Silicon Valley Bank Too Big to Fail?
Here we go again.
AP (“Can the chaos from Silicon Valley Bank’s fall be contained?”):
Can Washington come to the rescue of the depositors of failed Silicon Valley Bank? Is it even politically possible?
That was one of the growing questions in Washington Sunday as policymakers tried to figure out whether the U.S. government — and its taxpayers — should bail out a failed bank that largely served Silicon Valley, with all its wealth and power.
Prominent Silicon Valley personalities and executives have been hitting the giant red “PANIC” button, saying that if Washington does not come to the rescue of Silicon Valley bank’s depositors, more bank runs are likely.
“The gov’t has about 48 hours to fix a soon-to-be-irreversible mistake,” Bill Ackman, a prominent Wall Street investor, wrote on Twitter. Ackman has said he does not have any deposits with Silicon Valley Bank but is invested in companies that do.
Some other Silicon Valley personalities have been even more bombastic.
“On Monday 100,000 Americans will be lined up at their regional bank demanding their money — most will not get it,” Jason Calacanis wrote on Twitter. Calacanis, a tech investor, has been close with Elon Musk, who recently took over the social media network.
Silicon Valley Bank failed on Friday, as fearful depositors withdrew billions of dollars from the bank in a matter of hours, forcing U.S. banking regulators to urgently close the bank in the middle of the workday to stop the bank run. It’s the second-largest bank failure in history, behind the collapse of Washington Mutual at the height of the 2008 financial crisis.
Silicon Valley Bank was a unique creature in the banking world. The 16th-largest bank in the country largely served technology startup companies, venture capital firms, and well-paid technology workers, as its name implies. Because of this, the vast majority of the deposits at Silicon Valley Bank were in business accounts with balances significantly above the insured $250,000 limit.
Its failure has caused more than $150 billion in deposits to be now locked up in receivership, which means startups and other businesses may not be able to get to their money for a long time.
Staff at the Federal Deposit Insurance Corporation — the agency that insures bank deposits under $250,000 — have worked through the weekend looking for a potential buyer for the assets of the failed bank. There have been multiple bidders for assets, but as of Sunday morning, the bank’s corpse remained in the custody of the U.S. government.
Despite the panic from Silicon Valley, there are no signs that the bank’s failure could lead to a 2008-like crisis. The nation’s banking system is healthy, holds more capital than it has ever held in its history, and has undergone multiple stress tests that shows the overall system could withstand even a substantial economic recession.
Further, it appears that Silicon Valley Bank’s failure appears to be a unique situation where the bank’s executives made poor business decisions by buying bonds just as the Federal Reserve was about to raise interest rates, and the bank was singularly exposed to one particular industry that has seen a severe contraction in the past year.
[…]
While highly unusual, it was clear that a bank failure this size was causing worries. Treasury Secretary Janet Yellen as well as the White House, has been “watching closely” the developments; the governor of California has spoken to President Biden; and bills have now been proposed in Congress to up the FDIC insurance limit to temporarily protect depositors.
“I’ve been working all weekend with our banking regulators to design appropriate policies to address this situation,” Yellen said on “Face the Nation” on Sunday.
But Yellen made it clear in her interview that if Silicon Valley is expecting Washington to come to its rescue, it is mistaken. Asked whether a bailout was on the table, Yellen said, “We’re not going to do that again.”
“But we are concerned about depositors, and we’re focused on trying to meet their needs,” she added.
Sen. Mark Warner, D-Virginia, said on ABC’s “This Week” that it would be a “moral hazard” to potentially bail out Silicon Valley’s uninsured depositors. Moral hazard was a term used often during the 2008 financial crisis for why Washington shouldn’t have bailed out Lehman Brothers.
The growing panic narrative among tech industry insiders is many businesses who stored their operating cash at Silicon Valley Bank will be unable to make payroll or pay office expenses in the coming days or weeks of those uninsured deposits are not released. However, the FDIC has said it plans to pay an unspecified “advanced dividend” — i.e. a portion of the uninsured deposits — to depositors this week and said more advances will be paid as assets are sold.
The “moral hazard” argument doesn’t make much sense here. Are individual depositors —or, at least those with large deposits—supposed to closely monitor the investment strategies of other bank’s management team? Was SVB giving out returns on investment that were wildly out of whack, signaling that investors were taking a higher risk? If not, then it only makes sense to apply moral hazard to the bank’s ownership, not its customers.
Which seems to be how regulators are leaning. A Joint Statement by Treasury, Federal Reserve, and FDIC was released yesterday evening, signed by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenber.
Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.
NBC News (“Is Silicon Valley Bank getting a government bailout? Not in the 2008 sense.”):
Funding for the emergency measures will also come from selling off SVB’s assets, said Morgan Ricks, a banking professor at Vanderbilt Law School. As a result, he said, taxpayer dollars will not be directly implicated in the backstop measure.
That is a key difference from the congressionally approved bailout of the U.S. financial system authorities approved in the fall of 2008. That legislation, called the Emergency Economic Stabilization Act, earmarked $700 billion to create the Troubled Asset Relief Program to purchase toxic assets from banks.
By designating their backstop measures as a “systemic risk exception” event, Washington regulators sidestepped a vote that would otherwise be required from Congress on whether to backstop the banks’ depositors.
The “exception” designation required the approval of two-thirds of the Federal Reserve Board of Governors, two-thirds of the board of the FDIC and the Treasury Department in consultation with the president, Ricks said.
Offhand, this strikes me as a reasonable approach. The managers responsible for the failure have been fired. Whether they will be subject to other sanctions—or whether they’re even appropriate—is beyond my knowledge. Those who invested in the bank hoping to make money will, appropriately, lose money on their bad investment. Depositors will be made whole, with the costs of that possibly being spread out to customers of other banks.
The only thing close to a moral hazard situation here is the protection of assets over the ostensible $250,000 limit. But I really don’t see it. That’s just not a lot of cash on hand for a big business and it strikes me as absurd to expect even individual customers who have that much in non-investment accounts to spread it along multiple banks just in case one of them goes down.
The Washington Post had some examples of big depositors.
Roku
Circle
snip
Several others at the link.
https://www.washingtonpost.com/business/2023/03/11/silicon-valley-bank-companies-affected/
Note that some stock index funds may be shareholders, so some 401k’s etc. may take a small hit. But the numbers involved are tiny even compared to IIRC $19 Trillion in bank deposits in the country.
There are some serious questions about the role of large VC players arranging loans for companies whose terms required all their deposits to be at SVB.
