6 ms·

> If banks need to take losses, so be it. Then the government is bailing out with FDIC, plus the economy explodes. It's not as sexy as it sounds.

Spivak 3y ago
> Then the government is bailing out with FDIC. At least then it's bailing about depositors.
deleted 3y ago
[deleted]
toomuchtodo 3y ago
It’s not supposed to be sexy. It’s avoiding moral hazard. Eventually, you have to let poor risk management fail.
- generic92034 3y ago
  Beware the domino effect, though.
  - toomuchtodo 3y ago
    Edit: What AnimalMuppet said. FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
    - andersa 3y ago
      > you should fix that how do you fix it?
      - toomuchtodo 3y ago
        As an individual, spread deposits across accounts or institutions to stay within limits [1]. There are account products that will sweep your deposits across other institutions in order to ensure full coverage. Fidelity's cash management account will cover up to $5M using sweeps [2], for example. Mercury has a similar product for business accounts [3]. If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here. [1] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/ https://www.fdic.gov/resources/deposit-insurance/brochures/i... [2] https://www.fidelity.com/why-fidelity/safeguarding-your-accounts https://www.fidelity.com/why-fidelity/safeguarding-your-acco... [3] https://mercury.com/vault https://mercury.com/vault (previous comment on the topic during SVB failure: https://news.ycombinator.com/item?id=35171289 https://news.ycombinator.com/item?id=35171289)
        initplus 3y ago
        Splitting assets between banks doesn’t change the insurance income collected by FDIC, and nor does it change the overall risk profile for FDIC - its artificial structuring behaviour. It’s a minimum, not a cap.
        toomuchtodo 3y ago
        Again, as my comment [1] mentioned, there are no hard limits. For FDIC to fail, the US government and it's largest member banks (including those considered globally systemic) would have to fail. There will be losses, but there will be no systemic failure. Properly titling and distributing deposits ensures you've met your obligation to meet deposit insurance requirements (although it might not matter such that happened with SVB depositors). You cannot control the regulatory mechanisms, but you can take somewhat straightforward, prudent measures to keep the paperwork you'll have to do and any interruptions to your finances to a minimum. If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms. [1] https://news.ycombinator.com/item?id=39441532 https://news.ycombinator.com/item?id=39441532
    - lr4444lr 3y ago
      And how are credit-worthy people supposed to take out loans going forward for basic things like mortgages and credit cards, when there aren't enough bank deposits left to allow said banks to make loans? They're just supposed to wait until enough entrepreneurial financiers set up these institutions?
      - 15457345234 3y ago
        The problem is too many loans. Loans make it too easy to do things so there's always more pressure to lend. Eventually you get to a stage where loans are secured with loans (today's issue) because of greed and it becomes impossible to ever call in loans because it causes cascading failure. When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
      - salawat 3y ago
        https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
- ToucanLoucan 3y ago
  It's not poor risk management. The banks (correctly) have identified that the government cannot, without massive backlash both political and economic in nature, permit them to fail in the way they should. They are some of the largest trees in the financial forest, and even if they are rotten to the core, they're incredibly big trees and as one of them falls, it will shred it's neighbors.
- AnimalMuppet 3y ago
  Fire the management. Destroy the stockholders. Protect the depositors.
  - JumpCrisscross 3y ago
    > Fire the management. Destroy the stockholders. Protect the depositors. TL; DR What we did in March 2023.
    - AnimalMuppet 3y ago
      That took me a minute. Silicon Valley Bank, I presume? I don't recall the details, but yes, there are historic examples of this being done well.
      - JumpCrisscross 3y ago
        > took me a minute. Silicon Valley Bank, I presume First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later. [1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
        FireBeyond 3y ago
        > Resolved so smoothly we don’t even talk about it less than a year later. Except now with the banks understanding that FDIC will make depositors whole, above and beyond the $250K limits. The only thing this does is increase banks comfort with risk.
        AnimalMuppet 3y ago
        Not if the managers got fired. Not if the stockholders got wiped out. The stockholders care more about the stockholders than they do about the depositors. This is also true for most of the managers, maybe all of them.
- oldpersonintx 3y ago
  [dead]
pooper 3y ago
> Then the government is bailing out with FDIC, plus the economy explodes. FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.
- onlyrealcuzzo 3y ago
  > This is what we should have done with Silicon Valley Bank. SVB deposits were businesses. You're ensuring every regional bank collapses and all businesses bank with Chase if you let SVB fail and don't bail out the depositors. Maybe that's what you want. It's not what the government wanted. So they bailed out SVB.
  - bigtunacan 3y ago
    I don't want businesses to fail because their bank took undue risk, but the reality is that sufficiently large businesses should have their money spread around multiple banks to reduce the risk to the business.
    - mywittyname 3y ago
      > I don't want businesses to fail because their bank took undue risk, SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market. Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
      - mrguyorama 3y ago
        >SVB didn't even take undue risk. Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert. You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid. >but what SVB was doing wasn't irresponsible with the knowledge they had at the time. If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.
marcosdumay 3y ago
Hum, or the government takes the worthless banks for free, make good on their obligations, and sell them later to the highest bidder.
- onlyrealcuzzo 3y ago
  > Hum, or the government takes the worthless banks for free, make good on their obligations, So bail out the customers / depositors and wipe out the equity investors? That's what they did with SVB...

