9 ms·

The End of Silicon Valley (Bank)

84 points by kaboro 4y ago

acover 4y ago
Has the low cost of online banking removed the need for fractional reserve banking? Why does a basic checking account need to have economy destroying risks?
- sbelskie 4y ago
  In what way does online banking change things?
  - acover 4y ago
    If the bank can't lend out your money that's in your checking accounts, then they'll have to make money another way. Online banking makes the cost tiny and easy bare. Fractional reserve banking seems like an absurd way of paying for banking.
  - coldtea 4y ago
    For one, an online bank can just be some servers and staff. No physical locations, no actual tellers, no physical money stored, etc.
- worksonmine 4y ago
  Because money. Yes to any reasonable person your bank account is money not intended for gambling, but that's not how bankers see it. They're in an industry where appearance is everything. As long as you drive a Tesla and never have to cook in your Italian marble kitchen (I don't know and don't care if it's a thing, just making a point) it doesn't matter if it's all debt. The entire point of our economy is to kick it downhill and have someone else pay for it. Nothing grows indefinitely, we all know this, but we pretend economy is different.
jacknews 4y ago
"remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?" No, depositors get interest to compensate for inflation.
nsmog767 4y ago
>The federal government’s action is, in my estimation, the right thing to do for this moment in time. There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Banks, meanwhile, are now motivated to pursue even riskier strategies, knowing that depositors will be safe. I don't believe this is a binary issue, but a lot of the "pro-bailout" rhetoric is essentially "well of course we need to know we'll get our money back if we deposit it in a bank." This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!
- jen20 4y ago
  > This is clearly the best ideal. But that's not how it works! The “systemic risk” exceptions that are in the legislation and announcements over the weekend mean this is exactly how it works. My guess is that this will be continued - perhaps even publicly formalized - or small banks will cease to exist very quickly in favour of those that are too big to fail.
- sebzim4500 4y ago
  >But that's not how it works! I would imagine the people advocating for a 'bailout' (using the most generous possible definition here) want this to become how it works. Like how in Germany the government guarantees every German bank balance. I have enough problems, I don't want to have to worry that my bank balance will disappear unless I spread it around in order to abuse a technicality.
  - ericpauley 4y ago
    Spreading deposits around is not abusing a technicality. The limit incentivizes diversifying deposits because it reduces the risk of a single bank. Retail banks benefit immensely from the fact that much of their deposit base is smaller accounts that are less correlated. A bank handling only large deposits from a small number of highly correlated depositors is exactly what FDIC caps ought to prevent.
  - 4y ago
zpeti 4y ago
This is still a better situation than 2008, where banks were bailed out to the extent that management even stayed (despite deserving prison), and shareholders lost nothing. So that's the worst possible outcome, today's is probably second worst. But I don't see what would be better. Ben talks about loss of trust now, but we'd actually lose more trust if depositors weren't bailed out, and probably contagion would spread and many banks would fail. Thinking about an endgame, I think extending this all out into the future, its hard to see banking remaining in any way a free market. Either it becomes state sanctioned and protected profit making, which it already is for the big 4 banks, or banking just becomes fully nationalised, and basically a state run commodity. You can't get out of it being more and more centralised. I just don't see another way. And when it becomes fully centralised, the question is, does Jamie Dimon actually do anything, or is he basically a state actor with a billion dollar salary?
- themitigating 4y ago
  "Deserve prison"? Did they commit a crime?
  - parthianshotgun 4y ago
    What do you think?
  - vxNsr 4y ago
    yes, they 100000% did. They defrauded their clients, the government and each other. They committed multiple levels of fraud and all got away with it.
  - worksonmine 4y ago
    In 2008? I think it was fraud yes. What would you call packaging mortgages you know are worthless in pretty wrapping to be able to sell them to the next bagholder? That it temporarily works and it's how everyone does business isn't an excuse.
    - themitigating 4y ago
alephnerd 4y ago
Is it just me or has Stratechery gone downhill in it's analysis (or at least put too much mindshare on mid-market B2B SaaS startups, AdTech, and B2C). A number of the Stratechery articles I've read recently seem to remain in that whole echo chamber and don't seem to extend that well into other segments in the larger innovation industry.
- boh 4y ago
  What industry is that?
  - alephnerd 4y ago
    Stratechery seems to stick to the B2C, AdTech, Fintech, and mid-market B2B SaaS sectors, and at least for Biotech (loose term, Pharma VC is distinct from Healthtech VC is distinct from B2C health apps is distinct from ...) and Cybersecurity+Infra Startups, some of the analysis seems not as targeted. I've worked in both those industries and the VCs, GTM, Operations, Personas, and Economics for those segments are different from how an early stage Stripe or Uber or Amplitude would operate.
