t seem to require a cost to account holders.
nukemandan 4y ago
This is a direct path to a central bank (digital) currency that they are the depository institution for individuals.
Aperocky 4y ago
The banks are still gone though, once they get taken over, their equity zeroes out. All owners of the bank will end up with nothing, I think that's a good enough deterrence against bad things.
- scottLobster 4y ago
  Honestly I'd like for there to be a decent look-back period to recover the funds from any stock sold ahead of time, as appears to have happened in this instance. Use the proceeds to help make depositors whole. No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
  - noah_buddy 4y ago
    I would guess that these executives entered their sales months in advance as is relatively typical to avoid insider trading. You can look this up on the SEC website
    - scottLobster 4y ago
      And in the case of company failure, perhaps the lookback period should be extended beyond several months. I don't have nearly the financial or legal knowledge to suggest viable policy, but from what we know of how SVB failed it would have likely been visible well in advance of the failure to someone with access to the requisite information. Edit: Also, the CEO sold stock not even two weeks in advance https://www.bloomberg.com/news/articles/2023-03-10/svb-chief-sold-3-6-million-in-stock-days-before-bank-s-failure#xj4y7vzkg https://www.bloomberg.com/news/articles/2023-03-10/svb-chief...
      - arcticbull 4y ago
        I don't know why people keep calling out the CEO stock sales, unless we find out something new this was almost guaranteed to have been done pursuant to a publicly filed 10b5-1 plan which has a 30 or 90 day cooling off period and must be filed when they have no material non-public information. So if the CEO could see this coming, anyone else could have too on the basis of the same information. These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading. Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.
ojbyrne 4y ago
Define “invest.” Banks invest. That’s literally what they do. People deposit their money rather than put it under their mattress, and the banks reward them by giving extra money to them. Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors. Basically that’s the foundation of civilization.
- citizen_friend 4y ago
  The point is, why doesn't the government just capture that revenue? Instead we are letting private companies keep those earnings, without taking on any risk. Let's deposit at the bank of USA and cut out the middle man. > Basically that’s the foundation of civilization I think many of us would disagree.
  - Panzer04 4y ago
    Because then it’s quite easy to end up with rampant corruption. By and large, well-regulated private banks work pretty well.
    - bumby 4y ago
      I think the idea that they work pretty well went out the window in most people’s mind when they threatened to crash the world economy 15 years ago.
oarabbus_ 4y ago
>If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them. >Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates. You are missing something crucial here - treasury bonds are a loan to the government - this is all by design. Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
- nopassrecover 4y ago
  > because the Treasury needs banks to purchase government bonds Does it? Or is this just how the system is currently designed? 50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
  - runeks 4y ago
    > Does it? Or is this just how the system is currently designed? It does in the sense that the US Government will default on its financial obligations if banks don’t use deposits to buy government bonds.
    - dllthomas 4y ago
      I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.
  - oarabbus_ 4y ago
    >Does it? Or is this just how the system is currently designed? Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds. The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money. >50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially. It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well. You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.
citizen_friend 4y ago
I see this issue in so many areas. Government orgs and companies have different organizational incentives and tradeoffs. When we substitute a government function with a wallet for contractors, we lose those tradeoff. But it's even worse because now the company has moral hazard.
malborodog 4y ago
Yep but look how hard the Fed has fought to prevent the existence of 'narrow banks'. Cartel logic in full effect.
deleted 4y ago
[deleted]
rocqua 4y ago
Do realize that the SVB bankers and shareholders remain completely screwed. This bailout does not save them. Nor will any FDIC bailout. So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.
EVa5I7bHFq9mnYK 4y ago
They must pay salaries - about 2% of deposits. They must pay interest on deposits - now people are demanding 4%. They must pay some dividends too. So they must invest in something.
op00to 4y ago
> Revoke banks ability to invest deposits. This is literally the purpose of holding deposits for banks.
batmenace 4y ago
Well that's far from the complete picture. It's not that the gov't is backstopping all bank stupidity -- the new facility simply says that for redemptions, US government bonds and MBS can be valued at face value not market value. Only for the purpose of ensuring liquidity for redemptions
- machina_ex_deus 4y ago
  Yes, they keep on inventing all kinds of new rules that effectively transform the assets that banks happen to be holding onto assets that are worth more. It's just printing money in an obscure way. The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else. It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government. They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk. All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk. The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash. If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money. It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.
kneebonian 4y ago
This strikes me as more a perspective of someone whose lived so long in a stable system that they consider it a fundamental immoral failing when something does occasionally go wrong. The loaning of your clients money is the fundemental idea that banking works on, if you weren't able to grow your clients money through lending it you would have no reason to accept clients money in the first place. Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.

ashwagary 4y ago

>If those deposits are guaranteed by the government, and backstopped by the government "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?

