Hacker News Reader

Comment by lotsofpulp | Hacker News Reader

> “Depositors shouldn’t get anything beyond the insured $250,000”. Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?

I think the common sentiment is depositors should not get any more than whatever the remaining assets are worth.

And I think the prominent people asking the government to bailout depositors are worried about only getting 75% of their deposits back, because the remaining assets might not cover all of the deposits, or it might take a while to recover the deposits.

And that is what people are against.

View on HN

Yes, but "worth" is a complicated concept here. What's probably going to happen is that a big bank like JPMorgan is going to buy the remaining assets at 100% book value, and the depositors are going to be made whole out of that. That's not their current market value if sold at fire-sale prices, but banks have the time horizons to hold those assets to maturity and not worry so much about their market value. The stability of the US banking infrastructure is worth more to JPMorgan then haggling over a few billion dollars of lower rates bonds

I do not think there is reasonable pushback on this. If a private company like JPM wants to do it, great!

The issue is with using government money to repay depositors beyond what they would otherwise get from the FDIC floor plus liquidation of SVB assets. I am not saying it should not be done (it probably should to avoid forcefully consolidating all banking at the big three), but that it should be a subject of hard questions and a serious discussion. My 2c.

You’re missing the point. There’s no need to liquidate the bank or do a fire sale.

Assuming there was no malfeasance and the assets are as described on the books, the bank just needs liquidity so it doesn’t have to fire sale.

Also worth pointing out that every bank likely has the same problem trying to move treasuries from 1-5 years ago right now. The financial big heads should be trying to figure out how to make such a “safe investment” actually safe again.

The source of the problem is liquidity, not the problem assets. But providing this liquidity when needed has costs. That money should not have been spent by government. Here is a simpler example:

A person deposits $1000 at a bank at 1% interest. Bank buys 10-year treasuries yielding 3%. Rates rise, treasuries drop and the person suddenly wants his $1000 back (say, because he can get 4% at an MMF with checkwriting privileges). Bank can sell those treasuries at $950 and eat the $50 loss. Or use own money. Or get a loan.

But this is not simply "the bank just needs liquidity". It sure does, but no one is willing to lend the bank money at a lower rate, so based on the original price and the current state (rates rose + the customer wants his money back) the bank will be short those $50 that went to the t-bond seller who can now buy the same bond back for $50 less.

> not their current market value if sold at fire-sale prices

Fire sale means the selling of the assets pushes their value down. This is not that. It’s insolvency; the assets were and are worth less than their book value.

> stability of the US banking infrastructure

Speaking anecdotally, New York is surprised and the Bay Area scared. This is a local problem. Not a systemic one.

> Fire sale means the selling of the assets pushes their value down. This is not that. It’s insolvency; the assets were and are worth less than their book value.

As has been repeated many times, the bank was never and is not insolvent.

> the bank was never and is not insolvent

Yes, it was, as declared by its regulators. Its balance sheet balanced. But its liabilities were worth more than its assets. If it weren’t insolvent, SVB could have borrowed at the Fed’s discount window. It couldn’t.

the bank was closed by the FDIC due to insolvency

I highly doubt that JP Morgan will buy SVB's assets at above-market prices.

They might if they’re buying more than the assets (i.e. credibility of the whole sector), but the hole is probably too big for even JPM to take it alone. Maybe the top 4 split it between themselves?

It's definitely possible. assets = liabilities + equity. Well, SVB equity has already been wiped out to zero, so that's money JP Morgan doesn't need to come up with to make the value of the assets (i.e their securities) equal their liabilities (their deposits). It could theoretically be worth it to JPM to buy SVB to (a) in one fell swoop take over the biggest startup-focused financial institution, and (b) calm systemic risk fears.

> The stability of the US banking infrastructure is worth more to JPMorgan then haggling over a few billion dollars of lower rates bonds

I wonder why the leaders at JPM did have not announced this yet, to say they are paying 100% book value.

Seems like it would let everyone go back to enjoying their weekend, including Yellen and numerous other prominent people.

Your attitude is flippant and ignores massive risk. Was it meant to be sarcastic?

Due diligence. Risk. Opportunity costs.

JP Morgan is probably re-evaluating their own assets right now with the assumption that what happened to SVB might happen to them also in a few weeks/months.

But why? What purpose does that serve? It's hardly even inflationary, the value was basically destroyed, so the Fed conjuring replacement money doesn't seem like such a bad thing. Shareholders will still be taking a major loss, and they are the ones who ought to be held responsible, so it makes sense. You can't fault depositors for not doing thorough diligence on a 40-year-old bank with a good reputation and it doesn't make sense to punish their employees for it, especially in a cooling job market with uncomfortably high inflation.

Suppose an immigrant is starting a restaurant, and has to pay up front to some suppliers that have been in business for 40 years for kitchen equipment. And the supplier goes out of business, and the money is gone. And the immigrant has no more time or money to hire a lawyer to submit a claim to recover it.

Is there a federal bailout waiting for the immigrant? Or the immigrant’s employees who might also be family members?

> What purpose does that serve?

