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This article feels like rich people who were trying to get around US law/regulations/taxes now wanting the protections afforded by it. They deposited money in
by mdasen 3y ago
This article feels like rich people who were trying to get around US law/regulations/taxes now wanting the protections afforded by it.
They deposited money in SVB's Cayman Islands subsidiary (a country that's a well-known tax haven). SVB goes under and the Cayman Islands have no deposit insurance so their deposits are wiped out. Now they want their money back or their debt forgiven. The SVB Cayman deposits didn't pay into the FDIC insurance fund so they shouldn't be given the protection of the FDIC.
The title of the article makes it sound like some poor SVB "customers" are in a bad situation. The truth is that it's going to be venture capital, private equity, and some really wealthy individuals (who were probably trying to dodge taxes). It's hard to feel bad for extremely rich people using a well-known tax haven losing some money. The WSJ is really burying the lead in this story. If you're trying to avoid US laws, regulations, and taxes, you can't come looking for US protections.
EDIT: In a previous article on the topic, the WSJ noted "The financial pain being felt by SVB’s foreign depositors could make investment firms that are incorporated or doing business in offshore financial hubs reconsider where they should put their money and what protections they have" https://www.wsj.com/articles/cayman-islands-regulator-exploring-legal-options-after-fdic-seized-svb-deposits-b00704ae https://www.wsj.com/articles/cayman-islands-regulator-explor...
We don't want to incentivize people to dodge taxes while thinking they'll enjoy all the protections paid for by taxes.
- epgui 3y agoI don’t know if it’s just me that’s heartless, but I think if you’re financially sophisticated enough to bank in other countries or to have more than the insurable limit held in cash (!!! why???) then you ought to have known better or to have known the risks. I never have more than a small amount held in cash, and even if I had a crazy windfall and made some billions, I wouldn’t keep more than a small amount in cash. For the patient folks, there’s equities… For the risk averse, there’s money markets, treasurys, real estate, etc.
- sp332 3y agoAny company with more than a couple dozen employees is going to have more than $250k in the bank for payday. SVB had some payroll processing companies as clients, so they each had multiple companies' payroll in the accounts that Friday. And the article mentions that the Cayman Islands branch had investment and private equity firms as clients, so they wouldn't get too far with only $250k in their accounts.
- epgui 3y agoAh… yes, well I don’t know anything about corporate banking. I was thinking about personal banking practices.
- deleted 3y ago[deleted]
- Retric 3y agoYou can use multiple banking accounts at multiple banks and still maintain FDIC protection. There’s many business models set up to facilitate such things, so while you can’t hold billions in this way in practice it’s not a problem for payroll. Ex: https://en.wikipedia.org/wiki/IntraFi_Network https://en.wikipedia.org/wiki/IntraFi_Network Alternatively, you can also buy your own insurance from a 3rd party to minimize risks. However, you can also get incentivized to ignore the risks and keep large sums at individual institutions. Which has the obvious downsides SVB customers are discovering.
- deleted 3y ago[deleted]
- HWR_14 3y agoAre many payroll companies doing business out of the Caymans? No. This was investment and private equity firms. They should take their losses.
- bhaney 3y agoThey certainly did know better. They're just hoping if they whine loudly enough now, they won't have to deal with the consequences of the risks they knowingly took and would have happily benefitted from without a word.
- citizenkeen 3y agoPlay capitalism games, win capitalism prizes.
- omnimus 3y agoPlay capitalism games, win socialism prizes. Thats what they would like.
- red-iron-pine 3y agoi.e. socialize the losses, capitalize the gains. see also COVID PPP loans
- epgui 3y agoWhatever issues these may have, they are completely irrelevant to the topic or to this thread.
- hyevbnff 3y agoHigh yield savings accounts give up to 5% atm.
- deleted 3y ago[deleted]
- epgui 3y agoIn inflation-adjusted terms, it’s not that exciting: so do other fixed assets that aren’t you lending a random bank cash, such as US/Canada treasurys / government bonds. The point is that these other instruments don’t have the same risks as lending large amounts of cash to a bank, or even just holding large amounts of cash under your proverbial mattress. If you’re chasing returns, you’ll need to take risks (and you probably won’t be interested in a 5% savings account in this sort of inflationary environment).