youngtaff 4y ago
This is one of the better articles written about the whole debacle… Also demonstrates VCs shortcomings (lack of diligence?) in the affair… which is probably why VCs are shouting about it and pointing fingers at others rather than examining their own failure in this
- rexreed 4y ago
  Maybe startups shouldn't blindly follow Silicon Valley recommendations and make their own decisions on operational matters like who they hire, where they bank, and what systems they use. There's too much groupthink and cult-following especially in the Silicon Valley venture community, where the investor's word is taken as Gospel to be followed to the letter. A bit of independent thinking goes a long way.
nine_zeros 4y ago
> There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Because if the bank doesn't give any interest, people will keep the money in either a competing bank that gives interest or in cash or in other instruments that pay interest. What a full backstop removes from the interest is a risk premium. You already see that at Chase or BoA accounts. The risk premium is zero so the interest they pay is much lower than other banks. But this is where other banks get an opportunity to compete for deposits.
- ghaff 4y ago
  The only "interest" I've gotten from a bank in probably decades is a free checking account which money can be deposited into and withdrawn from (via paper check or a couple different online payment mechanisms), the very rare notary service, and ATMs (also increasingly rare). I regularly sweep any significant excess cash to a brokerage account. I understand companies keeping larger pure cash accounts but how many individuals are keeping $500K in a bank deposit account?
- afiori 4y ago
  Do people chose banks for interests rates in saving accounts? Like do people make the financial decision to use saving account rather than stock/bonds/hedge funds as investments? As far as I understand no reasonable bank anywhere offers interest higher than inflation.
  - nine_zeros 4y ago
    Yes, people do make such decisions. Why? Because they expect stocks to fall and bonds to expose them to interest rate risk. They'd rather keep the money liquid and ready to sweep in to buy assets. People also use savings accounts for impending expenses. Human stuff such as pregnancy, kids, car repairs. Parking money in liquid savings with 3.5% interest is a very viable hedging strategy for humans. Perhaps not for institutions.
cced 4y ago
Can someone shine some light on[1][2]? If true, it would seem that some of this panic would have been engineered in order to save VC capital at the expense of the rest of us? --- edit: We really need an analysis of @Jason and @DavidSacks w.r.t [1][2]. They were touting Doomsday on their AllInPodcast[3] but with [1][2] I'm starting to wonder... [1]: https://twitter.com/innoc_bystander/status/1634773053304610818 https://twitter.com/innoc_bystander/status/16347730533046108... [2]: https://twitter.com/ddayen/status/1634925785550319616 https://twitter.com/ddayen/status/1634925785550319616 [3]: https://m.youtube.com/watch?v=CEee7dAk25c https://m.youtube.com/watch?v=CEee7dAk25c
- dougmwne 4y ago
  Yes, and VCs have been exposed for the leaches they really are. Years spent being actively hostile to government and regulation, encouraging their companies to break the law at every turn, only to come begging when it all threatened to implode.
mikewarot 4y ago
>Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest. That's not why I have a bank account. It's how you avoid paying fees to get checks cashed. If you want interest, you put it in a savings account, or a CD, also in a bank. The only safe alternative is savings bonds. If you want to gamble the money, then you invest in stocks, bonds, etc.
- ISL 4y ago
  Those free services are the "interest" you receive in return for your deposits.
  - coldtea 4y ago
    Don't give me interest then. Just store the money. If I want interest I'd then switch to another type of account, that I explicitly allow to lend them out for this purpose. In fact, they should have seggregated isolated-from-others-in-default accounts, with different fractional reserve percentages...
    - gen220 4y ago
      This is how the banking system works. As fiduciaries responsible for managing millions of dollars in capital, founders/VC have a responsibility to understand the parameters of the financial game they're playing. Any competent financial risk manager has a well-worn playbook of solutions to the problem of "how do we put money in short/medium/long-term storage?", that are appropriate in accordance to how big the pile is and how liquid you need it to be. If we disagree with the rules of the game, the proper solution is to lobby to have them changed and debate the merits in the court of public opinion, not to live in ignorance of the rules and cry "contagion" to be made whole, when we're faced with the consequences of ignoring those rules.
- esja 4y ago
  "depositors lend their money to a bank, for which they are paid interest, and banks lend that money out" ... isn't how banking actually works. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
irusensei 4y ago
I have this innovative idea for business. Imagine you charge money from depositors for keeping their money in a big safe vault. No trading or lending their money. You just keep it safe.