And those same VC’s having personal accounts at SVB, which came with considerable perks.
Deposit schemes known as insured cash sweeps, breaking up deposits over 250k limit into smaller insured parts, up to ceiling of $150m, appear to be widespread deposit risk mitigation approach.
It seems that few (possibly none) of SVB’s clients used this mechanism.
And Roku parking nigh on $500m in one bank was utter stupidity.
Also 2018 legislation, which SVB and its VC clients lobbied for, lifted the asset level for closer regulation of banks to $250b from former $50b.
Oops.
It was probably necessary to protect the the corporate deposits. And the bank assets should be realisable, to cover most of the amounts. But making the VC personal deposits whole seems bit ripe.
Note that Peter Thiel reportedly got his money out early, along with a few others he tipped off. Which may have helped the run get going, although it probably would have happened anyway.
@JohnSF:
Really? With 1.9 Billion to spread around? I don’t think so.
As I noted previously on this here blog, regulations don’t come out of nowhere, they are almost always in response to something bad happening.
I am really, really tired of the whining that goes on about regulations when stuff like this happens within a decade or so of prior problems. Expect more regulation, and for those who don’t like it, thank SVB.
@charon:
It was if said bank was specifically one that was NOT subject to higher grade stress tests.
And yet, despite all the receipts that @JohnSF provided about the bank’s risky practice, the Conservative Media Complex and the Intellectual Dark Web have already decided to… drum roll please… blame Black people. They are running the 2008 strategy again saying that the real reason the bank failed was…. *check notes*… due to DEI and wokeness.
Though, to be honest, the attempt is so half-hearted at the moment that I’m not sure they think anyone but the basiest of the base will buy it this time.
@Matt Bernius: I skim the FOX website most days to see what they’re presenting as news. I sometimes dip into comments. Their readers are buying it. Also ESG. And their female CEO.
But yet… the student loans forgiveness package was unacceptable because it isn’t “fair”.
Socialism for the rich, crushing capitalism for the rest.
Between this and the and the pending announcement of oil drilling on sensitive public lands in the arctic, this is not a good week for we the people.
I’ll add to my comment on FOX @gVOR08: that I looked last night to see how they were reporting on SVB. By the time I went to bed NYT and WAPO had prominent stories, FOX had nothing. They frequently lag considerably on breaking news. Whatever their process for spinning the news, apparently it takes time.
It’s been comical to read about the start-ups doing business with SVB. Just a bunch of etsy-aesthetic dumbass uselessness. As far as I can tell, the majority of start-ups are things aimed at weird people with money who can’t function in the real world. Smart dog collars, subscription services to help you organize work-life balance better, bespoke baby food, all sold to the type of person who believes 100% those articles about struggling to make it at 500K/year.
They should have let the entire bank fall, and everything connected to it. And then used the Senate to tear into the tech libertarians who started this bank run, just to rattle their cages and make them all sound as relatable as Elon Musk.
@Matt Bernius: @gVOR08:
Wow. Color me flabbergasted.
On the woeness issue the current risk officer has written that she support LGBTQ and considers herself an ally. However, she did start the job until this January. Before that they didnt have a risk officer for 9 months. The CEO is a male and he was on the board fo the SF Fed and lead the effort to have regional banks deregulated. SO what you see is a new risk officer who came in to late to do anything and an organization that didnt care enough about risk to have a risk officer for almost a year.
The other angle you will see there right trying to take is that the risk officer in charge of the banks European operations is gay, or something, and writes positively about gay/trans issues. However, its the European branch causing problems. So once again if a company has problems people on the right go searching to see if they have any of the wrong kind of employees so they can be blamed, even if they arent even in the same country where the problems are occurring.
Steve
@gVOR08:
ESG?
Peculiar, this rather happens to be my word, although not myself exposed to SVB.
@Matt Bernius: John’s comments are not SVB risky practices, they are clients risky practices. Not the same thing.
There are some potential rationales potentially for the specific deposit profiles depending if the depositors were also bank borrowing clients as SVB extended certain kinds of fixed rate lending based on revenue – they did not operate as a classic and plain vanilla Commercial Bank, and offered to the Start-up world various debt instruments that a classic Commercial Bank would never, ever offer such companies. Some of them may have used soft-collateralisation by providing advantageous borrowing rates against principal usage of the SVB for deposit side needs. I have faced such in VC world ex-USA for specialist banks. This is also a reason in m view that it could not quickly find a Commercial Bank buyer as it has a lending profile in both clients as well as lending instruments that is radically different than what Tier 1 commercial lenders under systematic regulation can get comfortable with. It needs a specialist buyer (if it is to continue as a specialist bank rather getting absorbed in and effectively ending its venture bank role), such as PE.
Notably however these instruments to date are not identified as the source of their problem – rather their (SVB) problem came from making a really eccentric and risky one-way inteest rate alignment bet in placing excess deposits (which they had hundreds of billions of during Covid period as massive inflows as VC money in Cali poured into a certain universe of Pandemic Tech bets) into long-term Treasuries, which was not an excellent choice for a specialist lender as it doubled down on a view on low rates on both sides of business.
The Financial Times has had, as one might expect given this is square in their sweet spot, useful review of SVB development to date.
Of course the bizarre Fox world blithering on about Woke or as I saw on a headline scroll, Climate is just Pravda-esque blithering on.
@charon: The call from Founders Fund to pull money out on Thursday almost certainy was the last straw for the bank run – although SVB should have started their capital raise before their March guidance when their deposit outflows were clearly in red alert. Rather than playing a J.P. Morgan role of course Theil & Co played a narrow and myopic role.
Useful FT
As virtual catnip for the Left and Centre readers: SVB shows that there are few libertarians in a financial foxhole: https://www.ft.com/content/ebba73d9-d319-4634-aa09-bbf09ee4a03b (FT opinion banging on the sheer hypocrisy of the tech titans…)
HSBC via Bank of England buys UK SVB: https://www.ft.com/content/216b193d-62b3-4e5e-8f67-e8eb3d96ebf1
Overview of SVB from Sunday: https://www.ft.com/content/b556badb-8e98-42fa-b88e-6e7e0ca758b8
US regional bank contagion risk: https://www.ft.com/content/7b3214e9-aa2e-4d3a-8724-fe71bb8dd006 – not from genuine shares risk but depositor panic
Unhedged analytical newsletter (favourite of mine)
SVB was only a little bit insolvent, luckily: https://www.ft.com/content/9ee5edda-a038-4992-863f-242bd69c8b79
SVB’s collapse is not a harbinger of another 2008: https://www.ft.com/content/0e1c671f-7998-4a55-a44e-edf07193616d
SVB is not a canary in the banking coal mine; All we have to fear is fear itself, and that’s plenty: https://www.ft.com/content/7cf4eb45-78b7-4e6e-b134-1f0b082ba203
@Modulo Myself: I would highly suggest that unless you actually have an idea of the real overall VSB portfolio, you not make observations about it. SVB was not merely stupid Apps Tech, their portfolio is heavily venture that includes life sciences etc.