- bradleyjg 3y agoIt reminds me of when cruise lines that flag their boats in places like Libera wanted a Covid handout from the US government.
- deleted 3y ago[deleted]
- NotYourLawyer 3y agoHoo boy did you miss the point of that’s happening here.
- seanmcdirmid 3y agoReminds me of Iceland being on the hook for all those savings from people in the UK looking for better interest rates. It almost bankrupted the country since the size of their banking industry was much larger than their internal economy needed. https://en.m.wikipedia.org/wiki/Icesave_dispute https://en.m.wikipedia.org/wiki/Icesave_dispute
- award_ 3y agoWe don't want to incentivize people to dodge taxes while thinking they'll enjoy all the protections paid for by taxes. This exactly. Either the deposits were insured or they weren't (as it seems in this case). Can't have it both ways, having cake and eating it too.
- nickff 3y agoWhat "protections paid for by taxes" are you talking about? FDIC isn't paid for by taxes.
- lowbloodsugar 3y agoUS banks are regulated by the US government. One part of that regulation is that they must pay into a government body called the FDIC. Most people would say that if the government adds to your cost of doing business by forcing you to pay money proportional to some amount of money you collect or spend, then that's taxes. Ultimately, the FDIC is backed by "the full faith and credit of the United States government", which means if push comes to shove, it's backed by taxes. Regardless of whether it really is taxes or not, it is an extra cost of doing business that the Cayman islands do not have, and therefore do not pass on to their customers. So reasonably, if one puts money in the Cayman Islands one is enjoying the benefits of looser regulation, i.e. lower costs. You can't then complain when that looser regulation includes not enforcing deposit insurance and you lose all your money.
- jmyeet 3y ago100% this. Here's the lesson I want people to take away from this: only when the government gives money to ordinary people is it somehow a moral hazard. The wealthy will never say no to government money. Worse, they will expect it and lobby for it. It's why student loan forgiveness is somehow a moral hazard but forgiving PPP loans isn't. So here you have a bunch of rich people who wanted to avoid paying any US taxes and being outside the protections the US financial system offers. And they may well get burned. It won't stop puff pieces like this from the WSJ to somehow paint the problems of a Cayman Islands hedge fund manager being a slippery slope to the government seizing Iowa farms. Sucks to suck.
- yieldcrv 3y agothats not what happened its actually a bad take due to the inaccuracies it relies upon, I wrote the other view in a sister comment
- soderfoo 3y agoWholly agree. One thing I do not miss about about the US is the erosion of empathy among the common folks, while the elite and ruling class rob the country.
- cactusplant7374 3y agoWill we get the names of those rich people?
- jiveturkey 3y ago> burying the lead (lede, not lead) Not at all. The article gets right into it, immediately. It's not a surprise ending or afterthought. Sure the headline is slightly clickbait (but just slightly). The article reads just like you've summarized.
- yieldcrv 3y agommmm not quite > SVB Cayman Islands … which had deposits from the bank’s clients in China, Singapore and other parts of Asia, including venture-capital and private-equity firms A) non-Americans should never bank directly in the US given the option of the Cayman Islands because the US not a competitive jurisdiction in comparison to more competitive jurisdictions such as the Caymen Islands, its way more than just the tax rate. It requires complete indoctrination and hubris to assume the US is the most right and claims to the title to all capital. In this case, the US has onerous requirements levied on non-US persons in an effort to create a “tax person” that had no reason to be created, but its not about avoiding that status because there may be no tax event regardless, it’s about the mountain of paperwork. Its not based on an intention of Congress its just fallout from a nebulous regulatory environment. B) The FDIC placed this subsidiary into receivership and made them unsecured creditors. In order to harbor your opinion, the FDIC most likely shouldnt have done that. It doesnt pay into FDIC insurance so FDIC shouldnt have taken it over. So its more like the US took funds it shouldnt have and the investors/depositors were correct to rely on the advances of the Cayman Islands but the US, once again due to nebulous regulatory quirks, chose to seize the parent organization and everything under it in a hurried mess, which maybe a more developed nation could do better. C) The FDIC did pick winners in coordination with the Treasury and Federal Reserve, which undermines your stance on the people you denigrate under poor assumptions. There was actually no way to make everyone whole immediately, without the credit facility from the Federal Reserve to give a 100% LTV loan on treasuries, marked UP to a price nobody would pay on the market. If any VC and PE funds were US based General Partners, then I would mostly agree with you, partially because even their offshore feeders can bank directly in the US. But the FDIC also probably should have just ignored that subsidiary either way, or not called them unsecured creditors.
