> The FDIC will pay uninsured depositors an advance dividend within the next week.
Depending on the amount, this can possibly make things a lot better for the startups banking there.
Depending on the amount, this can possibly make things a lot better for the startups banking there.
edit : thanks all for coherent clear responses.
> A. The FDIC's deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or state tax revenues are involved.
Source: https://www.fdic.gov/consumers/banking/facts/#:~:text=what%2...
In other words, IOUs to itself, like the social security “fund”
And yet: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
I don't even doubt you can sell the assets and come out of it with 90% of deposits, but the wording is off.
From "1999 Repeal of Glass-Steagall was the worst deregulation enacted in US history" (2022) https://news.ycombinator.com/item?id=30206570 :
> Yeah what was the deal with that dotcom correction in the early 2000s? Did banks invest differently after GLBA said that they can gamble against peoples' savings deposits (because they created a 'sociallist' $100b credit line, called it FDIC, and things like that don't happen anymore)
> Decline of the Glass-Steagall Act: https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93S...
> Dot-com bubble: https://en.wikipedia.org/wiki/Dot-com_bubble
Right. The problem is that SVB's books reported that the assets were worth more than they were actually worth.
If they weren’t forced to sell, they could collect coupons and make the exact amount of money they claim to have.
It’s not a matter of “actual” vs “paper”. Their books were correct until the run happened.
Yes… so if you hold it, that is exactly what it is worth. The issue is that they are forced to sell. We’re literally talking in circles.
If you are forced to sell on most assets, you are going to take a hit on your books, that doesn’t suddenly mean that the asset was valued incorrectly.
They didn't become insolvent because of the bank run. The bank run exposed the fact that they were already insolvent.
They are worth one 2033 dollar or 0.7 2023 dollar. 2033 dollar and 2023 dollar should be considered two different currencies. The bonds are pegged to 2033 dollars but customers want 2023 dollars, and when dominated in 2023 dollars the bonds are devaluing like shit.
A bank run is a bank run, it doesn’t matter what you hold if all your customers demand their money back at once.
That is an accounting practice; it has no bearing on the actual value of the asset. The same is true with calculating cost of goods sold; you can actually choose to use LIFO or FIFO costing to alter the accounting value of your inventory for tax purposes and such. Look up "LIFO liquidation" to see an example of what I mean.
Using generally accepted accounting principles, you have some room to conceal extra value or loss on your balance sheet. But the cash flows don't lie.
Insinuating that all assets must be liquid enough for all deposits to be withdrawn simultaneously basically requires that the bank only hold cash, which makes the entire concept of a bank fall apart.
We may use fiat instead of gold now but that doesn't mean a bank can float itself by hoping no one opens the box and breaks their superposition.
A bank is expected to be able to float itself as long as a sufficiently low number of customers demand their money at any given time, a bank run will collapse a bank no matter what monetary standard you’re on.
Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards to future cash flows for the bond.
Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
The only difference that is due to todays interest rates is that your low interest bonds have to fall in value to meet the market clearing interest rate if you are to sell them.
Correct.
>Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
Correct.
>The only difference that is due to todays interest rates is that your low interest bonds have to fall in value
Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity.
If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much.
Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.
In a firesale the market price isn't full price, because the market needs time to react to price signals. More time than you give it during a firesale.
If you don't have time to let buyers figure out what a fair price would be, you gotta sell for much less than full price to convince those buyers to buy.
So the FDIC’s responsibility is to do something with what remains. Selling it all to another bank was one option that may not be panning it out; failing that, they’ll fund depositors, creditors, and investors as individual blocks of assets are wound down.
Insured depositors are sure to get all of their insured funds and the FDIC would have provided their own funding for that if they needed to. Uninsured balances and uninsured depositors will have high priority for what remains, which should be substantial.
These advanced dividends may come from liquid capital at the bank or from some other source of funds the FDIC has access to, and will be based on what the FDIC is already confident they can recover from the assets.
The issue is that the bonds can’t be sold now for anything like npv, because nearly risk-feee government issued bonds pay 3-4x what these bonds will.
That makes them… discounted
The actual value of the bond went down, because the expected value of the payout is less, even though the actual amount of dollars returned at maturity is the same.