Barely investment and financial literate journos playing “oh look at the dumb shit” with cherry picking for a narrative.
This is not to be read as a defence of California VC tech investment, which I actively dislike, but the broad SVB portofolio and role for collateral-light start-ups does not resolve down to just the HaHah gotchas of journos – not any more than the similar nonsense written about government action.
@Liberal Capitalist:
Can you expand on your analogy a bit because I don’t see it. In the first case, people are being asked to pay back loans they undertook and there is indeed a fairness issue in that those who already met their obligations not only don’t get the bailout but helped subsidize the bailout. In this case, those who deposited money in a bank are getting their money while those who managed the bank and those who invested in the bank are taking the hit.
OT query for James or Steven:
How many links can you put in a post without triggering the anti-spam software?
I have always limited to 2 outside links, but I suspect I am being too conservative.
@James Joyner: There is not a proper logical (versus emotional ideological) connexion.
The equity investors and certain classes of regulatory capital senior bond holders to SVB are getting wiped out.
@The Lounsbury:
Agreed that I should have also included the bond issue as the primary cause–though I have seen analysis that while the easing of regulations in 2018 would not necessarily have prevented this, it would have cushioned things. I’m curious about your take on that.
TY for the links to the FT!
Either way, it’s clear that for once wokeness wasn’t an issue.
@Matt Bernius: IIRC, “ESG”–Environmental and Social Governance.
@Modulo Myself:
As The Lounsbury said, there are many different kinds of startups who banked with SVB. My company created software that helps doctors prevent adverse effects on patients, improving patient outcomes and saving hospitals money.
I completely understand why people want to see the Peter Thiels of the world suffer a bit. I also get that a lot of startups are doing things that make no sense. My husband is a software engineer and some of the “we’re hiring” emails he gets are good for a lot of laughs when we see what those companies do (eggsbymail.com is a running joke comparison). But there are good ideas, maybe good ideas, things definitely worth trying also.
Aside from all that, if the FDIC doesn’t make depositors whole, what would that do to trust in banks? And if people don’t trust banks, what will that do to the financial system? And how long till that harms the company you work for?
Any way, my company is looking fairly secure, since they aren’t going to suffer for their moral hazard of choosing the wrong bank.
@The Lounsbury:
It may surprise you but my views on for-profit medicine/life sciences are not exactly positive. But I am also happily illiterate.
@Kari Q:
My experience with and views regarding the ‘helpful’ parts of the tech industry are–let’s say–ambivalent. As far as banking goes, the non-profit I manage has about 2 million cash in various accounts with Chase. (Who btw managed to somehow accept the same check deposited twice, once in August and then last month. Whoops!) I have zero trust in them but they are atop the pyramid scheme of this economy and if they go, we’re all screwed.
Elizabeth Warren has a “Guest Essay” in NYT today on SVB. Her thesis is that their failure is due to the 2018 rollback for “regional” banks of some requirements of Dodd-Frank. From what I read it’s not certain that those requirements would have prevented the failure. On the other hand, it wouldn’t have hurt and it might have shifted the odds.
In her column Warren links to a 2017 NYT article from Powell’s confirmation hearing for Fed Chair. With hindsight, it’s pretty scary.
Apparently the distance between Powell and the Trump administration on easing regulation for “regional” banks wasn’t really all that large.
Entertainingly, NYT inserted into this 2017 article links to several 2022 and 23 articles on inflation. Consistent with their normal stance as socially liberal (except for trans) and fiscally conservative, i.e. non-MAGA Republican.
@James Joyner:
Their money wasn’t insured so they knew the risks the same as an 18-year old kid who wants a college education.
For those saying the effective uncapping of FDIC can have no downside, I invite you to meditate upon the
possibilityprobabilityinevitability that right now some unpleasantly inventive financial wiz is pitching a scheme for a “bank” with utterly crazed risk levels financed by leveraged deposits. With the returns shared between depositors, and the equity treated as a throw-away.How can you lose?
@Matt Bernius: It seems likely but I am not familiar enough with the specifics of the 2018 waiver to have a direct opinion, having not been in bank regulation world for a while. But by the information I know, seems plausible.
@Kari Q: Notably the extension of backstopping and depositors appears justified on the largely innumerate greater public reaction, unable to process that SVB is/was a specialist lender and not extrapolatable to wider commercial banks, even regional (and of course the ideological knee-jerk attacks and fear mongering from fringes on Left and Right)
@Jen:
Yes, thank you. And I note @The Lounsbury: said
@gVOR08: The opinion piece is frankly worthless relative to any understanding, being political posturing and populist grandstanding, with no particularly useful insight as to SVB and actual regulation, populist factoids and red-meat on executive bonuses aside.
More usefully: FT Alphaville “A quick run through Silicon Valley Bank’s risk management snafus
Don’t do these things”
https://www.ft.com/content/63dc908c-d5cd-4b04-b51a-9a9ba3e38b31
“5. Risk management oversight
If you are a $250bn bank — well, almost $250bn, and I’ll get to that in a bit — you should have professional risk management. SVB had one, but only until April 2022. They hired a new one in January, too late to have helped them out of the mess.
6. A new lesson: the importance of the network.
Not part of the usual risk discussion, but SVB clients all had pretty much one degree of separation, sharing the same central nodes. To wit: Peter Thiel’s Founders Fund and other high-profile venture capital firms advised their companies to pull money from the bank. It’s like having all of your power lines on one master switch.
Bank runs always come down to crowd behaviour. For example, in It’s a Wonderful Life just one person, Jimmy Stewart’s George Bailey, turned the crowd around. Here, SVP was set up to have one person — maybe a few — wave the crowd on.”
This sort of info tells you something useful.