The purpose is to show we are playing by the same rules. And that somehow, it is not always the poorer, the more uneducated, the ones born to the wrong parents who do not get bailed out.

What if the restaurant employs 5 people? 500 people? 50,000? 5,000,000 people?

Sometimes it actually pays to evaluate breaking a policy if the harm of following it is larger than the harm of coming up with a different decision. How much does the US Treasury expect to lose in tax revenue if SVB’s customers are stuck with frozen accounts or the assets are sold at too steep of a discount just to get them resolved quickly?

The use of bailout here seems to be using a tainted term to spread taint to the victim. The restauranteur is a depositor. His assets can be very nearly made while so long as there is no fire sale on the bank assets. The “bailout” is really just providing sufficient liquidity to keep the bank working. It’s only insolvent so long as it has short term liquidity issues.

> Is there a federal bailout waiting for the immigrant? Or the immigrant’s employees who might also be family members?

Why shouldn't there be? As long as they weren't utterly reckless up to some reasonable standard, IMO they should be. This has the same empty tenor as arguments against student debt relief on whatabout/fairness grounds.

> The purpose is to show we are playing by the same rules. And that somehow, it is not always the poorer, the more uneducated, the ones born to the wrong parents who do not get bailed out.

Two wrongs don't make a right. I get that you're bitter. So am I. Doesn't mean we need to fuck over a bunch of people who are not at all at fault and possibly trigger systemic economic problems, contagion, recession, etc.

But where does it stop? When I lent my friend $100 dollars when we were 16 and he never paid me back, should I have been bailed out too? If not, why not? If the government bails out people/businesses every time something goes wrong there will be a lot more risky investments.

No, because your friend isn't a tightly-regulated institution whose proper functioning is integral to the core of our economic and financial system, and as a "client" of your friend you have no reason to generally expect that your friend will be trustworthy.

And yes, I do think we should have some kind of public fund to help victims of theft and fraud. I can think of many worse uses of my tax money.

Someone always gets fucked.

It is either startup or the taxpayer, restaurant owner or the taxpayer, student debt holder or the taxpayer.

The taxpayer minding their own business gets tired of always being on the short end.

You could say the same about any government-provided taxpayer-funded service that benefits people in times of need. This is literally what our taxes are supposed to be for.

>You could say the same about any government-provided taxpayer-funded service that benefits people in times of need.

But certainly not every need should be the taxpayers responsibility. Government safety nets should have positive return on investment for individual citizens. Increasing the cost to the individual without increasing the benefit threatens to delegitimize the entire endeavor.

Why would I ever want to expand the scope to include restaurants, student debt, or business risk if that scope has no benefit to me?

If I don't have student debt, a restaurant, or a corporate account, it just becomes crony capitalism and extortion from my perspective.

A lot of people feel that the purpose of taxes is not to socialize the cost of people's mistakes, but rather provide services where all sides see net benefit.

Preventing thousands of job losses and helping small businesses stay afloat during crises that they should not reasonably have to expect does have a positive return on investment for taxpayers.

It is absolutely valid to interpret this incident as a regulatory failure and the failure of our legal system to enact sufficient penalties on those responsible, leading to some amount of moral hazard, which means that problems like this might arise again in the future.

But you are also arguing that, in general, spending taxpayer money to help businesses and individuals ride out random crises and catastrophes is not a good use of that taxpayer money. I and I think most sound-minded economists would disagree with you, on a purely mechanical cost-benefit basis.

>Preventing thousands of job losses and helping small businesses stay afloat during crises that they should not reasonably have to expect does have a positive return on investment for taxpayers.

Why do you say this with such certainty?? I am for efficient government and savings to the taxpayer, so I would absolutely support such a measure if I agreed.

Just because the government provides help, it is not given that it will ultimately be positive ROI for the taxpayers. What is the payback period here and when can I expect to see the savings on my tax bill going down? If it takes 50B to make depositors whole, how many jobs will be saved, how long will it take to recoup that from taxing those jobs, and what will the profit in excess of cost be?

Reasonable people would agree that 1 billion to save a single job would never pay itself back, so clearly there is a threshold somewhere. No economist would refute that one exists.

People seem to assume or treat it as an axiom that any help the government provides is a net positive investment, independent of cost or analysis.

The idea that this is known or calculated here is absurd. We don't know what % the deposits will be written down, How many jobs that will cost, or how successful those companies will ever be at generating tax revenue.

I am not strictly opposed to aid in a crisis. It is clear that in some cases government action saves the taxpayer money. For example, a cheap medical treatment might prevent lifelong government disability payments, with tax savings that vastly outweigh the initial cost. That does not mean that every medical treatment at any cost translates to tax savings.

There are also questions of moral Hazzard and incentives, but I put those secondary. Regulations can and should be fixed, independent of how we respond to this crisis. However, that does not factor into question of if an account holder bailout is a profitable venture for the taxpayer.

Does this make sense and do you understand where I am coming from?

> Why do you say this with such certainty?? I am for efficient government and savings to the taxpayer, so I would absolutely support such a measure if I agreed.

I'm not certain, but my life experience and limited formal training in economics suggests that it's a possibility at least worth considering, and I have a strong positive prior on it for many circumstances.