Which is why the market price for it went down.
That should be enough for payroll, but not enough to spark a mass exodus from small and regional banks into the "systematically important banks" (ie too big to fail).
Seems like a no brainer move to shift your cash to JPM, at least until this blows over.
I am all for FDIC insuring accounts, and I'm fine with the level being as high as $250k. But anybody with a lot of cash beyond that should already understand what the word "uninsured" means. If they don't my sympathy for them is limited.
If we're going to spend billions more on improving the social safety net, people with hundreds of thousands of dollars in cash just lying around are not my first priority.
When people choose where to bank their millions of dollars, they are making a market-based choice. Markets only work when, on balance, good choices get good results and bad choices get bad results. If people can make risky choices and still make money because other people bail them out, that creates a moral hazard.
It incentives ignoring risks from grey/black swan events. Weak analogue, a CTO comes in who removes redundancy/backups from the system, saves huge costs and gets huge bonuses. Once every 5 years system fails and data is lost, CTO loses bonus but on average he is making more.
For people managing millions of dollars, though, I think they should, y'know, do their jobs and make professional-grade risk management decisions. Especially when the alternative is taxpayers coughing up money to subsidize their mistakes.
It's small though and I'm surprised there hasn't been more talk of it and other optional deposit insurance. What does this landscape look like for large companies routinely doing millions in payroll? You can't tell me they sweep it all in/out of different banks in 250k chunks. There has to be some sort of widely used insurance offerings, no?
There's a really nice threshold for measuring this: if you have more cash than can be spread conveniently amongst a number of banks such that those account balances do not exceed FDIC insurance limits, you do need to pay attention to what your bank is doing.
Please. This is not a serious argument.
You could say absolutely the same thing about buying stocks. By your logic, nobody should be allowed to buy stocks because it's just too darned complicated.
Similarly, it is quite literally -- and I do mean this literally -- impossible for anyone to conduct a meaningful and ongoing analysis of their bank.
This leaves basically three options:
* Buy private insurance, which is a fool's errand, as there's no guarantee it would make you whole in the event of a major black swan event.
* Split your account up into an absurd number of institutions. (You get FDIC insurance only per depositor, per account category, per institution. You can't open more accounts of the same category at the same institution).
* Place all your money at one of the Systemically Important Banks, where you basically get unlimited insurance.
Please explain what you thin the rational thing to do here is.
Anyhow, yes, buying stocks is too complicated to be a sure thing. But rather than banning the process, we just make sure there are decent guardrails so the average Joe doesn't get too screwed and systemic risk is limited, and then we let people do a capitalism if they want, but on their own heads be it. And whole industries have risen up to help them do it.
It's the same deal with banks. The government's job isn't to hold the hands of people trying to figure out what to do with their millions. It's to protect the small players from predation and limit systemic risk.
I am not a professional in this field, so I'm not going to pretend to give one-size-fits-all prescriptions for something that is obviously complex and context specific. Instead, I will encourage all fellow founders and would-be founders that there are many things where they should just hire an expert. Like law, or regulatory compliance, or the best way to manage millions in cash.
Just spitballing here, but since apparently a lot of people with millions of dollars who have heard their whole lives about FDIC-insured deposit limits are suddenly waking up to the fact that things above the line are uninsured, seems like a good time to innovate.
Back in 2008, the FDIC launched the Transaction Account Guarantee Program to provide unlimited insurance to uninsured deposits in non-interest bearing accounts, and then later expanded to low interest accounts, on an emergency basis.
This program protected nearly a trillion dollars in uninsured deposits, and made all of them whole.
After Dodd-Frank, the program was ended. However, if the FDIC deems a situation to have systemic risks, it's within their statutory authority to do this again. And it now seems the Government is planning to do exactly that, should they be unable to find a buyer for SVB.
That program was an always-temporary response to a major financial crisis. I expect most finance professionals knew that it was temporary.
But suppose you're right. Suppose all the cool kids thought they'd get bailed out no matter what. In that case, it's even more important now to not use taxpayer money to prevent the big-money SVB accountholders from taking a haircut. Because your justification here is exactly the kind of moral-hazard problem that regulators are very eager to prevent.