As does this: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/11/warning-signals-about-silicon-valley-bank-were-all-around-us/?sh=130842591e10
relative to stress testing (relevant unlike CEO bonuses, however much they are Lefty catnip)
“With a rise in assets comes more risk. What should have also caused eyebrows to raise was when risk weighted assets went up 13% at a time that asset size barely moved from 2021 to the end of 2022.”
and
“From a credit perspective, SVB’s loans and bonds were of a good credit quality; their data showed a low probability of default. The problem with SVB’s assets however was not credit, but rather market risk, specifically their sensitivity to interest rate risk. Since the mid-2000s, market participants have been talking about the likelihood that after over a decade of lower interest rates, the Federal Reserve would have to raise rates. That moment certainly arrived last year. And it is not the Federal Reserve that has been raising rates, so has practically every key central bank around the globe. What more of a signal does a bank need to conduct interest rate sensitivity analysis and stress tests on their bond holdings?”
The Forbes contributor has quite useful insight.
Here’s what I can say for certain:
1) I don’t understand all the issues and much less the intricacies involved. Therefore there’s not much to opine (not intelligently).
2) What happened is usually apparent. How and why it happened is usually not, So the intant explanation we’ve been given so far is most likely wrong or at the very least incomplete.
3) See 2) above. taking actions to ameliorate the situation is hard if the facts are not all in. Nevertheless, actions need to be taken now.
Bugger. Meant to add this qutoe:
Thanks to all those politicians and bank lobbyists who fought hard to lower risk management requirements for banks under $250 billion assets, SVB was not required to disclose how much it had in high quality liquid assets to help it cover net cash outflows in a period of stress. Part of the Basel III definition of stress certainly includes testing fleeing deposits. These regulatory changes were signed into law by President Trump in 2018 as part of the Economic Growth, Regulatory Relief and Consumer Protection Act, which eased requirements put in place in the aftermath of the 2008 Financial Crisis under Dodd-Frank and the Consumer Protection Act.
@gVOR08: ESG: Environmental, Social and Governance reporting.
KPMG wonderful little financial professionals reference site: https://frv.kpmg.us/all-topics/esg/esg-reference-library.html
I have wonderous multi-coloured dashboards of this. Hell the CFA Institute has references on it.
@Matt Bernius: relative to the technical subject matter, this lovely page is a primer to US banking regulatory capital:
https://www.sifma.org/resources/news/understanding-the-current-regulatory-capital-requirements-applicable-to-us-banks/
Which I have started reading out of curiousity on current rule set.
I would note, working in emerging markets, that there is a quite legitimat question posed on the Basel III tradeoffs and applying without size tailoring as these things have a real cost, a cost that results in either higher-borrowing costs or borrowing rationing – that is smaller, higher risk borrowers are excluded from borrowing. How good or bad that is … perhaps subjective and certain a trade off that probably is changing over time and perhaps does not have any single answer to. In any case, it does not come for free.
I am frequently reminded of J. K. Galbraith’s 1975 book https://www.amazon.com/Money-Whence-Came-Where-Went/dp/0691171661/ref=sr_1_1?crid=P4OD8WKQKO8&keywords=money%2C+from+whence+it+came&qid=1678722633&s=books&sprefix=money%2C+from+whence+it+came+%2Cstripbooks%2C109&sr=1-1&asin=0691171661&revisionId=&format=4&depth=1. It’s a popularized version of just that, the history of money. It’s worth a read if for no other reason than it’s hilarious. He tells a lot of anecdotes about banking. A favorite is a letter from a state bank examiner riding a circuit of back country banks. He said he could almost hear the jingle of specie as he rode. The state required a certain gold reserve. As he rode from bank to bank, a faster rider was carrying a bag of gold coins from his last bank to his next .
It’s a history of the tension between regulated prudence and the profits to be had from skirting those regulations. And as now, the banks have always had inordinate sway over their own regulation. When Alan Greenspan said, pre 2008, before a congressional committee, that modern banks could be trusted to manage their own risk, he should have been laughed out of the room.
For further entertainment value, from the FT again on the Enviro, Social & Governance,
Silicon Valley Bank shows why the ‘G’ in ESG matters Premium
https://www.ft.com/content/31af4574-a163-4d42-baee-ed286fa9e93a
“Like clockwork, the haters of environmental, social and governance (ESG) investing sought to pin Silicon Valley Bank’s problems on its ESG efforts. Writing in the Wall Street Journal, Vivek Ramaswamy argued the bank’s $5bn commitment to “sustainable finance and carbon neutral operations” was a reason for its collapse. […]
As investors ponder the dramas there is another lesson emerging: SVB shows why the “G” in ESG — governance — matters, given that the lack of it seems to have contributed to the failure.
Silicon Valley Bank did not seem to have had a chief risk officer for much of 2022, said Mike Puangmalai, author of the NonGaap newsletter, a tipsheet for corporate governance watchers.
The bank announced a new chief risk officer on January 3, but it quietly disclosed on March 3 that its previous chief risk officer stepped down in April 2022. This is likely to provoke scrutiny from Washington bank regulators. Additionally, chief executive Gregory Becker had a pretty well-timed stock sale last month. On February 27, Becker sold $3.6mn of the bank’s shares at $287 (its shares were halted on Friday at $106). Executives sell their company shares all the time, but Becker’s plan to sell was adopted on January 26 — just one month before the sale.”
@Modulo Myself: Boring Leftist knee-jerking combined with grandpa get off my lawnism are frankly boring – I suppose you have a dim view of private investment in RE innovation (also a huge area for SVB, the only reason I know them at all) and would prefer a state planning commission.
My opinion from 2008 remains unchanged. If something is too big to fail, it is too big to exist and should be preemptively broken up.
And never – EVER – trust any business lobbying for less regulation because they can be trusted.
@Lounsbury:
You mean like a Manhattan Project, but for renewables? Sounds terrible.
Just a reminder that in the two most recent Ultra-MAGA bugaboos…first the Palestine derailment and now the SVB failure…de-regulation played a role. (spoiler alert; in spite of Ultra-MAGA claims to the contrary, “woke” played no role in either)
Yeah, sure, de-regulation sounds awesome in the abstract. But like most things libertarian in nature, de-regulation doesn’t stand up to exposure to the real world.
@Modulo Myself: It does, particularly as the Manhattan project was grossly unsafe and for nuclear weapons, not nuclear power. War materials development models not being a particularly effective model for economically efficient civilian economies – see Soviet Union.
@Modulo Myself: One would hope that future tech titans and people running existing companies would have better understanding of economics and finance than an 18-year-old borrowing money for college, but that only makes your argument stronger.