- Aloha 4y ago
  I dont know a great many who would pay for that service.
  - afiori 4y ago
    I imagine that people are paying for insurance for these kind of things. A less risky bank is worth at least a fraction of that.
- micromacrofoot 4y ago
  I can go buy a fireproof safe for a few hundred bucks. Or rent a safe deposit box. My money becomes less valuable the longer it sits in either.
  - coldtea 4y ago
    Your money becomes less valuable in a bank too, as a bank account is not an investment vehicle anyway. It's just that now you also have the added risk of the bank defaulting like SVB. If you want to invest, invest. If you don't, you shouldn't have the added risk tied to your "sitting in the bank" money, just inflation.
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- SketchySeaBeast 4y ago
  So by keeping my money with you I lose spending power at a rate of your fees PLUS inflation? Where do I sign up?
deleted 4y ago
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chernevik 4y ago
> "the answer will almost certainly be far more stringent regulation on small banks" And that regulation won't look kindly on lending to anything new, different or weird. A lending model like SVB's won't be supported by regulators.
- coldtea 4y ago
  They can always still lend on useful, productive, and with a chance of success, rather than using cheap QE VC money for BS business ideas...
  - chernevik 4y ago
    The point is that if you make a bureaucracy responsible for 100% of deposits it will be very risk averse in the loans it will let a bank make.
the_af 4y ago
Out of curiosity, did anyone ever believe the "rainforest" metaphor for Silicon Valley, that entrepreneurs and investors were more interested in global/"community" success than their own individual wins, and that they wouldn't react egotistically when real money was at stake? Stratechery asserts this was "probably true" in 2012 but not longer true, and that Uber was one of the first cases where short term/individual wins became more important, even if they destroyed trust. I find it hard to believe this "let's all of us win together" was ever true.
- coldtea 4y ago
  You'd be surprised how many naive people exist, when it comes to such empty promises... It's why all SV companies say their mission is "to change the world" and such BS
- gen220 4y ago
  As somebody who grew up in SV, I think this mythos was incubated around the period between the Yahoo/Ebay IPOs ('96/'98) and the Google IPO ('08). The concept reached its peak (although it was already rotting from the inside) around the time of FB's IPO ('12). It didn't exist much before, and it's (IMO) fully gone now.
mariodiana 4y ago
The way capitalism works is this. Rich people have the responsibility of knowing what to do with their money. If they don't know what to do with it, it won't be long before they're no longer rich. Perhaps people are sympathetic towards FDIC deposits up to 250 thousand dollars. (That isn't capitalism, either.) But at some point people need to evaluate whether or not a bank — or anyplace else, for that matter — is a safe place for their money. If it isn't, the money shouldn't be there. Of course, this takes work. That's called reality. This is now the second major banking crisis in 15 years. That's called death throes. The system we have is a mess. And bailouts aren't helping. With respect to the system, bailouts are doing the job of alcohol in staving off delirium tremens.
hackererror404 4y ago
We are sooooooooo screwed! VC money is completely frozen. It's an insane tragedy. There needs to be a bank where we can put our funds above 250k that is insured but also heavily regulated.
ericpauley 4y ago
Any article, tweet, or comment section on this issue is rife with willfull ignorance of basic banking practices, chief among this being the strawman multiple bank accounts. The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection. The current dollar value of the cap also makes sense. Unlike what plenty people are trying to claim, there is no amount of money for which that current system is unsuitable. Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits). Money market funds provide short-term treasury exposure above that, and businesses with many millions liquid should absolutely be expected to invest in treasuries. If Bogleheads can do it in their retirement accounts why can't $10M+ startups? Maybe the SVB depositor bailout was necessary in this case to prevent broader panic, but it sets a grim precedent for depositor behavior that ultimately makes the system more brittle and reliant on government handouts (which despite rhetoric to the contrary, will be paid for by the taxpayer/bank account holder).
- tolmasky 4y ago