> Just because the government provides help, it is not given that it will ultimately be positive ROI for the taxpayers. What is the payback period here and when can I expect to see the savings on my tax bill going down? If it takes 50B to make depositors whole, how many jobs will be saved, how long will it take to recoup that from taxing those jobs, and what will the profit in excess of cost be?

This is literally why government agencies like the BLS, Treasury, et alia exist and hire economists and statisticians to address such questions.

Whether or not Congress listens or allows them to do their jobs is another story.

> Reasonable people would agree that 1 billion to save a single job would never pay itself back, so clearly there is a threshold somewhere. No economist would refute that one exists.

Sure, see above.

> People seem to assume or treat it as an axiom that any help the government provides is a net positive investment, independent of cost or analysis.

I don't. You don't. Ignore the people who do.

> The idea that this is known or calculated here is absurd. We don't know what % the deposits will be written down, How many jobs that will cost, or how successful those companies will ever be at generating tax revenue.

The FDIC does. They had a pretty good idea about this on Friday, too, even before they put the bank up for sale.

> I am not strictly opposed to aid in a crisis. It is clear that in some cases government action saves the taxpayer money. For example, a cheap medical treatment might prevent lifelong government disability payments, with tax savings that vastly outweigh the initial cost. That does not mean that every medical treatment at any cost translates to tax savings.

I am proposing that this is one such scenario, where both the costs and benefits are relatively easy to quantify, and that on its face we should expect it to be net positive.

> There are also questions of moral Hazzard and incentives, but I put those secondary. Regulations can and should be fixed, independent of how we respond to this crisis. However, that does not factor into question of if an account holder bailout is a profitable venture for the taxpayer.

This seems backwards to me. Moral hazard and (lack of proper) incentives are the root cause. If you don't like the government needing to step in to help people, then you should consider these your top priority.

> Does this make sense

Yes.

> do you understand where I am coming from?

Not really, sorry.

Thanks for the productive discussion. I think I got my general point across but I want to make a couple clarifying comments.

>This is literally why government agencies like the BLS, Treasury, et alia exist and hire economists and statisticians to address such questions. Whether or not Congress listens or allows them to do their jobs is another story.

Most policy and politics isn't decided on the basis of financial ROI, even when it is available. I think it should be more of a central driver. Basically nobody is making serious arguments that student loan forgiveness will lower taxes. Same with SVB. Im sure the FDIC has an idea of what the deposit write-down is, and maybe the total number of employees at those companies. They have no idea what the long term impacts and ROI would be. Even the founders of those companies don't know if they will be successful and the total taxes paid over the future lifetimes of their corporations. If you think this is simple and known, we simply disagree on the facts.

>This seems backwards to me. Moral hazard and (lack of proper) incentives are the root cause. If you don't like the government needing to step in to help people, then you should consider these your top priority.

I think I could have been clearer here. I'm saying moral hazard and incentives are secondary when deciding if account holders in this specific instance should be made whole.

I agree fixing the root issue is probably a more important problem, but again separate from what to do with the account holders.

By way of analogy, if you have a car crash on a dangerous road, what to do with the car and how to fix the road are separate questions. Maybe the ROI on repairing the car is bad so you write it off, but it still makes sense to fix the road so you don't have more crashes.

> You can't fault depositors for not doing thorough diligence on a 40-year-old bank with a good reputation

The 40-year-old bank with a good reputation was offering deals that were too good to be true, like 4.5% APR on a savings account (other high yield savings accounts are at 3.5% right now, and those are online banks that achieve those rates by having minimal overhead). Naive startup founders aside, the VCs should have known better than to think interest rates like that were coming from a bank that was playing it safe, and for them to now be asking for the taxpayer to make up the difference between the bank's assets and their startups' deposits is weird.

They knew they were advising their startups to put all of their money into a high reward system, but we're supposed to believe that they didn't realize that was also high risk?

So blame the VCs, but I don't see why of startup founders and their employees should suffer for doing what their investors told them to do.

The VCs put money into a startup and encouraged them to engage in risky banking practices. If these startups succeed the VCs get a payout, if they fail they get nothing.

A taxpayer-funded bailout of the depositors is socialized risk, privatized reward. Why should the taxpayers stand for that?

Again, two wrongs don't make a right.

This is like arguing that we shouldn't pay for housing for the homeless because rich property developers are partly to blame for the housing crises in many cities.

The bank became a crypto onramp/offramp and also counted a bunch of web3 stuff to not draw down their deposits.

That we can't let crypto-ponzi involved stuff infect the real system and get bailouts is a general sentiment over this that makes sense. $250,000 per account is what we are mandated to compensate Circle legally and to go beyond is people who stayed out of crypto subsidizing the crypto ponzi scheme ecosystem.

USDC can probably maintain $1 from the crazy amount of slippage from people losing their keys anyway.

> And I think the prominent people asking the government to bailout depositors

Anyone spouting this kind of rhetoric isn't helping matters, but in any case when it comes to this situation there are really well-defined mechanisms for making depositors whole without bailouts.

Reply on news.ycombinator.com