@Lounsbury:
Yeah, nuclear power in America was developed by VC-funding and definitely not the government. Excellent point.
@James Joyner:
Absolutely.
1) The covid stimulus tended to focus on PPP loans for companies. Massive loan forgiveness that kept companies afloat. And while some companies kept their employees and companies open, there were massive instances where the companies took the money and still laid off massive amounts of employees. (airlines, etc). and that does not even take into account the massive fraud by various individuals that looked at this as “just free money” (ex: my representative Matt Gaetz receiving $482,321 in forgiven PPP).
2) If this can be done for companies, this could have been extended to students, where their loan forgiveness would have been targeted at $20K per individual. and let’s face it: people of lower income tend to spend windfall money. And that would have been a massive wave of spending nationwide. And isn’t that exactly the definition of a stimulus?
3) As one of the former poors, I could only afford college via grants and loans. and while it looked like a lot, the grants reduced a substantial amount, and the overall cost of higher education was much lower. Today, grant’s make up a far smaller portion of what a student can get and the cost of higher education has shyrocketed (my $10K / year in the 80’s is now well over $50K / year in 2018 https://www.forbes.com/advisor/student-loans/college-tuition-inflation/ ) I do in no way feel slighted or jealous that they get a break. But then again, I am not a “I got mine F you” mindset kind of person. I realize that civilization needs to be supported to progress. Clearly this doesn’t resonate with the MAGA folk, but that is what makes elections “interesting” now.
4) As one that IS a capitalist, I can tell you that I made a bad call earlier this year, and it cost me $100K. The possible reward would have been awesome, but it didn’t pan out. But even with that, I will be able to write off losses against profits… and that is the way that these things take care of the rich folk. But the point I’m making here is: Capitalism is inherently risky. HOWEVER: The company that I worked for laid me off. Boom. Gone. They filed Chapter 11, stocks evaporated, loans will be eliminated, they are still in business. Seriously, if that ain’t corporate socialism, then I’m a mallard duck.
5) Finally, SVB: people put their money into a financial institution that seemed to play a bit more loose and loved them some cryptocurrency. And as a result, returns paid by the bank were higher than elsewhere. If the FDIC covers you to $250K, then you damn well (as an individual make sure that your savings are less than $250K. (And that is why I have two credit union accounts.) But corporations that put 10’s or 100’s of millions into this one bank… that is on them. The rules exist. Their CFO should have earned their salary and done their job to protect the comany’s assets. BECAUSE THAT IS THEIR JOB.
6) And now, the government steps in. That horrible government that should be so small you could drown it in a bathtub… right? That socialistic wet-nurse government covering ALL the funds for EVERY company that had money there. Next week, the expectation will be that the government will cover all the future bank deposits no matter what, how much or the reason.
7) If you can bail out Roku for $145 million https://www.reuters.com/business/finance/global-firms-with-exposure-collapsed-svb-2023-03-13/ , then tell me how that is “fair”, and my niece, trying to start her own business, can’t get her $18K loan wiped out?
Don’t even talk to me about fair. America has never been about fair.
@daryl and his brother darryl:
Libertarianism only exists in the abstract. Wherever some clowns actually implement anything based on libertarian principles, the inevitable disaster is always hand waved away, with loud protestations that it wasn’t “real” libertarianism. (Actually, it is usually just ignored and deleted from libertarian collective memory.)
@Modulo Myself: So indeed you would prefer the statist approach that led to such great economic and development success for nuclear, whereas the private led, with positive enablement to be sure of government, technological development of wind and solar has been meagre, uneconomical and uncompetitive to hydrocarbons these past years.
Nothing like ideological reaction and blinkers to get one very good and effective policy.
@Just Another Ex-Republican: completely empty sloganeering may make for nice Populist politics, but is otherwise useless. SVB was not as an institution “too big to fail” but the fear of broad contagion (driven by an innumerate population unable to parse finance and Fox fear-mongering) hitting US community and regional banks was a point of intervention.
Or otherwise put, pragmatic centre Left regulation and simple good governance allowed for a pragmatic if Left side oriented intervention in the market – which of course will provoke as usual empty sloganeering from both fringes of the political specrtum.
@Liberal Capitalist: Crypto currency has fuck-all to do with SVB failure for God’s sake, utterly irrelevant to the bloody subject…
but why let data get in the way of good old ideological knee jerking and riding of pre-determined hobby horses around.
@Modulo Myself: And of course the Internet had nothing to do with the government, especially the defense department. The printout I have in my firebox of me engaging in a comment thread on something called ARPANET is from a parallel universe.
All kidding aside, I think Lounsbury makes a valid point: rapid advances of high risk technologies that are not critical infrastructure are better left to the private market rather than government oversight. The government should have no interest in whether another super-cool grocery app makes it to the market or not.
@James Joyner:
Ha. Getting “their” money? Hardly. Their money, deposited into SVB, was taken and mismanaged by SVB’s the risky financial practices, which went bankrupt with a negative balance sheet. Meaning everything deposited into SVB was spent and then some.
So “their money” is gone. Those deposits will be covered by other people’s money, which is a fairness issue.
Of course conservatives “don’t see” this — which will shock no one. Conservatives always magically go blind on “their money” vs ‘other people’s money’ when other people’s money is being given to the rich. The blinders only come off when the relatively poor are getting relatively little assistance, like working- and middle-class millennials struggling under student debt in economies hollowed out again and again by the selfishness, fiscal irresponsibility, and price gouging of Xers and Boomers.
@Lounsbury:
Well…
\
Source: https://mashable.com/article/silicon-valley-bank-failure-startups-cryptocurrency
Looks like that it’s possible that the good old nanny state will be ponying up $3.3 BILLION for some stablcoin crypto funding because of SVB.
Help me understand why we should do that?
@Liberal Capitalist:
Correction: Roku’s bailout would be nearly $500 Million. I was only off by $300 Million.
I should be a banker, eh?
@Lounsbury: A complete aside, but I saw recently, I think at Marginal Revolution, reference to an econ paper debunking the idea that productivity went up under our WWII war economy. Funny thing is I don’t recall anyone claiming that productivity went up, only production. Although there may be arguments that government investment and more “scientific” management improved productivity in some areas, or compared to earlier in the war.
