4 ms·

The bank was insolvent. Prisoner's dilemma applies. "The best response, ie. the dominant strategy, is to betray the other, which aligns with the sure-thing pr

The bank was insolvent. Prisoner's dilemma applies. "The best response, ie. the dominant strategy, is to betray the other, which aligns with the sure-thing principle.[3] The prisoner's dilemma also illustrates that the decisions made under collective rationality may not necessarily be the same as those made under individual rationality. This conflict is also evident in a situation called the "Tragedy of the Commons".[3]". https://en.wikipedia.org/wiki/Prisoner%27s_dilemma https://en.wikipedia.org/wiki/Prisoner%27s_dilemma

eganist 4y ago
The bank became* insolvent as a consequence of the actions taken by a select few to encourage withdrawals; the asset-liability mismatch wouldn't have been consequential had the run not been spurred on. I'm not giving a tutorial about how no bank will survive a run. The bank became insolvent because of a run spurred on by people like Thiel regardless of their issues with realizing losses on their AFS securities. It became insolvent^ last Friday after 42 billion dollars walked out the door The bank doesn't deserve a bailout, sure. But depositors certainly do, and people like Thiel will hopefully be black marks for future lenders who know the risks they bring. Here's a good thread explaining where SVB went wrong - https://twitter.com/MacroAlf/status/1634626124260028419 https://twitter.com/MacroAlf/status/1634626124260028419 - but in the end, they only became both illiquid (unable to sell shares being the last straw after having exhausted AFS securities and cash/equivalents) and insolvent (unable to cover debt obligations) at the hands of the people who spurred on the bank run. ^edit to correct from "illiquid" to "insolvent"
- testfoobar 4y ago
  No. The bank was insolvent due to an asset-liability mismatch. Regulators should have forced a capital raise last year. It became illiquid last Friday. Here is a good thread explaining it: https://twitter.com/MacroAlf/status/1634626124260028419?s=20 https://twitter.com/MacroAlf/status/1634626124260028419?s=20
  - hn_throwaway_99 4y ago
    Thanks very much for posting that link, very informative, especially from the perspective of understanding the "hold to maturity" vs "available for sale" classification and how banks can play tricks with those.
- testfoobar 4y ago
  > It became illiquid last Friday after 42 billion dollars walked out the door. True. That was the precipitating event that forced it into the hands of the FDIC. But illiquidity is not insolvency. Insolvency means it could not pay back its depositors because it assets could not cover withdrawals. This hole did not appear last week due to the $42 billion withdrawals.
- twelve40 4y ago
  It's not VCs or SMB owners obligation to keep propping up failing banks. Thiel here did his job properly by advising his companies to take care of their own fate.
  - eganist 4y ago
    > It's not VCs or SMB owners obligation to keep propping up failing banks. Thiel here did his job properly by advising his companies to take care of their own fate. He might've done his short term job properly, but there's a social contract he stepped on and the consequence of it is a lesser likelihood that ventures with his name on them (in any capacity. Advisor, investor, founder, whatever) will get favorable terms from lenders. He and others who pushed for rapid exits are now a high risk for lenders, especially any lenders already evaluating their exposure to startups and VCs.
    - testfoobar 4y ago
      VCs have fiduciary responsibility to their Limited Partners. VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
      - eganist 4y ago
        > VCs have fiduciary responsibility to their Limited Partners. > VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty. No VC is getting sued for not telling their startups to yank cash during a 48 hour bank run.
        twblalock 4y ago
        Wait and see, I bet it will happen.
      - 4y ago
- Aperocky 4y ago
  An insolvent bank would eventually end up illiquid. But an illiquid bank is not necessarily insolvent. In this case, the bank is both illiquid and insolvent. In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates.
  - eganist 4y ago
    Your recitals are correct, yes. But this: > the bank was insolvent long before that. Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time. Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter. --- edit: > as the bank was insolvent ever since the feds hiked rates. This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.
    - Aperocky 4y ago
      So what should it be called? There's got to be a name for it where the mark to market asset values are below that of liabilities right?
    - kgwgk 4y ago
      > insolvency is - the inability to pay debts at maturity What is the maturity of deposits?
      - eganist 4y ago
        For all practical purposes, the moment of withdrawal. Though the FRB states that "maturity" is not something that applies to these types of accounts. https://www.federalreserve.gov/boarddocs/supmanual/cch/200601/int_depos.pdf https://www.federalreserve.gov/boarddocs/supmanual/cch/20060... page 2 That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it. Edit: Fed source.