- HWR_14 3y ago> A) non-Americans should never bank directly in the US given the option of the Cayman Islands because the US not a competitive jurisdiction It's pretty competitive when your couterparty goes bankrupt. If you opt out of US protections, congrats, you've opted out of US protections.
- 3y ago
- DelaneyM 3y agoAs a Caymanian I’m doing to take exception to your non-sequitur about Cayman being a “well-known tax haven”. Cayman is one of the most financially transparent, if not _the_ most financially transparent, location in the world. We fully comply with FATCA, CRS, and AEOI, to the extent that it takes even a native Caymanian multiple weeks to open a local bank account. The reason most foreign investors use Caymanian intermediaries is actually just that transparency, particularly when they’re being scrutinized by foreign regulatory bodies and don’t want their money to disappear into a Delaware numbered company. It is very, very hard to use Cayman to hide money from taxes. It is, however, a particularly easy place to keep global funds in a law abiding and transparent way. This is our whole regulatory strategy for continued national growth and prosperity. I don’t challenge your conclusion that FDIC protection shouldn’t apply to non-regulated funds. Just don’t trash Cayman. If your country allows tax shenanigans that’s on your government and has nothing to do with us. Cayman will not aid or abet any tax evasion, and does not deserve the snide aside.
- deleted 3y ago[deleted]
- paulddraper 3y agoI don't know what to tell you; the Cayman Islands for years has been ranked top of the list of tax havens and money laundering locations for years and years. Those are just facts. https://www.republicworld.com/world-news/rest-of-the-world-news/cayman-islands-is-a-prominent-centre-for-financial-secrecy-study.html https://www.republicworld.com/world-news/rest-of-the-world-n...
- fakedang 3y agoYou both are right though. Cayman Islands is actually a trusted jurisdiction for parking cash for companies, part of the reason why a lot of hedge funds are based out of it. Same for BVI, the Channel Islands, etc. Those are jurisdictions enabled by US' own laws to park American money - they fully comply with American rules and if the rich are allowed to park their money, it's because US Law lets them to do so. Now if someone or some corporation's hiding money in Dubai, Cyprus or Liechtenstein or one of those dozens of other dodgy tax havens, then you can bet your ass there's something shady behind the scenes. My neighbor for a while in Dubai was a wanted criminal in the UK.
- s1artibartfast 3y agoI think it's actually more nuanced than you're making out to be. If a customer has both a bank loan and a bank account, I think it is reasonable that the customer received some of the proceeds when their loan is sold off.
- greenthrow 3y agoThat is not how it ever works. When my mortgage was sold by the original bank I didn't get anything.
- s1artibartfast 3y agoDid your bank also go bankrupt and zero out your account? Because that's what's going on here. It is a question of which debts a bank pays before its assets can be sold off to another bank. In this case, I think it is reasonable that a bank use the assets it has to pay back depositors, before those assets can be sold to someone else.
- imustbeevil 3y agoIf your bank sells your mortgage to another bank, the second bank now owns that debt. If the first bank goes out of business, you very obviously (separately from the previous transaction) lose any money that isn't insured. I'm not sure what else you would expect to happen.
- s1artibartfast 3y agoyes, and I am saying the first bank should have to use the assets it has tied to you to pay off the debt it has to you, before it can sell them in bankruptcy to bank #2.