  > The current dollar value of the cap also makes sense. How can a static number make sense given the existence of inflation? We've been told for the last year that inflation is "out of control," and yet in the case of the FDIC cap, $250K in 2012 dollars makes the same amount of sense as in 2023 dollars? To save anyone the work, $250K in 2012 is equivalent to $350K in today's dollars, so, a change of $100K, or 40%. Did TARP, which is repeatedly criticized for being passed too hastily, and also included this $250K cap, have secret future knowledge of interest rates and specifically intend for the cap to reduce in value by 40% over the following 10 years? The FDIC limit started at $2,500 in 1966 and has been increased several times. Have we magically arrived at the final number now? > Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits). These numbers remain arbitrary. Your argument is only that there needs to exist an FDIC limit, not this particular limit. Why is $3M the right amount for sweep accounts? Saying "you can combine accounts to stack FDIC limits like video game power buffs" is true regardless of the base FDIC limit, it doesn't explain why this limit is correct, too high or too low. Look, it works for $50,000 too: "You can have deposit sweep accounts that cover up to $600K. Money market funds provide short term-term treasury bonds above that". And hey, it works for $500K: "You can have deposit sweep accounts that cover up to $6M. Money market funds provide short term-term treasury bonds above that". See, the surrounding multiplier system has nothing to do with justifying the base number. It seems much more likely that a number that was set 10 years ago when money was worth 40% more, and that has a history of needing to be raised, probably doesn't make sense today and needs another update. > The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection. If it is so critical to the integrity of the system, then why aren't accounts required by law to be sweeps above the FDIC limit, and not allowed past the "natural sweep multiplier FDIC limit" at all? You just said it yourself: the purpose is to reduce systemic risk. Then let's actually reduce it instead of "planting the seeds of reducing it if everyone gets sophisticated enough," and then getting angry when they fail to do it. The current system is like purposefully trying to create a tragedy of the commons, where individual mistakes are rarely very rarely punished but together contribute to bringing down the entire system. Allowing below FDIC limit accounts seems to be a weird landmine for both the depositor doing it, and for the larger system it operates in. It's the worst of both worlds. It's like when an API doesn't work, and instead of fixing the API, the author updates the documentation to include a workaround and is baffled why people keep running into this problem. Don't they read the docs? These uses are supposedly supposedly so smart but can't be bothered to find this simple workaround buried in my documentation?
iandanforth 4y ago
There's a huge leap taken by this piece with distressing casualness. "This action effectively means the $250,000 FDIC limit is meaningless: all deposits in any bank are presumably insured by the full faith and credit of the United States." Exceptional circumstances sometimes call for exceptional measures. A bank with 85% of its accounts over the $250k limit where most of the depositors are contractually locked-in companies is not normal. Moreover the contagion nucleus in this network were a few culpable super-spreaders with exceptional power. Other banks don't face that threat either. Banking policy must be written to include exceptional circumstances, but the idea that all banking policy needs to be rewritten to burden smaller banks with situational precautions which are impossible for them to encounter is dangerous idiocy. Don't write housing codes that require 9.0 earthquake tolerance in areas primarily hit by hurricanes! Furthermore it's dispiriting to see generous tit-for-tat given such a cynical portrayal. If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down. This situation was exceptional, and the panic was triggered by people with outsized network influence who should have known better. So maybe, just maybe, we deal with the reality of the situation rather than assuming it must be a harbinger of total change.
- javajosh 4y ago
  >If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down. Strictly speaking there are 4 outcomes, according to John Nash. The cooperate outcome is globally the best, but the 2 defect outcomes are much better for the individual winner. The 4th outcome, 'they fought and badly wounded each other, but both lived', is what's going on here, and the FDIC medics are coming in. This helps now but has the perverse effect of increasing the chances of defect behavior in the future, IMHO. The angle I want to know more about is Peter Thiel. He's already demonstrated the willingness and ability to execute complex plans to destroy enemies (e.g. Gawker). He likes Trump, so not a fan of self-restraint or basic morality. Is it possible that Thiel has a bone to pick with SVB? Or maybe it's bigger, and Thiel, who famously hates competition, saw a way to hurt ALL startups, including some that might one day threaten him and his businesses. It's the old story about the orphan who makes it, recognizes the positive influence the orphanage had on his success, and then burns the orphanage down to ensure no others get its benefits and challenge his power.
alecco 4y ago
This post was #2. And 10 minutes later it's #44 on second page. SMH
commondream 4y ago
> Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest. This may be how banks think about themselves, but I'm pretty sure that most consumers, even businesses, don't think about them this way. Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction?
- afiori 4y ago
  > Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction? That is what I always believed hedge funds are. It might matter that (in my country) I will likely never have enough money to get net profit from my saving account (interests minus price of services), but if I were aiming for that I would invest, not deposit
deleted 4y ago
[deleted]