And a further aside, but relevant to the Manhattan Project. I recently read How the War Was Won by one Phillips Payson O’Brien. His thesis is that WWII was a war of production and logistics. Actually a poorly written book, badly organized and as a result redundant and disjointed. But fascinating if you’re into such things. He starts with the claim there were no major battles in WWII. His point being that Second Alemein, Midway, Kursk, etc. each destroyed only tiny fractions of the participants war materiale. He also makes the claim that the war against Japan was won when we captured the Mariana Islands in July ’44. At that point we not only had B-29 bases within range of most of the Japan, our fleet could roam at will, cutting Japan off from all the raw materials they lacked. He has an anecdote about a guy with the second most dangerous job after Kamikaze pilot, he survived the war despite captaining a Japanese oil tanker. O’Brien argues that invasion would have been unnecessary, and therefore the atom bombing was unnecessary.
Report on Bloomberg:
SVB executives were made aware in 2020 of the peril of their long Treasuries positions.
But failed to address it due to an immediate $18m earnings hit, and probable losses in a long dated to short dated switch of $36m.
If this is accurate, legal implications re. due diligence ?
Any lawyer types hereabout have an opinion on this?
@Liberal Capitalist: The failure of SVB arises from a classic bank run, which was from a large deposit base of jumbo corporate deposits. Hundreds of billions. a mere single digit billion is neither here nor there and it is not Crypto that drove SVB in the least, crypto except to crypto bros is an irrelevancy. Founder Fund and Mr Thiel & Randist co may be blamed in addition to the management for not having had a chief risk officer for essentially one year… Crypto is only important to SVB story in the fevered imagination of crypto bros.
The “state” of any kind is not ponying up whatever capitalised billion value you want to throw out, SVB is illiquid, not insolvent and on a net basis against the par value pledge window for US Treasuries, there’s no data based indication that SVB can’t be recapitalised at likely end-zero net cost to the public.
As to why- well since the general public and persons like yourself are generally innumerate and weak at best a weak to zero understanding of banking, and given there is Fox engaging in all kinds of absurd scaremonging AgitProp, it is rather prudent of the US Federal authorities to step in to prevant an irrational panic driven set of bank runs that can indeed tip the US banking system into a crisis as bank runs (as irrational panics) historically have done. Particularly as if you read actual numerate and financial sector savvy reporting with data and not ideological driven analysis, as in the FT, SVB in the end as a Lender was not in bad shape. SVB as a liquidity source got trapped by panic, one set-off fundamentally by a certain VC subset with rather hypocriical and blinkered ideology.
@Lounsbury:
“Innumerate”? Sir, if your argument hangs on Ad Hominem, then you come from a weak position.
@DK: This is … “not even wrong”….
@gVOR08: it does seem indeed bizarre to refute a claim that yes, I do not recall ever reading… I suppose scaling up mass production methodologies expanded/perfected/developed in WWII probably did contribute to post war productivity but…
@JohnSF: There is commentary from Hedge Funds (of which one opposing an SVB takeover of a bank they were invested in) in 2021 highlighting the disturbing liquidity risk escalation of SVB in 2021-2022 period: this a critique that was seen by SVB (as it was proxy vote lobbyng against their bid). A 2020 critique prior to the global central bank rate rises … eh. One could reasonably put off given the facts of 2020.
The fact they, SVB, spent a year almost without a Chief Risk Officer (April 22-Jan23) in the face of a rapidly escalating rate risk (and thus escalating liquidity stresses on them)… that… that is going to be an item the now-former-management and Board are going to have a rather pretty time trying to explain.
@JohnSF:
Heh. Apparently bankers don’t understand banking either.
@Liberal Capitalist: My point hardly hangs on “ad hominem” as the data and/or articles with the data have been quoted by me in this thread, although pointing out the stubborn innumeracy and ignorance as to the operations of banks and thus the tendency to irrational and in this case unfounded general panic, or even the specifics of SVB may be taken as a sort of desert following the main meal of data.
@Lounsbury: I’ve long wondered. What the hell is wrong with you? Why can’t you engage in a normal conversation without insulting everyone?
As illustration of fear and the irrational general panic and the Why of stepping for the backstopping :
First Republic and other US regional banks tumble over fears of deposit flight
https://www.ft.com/content/7b3214e9-aa2e-4d3a-8724-fe71bb8dd006
This is irrational panic, not number driven solvency reaction. Pure fear of fear, and more fear on fear and fear of others fear…
Thus the Biden administration and the US regulators are quite right and prudent to have intervened.
Solvent but illiquid? Seems like that was a pretty predictable event if your deposits were going to be so highly concentrated from one or two sectors. (What is being reported is concentration in tech.) If you wanted to set up conditions leading to a run that would be a great first step. Seems like pretty easy math.
Fear? I can certainly understand that. I have a bit over 200 employees. We have to make payroll. If my bank tells me they are solvent (good) but they are illiquid so I cant have my money (very bad) I am screwed.
I might be persuaded that it is ultimately a good thing to make sure all of these other banks are safe. That said, I find it hard to believe that it is coincidental that regional banks had their regulatory oversight cut and this then happened. Banks running into problems after deregulation seems the norm. We should learn from this. Next, the finance sector is very well paid. It has seen major growth, but we dont seem to get much out of it. The bank is going to fail and they still pass out bonuses hours ahead of failure. Where else in the world does that happen?
Steve
Should anyone wish to actually read the data and a reasonably accessible profiling, the Forbes article, whose author has bothered with the numbers is accessible
https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/11/warning-signals-about-silicon-valley-bank-were-all-around-us/?sh=130842591e10
Notably the values in play in deposits are hundred billion order, so concerns about a single billion value is rather Dr Evilesque number.
The panic hitting the US market over the regional banks is simply irrational as the profiles are not the same as SVB (or the weird little crypto banks which if not for the timing coincidence would have passed unnoticed, but the contagion of fear is a real substantial risk for financial markets even if logically unfounded )
The Biden administratoin should be applauded for its reactivity and competence in responding to what freeze up (and given the headline scanning no small part of Fox political agitprop fear mongering, irresponsibly of course).
@Lounsbury:
Thank you for stating the obvious! Clearly, that is how markets work.
2008 was wealth building for me, as Citi and BOA dropped to nearly nothing. But America loves profits, and no one knows how to squeeze the little folk like banks. Recovery was fantastic. For me.
And… I did say that I keep my money in a credit union. Did you know that Dearborn Financial (the former Ford Credit Union) actually pays the shareholders (CU Members) an annual profit sharing check? Try having that conversation with a bank.
Average Big Financial institution CEO salary: $20Million
https://graphics.wsj.com/table/CEOPAY_slice_Financial_0529
And…
On the one hand, I agree. On the other, not to the massive sweeping amounts that are being discussed. Capitalism shouldn’t be “I win when I win and I win when I lose”. But that is what is happening here.
