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Silicon Valley Bank Depositor Bailout Makes Mockery of ‘Too Big to Fail’

61 points by fortran77 4y ago

jkmcf 4y ago
No one is saving SVB. They are saving the depositors. The mockery will be not holding anyone accountable. Just like they weren't in 2009.
tezthenerd 4y ago
“In fact, it isn’t even clear that depositors were going to be wiped out, absent federal intervention. When SVB was shut down, it still had real assets that were worth money, which can be sold to pay back investors. ” Would conservatives suggest investors really should be paid back first? Unlikely to be popular.
- LatteLazy 4y ago
  Are there any "conservatives" who aren't just corporatists? Not that the other side is much better...
- ahepp 4y ago
  Based on context, I assume "investors" should in fact read "depositors" in the article? It doesn't seem like the author is disputing the traditional order of repayment (depositors, bondholders, stockholders)
- LewisVerstappen 4y ago
  > Would conservatives suggest investors really should be paid back first? Unlikely to be popular. He's obviously not suggesting that, considering how he goes on to say "when liquidated, SVB has the assets to pay off 95 percent of deposits." There's clear procedures for bankruptcy and equity holders would be on the bottom of the capital stack while depositors would be on the top.
rspoerri 4y ago
A insurance tax should be setup for banks that are to big to fail. If it‘s clear that it needs a public bailout, the state acts as an insurer and needs to pe paid accordingly. Edit: wording
- grandmczeb 4y ago
  https://www.fdic.gov/deposit/insurance/assessments/proposed.html https://www.fdic.gov/deposit/insurance/assessments/proposed....
  - rspoerri 4y ago
    The highest rate is 42 cents for 100$ per Year? After 240 Years of insurance the cost might be covered? Why don't i get such deals? ;-)
    - grandmczeb 4y ago
      You do. This is literally the “deal” you get when you deposit money in a U.S. bank.
cormacrelf 4y ago
Chris Hayes on Twitter: > These billionaire VC's started a bank run on their own bank and then immediately pivoted to screaming for a government backstop. Incredible stuff. > It's really not even clear SVB was in such terrible shape on the merits. Was def squeezed, for sure, but really looks like their little group chat knocked it over! https://twitter.com/chrislhayes/status/1635136751516938240 https://twitter.com/chrislhayes/status/1635136751516938240
- Joeboy 4y ago
  > These billionaire VC's started a bank run on their own bank Are they talking about short sellers talking up the bank run, or just companies that withdrew funds so they could pay their employees?
  - jpgvm 4y ago
    They are talking about VCs that pulled their fund capital + advised portfolio companies to move all their deposits to Big 4 banks. i.e inciting a bank run.
- makomk 4y ago
  This seems to miss the point by a mile. The reason this backstop is necessary is because without one, pulling your funds is the rational decision as soon as it's "not even clear" whether the bank is in good enough shape to back everyone's deposits - the sooner the better, and anyone who ignores the warning signs and waits until it's definitely clear that the bank is bankrupt is going to get screwed.
  - cormacrelf 4y ago
    You are describing the unbridled panic of a hundred extremely frightened VCs and startup CFOs as “rational” behaviour. The bank did not have to collapse on Friday. If it had not collapsed then none of these people would have had their funds locked up in the bankruptcy settlement. I’m not saying it’s all their fault, but they engaged in a big discussion in which they could have agreed on some collective action, and then somehow decided to each act in their own interests and withdraw at full speed, seeing (and I quote Alexander Torrenegra https://twitter.com/torrenegra/status/1634573234187407369 https://twitter.com/torrenegra/status/1634573234187407369), “only upside, no downside” to that approach. If everyone was talking to each other, and they’re so smart and rational, why didn’t they decide to have everyone take out a small amount to cover essentials like payroll? Was it maybe… greed? Lack of ingenuity? To be fair, bank runs do happen, but everyone who caused this one was in a big old group chat and they could have prevented it, and nobody had the idea. If it was so rational, why did they continue to demand a bailout even after it became clear the FDIC would get them nearly 100% back? Was it maybe… greed? God forbid that anyone lose even a few cents of uninsured deposits. What happened to paying for extra insurance? Now they complain about contagion to get a bailout, contagion which they began and continued.
bunabhucan 4y ago
https://archive.ph/uh0MO https://archive.ph/uh0MO
etothepii 4y ago
It's surprising to me that a 90% backstop wouldn't have been sufficient. Make 90% of balances available today and commit that any residue will first be paid to those that leave their money behind. Having no consequence for those with a $3.3b balance creates too much moral hazard.
- junofan 4y ago
  Depositing cash in a US bank creates a moral hazard? That’s extreme, and I don’t think that’s the world the Fed wants.
seanalltogether 4y ago
> it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess. It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?
- refurb 4y ago
  Will it create a problem where depositors will be less discriminating when it comes to banks because they think the FDIC limit doesn't apply?
  - jpgvm 4y ago
    Ideally the idea of an FDIC limit is just removed and banks are just further regulated to ensure that risk is kept at acceptable levels such that FDIC insurance fund is always capable of absorbing any failures in full.
    - refurb 4y ago
      Im not sure thats possible. Like all regulation, it’s impossible for the regulator to truly know the full situation. It would take a massive army of regulators to go through the financials of thousands of banks in the US. Plus the banks can lie, put things in their best light, or structure transactions to make it look like a lower level of risk than there really is. And of course, by the time the regulator finds out, the damage is done. I think its far better to cap the risk protection. That way you have customers doing their own risk management as well - avoiding what they perceive to be risky banks, diversifying deposits across banks, choosing alternative assets to store wealth, etc.
- Nextgrid 4y ago
  This means that owners/shareholders can still profit off a mismanaged bank as long as they cash out before the music stops.
jpgvm 4y ago
Shockingly bad take. SVB investors were wiped out 100%, this includes most of the net worth of the leadership team. Moral hazard is definitely still in play. All we need to see after this is is Basel III and Fed regulation extended to cover all banks of any size, not just those with over 250B in assets. Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future). The only people that lost here are investors in SVB and temporarily the other FDIC members will lose a small amount of money to additional FDIC special payment to replenish the insurance fund (but they will "get it back" later).
- Gwypaas 4y ago
  > Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future). This is completely ignoring the time value of money. Money today is worth more than money in the future. We are transferring real value today and thus making the public, through the other less risky banks, eat the haircut that will happen no matter what. The losses are real. What this has done is create the following incentives: For depositors: 1. Bank with the riskiest bank possible since all deposits are covered. For banks: 1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way. The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
  - Ekaros 4y ago
    And for bank owners. Simply setup company or your own funds in bank as deposit and offer huge rates to yourself. 100% safe whatever you do.
  - rhaway84773 4y ago
actual_leftie 4y ago
Yet another example of privatize the profits, socialize the losses. The wealthy and powerful only want welfare for themselves, not anyone else in society.
kryptiskt 4y ago
I don't see the moral hazard in making the depositors whole as long as they weren't given juicy rates for putting their money in the bank, it's not that they stood to gain anything from the mismanagement of the bank. When the alternative is that a lot of deposits in smaller banks flee to the huge banks that would have to be backstopped anyhow, starting fires all over the place, it seems downright attractive to signal that depositors don't have to worry.
- orwin 4y ago
  Lower fees and higher rates than in an average bank should trigger some signals tbh. If I was an US citizen, I would have exploited this as much as possible.
ihalip 4y ago
SVB should have learned from some of their depositors - just throttle withdrawals and blame "technical difficulties" or "systems update" or "scheduled maintenance".

