But, crucially, the shareholders are wiped out. No CEO would be incentivized to repeat the SVB strategy if they stand to make no gains from it.
1) form a bank
2) make imprudent investments, and offer better terms than other banks
3) watch the deposits roll in
4) collect fat bonuses every year
5) fifteen years later, get taken over by the FDIC
6) no need to return bonuses
7) other banks want to hire executives from failed banks, go do it again somewhere else
> 7) other banks want to hire executives from failed banks, go do it again somewhere else
As a shareholder of another bank, why the hell would you want to hire someone who took stupid risks, and lost everything owned by their previous set of shareholders?
OK, so you can only rip everyone else off massively once.
ING, before they bailed on US retail operations, only offered adjustable rate mortgages. They were also the only financial institution I ever dealt with that required the use of separate credentials for external banking integration (e.g. tax prep, quicken, whatever shiny new app).
I remember reading about something called principal agent problem here in HN… I think almost ten years ago. It changed my life. I spend a lot of time thinking about it. Once you look it up, it is difficult to not see everything in life with this lens.
Basically, the shareholders are not in control. Management is. And the management class has a special interest to protect “their own”.
A summary of the problem:
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal"). The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".
From: https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...
See also: https://www.investopedia.com/terms/p/principal-agent-problem...
You can apply the same thing to people management. Who cares if you're a shit manager, if you've managed 100 people that's still going to be looked upon more favourably than someone who's managed 20 people really well for a 100 person management position.
Applying it to execs is probably a simpler comparison. Shit exec means you were still an exec, so you can probably get hired somewhere else as an exec.
Guys, I’m starting to think the economy is sick…
https://finance.yahoo.com/news/silicon-valley-bank-exec-lehm...
I think in the World War Z novel they hired the best administrator from the Apartheid era to enforce Zones of containment.
Even before this week I already knew I didn't understand how banks worked, or finance in general. Which is why I keep what little cash I have in an insured account.
Still my point stands, having depositors drown won’t stop others from pulling another SVB.
Selling your equity compensation for even bigger returns.
Compensation packages for CEOs are structured such that most of the money is at risk equity grants.
They’d be nuts to lose tens of millions of equity in exchange for their base + bonus.
Why not just be prudent and keep making money rather than gambling it all on red?
Which strategy has a higher expected value?
2) with part of the proceeds from #1 pay more interest than other banks
2b) optionally use part of the money from #1 to give free ski trips to “influencers” like VCs in a position to recommend banks
3) watch the deposits roll in
In fact, I'd say that CEOs would be heavily incentivized to follow this strategy. Their compensation is tied to stock. Stock price is tied to growth (not risk management). You have all the reason to pursue growth, show great performance, watch the stock go up and keep cashing out before the eventual collapse.