eganist 4y ago

The bank became* insolvent as a consequence of the actions taken by a select few to encourage withdrawals; the asset-liability mismatch wouldn't have been consequential had the run not been spurred on. I'm not giving a tutorial about how no bank will survive a run. The bank became insolvent because of a run spurred on by people like Thiel regardless of their issues with realizing losses on their AFS securities. It became insolvent^ last Friday after 42 billion dollars walked out the door The bank doesn't deserve a bailout, sure. But depositors certainly do, and people like Thiel will hopefully be black marks for future lenders who know the risks they bring. Here's a good thread explaining where SVB went wrong - https://twitter.com/MacroAlf/status/1634626124260028419 https://twitter.com/MacroAlf/status/1634626124260028419 - but in the end, they only became both illiquid (unable to sell shares being the last straw after having exhausted AFS securities and cash/equivalents) and insolvent (unable to cover debt obligations) at the hands of the people who spurred on the bank run. ^edit to correct from "illiquid" to "insolvent"

testfoobar 4y ago
No. The bank was insolvent due to an asset-liability mismatch. Regulators should have forced a capital raise last year. It became illiquid last Friday. Here is a good thread explaining it: https://twitter.com/MacroAlf/status/1634626124260028419?s=20 https://twitter.com/MacroAlf/status/1634626124260028419?s=20
- hn_throwaway_99 4y ago
  Thanks very much for posting that link, very informative, especially from the perspective of understanding the "hold to maturity" vs "available for sale" classification and how banks can play tricks with those.
testfoobar 4y ago
> It became illiquid last Friday after 42 billion dollars walked out the door. True. That was the precipitating event that forced it into the hands of the FDIC. But illiquidity is not insolvency. Insolvency means it could not pay back its depositors because it assets could not cover withdrawals. This hole did not appear last week due to the $42 billion withdrawals.
twelve40 4y ago
It's not VCs or SMB owners obligation to keep propping up failing banks. Thiel here did his job properly by advising his companies to take care of their own fate.
- eganist 4y ago
  > It's not VCs or SMB owners obligation to keep propping up failing banks. Thiel here did his job properly by advising his companies to take care of their own fate. He might've done his short term job properly, but there's a social contract he stepped on and the consequence of it is a lesser likelihood that ventures with his name on them (in any capacity. Advisor, investor, founder, whatever) will get favorable terms from lenders. He and others who pushed for rapid exits are now a high risk for lenders, especially any lenders already evaluating their exposure to startups and VCs.
  - testfoobar 4y ago
    VCs have fiduciary responsibility to their Limited Partners. VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
    - eganist 4y ago
      > VCs have fiduciary responsibility to their Limited Partners. > VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty. No VC is getting sued for not telling their startups to yank cash during a 48 hour bank run.
      - twblalock 4y ago
        Wait and see, I bet it will happen.
    - 4y ago
Aperocky 4y ago
An insolvent bank would eventually end up illiquid. But an illiquid bank is not necessarily insolvent. In this case, the bank is both illiquid and insolvent. In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates.
- eganist 4y ago
  Your recitals are correct, yes. But this: > the bank was insolvent long before that. Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time. Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter. --- edit: > as the bank was insolvent ever since the feds hiked rates. This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.
  - Aperocky 4y ago
    So what should it be called? There's got to be a name for it where the mark to market asset values are below that of liabilities right?
  - kgwgk 4y ago
    > insolvency is - the inability to pay debts at maturity What is the maturity of deposits?
    - eganist 4y ago
      For all practical purposes, the moment of withdrawal. Though the FRB states that "maturity" is not something that applies to these types of accounts. https://www.federalreserve.gov/boarddocs/supmanual/cch/200601/int_depos.pdf https://www.federalreserve.gov/boarddocs/supmanual/cch/20060... page 2 That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it. Edit: Fed source.