84 points by kaboro 4y ago

Has the low cost of online banking removed the need for fractional reserve banking? Why does a basic checking account need to have economy destroying risks?

sbelskie 4y ago
In what way does online banking change things?
- acover 4y ago
  If the bank can't lend out your money that's in your checking accounts, then they'll have to make money another way. Online banking makes the cost tiny and easy bare. Fractional reserve banking seems like an absurd way of paying for banking.
- coldtea 4y ago
  For one, an online bank can just be some servers and staff. No physical locations, no actual tellers, no physical money stored, etc.
worksonmine 4y ago
Because money. Yes to any reasonable person your bank account is money not intended for gambling, but that's not how bankers see it. They're in an industry where appearance is everything. As long as you drive a Tesla and never have to cook in your Italian marble kitchen (I don't know and don't care if it's a thing, just making a point) it doesn't matter if it's all debt. The entire point of our economy is to kick it downhill and have someone else pay for it. Nothing grows indefinitely, we all know this, but we pretend economy is different.

jacknews 4y ago

"remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?" No, depositors get interest to compensate for inflation.

nsmog767 4y ago

>The federal government’s action is, in my estimation, the right thing to do for this moment in time. There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Banks, meanwhile, are now motivated to pursue even riskier strategies, knowing that depositors will be safe. I don't believe this is a binary issue, but a lot of the "pro-bailout" rhetoric is essentially "well of course we need to know we'll get our money back if we deposit it in a bank." This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!

jen20 4y ago
> This is clearly the best ideal. But that's not how it works! The “systemic risk” exceptions that are in the legislation and announcements over the weekend mean this is exactly how it works. My guess is that this will be continued - perhaps even publicly formalized - or small banks will cease to exist very quickly in favour of those that are too big to fail.
sebzim4500 4y ago
>But that's not how it works! I would imagine the people advocating for a 'bailout' (using the most generous possible definition here) want this to become how it works. Like how in Germany the government guarantees every German bank balance. I have enough problems, I don't want to have to worry that my bank balance will disappear unless I spread it around in order to abuse a technicality.
- ericpauley 4y ago
  Spreading deposits around is not abusing a technicality. The limit incentivizes diversifying deposits because it reduces the risk of a single bank. Retail banks benefit immensely from the fact that much of their deposit base is smaller accounts that are less correlated. A bank handling only large deposits from a small number of highly correlated depositors is exactly what FDIC caps ought to prevent.
- 4y ago

zpeti 4y ago

This is still a better situation than 2008, where banks were bailed out to the extent that management even stayed (despite deserving prison), and shareholders lost nothing. So that's the worst possible outcome, today's is probably second worst. But I don't see what would be better. Ben talks about loss of trust now, but we'd actually lose more trust if depositors weren't bailed out, and probably contagion would spread and many banks would fail. Thinking about an endgame, I think extending this all out into the future, its hard to see banking remaining in any way a free market. Either it becomes state sanctioned and protected profit making, which it already is for the big 4 banks, or banking just becomes fully nationalised, and basically a state run commodity. You can't get out of it being more and more centralised. I just don't see another way. And when it becomes fully centralised, the question is, does Jamie Dimon actually do anything, or is he basically a state actor with a billion dollar salary?

themitigating 4y ago
"Deserve prison"? Did they commit a crime?
- parthianshotgun 4y ago
  What do you think?
- vxNsr 4y ago
  yes, they 100000% did. They defrauded their clients, the government and each other. They committed multiple levels of fraud and all got away with it.
- worksonmine 4y ago
  In 2008? I think it was fraud yes. What would you call packaging mortgages you know are worthless in pretty wrapping to be able to sell them to the next bagholder? That it temporarily works and it's how everyone does business isn't an excuse.
  - themitigating 4y ago

alephnerd 4y ago

Is it just me or has Stratechery gone downhill in it's analysis (or at least put too much mindshare on mid-market B2B SaaS startups, AdTech, and B2C). A number of the Stratechery articles I've read recently seem to remain in that whole echo chamber and don't seem to extend that well into other segments in the larger innovation industry.