61 points by fortran77 4y ago

No one is saving SVB. They are saving the depositors. The mockery will be not holding anyone accountable. Just like they weren't in 2009.

tezthenerd 4y ago

“In fact, it isn’t even clear that depositors were going to be wiped out, absent federal intervention. When SVB was shut down, it still had real assets that were worth money, which can be sold to pay back investors. ” Would conservatives suggest investors really should be paid back first? Unlikely to be popular.

LatteLazy 4y ago
Are there any "conservatives" who aren't just corporatists? Not that the other side is much better...
ahepp 4y ago
Based on context, I assume "investors" should in fact read "depositors" in the article? It doesn't seem like the author is disputing the traditional order of repayment (depositors, bondholders, stockholders)
LewisVerstappen 4y ago
> Would conservatives suggest investors really should be paid back first? Unlikely to be popular. He's obviously not suggesting that, considering how he goes on to say "when liquidated, SVB has the assets to pay off 95 percent of deposits." There's clear procedures for bankruptcy and equity holders would be on the bottom of the capital stack while depositors would be on the top.

rspoerri 4y ago

A insurance tax should be setup for banks that are to big to fail. If it‘s clear that it needs a public bailout, the state acts as an insurer and needs to pe paid accordingly. Edit: wording

grandmczeb 4y ago
https://www.fdic.gov/deposit/insurance/assessments/proposed.html https://www.fdic.gov/deposit/insurance/assessments/proposed....
- rspoerri 4y ago
  The highest rate is 42 cents for 100$ per Year? After 240 Years of insurance the cost might be covered? Why don't i get such deals? ;-)
  - grandmczeb 4y ago
    You do. This is literally the “deal” you get when you deposit money in a U.S. bank.

cormacrelf 4y ago

Chris Hayes on Twitter: > These billionaire VC's started a bank run on their own bank and then immediately pivoted to screaming for a government backstop. Incredible stuff. > It's really not even clear SVB was in such terrible shape on the merits. Was def squeezed, for sure, but really looks like their little group chat knocked it over! https://twitter.com/chrislhayes/status/1635136751516938240 https://twitter.com/chrislhayes/status/1635136751516938240