But $18K for my niece to eliminate that student loan? Oh noes! not fair!
OK… I have to go re-write my resume so I can go back to a mind-numbing corporate job where I get paid way too much just so I can get better health care. I plan to ride that benefits-of-systemic racism-pony just a while longer.
And yes, I have a problem with that. Didn’t you see my user name?
@steve: The fundamentals of the regional bank numbers speak for themselves – as the utterly neutral and do-not-give-a-damn-about-USA-land politics commentary from The Financial Times shows.
However, when the contagion of fear starts running through deposit taking banks customers base, rational and numerate analyses become beside the point – fear provokes the very thing thing the fearful reaction was fearful of, self-fulfilling as no depositor can withstand a bank run on its own. None.
But yes, as the fact set has emerged, it is quite clear that while SVB ran into bad luck (and notably the complete assholery of the Peter Theil crowd who fired a Galt shotgun at their own feet) they also did from at least end 2021 on an incredibly shitty job in liquidity risk management. The fact they spent nearly a year without a Chief Risk Officer while they were facing unambiguous risk escalation is frankly incredible and … quite peculiar.
That does not say of course that the loosening of stress testing under Trump was a good idea.
@Lounsbury: So basically the bank had to be bailed out because everyone is stupid but you.
Thanks for the explanation!
@steve:
Not insolvent, just illiquid = six in one hand, a half dozen in the other.
@wr: Well you gotta admit, he has to be the smartest guy in the room… because everyone else is an idiot. We should take his word for that. I remember a few times when he was wrong on the actual facts of something. When it was pointed out, with proof, oh – how the insults flew then. And the anger!
@Lounsbury: I love how you ignored everything in their post except the cryptocurrency part. Laser focus on that one part you think you can use to prove how much better/smarter you are. Then you got dunked on by reality. Is it even possible for you to behave like a decent human being when someone destroys your “logic”? You just seem to resort to name calling every time you’re out debated. At least you put down the thesaurus and stopped with the try hard verbiage. Which is partially why I actually read your posts this time. You do have some good points and some actual insight into this fiasco so I’m glad I did.
@Lounsbury: Simple sloganeering tends to win elections, I’m afraid. Though I admit I can’t understand your genius point that SVB was not too big to fail, it was just the contagion effects people were scared of that was the problem so it had to be bailed out. Because if it was smaller and less contagious…it would still need to be bailed out? That’s the logical result of your claim that the size wasn’t a problem. Or…maybe…just maybe…if it was smaller it wouldn’t matter and could be allowed to fail because it wouldn’t impact as many depositors to as great an extent.
@DK:
IMO, no one knows how banking works, only how it’s supposed to work.
Implication of the current policy of Treasury buying bonds at par is massive. Bonds effectively no longer vary in price if they can always be redeemed at par!
Potential flight to dollar bonds?
Signal for a massive offload of bank held bonds to the Treasury?
Surely there must be some limit on the liability the treasury appears to be opening itself up to here.
@Just Another Ex-Republican: Yes smaller will still need to be bailed out as one sees rather clearly from the panic running from the small NY crypto bank failure. And smaller can trigger panics, and has done so in the past.
The Regional banks that are suffering a hammering presently in the USA are not individually systematic banks nor particularly large (while the large systematic banks are barely touched). But there is an irrational panic right now.
22 MINUTES AGO22:21
Large US bank stocks fare better than regionals in sector sell-off
Peter Wells in New York
US bank stocks endured one of their roughest days in years, as the recent failure of Silicon Valley Bank kept investors trained on the possibility of deposit flight at peer lenders.
The 18-member S&P 500 bank index finished Monday’s session 7 per cent lower for its biggest one-day drop since June 2020.
But US regional banks had a much tougher day. The 13-member S&P 500 regional banks sub-index, which excludes big lenders like JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp, was down 14.9 per cent for its biggest fall since March 16, 2020.
So the simplistic slogan is worthless, even actively wrong and inducing error by misdiagnosing the problem.
Meanwhile, the Biden adminstration is proving usefully pragmatic and unpopulist, and focused on doing worthwhile things rather than empty posturing and fighting the last war, so to speak
3 HOURS AGO20:01
Key lender to US regional banks to raise $89bn in move to support sector
Eric Platt in New York
© Bloomberg
An important lender to many US regional banks raced to raise tens of billions of dollars in a move to safeguard the sector as stress rippled through the financial system.
The Federal Home Loan Bank system was finalising the sale of $88.7bn of short-term notes on Monday afternoon, signalling lenders could tap the backstop for funding in the coming days, according to two people briefed on the transaction.
The sheer size of the offering would give the system, created in the midst of the Depression, the ability to lend a large sum to banks attempting to fortify their balance sheets as they struggle with deposit flight.
The FHLB — regarded as the lender of second-to-last resort before a bank might tap emergency funding from the Fed — was already a large provider of capital to Silicon Valley Bank.
@JohnSF: Not redeemed at par, pledged on a short-term loan 72c25414-aabe-432a-a785-a8b2bd6887f9
It is not a sale but rather a pledge for a liquidity loan to allow for a bank to avoid having to do a fire sale of such securities into a panicked and/or saturated market (and setting off a vicious cycle of fear-contagion).
Repayable collateralised bridge financing.
Not sale. And one will not see massive off-load a top tier unless panic deepens as there’s no point as this comes a t a cost. But stressed regional banks and local banks facing depositor panic will have a lifeline to not get sucked further into panic cycle.
@DK: no dear innumerate, illiquid is not = to insolvent.
Illiquid means one can not easily convert an asset into cash quickly. As illustratively if one owned a 500 million USD commercial property with performing tenants, but needed for some reason cash tomorrow in a banking crisis. You are not insolvent, as the cash flows of the building are not the problem nor the operations. But there’s not enough cash in the market to get your price quickly. You are facing a liquidity squeeze even though your operation is perfectly solvent.
Liquidity is a timing problem.
Solvency is an economic sustainability problem.
SVB was solvent, however it was illiquid relative to the on-demand depositors.
Unlike the 2008 financial institutions with mortages going bad by the metric tonne, which were insolvent.
@wr: Your talent for incompetent and blundering straw men and ongoing petty petulance is noted.