Spivak 3y ago

> Then the government is bailing out with FDIC. At least then it's bailing about depositors.

deleted 3y ago

[deleted]

toomuchtodo 3y ago

It’s not supposed to be sexy. It’s avoiding moral hazard. Eventually, you have to let poor risk management fail.

generic92034 3y ago
Beware the domino effect, though.
- toomuchtodo 3y ago
  Edit: What AnimalMuppet said. FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
  - andersa 3y ago
    > you should fix that how do you fix it?
    - toomuchtodo 3y ago
      As an individual, spread deposits across accounts or institutions to stay within limits [1]. There are account products that will sweep your deposits across other institutions in order to ensure full coverage. Fidelity's cash management account will cover up to $5M using sweeps [2], for example. Mercury has a similar product for business accounts [3]. If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here. [1] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/ https://www.fdic.gov/resources/deposit-insurance/brochures/i... [2] https://www.fidelity.com/why-fidelity/safeguarding-your-accounts https://www.fidelity.com/why-fidelity/safeguarding-your-acco... [3] https://mercury.com/vault https://mercury.com/vault (previous comment on the topic during SVB failure: https://news.ycombinator.com/item?id=35171289 https://news.ycombinator.com/item?id=35171289)
      - initplus 3y ago
        Splitting assets between banks doesn’t change the insurance income collected by FDIC, and nor does it change the overall risk profile for FDIC - its artificial structuring behaviour. It’s a minimum, not a cap.
        toomuchtodo 3y ago
        Again, as my comment [1] mentioned, there are no hard limits. For FDIC to fail, the US government and it's largest member banks (including those considered globally systemic) would have to fail. There will be losses, but there will be no systemic failure. Properly titling and distributing deposits ensures you've met your obligation to meet deposit insurance requirements (although it might not matter such that happened with SVB depositors). You cannot control the regulatory mechanisms, but you can take somewhat straightforward, prudent measures to keep the paperwork you'll have to do and any interruptions to your finances to a minimum. If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms. [1] https://news.ycombinator.com/item?id=39441532 https://news.ycombinator.com/item?id=39441532
  - lr4444lr 3y ago
    And how are credit-worthy people supposed to take out loans going forward for basic things like mortgages and credit cards, when there aren't enough bank deposits left to allow said banks to make loans? They're just supposed to wait until enough entrepreneurial financiers set up these institutions?
    - 15457345234 3y ago
      The problem is too many loans. Loans make it too easy to do things so there's always more pressure to lend. Eventually you get to a stage where loans are secured with loans (today's issue) because of greed and it becomes impossible to ever call in loans because it causes cascading failure. When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
    - salawat 3y ago
      https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
ToucanLoucan 3y ago
It's not poor risk management. The banks (correctly) have identified that the government cannot, without massive backlash both political and economic in nature, permit them to fail in the way they should. They are some of the largest trees in the financial forest, and even if they are rotten to the core, they're incredibly big trees and as one of them falls, it will shred it's neighbors.
AnimalMuppet 3y ago
Fire the management. Destroy the stockholders. Protect the depositors.
- JumpCrisscross 3y ago
  > Fire the management. Destroy the stockholders. Protect the depositors. TL; DR What we did in March 2023.
  - AnimalMuppet 3y ago
    That took me a minute. Silicon Valley Bank, I presume? I don't recall the details, but yes, there are historic examples of this being done well.
    - JumpCrisscross 3y ago
      > took me a minute. Silicon Valley Bank, I presume First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later. [1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
      - FireBeyond 3y ago
        > Resolved so smoothly we don’t even talk about it less than a year later. Except now with the banks understanding that FDIC will make depositors whole, above and beyond the $250K limits. The only thing this does is increase banks comfort with risk.
        AnimalMuppet 3y ago
        Not if the managers got fired. Not if the stockholders got wiped out. The stockholders care more about the stockholders than they do about the depositors. This is also true for most of the managers, maybe all of them.
oldpersonintx 3y ago
[dead]

pooper 3y ago

> Then the government is bailing out with FDIC, plus the economy explodes. FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.

onlyrealcuzzo 3y ago
> This is what we should have done with Silicon Valley Bank. SVB deposits were businesses. You're ensuring every regional bank collapses and all businesses bank with Chase if you let SVB fail and don't bail out the depositors. Maybe that's what you want. It's not what the government wanted. So they bailed out SVB.
- bigtunacan 3y ago
  I don't want businesses to fail because their bank took undue risk, but the reality is that sufficiently large businesses should have their money spread around multiple banks to reduce the risk to the business.
  - mywittyname 3y ago
    > I don't want businesses to fail because their bank took undue risk, SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market. Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
    - mrguyorama 3y ago
      >SVB didn't even take undue risk. Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert. You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid. >but what SVB was doing wasn't irresponsible with the knowledge they had at the time. If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.

marcosdumay 3y ago

Hum, or the government takes the worthless banks for free, make good on their obligations, and sell them later to the highest bidder.

onlyrealcuzzo 3y ago
> Hum, or the government takes the worthless banks for free, make good on their obligations, So bail out the customers / depositors and wipe out the equity investors? That's what they did with SVB...