If the industry wants a program like that, they can create it. Indeed it already exists: https://www.difxs.com/DIF/Home.aspx
But depositors obviously have the ability to gauge risk, especially sophisticated depositors with millions of dollars of cash lying around. Otherwise people wouldn't be squawking right now about the risk of money being moved out of certain banks to certain other banks. Otherwise things like the DIF wouldn't exist. Otherwise treasury management wouldn't be a whole profession.
The problem is that many depositors are not looking just for safety, they pick other things, sometimes over that. Which is their right! But sometimes when trade safety for other things, it turns out badly for them.
Do you think all the CFO’s, accountants, and financial advisors of American industry didn’t know that until this weekend?
Yet the small and regional banks still seemed to have made it all this time.
I was aware of this regulation. I thought it was unlikely. But now that it is happened, I will be removing all my money from smaller banks over to TD (big Canadian bank).
This line needs to stop making the rounds. It’s a part of the political game playing for a bailout.
Nothing fundamental about deposit risk has changed this weekend vs the last few decades. The rules have been established, well known, and integrated into the market as it currently stands. Those small and regional banks got wherever they are in that market and the collapse of SVB doesn’t change that any more than the collapse of the other 576 banks in those decades.
There are well-established practices for managing the risks associated with your deposits. People like Ackman and other vocal VC folks just thought they could get away with cheating the system (disruption!) and are now crying for the taxpayer money they built into their risk strategy.
Because banks use deposits to fund investments, deposits have a risk of loss. That’s why there’s insurance available for them. Businesses and wealthy individuals have been navigating their way through this risk for a long time. The need to do so is not rarified knowledge and the means are not secret.
Imagine some homeowner called up Allstate saying, "Hey, my house burned down last week, can I get that covered even though I don't have insurance?" We'd laugh at them. I get that it sucks for them, and they're going to have some Kubler-Ross time ahead. But that doesn't mean that somebody else should bail them out.
And some other forms let you actually “come current” before a claim, but it varies.
Which would be like buying fire insurance after calling 911 but before the trucks arrive.
If you do the work and don’t get paid soon, what’s your expectation going forward?
On the other hand, if the CEO were saying, "Gosh, our company managed our cash so poorly that problems with one bank mean the company might go under," then I'd be looking for a new job pronto. Because not only would that mean notable financial mismanagement, but would also suggest that the business was not healthy enough that they could get a bridge loan or emergency investment.
I'm under the impression that every American adult has a credit card, so I don't understand what all the fuss is about.
A worked who understands this situation and still leaves because they got paid a week late is a worker who was going to leave soon anyway.
And these startups could announce they’re going to “monthly pay period” and glide out two weeks. Questionably legality.
I’d rather work for a job that’s most likely going to pay me in the near future and start to look around than quit and not be able to find anything else.
a) needs this lesson
b) will also be totally fine when they experience the hardship of learning it
I am having trouble finding sympathy for someone wealthy with no savings who is suddenly going to get some late marks on their credit report (who won't miss any meals and will remain wealthy).
Let them learn.
It’s not necessarily about the finances of the employees, it’s about the finances of the startups.
> It’s not necessarily about the finances of the employees, it’s about the finances of the startups.
This has nothing to do with that. This has nothing to do with the employer. They got screwed by their bank.
> All depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
My understanding that everyone will receive anywhere from 70% to 90% of the uninsured parts of deposits eventually. Uninsured does not mean "... and it's gone". It rather means "best effort to get it back".
Beyond that, customers have "uninsured deposits"
But the FDIC is in the process of selling all the banks assets, which nearly cover all of their outstanding deposits. No one knows how much that difference will be right now. But companies should expect a lot more than just the minimally insured deposits back.
Source: https://www.netinterest.co/p/the-demise-of-silicon-valley-ba...
> As of the end of December, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits
Say $80B of that is worth 83% of the HTM value on their balance sheet. That would be $14B less, or $195B in assets against $175B in deposits. I don't know the details of their holdings or exact difference between market prices and their HTM accounted value, but the important points are (1) they started with a lot more assets than deposits and (2) different portions of their balance sheet have declined different amounts. It's not all 10-year 1.5% MBS notes; only about $80B is.