@Liberal Capitalist: I am sure you also have a hand-woven hemp market bag bought from photogenically impoverished central American lady, but similarly like congratulating yourself over a coop bank (without presumably knowing where said bank is placing its money) performative virtue signaling is neither here nor there relative to the banking run problem
@Kathy: It is perfectly clear how banking works. That is not a mystery, except to the general public. The problem is simply that banking is inherently a risky endeavour, a collective act of confidence and perhaps modest self-deception all around, prone to gone wrong, like keeping spinning plates on poles going in an inherently windy plaza. One can master the skills very well, but one wrong gust et voila.
There’s nothing not per se understood, however humans can not quite accept chaotic systems, and have to seek out Just So Stories. Everyone. Myself included of course, particularly for those subjects that I do not master.
The social contract.
@Lounsbury:
Ah. That makes sense. And it should cover any other banks who have similar exposure to long dated bonds; or to depositors nervous about such.
@Lounsbury:
Jesus christ… you have a smidgen of knowledge and try to polish it to make yourself seem self-important.
Banking is simple: Take money in. Make investments with said money. Keep enough liquidity for day-to-day business. Offer customers interest, but less than you make. Then likely deposit funds overnight with the fed to protect the digital currency. Do it again the next day.
Because you can, because having a shit-ton of money allows for investments that can’t be done by an average joe.
Banking functions to (at least) double money: Like Schrodinger’s cat, it exists in (at least) two states at once: once a balance statement in the depositor’s account, and again as the investment.
Simple. Everyone gets that. AND people understand what a run on a bank is. The “spinning plates” is running a business. If they overextended & mismanaged and people got wind of it, then the results are the results.
No one wants to end up holding-the-bag. So yeah, the feds stepped in.
It’s so ridiculously simple that even folks like this lay down how it works and how people make a bundle in banking: https://www.businessinsider.com/henry-blodget-how-to-make-the-worlds-easiest-10-billion-2009-12
BTW… That article should explain why folks should be absolutely livid over Kushner getting $2Billion from the Saudis.
It ain’t rocket science and you are pontificating here as if this is some magic secret is absolutely ridiculous. Realize the folks that are on this blog. Grow up, add value, or GTFO troll.
And no, my canvas bag is from a company selling Himalayan rice. From Costco. Until it’s empty. Then it’s gone.
Oh look: Mismanagement and bad investments.
Who could have known that!??!
@Lounsbury: I for one find the detail you are bringing here to be interesting and valuable. Thanks.
There’s a sort of person who loves to tell you how they have everything figured out. I’ve had other engineers who thought about a problem for maybe 5 minutes say that to me about something I’ve worked on for a couple of years. I had done my homework and knew exactly how to take the air out of their tank, of course. But it’s still irritating. Best to ignore them when you can.
For me, humility is an important first step to learning more.
@Lounsbury:
Liquidity is a timing problem.
Solvency is an economic sustainability problem.
SVB was solvent, however it was illiquid relative to the on-demand depositors.
Unlike the 2008 financial institutions with mortages going bad by the metric tonne, which were insolvent.
Right, and the larger question is why did the run commence? Because it does seem like people who are super well-connected and ostensibly should know better panicked and started a run rather than working behind the scenes to prop up the bank. Instead, it was a group panic, like a bunch of teenagers. It points to the obvious truth: which is that they’re leaders of a shoddy and infantile system which treats even their own banks like shit. You blather about statism but you are literally talking about the difference between the Rockefellers, who built actual things like museums people still go to a hundred-years later, and Elon Musk, who chats with a guy named catturd while his cars self-drive into destruction.
Yes yes, we all know paper stock losses are the real economy, because everything is so f–ing leveraged any more. Which IS the problem. I mean, your position basically boils down to no financial institution can ever be allowed to fail because God alone knows what the knock-on impacts may be. And the problem will only grow as rich people get their rich government friends to bail them out when things go wrong so they take on greater and greater risks because who cares? They win either way. Tough luck on the employees and sure the incompetent CEO’s may go down, but the oh so precious investor class is simply immune.
The irony is I actually pretty much agree with you on this particular issue-there was no real choice about bailing things out this time (because we learned very little after the last time this happened, won’t learn after this time and won’t the next either). But it should lead (though won’t) to serious reforms-and the finance industry will scream bloody murder about the mildest of steps anyway, and spend billions trying to roll it back in the next few years. The basic issue is that our financial system is fundamentally broken in a way that ensures wealthy investors always get bailed out, that profits are privatized and losses socialized. It’s a joke.
So, an admittedly semi-informed question:
If SVB and Signature were just allowed to fail, with ordinary FDIC coverage for the depositors, what’s the overall harm to the economy? Why is this not just the invisible hand doing its thing?
@Just Another Ex-Republican:
Since there’s no @, I presume this is directed at the OP? Because it’s not at all my position. (See below.)
@DrDaveT:
I don’t care a whit about this bank or whether it “fails.” I do care, generically, about bank depositors. Putting money in an FDIC insured bank shouldn’t be seen as an even remotely risky venture. Depositors should presume the bank is being run on the up-and-up. Otherwise, the entire banking system collapses.
@James Joyner:
Why not? The FDIC insures up to $250,000 of deposits. People, and corporations, who deposit more than that in a bank are taking a risk.
There are bank accounts that insure deposits up to $1 million. I have more than one. Key is, I have to pay for that extra protection. There are banks that offer more protection that that, insuring deposits into the hundreds of millions for consumers and corporations with very high assets. And yes, that extra protection must be paid for.
The techbro super-capitalist, super-libertarian galaxy brains should have spread their assets across multiple bank accounts and paid extra for more insurance. But they were being cheap, lazy, risky, and looking to benefit from SVB’s risk taking.
So, yes, they did take a risk by throwing all their eggs in one basket, even though they had to know “FDIC insured” has never met you get tens of millions to hundreds of millions of dollars of protection. That they’re being bailed out with other people’s money because they’re risk did not work out for them is an issue of fairness. Although some will continue to bend over backwards to pretend it’s not because rich people are involved — an issue that, predictably, we never have when the poor, working class, and middle class are the ones in need of help.
@DK:
There appears to be some grounds for thinking both the bank and most depositors were reckless in their approach to risk.
I think protecting the companies affected was probably a necessity.
But there should certainly be a investigation, with teeth, into the whole business, with preferably legal sanctions against the bank management and board, company treasurers, and VC’s setting up exclusive banking deals.
I also, having a nastily corkscrew-like mind, have a suspicion that, unless it is illegal under California law or US law (?) it’s rather likely that some VC’s directing startups into exclusive relationships with SVB, might also be investors in SVB.