Godel_unicode 4y ago
Not sure why you’re being downvoted, that analysis is correct.
- ashwagary 4y ago
  "It's not all tax payers, just all tax payers with bank accounts", which is basically all tax payers. Sounds like word games played by people in charge to have tax payer bailouts using two layers of obfuscation.
  - muzz 4y ago
    And also "people with bank accounts who don't make enough to pay taxes" like my grandma.
    - Godel_unicode 4y ago
      Yeah, the fees and lower interest rates from this will be pretty brutal for the poor. Not using tax dollars is actually pretty regressive.
      - notfromhere 4y ago
        Most people get so little interest from their accounts that it is basically immaterial
      - piyh 4y ago
        They only need to cover 20 billion or so for SVB? In the grand scheme of all banks, that's not a ton. SVB wasn't some FTX oops it's all gone level fraud. Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
        muzz 4y ago
        $20 Billion is roughly $60 for every person in the country It's more the state government budget for about 1/3 of the states in the union
        piyh 4y ago
        128 billion in the FDIC reserves as of December 2022. Better than letting more dominoes fall if you're trying to preserve that insurance pool.
      - davidgay 4y ago
        > Yeah, the fees and lower interest rates from this will be pretty brutal for the poor. I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
        ashwagary 4y ago
        It's not only the earned interest on savings being discussed here, the OP was also including higher interest rates on the variable rate loans that most poorer borrowers qualify for.
  - deleted 4y ago
    [deleted]
  - om2 4y ago
    An assessment on banks costs shareholders of the bank, not accountholders. (Maybe it indirectly costs accountholders if banks lower interest rates on customer deposits, but these rates are generally not affected by a small short term shock). It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
  - wolverine876 4y ago
    More of the population lacks banking services than you think. According to a pre-pandemic report, IIRC, very large number have <$600 savings.
    - BlueTemplar 4y ago
      Being unbanked is on a whole other level : no cheques, no debit cards, savings vulnerable to theft...
  - nostromo 4y ago
    They’re spinning it because no politician or appointee wants to be on record as bailing out Silicon Valley, venture capitalists and Crypto. But the end result is the same: a tax on everyone to bail out Peter Thiel and friends.
dkjaudyeqooe 4y ago
> (indirectly bank customers) That's not a given since it may just reduce profits. Banking is a very competitive environment.
- ashwagary 4y ago
  >That's not a given since it may just reduce profits. Banking is a very competitive environment. So the options are: 1. Banks eat the cost. 2. Banks take on more risk to cover the cost (putting the whole system at more risk). 3. Banks increase customer fees, interest rates, etc... I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented. Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers. If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
  - machina_ex_deus 4y ago
    4) Banks get their privileges revoked and they are no longer an oligopoly with privileges of being the only way to store dollars legally, and the only investment institutions who get to gamble their customers money while the government is insuring their loses but does nothing about their gains. The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money. Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
  - op00to 4y ago
    The last time a special assessment was required, the cost was 5 basis points of deposits. Would you notice a 0.05% increase in fees?
wolverine876 4y ago
> Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds? That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business). The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank. Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
- polygamous_bat 4y ago
  > If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank. However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers. More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
  - op00to 4y ago
    The fee is not the same for all banks. FDIC assessments are based on risk. Riskier banks pay more, safer banks pay less. Would you notice a 5 basis point change in your savings account?

Montaque 4y ago

What's the point of cake if you can't eat it? You'd have to start charging for having the cake. The current practice of limited investment is reasonable and helps keep the system self funded without much in the way of account fees. It's not as if banks are investing the funds in the equity market. Appreciate I'm commenting from afar and without emotion but these failures are normal. This kind of chaos makes the system stronger. And I think most commentators can agree that this is largely a symptom of a swift increase in the repo rate shortly after significant bond purchases by SVB. There are lessons to be learnt but I don't think if you were sitting on the SVB board and were part of the decision to purchase these low risk bonds did you in any way think it would lead to this outcome.

machina_ex_deus 4y ago
They didn't have risk officer for months. They lobbied to repeal regulations. And I don't blame them, that's their incentives. At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders. even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%! This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment. You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse. It's just a matter of time before they blow it beyond repair.
- om2 4y ago
  Why would customers being made whole (at the cost of wiping out all equity and possibly at some cost to other banks) affect the incentives of banks in this kind of situation? What would banks do differently if account holders could lose everything over $250k? If they are happy to “gamble with 10x leverage” then presumably they don’t care about impact to their customers. If bank management risked jail time that might change incentives but doing that doesn’t seem to require a cost to account holders.

nukemandan 4y ago

This is a direct path to a central bank (digital) currency that they are the depository institution for individuals.