- imustbeevil 3y agoAnd we're saying that's not how that works. When the FDIC takes over the bank, they pay out all of the insured deposits, sell all of the assets, and distribute the remaining funds, which in cases like this one are not enough to cover uninsured deposits. https://www.fdic.gov/consumers/banking/facts/priority.html https://www.fdic.gov/consumers/banking/facts/priority.html https://www.fdic.gov/resources/deposit-insurance/faq/ https://www.fdic.gov/resources/deposit-insurance/faq/
- notyograndma 3y agoCayman isn't really a tax dodge. I've structured a few hedge funds in the Cayman Islands, and FATCA/CRS regime to which it strictly adheres prevents it from being one. Companies set up foreign financial entities in Cayman Islands because it's a tightly regulated financial center with well known laws, and because foreign investors want it because it's perceived (particularly by Chinese investors) as a safe haven. If those investors invested directly through US entities, they still would not be taxed. What's also likelier here is that they were trying to avoid the US banking system so that funds could not be seized (so much for that). I can't see the article since it's paywalled, but the bank would have required that a certain amount of funds remain on deposit for the borrower to get the terms. I've seen and facilitated an SVB loan agreement for a startup, and I can tell you that's exactly what it says. So the bank required you to park your money there, and then it lost the funds. In any normal business context, the money lost would come off of the balance owed. It sounds like the loan was received from one entity, but the deposits were placed with another, and none of the parties contemplated a bank collapse that would require the bank to forfeit a portion of the owed amount.
- hughesjj 3y agoLol I call [bullshit](https://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp#:~:text=Key%20Takeaways,and%20are%20considered%20tax%20neutral https://www.investopedia.com/ask/answers/100215/why-cayman-i....) Not surprised the person "who has structured several hedge funds" is spreading misinformation about finances and taxes.
- Seanambers 3y agoYeah, it was the same when FTX went belly up. Crypto bros trying to use the U.S legal system(which they want to replace) in order to get their money back. It's all fun and games until someone has to pay.
- refurb 3y agoI get your point, but think of it this way - if you kept your money in a bank without deposit insurance, while also borrowing money from said bank, and then the bank went under, sure your money is gone, but is it fair for the bank to say "hey we lost your money, but we still expect you to pay us back the money you borrowed". That doesn't seem fair to me.
- deleted 3y ago[deleted]
- mdasen 3y agoMaybe I can put it in a way that will seem fair (or at least necessary for banking to function; or at least the closest approximation of fairness). Let's say that you deposit money with me and I tell you "if my house burns down, you won't get the money I'm holding in the house back." You agree. I lend you money and you say, "if my business fails, I won't repay the loan." I agree. My house burns down, but your business is doing fine. According to the terms that we both agreed to, you still need to pay me back the loan. Let's say that you deposit the money with me and we say that if my house burns down, you don't have to pay back any loans to me. I refuse to lend you money because of that clause. You borrow money from Frank, my house burns down, and you're back in the same position. Should people who had deposits wiped out, but had borrowed from other companies receive debt forgiveness? Should Frank be required to forgive your debt even though he had nothing to do with the failure of my bank? If it worked the way you propose, banks would never lend money to people whose deposits they held (unless those deposits were externally insured). You'd deposit at SVB and have to get loans from another bank since SVB wouldn't lend to you as a depositor-customer. When you take on a debt, you're saying you can pay that debt even with all the risks that exist in the world (including the risk that uninsured deposits might disappear). You're agreeing that if you can't pay the debt, that's your fault. We have processes like bankruptcy when people and companies can't pay their debts. I think I'd update your quote to be "hey we went bankrupt so we don't have your money, but we still expect you to pay us back unless you're willing to declare bankruptcy yourself." I think that's a key change and highlights what they don't want to do. These VCs, private equity, and wealthy elites don't want to declare bankruptcy. They looked at the risks, accepted the risks, and now they're annoyed that the risks went against them. Most likely, they can all pay back those loans. They just don't want to since they took a big loss on their uninsured accounts. Companies don't declare bankruptcy and wipe out their owners for fun. SVB's shareholders lost everything, over $40B. This isn't a fun technicality where the bank gets a happy ending on the backs of its depositors. I'd also note that these depositors may not have lost their money. They're simply unsecured creditors. If the bank's assets can cover their