boh 4y ago
What industry is that?
- alephnerd 4y ago
  Stratechery seems to stick to the B2C, AdTech, Fintech, and mid-market B2B SaaS sectors, and at least for Biotech (loose term, Pharma VC is distinct from Healthtech VC is distinct from B2C health apps is distinct from ...) and Cybersecurity+Infra Startups, some of the analysis seems not as targeted. I've worked in both those industries and the VCs, GTM, Operations, Personas, and Economics for those segments are different from how an early stage Stripe or Uber or Amplitude would operate.

youngtaff 4y ago

This is one of the better articles written about the whole debacle… Also demonstrates VCs shortcomings (lack of diligence?) in the affair… which is probably why VCs are shouting about it and pointing fingers at others rather than examining their own failure in this

rexreed 4y ago
Maybe startups shouldn't blindly follow Silicon Valley recommendations and make their own decisions on operational matters like who they hire, where they bank, and what systems they use. There's too much groupthink and cult-following especially in the Silicon Valley venture community, where the investor's word is taken as Gospel to be followed to the letter. A bit of independent thinking goes a long way.

nine_zeros 4y ago

> There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Because if the bank doesn't give any interest, people will keep the money in either a competing bank that gives interest or in cash or in other instruments that pay interest. What a full backstop removes from the interest is a risk premium. You already see that at Chase or BoA accounts. The risk premium is zero so the interest they pay is much lower than other banks. But this is where other banks get an opportunity to compete for deposits.

ghaff 4y ago
The only "interest" I've gotten from a bank in probably decades is a free checking account which money can be deposited into and withdrawn from (via paper check or a couple different online payment mechanisms), the very rare notary service, and ATMs (also increasingly rare). I regularly sweep any significant excess cash to a brokerage account. I understand companies keeping larger pure cash accounts but how many individuals are keeping $500K in a bank deposit account?
afiori 4y ago
Do people chose banks for interests rates in saving accounts? Like do people make the financial decision to use saving account rather than stock/bonds/hedge funds as investments? As far as I understand no reasonable bank anywhere offers interest higher than inflation.
- nine_zeros 4y ago
  Yes, people do make such decisions. Why? Because they expect stocks to fall and bonds to expose them to interest rate risk. They'd rather keep the money liquid and ready to sweep in to buy assets. People also use savings accounts for impending expenses. Human stuff such as pregnancy, kids, car repairs. Parking money in liquid savings with 3.5% interest is a very viable hedging strategy for humans. Perhaps not for institutions.

cced 4y ago

Can someone shine some light on[1][2]? If true, it would seem that some of this panic would have been engineered in order to save VC capital at the expense of the rest of us? --- edit: We really need an analysis of @Jason and @DavidSacks w.r.t [1][2]. They were touting Doomsday on their AllInPodcast[3] but with [1][2] I'm starting to wonder... [1]: https://twitter.com/innoc_bystander/status/1634773053304610818 https://twitter.com/innoc_bystander/status/16347730533046108... [2]: https://twitter.com/ddayen/status/1634925785550319616 https://twitter.com/ddayen/status/1634925785550319616 [3]: https://m.youtube.com/watch?v=CEee7dAk25c https://m.youtube.com/watch?v=CEee7dAk25c

dougmwne 4y ago
Yes, and VCs have been exposed for the leaches they really are. Years spent being actively hostile to government and regulation, encouraging their companies to break the law at every turn, only to come begging when it all threatened to implode.

mikewarot 4y ago

>Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest. That's not why I have a bank account. It's how you avoid paying fees to get checks cashed. If you want interest, you put it in a savings account, or a CD, also in a bank. The only safe alternative is savings bonds. If you want to gamble the money, then you invest in stocks, bonds, etc.

ISL 4y ago
Those free services are the "interest" you receive in return for your deposits.
- coldtea 4y ago
  Don't give me interest then. Just store the money. If I want interest I'd then switch to another type of account, that I explicitly allow to lend them out for this purpose. In fact, they should have seggregated isolated-from-others-in-default accounts, with different fractional reserve percentages...
  - gen220 4y ago
    This is how the banking system works. As fiduciaries responsible for managing millions of dollars in capital, founders/VC have a responsibility to understand the parameters of the financial game they're playing. Any competent financial risk manager has a well-worn playbook of solutions to the problem of "how do we put money in short/medium/long-term storage?", that are appropriate in accordance to how big the pile is and how liquid you need it to be. If we disagree with the rules of the game, the proper solution is to lobby to have them changed and debate the merits in the court of public opinion, not to live in ignorance of the rules and cry "contagion" to be made whole, when we're faced with the consequences of ignoring those rules.
esja 4y ago
"depositors lend their money to a bank, for which they are paid interest, and banks lend that money out" ... isn't how banking actually works. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

irusensei 4y ago

I have this innovative idea for business. Imagine you charge money from depositors for keeping their money in a big safe vault. No trading or lending their money. You just keep it safe.