Aperocky 4y ago

The banks are still gone though, once they get taken over, their equity zeroes out. All owners of the bank will end up with nothing, I think that's a good enough deterrence against bad things.

scottLobster 4y ago
Honestly I'd like for there to be a decent look-back period to recover the funds from any stock sold ahead of time, as appears to have happened in this instance. Use the proceeds to help make depositors whole. No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
- noah_buddy 4y ago
  I would guess that these executives entered their sales months in advance as is relatively typical to avoid insider trading. You can look this up on the SEC website
  - scottLobster 4y ago
    And in the case of company failure, perhaps the lookback period should be extended beyond several months. I don't have nearly the financial or legal knowledge to suggest viable policy, but from what we know of how SVB failed it would have likely been visible well in advance of the failure to someone with access to the requisite information. Edit: Also, the CEO sold stock not even two weeks in advance https://www.bloomberg.com/news/articles/2023-03-10/svb-chief-sold-3-6-million-in-stock-days-before-bank-s-failure#xj4y7vzkg https://www.bloomberg.com/news/articles/2023-03-10/svb-chief...
    - arcticbull 4y ago
      I don't know why people keep calling out the CEO stock sales, unless we find out something new this was almost guaranteed to have been done pursuant to a publicly filed 10b5-1 plan which has a 30 or 90 day cooling off period and must be filed when they have no material non-public information. So if the CEO could see this coming, anyone else could have too on the basis of the same information. These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading. Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.

ojbyrne 4y ago

Define “invest.” Banks invest. That’s literally what they do. People deposit their money rather than put it under their mattress, and the banks reward them by giving extra money to them. Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors. Basically that’s the foundation of civilization.

citizen_friend 4y ago
The point is, why doesn't the government just capture that revenue? Instead we are letting private companies keep those earnings, without taking on any risk. Let's deposit at the bank of USA and cut out the middle man. > Basically that’s the foundation of civilization I think many of us would disagree.
- Panzer04 4y ago
  Because then it’s quite easy to end up with rampant corruption. By and large, well-regulated private banks work pretty well.
  - bumby 4y ago
    I think the idea that they work pretty well went out the window in most people’s mind when they threatened to crash the world economy 15 years ago.

oarabbus_ 4y ago

>If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them. >Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates. You are missing something crucial here - treasury bonds are a loan to the government - this is all by design. Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds

nopassrecover 4y ago
> because the Treasury needs banks to purchase government bonds Does it? Or is this just how the system is currently designed? 50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
- runeks 4y ago
  > Does it? Or is this just how the system is currently designed? It does in the sense that the US Government will default on its financial obligations if banks don’t use deposits to buy government bonds.
  - dllthomas 4y ago
    I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.
- oarabbus_ 4y ago
  >Does it? Or is this just how the system is currently designed? Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds. The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money. >50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially. It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well. You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.

citizen_friend 4y ago

I see this issue in so many areas. Government orgs and companies have different organizational incentives and tradeoffs. When we substitute a government function with a wallet for contractors, we lose those tradeoff. But it's even worse because now the company has moral hazard.

malborodog 4y ago

Yep but look how hard the Fed has fought to prevent the existence of 'narrow banks'. Cartel logic in full effect.

deleted 4y ago

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rocqua 4y ago

Do realize that the SVB bankers and shareholders remain completely screwed. This bailout does not save them. Nor will any FDIC bailout. So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.

EVa5I7bHFq9mnYK 4y ago

They must pay salaries - about 2% of deposits. They must pay interest on deposits - now people are demanding 4%. They must pay some dividends too. So they must invest in something.

op00to 4y ago

> Revoke banks ability to invest deposits. This is literally the purpose of holding deposits for banks.

batmenace 4y ago

Well that's far from the complete picture. It's not that the gov't is backstopping all bank stupidity -- the new facility simply says that for redemptions, US government bonds and MBS can be valued at face value not market value. Only for the purpose of ensuring liquidity for redemptions

machina_ex_deus 4y ago
Yes, they keep on inventing all kinds of new rules that effectively transform the assets that banks happen to be holding onto assets that are worth more. It's just printing money in an obscure way. The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else. It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government. They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk. All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk. The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash. If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money. It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.

kneebonian 4y ago

This strikes me as more a perspective of someone whose lived so long in a stable system that they consider it a fundamental immoral failing when something does occasionally go wrong. The loaning of your clients money is the fundemental idea that banking works on, if you weren't able to grow your clients money through lending it you would have no reason to accept clients money in the first place. Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.