Joeboy 4y ago
> These billionaire VC's started a bank run on their own bank Are they talking about short sellers talking up the bank run, or just companies that withdrew funds so they could pay their employees?
- jpgvm 4y ago
  They are talking about VCs that pulled their fund capital + advised portfolio companies to move all their deposits to Big 4 banks. i.e inciting a bank run.
makomk 4y ago
This seems to miss the point by a mile. The reason this backstop is necessary is because without one, pulling your funds is the rational decision as soon as it's "not even clear" whether the bank is in good enough shape to back everyone's deposits - the sooner the better, and anyone who ignores the warning signs and waits until it's definitely clear that the bank is bankrupt is going to get screwed.
- cormacrelf 4y ago
  You are describing the unbridled panic of a hundred extremely frightened VCs and startup CFOs as “rational” behaviour. The bank did not have to collapse on Friday. If it had not collapsed then none of these people would have had their funds locked up in the bankruptcy settlement. I’m not saying it’s all their fault, but they engaged in a big discussion in which they could have agreed on some collective action, and then somehow decided to each act in their own interests and withdraw at full speed, seeing (and I quote Alexander Torrenegra https://twitter.com/torrenegra/status/1634573234187407369 https://twitter.com/torrenegra/status/1634573234187407369), “only upside, no downside” to that approach. If everyone was talking to each other, and they’re so smart and rational, why didn’t they decide to have everyone take out a small amount to cover essentials like payroll? Was it maybe… greed? Lack of ingenuity? To be fair, bank runs do happen, but everyone who caused this one was in a big old group chat and they could have prevented it, and nobody had the idea. If it was so rational, why did they continue to demand a bailout even after it became clear the FDIC would get them nearly 100% back? Was it maybe… greed? God forbid that anyone lose even a few cents of uninsured deposits. What happened to paying for extra insurance? Now they complain about contagion to get a bailout, contagion which they began and continued.

bunabhucan 4y ago

https://archive.ph/uh0MO https://archive.ph/uh0MO

etothepii 4y ago

It's surprising to me that a 90% backstop wouldn't have been sufficient. Make 90% of balances available today and commit that any residue will first be paid to those that leave their money behind. Having no consequence for those with a $3.3b balance creates too much moral hazard.

junofan 4y ago
Depositing cash in a US bank creates a moral hazard? That’s extreme, and I don’t think that’s the world the Fed wants.

seanalltogether 4y ago

> it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess. It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?

refurb 4y ago
Will it create a problem where depositors will be less discriminating when it comes to banks because they think the FDIC limit doesn't apply?
- jpgvm 4y ago
  Ideally the idea of an FDIC limit is just removed and banks are just further regulated to ensure that risk is kept at acceptable levels such that FDIC insurance fund is always capable of absorbing any failures in full.
  - refurb 4y ago
    Im not sure thats possible. Like all regulation, it’s impossible for the regulator to truly know the full situation. It would take a massive army of regulators to go through the financials of thousands of banks in the US. Plus the banks can lie, put things in their best light, or structure transactions to make it look like a lower level of risk than there really is. And of course, by the time the regulator finds out, the damage is done. I think its far better to cap the risk protection. That way you have customers doing their own risk management as well - avoiding what they perceive to be risky banks, diversifying deposits across banks, choosing alternative assets to store wealth, etc.
Nextgrid 4y ago
This means that owners/shareholders can still profit off a mismanaged bank as long as they cash out before the music stops.

jpgvm 4y ago

Shockingly bad take. SVB investors were wiped out 100%, this includes most of the net worth of the leadership team. Moral hazard is definitely still in play. All we need to see after this is is Basel III and Fed regulation extended to cover all banks of any size, not just those with over 250B in assets. Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future). The only people that lost here are investors in SVB and temporarily the other FDIC members will lose a small amount of money to additional FDIC special payment to replenish the insurance fund (but they will "get it back" later).

Gwypaas 4y ago
> Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future). This is completely ignoring the time value of money. Money today is worth more than money in the future. We are transferring real value today and thus making the public, through the other less risky banks, eat the haircut that will happen no matter what. The losses are real. What this has done is create the following incentives: For depositors: 1. Bank with the riskiest bank possible since all deposits are covered. For banks: 1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way. The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
- Ekaros 4y ago
  And for bank owners. Simply setup company or your own funds in bank as deposit and offer huge rates to yourself. 100% safe whatever you do.
- rhaway84773 4y ago

actual_leftie 4y ago

Yet another example of privatize the profits, socialize the losses. The wealthy and powerful only want welfare for themselves, not anyone else in society.

kryptiskt 4y ago

I don't see the moral hazard in making the depositors whole as long as they weren't given juicy rates for putting their money in the bank, it's not that they stood to gain anything from the mismanagement of the bank. When the alternative is that a lot of deposits in smaller banks flee to the huge banks that would have to be backstopped anyhow, starting fires all over the place, it seems downright attractive to signal that depositors don't have to worry.

orwin 4y ago
Lower fees and higher rates than in an average bank should trigger some signals tbh. If I was an US citizen, I would have exploited this as much as possible.

ihalip 4y ago

SVB should have learned from some of their depositors - just throttle withdrawals and blame "technical difficulties" or "systems update" or "scheduled maintenance".