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Comment by avianlyric | Hacker News Reader

> The reason SVB is in receivership is because they don't actually have the ability to make all their depositors whole.

No, SVB is in receivership because they can make their depositors whole right now. They have most of the assets, it’s just that liquidating them immediately would result in losses far greater than SVB can afford, but that’s what a bank run demands.

The feds can take over, make depositors whole now by funding deposits from federal funds, while taking on SVBs assets and liquidating them on a timeline that maximises the value, ideally a value that covers all depositor funds.

In effect the feds provide a loan to SVB depositors, backed by SVB assets. Which is far better than either forcing the FDIC to actually payout the insured amount, because depositors get their funds, and the fed avoid having to handover cash to SVB to keep them afloat. Meanwhile shareholders take a bath, because their shareholding value drops to zero.

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A fundamental component of finance valuations and rules is time.

Saying that the fed should stretch out the timeline of asset sales so as to ensure they mature into their valuations doesn't align with how things work. Time value of money is a thing, if we consider even moderate inflation for instance, the cash you can get today is worth less in the future. In order words if SVB assets are worth $100 today, it makes no sense for me to hand them $100 in cash today while I wait a decade for their bonds to mature, just so I can sell them for $100 again.

That is before we get to the fact that the fed is not in the business of managing investments for random failed businesses.

If some knight in shinning armor takes a look at SVB assets and deem them worth some future value that would justify the current need for cash, they'll buy the bank. So far it appears no such knight has emerged.

> it makes no sense for me to hand them $100 in cash today while I wait a decade for their bonds to mature, just so I can sell them for $100 again.

I know the Fed and Treasury are different entities but holding a bunch of bonds to essentially themselves is the best case scenario. They would hold both ends of the transaction: the money from the bonds and the bonds themselves (obviously ignoring the fact the liquid money is likely 'at work' somewhere else).

The risk at that point to the Fed is limited to only the US financial system failing entirely. 'They' can afford to hold the bonds even in perpetuity because they have no real responsibilities to anyone beyond providing stability.

I am not an economist but the risk of either asking for the cash from the Treasury or otherwise doing 'money-magic' to transform the bonds into liquid cash should be basically zero. They would just be fronting themselves money at a 0% interest rate, no one else would be exposed to that 'loan'.

Someone else smarter in economics may have to step into explain why this is wrong or bad.

This is not a typical liquidity squeeze. The scenario you are talking about is where liquidating some assets all at once would crash the market and so to capture the value a sale needs to be made over time.

The treasury and agency mbs markets are plenty deep enough to handle this liquidation. The issue is that the value of the holdings have dropped. That’s a solvency issue.

I’m boldly assuming that interest rates will change in the future. There’s no denying that SVB have fucked up, but equally it’s possible they would have survived if a bank run hadn’t occurred, and they had sufficient time to unwind their bonds, and raise needed capital to cover their inevitable losses.

Or maybe they would have managed to limp on long enough for interest rates to drop just low enough for their bonds to recover enough value to be sold without bank ending losses.

But who knows. There was a bank run, facilitated by VCs, which ironically, is now going to really hurt the very VCs that fanned the flames. Now we get to see how SVB gets unwound, who gets fucked, and who ends up picking up the tab.

By now all the liquid assets are already sold. The question is what about the loan book. The most interesting development would be FDIC making offers to the top 5 banks which they can’t refuse, which is what I’m personally hoping for.

In many cases the loans are to depositors (and the debt is questionable). The just thing would be make depositors without debt with svb whole first, ofc there is no system of fairness in finance.

Can't the federal government simply take the long term t-bills directly and "close" them now at theoretical face value + interest.

That would essentially be the government giving money away, since those bills are worth less than face value if sold now.

If that is done, you can imagine many others wanting access to the same deal.

I think you’ve reinvented callable bonds.

https://www.sapling.com/7796395/treasury-bonds-callable

That would effectively be no different than a bailout.

In this scenario, the government will likely lose money because the existing assets will not cover the loans made out to depositors.

For example, if the government buys the 10 year bonds yielding 1-2%, they will lose money based purely on future value.

Or they can find a buyer for SVB's assets - preferably a bank - which do all this and in addition provide business banking services as well.

Ideally they would, which is what happens to some banks in 2008. Unfortunately the banks that stepped in and bought failing banks got very badly punished, because they also inherited a whole bunch of liabilities far beyond the failing bank’s deposits, liabilities the purchasing bank didn’t expect and ultimately cost them substantial amounts of money.

If FDIC wanted another bank to buy SVB and make depositors whole, they would almost certainly also need to guarantee some sort of firewall against any liabilities beyond the deposits. Presumably the purchasing bank would want some ability to pick and choose exactly what bits of SVB it buys, and which liabilities. Leaving the remainder with either the feds, or some shelled out SVB entity. But who’s knows if that’s a path FDIC want to go down.

bull. shit. if their assets actually could be liquidated for full cover over time than any other bank with plenty of reserves would be happy to buy them. that didn't happen, so we know for sure their assets are not worth what they claim on any timeline.

The last time a bank bought another failing bank, they also ended up buying a whole load of extra problems that made the total deal very costly.

No bank is going to want to buy SVB unless there’s a clear and substantial profit to be made (which their obviously isn’t), or there’s some guarantee that the purchasing bank doesn’t get held liable for any of SVBs historical misbehaviour.

Right now, I suspect that every bank capable of purchasing SVB is taking a “wait and see” approach. There’s no risk to them if SVB and their depositors get fucked. And there is substantial upside to waiting and seeing if the FDIC is going to try and setup a sweetheart deal for another bank to takeover. So why would any bank move early?

No one is going to touch a bank while people are literally lining up to withdraw all their money no matter what their asset book looks like

that is a lie. the amount of money involved here is not that much. it would be very easy for a larger bank to swallow if they believed in the long term value of the assets.

the real thing is that SVB had an iconic brand, tons of business relationships, and very skilled and well connected employees, and yet none of that intangible value offset the hole in their balance sheet. that is the real indicator of just how bad it actually is.

Not in today’s environment. My Citi savings account pays 0.12% interest despite fed funds being at ~5%. Big banks don’t need more deposits, they can’t even make enough on their existing deposits. They especially don’t need to get involved in another bank during a bank run.

that's the thing. SVB has a loan portfolio paying much higher interest rates. but if that loan portfolio is to a bunch of companies that are going to go bankrupt, then it isn't worth anywhere close to what it is on the books at.

the game here is very simple: SVB loans money to cash burning startups and they keep that money in SVB accounts, so it looks like they have cash, and it looks like SVB has deposits, but all of that is created out of thin air by SVB giving loans to companies that couldn't get them from a real bank. If those companies actually take the money SVB loaned them out of their SVB account, then the scam collapses.

that is what happened. everybody knows it.

Ok, maybe that's true, maybe it's not? We don't know yet. Is that worth the collapse of the regional banking system in this country even if that is true? I'd prefer to have choices with my money, not just Citibank, Chase, and Wells Fargo.

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