deposits, they'll eventually get their money back (or a portion of it). I think the key thing is that the act of taking the loan must be treated independently of the act of depositing money. When taking the loan, one must assess the risk involved. With an FDIC insured account, you can be pretty assured that you can repay the loan based on deposited funds. With an uninsured account, you know you are taking the risk that the deposited funds might not be there. That makes it seem fair to me. The alternative is that banks simply wouldn't lend money to their depositors since they'd have more rights on the loans of non-depositors. It's fair, to me, because taking out a loan means accepting the risk that you might lose your job, your deposits might change within the regulatory framework on those accounts, etc. They accepted the risk that their deposits wouldn't be around to pay the loan - just as they would have if they'd taken the loan from HSBC while depositing at SVB. The decision to accept the risk of uninsured deposit account was the depositor's choice. Now the bank also accepted the risk that the borrower might default and declare bankruptcy just as the depositor accepted the risk that the bank might go under and their deposit would be lost. Then the issue becomes that the borrowers don't want to declare bankruptcy having accepted all the risks involved. They'd rather whine that they don't like how the risks they took turned out and hope someone else will cover the cost of those risks for them. But it's also somewhat essential to the banking system. Let's say I run a bank and there's no deposit insurance for 2 people. Bob has deposited $500 and has a loan for $10,000. Susan has deposited $10,000 and has a loan for $500. Someone tries to withdraw and I have a bank run and everyone's accounts are wiped out - pending the unwinding of the bank's loans. If we just said "ok, all the deposits are wiped out, but we'll wipe out the loans too," then Bob gains $9,500 while Susan loses $9,500. That's certainly not fair. Let's say that the unwinding process can only get people back to 90% because the loans won't cover all the deposits. It's still a lot closer to fair for Bob to repay $9,500 and get $450 in deposits (losing $50) and Susan repays $500 and gets $9,000 in deposits. That's a lot more fair than simply telling Susan that she should have borrowed and giving Bob a big pay day. In a sense, you're right that it isn't fair. However, it's probably the closest approximation of fairness. What would be fair is being able to wind back time and re-do things so that SVB didn't do the things that led to its collapse. However, when you find yourself in a situation where you owe more than exists, you only get to approximate fairness. There is no truly fair outcome. The fair outcome is that they'd have all their deposits back. The approximation is that they'll get their deposits back based on how much is actually left to give them. Simply wiping out their loans would mean redistributing wealth randomly from depositors to borrowers - a vastly less fair outcome. Letting someone who deposited $5 and borrowed $5M out of their debt would be unfair to someone who deposited $5M and borrowed nothing. If they don't have to repay the loans, it changes the funds available to repay the depositors and that would be unfair to those who deposited more than they borrowed. Again, bankruptcy is never quite "fair". Maybe bankruptcy should be thought of as trying to find the best approximation of fairness given an unfair situation.
- motohagiography 3y agoThis view of asset custody is uninformed, and it's designed to reinforce an ignorant worldview that would qualify as hate speech against any other group. The reason these jurisdictions exist is because when you have pension funds that need to pay their members over a long horizon, you need to hold the assets in a place with a legal framework that has the incentives and protections to be able to make those payment guarantees. Sovereign wealth funds also need management, and you can't leave the money where some regime is going to loot the treasury to keep themselves in power instead of supporting the conditions that return growth. If your understanding of money is something that you just debase yourself and accumulate resentments for, and then compensate for it by indulging in small acts of malice and deprivation, consider what you are putting out into the world before you complain about what you (or "the people") are getting back.
- nradov 3y agoPerhaps I'm missing something here but if depositors were exposed to uninsured risk then why didn't they just purchase credit default swaps on SVB? Surely such people understand the basics of hedging?
- voytec 3y ago> The title of the article makes it sound like some poor SVB "customers" are in a bad situation. The truth is that it's going to be venture capital, private equity, and some really wealthy individuals I wonder if this is the case for YC[1] companies. [1] https://www.ycombinator.com/blog/urgent-sign-the-petition-now-thousands-of-startups-and-hundreds-of-thousands-of-startup-jobs-are-at-risk https://www.ycombinator.com/blog/urgent-sign-the-petition-no... [1] https://news.ycombinator.com/item?id=35114009 https://news.ycombinator.com/item?id=35114009 [flagged]