Aloha 4y ago
I dont know a great many who would pay for that service.
- afiori 4y ago
  I imagine that people are paying for insurance for these kind of things. A less risky bank is worth at least a fraction of that.
micromacrofoot 4y ago
I can go buy a fireproof safe for a few hundred bucks. Or rent a safe deposit box. My money becomes less valuable the longer it sits in either.
- coldtea 4y ago
  Your money becomes less valuable in a bank too, as a bank account is not an investment vehicle anyway. It's just that now you also have the added risk of the bank defaulting like SVB. If you want to invest, invest. If you don't, you shouldn't have the added risk tied to your "sitting in the bank" money, just inflation.
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SketchySeaBeast 4y ago
So by keeping my money with you I lose spending power at a rate of your fees PLUS inflation? Where do I sign up?

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chernevik 4y ago

> "the answer will almost certainly be far more stringent regulation on small banks" And that regulation won't look kindly on lending to anything new, different or weird. A lending model like SVB's won't be supported by regulators.

coldtea 4y ago
They can always still lend on useful, productive, and with a chance of success, rather than using cheap QE VC money for BS business ideas...
- chernevik 4y ago
  The point is that if you make a bureaucracy responsible for 100% of deposits it will be very risk averse in the loans it will let a bank make.

the_af 4y ago

Out of curiosity, did anyone ever believe the "rainforest" metaphor for Silicon Valley, that entrepreneurs and investors were more interested in global/"community" success than their own individual wins, and that they wouldn't react egotistically when real money was at stake? Stratechery asserts this was "probably true" in 2012 but not longer true, and that Uber was one of the first cases where short term/individual wins became more important, even if they destroyed trust. I find it hard to believe this "let's all of us win together" was ever true.

coldtea 4y ago
You'd be surprised how many naive people exist, when it comes to such empty promises... It's why all SV companies say their mission is "to change the world" and such BS
gen220 4y ago
As somebody who grew up in SV, I think this mythos was incubated around the period between the Yahoo/Ebay IPOs ('96/'98) and the Google IPO ('08). The concept reached its peak (although it was already rotting from the inside) around the time of FB's IPO ('12). It didn't exist much before, and it's (IMO) fully gone now.

mariodiana 4y ago

The way capitalism works is this. Rich people have the responsibility of knowing what to do with their money. If they don't know what to do with it, it won't be long before they're no longer rich. Perhaps people are sympathetic towards FDIC deposits up to 250 thousand dollars. (That isn't capitalism, either.) But at some point people need to evaluate whether or not a bank — or anyplace else, for that matter — is a safe place for their money. If it isn't, the money shouldn't be there. Of course, this takes work. That's called reality. This is now the second major banking crisis in 15 years. That's called death throes. The system we have is a mess. And bailouts aren't helping. With respect to the system, bailouts are doing the job of alcohol in staving off delirium tremens.

hackererror404 4y ago

We are sooooooooo screwed! VC money is completely frozen. It's an insane tragedy. There needs to be a bank where we can put our funds above 250k that is insured but also heavily regulated.

ericpauley 4y ago

Any article, tweet, or comment section on this issue is rife with willfull ignorance of basic banking practices, chief among this being the strawman multiple bank accounts. The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection. The current dollar value of the cap also makes sense. Unlike what plenty people are trying to claim, there is no amount of money for which that current system is unsuitable. Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits). Money market funds provide short-term treasury exposure above that, and businesses with many millions liquid should absolutely be expected to invest in treasuries. If Bogleheads can do it in their retirement accounts why can't $10M+ startups? Maybe the SVB depositor bailout was necessary in this case to prevent broader panic, but it sets a grim precedent for depositor behavior that ultimately makes the system more brittle and reliant on government handouts (which despite rhetoric to the contrary, will be paid for by the taxpayer/bank account holder).

