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It was a modified prisoners dilemma where 100 prisoners are faced with steal or share, and have every possible chance to communicate but just can change their c

by expazl 4y ago

It was a modified prisoners dilemma where 100 prisoners are faced with steal or share, and have every possible chance to communicate but just can change their choice after making it. And if just 20 had shared, then everyone wins, even those who chose steal. But the panic and the irresponsible VCs lack of communication with the bank and each other meant that in a heartbeat 85 prisoners had chosen steal, before even looking up at each other or listening to the rules being fully explained, and the remaining 15 where left perplexed that there wasn't even 5 amongst the panicked bunch left to help resolve the situation calmly to everyones benefit.

stickfigure 4y ago
You can allow as many phone calls as you want but with thousands of players, you're going to get defect every single time you run the experiment. There's no "steal" here. It's your money, at a bank, and if you're late on the defect button you might not get it back. The rational action is always to defect.
- expazl 4y ago
  > The rational action is always to defect. If that was true, then every bank every day would see runs on their holdings. Obviously that doesn't happen, because most traditional banks have larger institutional customers who understand that the market-to-market value on bonds might dip a bit, but that as long as the bank is able to negotiation loans or raise capital to provide needed liquidity then it's not a big issue. You don't see runs on traditional banks like this, because in the traditional banking sector people pick up the phone and talk to each other instead of taking to twitter and screaming doom and destruction because they read a blog post that they didn't understand but which said something about market-to-market insolvent and sounded scary.
  - stickfigure 4y ago
    Oh, you sweet summer child. You don't see runs on banks because people believe their money is safe. Full stop. As soon as that belief is broken, a run is guaranteed. This is why we have deposit insurance, and why the fed just effectively made it unlimited. If they hadn't, every small bank in the country would now be experiencing a run, including those in "the traditional banking sector". What changed late last week is not any fundamental of the economy or banking sector, but people's belief in the safety of banks.
drited 4y ago
In your assertion here are you assuming that the bank was solvent and just had a liquidity problem, not a solvency problem?
- expazl 4y ago
  At the root of the issue was that they where not solvent when bonds where valued at market-to-market, but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates. The latter valuation is what you traditionally calculate and use in banking, the prior only becomes relevant if there is a run on the bank and you have to liquidate immediately to cover, which is of cause what happened. The great comedy of the situation is that if everyone had been calm and said "hmm, they need to raise some capital lets see what happens" SVB might have had a bad quarter or two, but they wouldn't have gone bankrupt. They only went down because the startup community reaction to hearing "we need to raise capital to cover day to day liquidity requirements" was to initiate an immediate flash run on the bank, which meant they where forced to sell all those bonds at a discounted market-to-market rate instead of holding them to maturity as was the expectation.
  - drited 4y ago
    >> but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates Actually if you're a bank whose business model is predicated on interest spread between your assets and liabilities you do care. This is particularly true for banks like SVB whose duration of liabilities (deposits) is short because suddenly cost of deposits rises while longer-duration 'held to maturity' assets still generate the same (low) rate of interest. Suddenly the bank is loss-making. People are talking about mark to market like it's irrelevant but it's actually a very important market signal. It is not just relevant for balance sheet valuation. It is also a signal of future income statement profitability unless duration of assets is well matched with duration of liabilities.
theRealMe 4y ago
Remember that we know a lot more about what was happening now than they did at the time. At the time they knew that 1. SVB had liquidity issues and were forced to sell underwater bonds. 2. Needed to raise more capital. 3. Transactions were starting to have issues going through. So it’s like your modified prisoners dilemma, but also, the prisoners don’t know if there is enough for 1 person or 100 people. That changes the calculation.

by expazl 4y ago

stickfigure 4y ago

You can allow as many phone calls as you want but with thousands of players, you're going to get defect every single time you run the experiment. There's no "steal" here. It's your money, at a bank, and if you're late on the defect button you might not get it back. The rational action is always to defect.

expazl 4y ago
> The rational action is always to defect. If that was true, then every bank every day would see runs on their holdings. Obviously that doesn't happen, because most traditional banks have larger institutional customers who understand that the market-to-market value on bonds might dip a bit, but that as long as the bank is able to negotiation loans or raise capital to provide needed liquidity then it's not a big issue. You don't see runs on traditional banks like this, because in the traditional banking sector people pick up the phone and talk to each other instead of taking to twitter and screaming doom and destruction because they read a blog post that they didn't understand but which said something about market-to-market insolvent and sounded scary.
- stickfigure 4y ago
  Oh, you sweet summer child. You don't see runs on banks because people believe their money is safe. Full stop. As soon as that belief is broken, a run is guaranteed. This is why we have deposit insurance, and why the fed just effectively made it unlimited. If they hadn't, every small bank in the country would now be experiencing a run, including those in "the traditional banking sector". What changed late last week is not any fundamental of the economy or banking sector, but people's belief in the safety of banks.

drited 4y ago

In your assertion here are you assuming that the bank was solvent and just had a liquidity problem, not a solvency problem?

expazl 4y ago
At the root of the issue was that they where not solvent when bonds where valued at market-to-market, but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates. The latter valuation is what you traditionally calculate and use in banking, the prior only becomes relevant if there is a run on the bank and you have to liquidate immediately to cover, which is of cause what happened. The great comedy of the situation is that if everyone had been calm and said "hmm, they need to raise some capital lets see what happens" SVB might have had a bad quarter or two, but they wouldn't have gone bankrupt. They only went down because the startup community reaction to hearing "we need to raise capital to cover day to day liquidity requirements" was to initiate an immediate flash run on the bank, which meant they where forced to sell all those bonds at a discounted market-to-market rate instead of holding them to maturity as was the expectation.
- drited 4y ago
  >> but you don't really care about that when you are intending to hold the bonds to maturity. They where solvent when bonds where valued at maturation rates Actually if you're a bank whose business model is predicated on interest spread between your assets and liabilities you do care. This is particularly true for banks like SVB whose duration of liabilities (deposits) is short because suddenly cost of deposits rises while longer-duration 'held to maturity' assets still generate the same (low) rate of interest. Suddenly the bank is loss-making. People are talking about mark to market like it's irrelevant but it's actually a very important market signal. It is not just relevant for balance sheet valuation. It is also a signal of future income statement profitability unless duration of assets is well matched with duration of liabilities.

theRealMe 4y ago

Remember that we know a lot more about what was happening now than they did at the time. At the time they knew that 1. SVB had liquidity issues and were forced to sell underwater bonds. 2. Needed to raise more capital. 3. Transactions were starting to have issues going through. So it’s like your modified prisoners dilemma, but also, the prisoners don’t know if there is enough for 1 person or 100 people. That changes the calculation.