tolmasky 4y ago
> The current dollar value of the cap also makes sense. How can a static number make sense given the existence of inflation? We've been told for the last year that inflation is "out of control," and yet in the case of the FDIC cap, $250K in 2012 dollars makes the same amount of sense as in 2023 dollars? To save anyone the work, $250K in 2012 is equivalent to $350K in today's dollars, so, a change of $100K, or 40%. Did TARP, which is repeatedly criticized for being passed too hastily, and also included this $250K cap, have secret future knowledge of interest rates and specifically intend for the cap to reduce in value by 40% over the following 10 years? The FDIC limit started at $2,500 in 1966 and has been increased several times. Have we magically arrived at the final number now? > Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits). These numbers remain arbitrary. Your argument is only that there needs to exist an FDIC limit, not this particular limit. Why is $3M the right amount for sweep accounts? Saying "you can combine accounts to stack FDIC limits like video game power buffs" is true regardless of the base FDIC limit, it doesn't explain why this limit is correct, too high or too low. Look, it works for $50,000 too: "You can have deposit sweep accounts that cover up to $600K. Money market funds provide short term-term treasury bonds above that". And hey, it works for $500K: "You can have deposit sweep accounts that cover up to $6M. Money market funds provide short term-term treasury bonds above that". See, the surrounding multiplier system has nothing to do with justifying the base number. It seems much more likely that a number that was set 10 years ago when money was worth 40% more, and that has a history of needing to be raised, probably doesn't make sense today and needs another update. > The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection. If it is so critical to the integrity of the system, then why aren't accounts required by law to be sweeps above the FDIC limit, and not allowed past the "natural sweep multiplier FDIC limit" at all? You just said it yourself: the purpose is to reduce systemic risk. Then let's actually reduce it instead of "planting the seeds of reducing it if everyone gets sophisticated enough," and then getting angry when they fail to do it. The current system is like purposefully trying to create a tragedy of the commons, where individual mistakes are rarely very rarely punished but together contribute to bringing down the entire system. Allowing below FDIC limit accounts seems to be a weird landmine for both the depositor doing it, and for the larger system it operates in. It's the worst of both worlds. It's like when an API doesn't work, and instead of fixing the API, the author updates the documentation to include a workaround and is baffled why people keep running into this problem. Don't they read the docs? These uses are supposedly supposedly so smart but can't be bothered to find this simple workaround buried in my documentation?

iandanforth 4y ago

There's a huge leap taken by this piece with distressing casualness. "This action effectively means the $250,000 FDIC limit is meaningless: all deposits in any bank are presumably insured by the full faith and credit of the United States." Exceptional circumstances sometimes call for exceptional measures. A bank with 85% of its accounts over the $250k limit where most of the depositors are contractually locked-in companies is not normal. Moreover the contagion nucleus in this network were a few culpable super-spreaders with exceptional power. Other banks don't face that threat either. Banking policy must be written to include exceptional circumstances, but the idea that all banking policy needs to be rewritten to burden smaller banks with situational precautions which are impossible for them to encounter is dangerous idiocy. Don't write housing codes that require 9.0 earthquake tolerance in areas primarily hit by hurricanes! Furthermore it's dispiriting to see generous tit-for-tat given such a cynical portrayal. If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down. This situation was exceptional, and the panic was triggered by people with outsized network influence who should have known better. So maybe, just maybe, we deal with the reality of the situation rather than assuming it must be a harbinger of total change.

javajosh 4y ago
>If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down. Strictly speaking there are 4 outcomes, according to John Nash. The cooperate outcome is globally the best, but the 2 defect outcomes are much better for the individual winner. The 4th outcome, 'they fought and badly wounded each other, but both lived', is what's going on here, and the FDIC medics are coming in. This helps now but has the perverse effect of increasing the chances of defect behavior in the future, IMHO. The angle I want to know more about is Peter Thiel. He's already demonstrated the willingness and ability to execute complex plans to destroy enemies (e.g. Gawker). He likes Trump, so not a fan of self-restraint or basic morality. Is it possible that Thiel has a bone to pick with SVB? Or maybe it's bigger, and Thiel, who famously hates competition, saw a way to hurt ALL startups, including some that might one day threaten him and his businesses. It's the old story about the orphan who makes it, recognizes the positive influence the orphanage had on his success, and then burns the orphanage down to ensure no others get its benefits and challenge his power.

alecco 4y ago

This post was #2. And 10 minutes later it's #44 on second page. SMH

commondream 4y ago

> Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest. This may be how banks think about themselves, but I'm pretty sure that most consumers, even businesses, don't think about them this way. Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction?

afiori 4y ago
> Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction? That is what I always believed hedge funds are. It might matter that (in my country) I will likely never have enough money to get net profit from my saving account (interests minus price of services), but if I were aiming for that I would invest, not deposit

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