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Comment by tgsovlerkhgsel | Hacker News Reader

This sounds like it's basically the opposite of a bailout: It's the FDIC stepping in, removing management, likely wiping out shareholders, but otherwise letting the bank operate normally with customers fully protected - instead of letting management continue to run the bank in ways that may lead to losses.

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One part of the bailout is depositors over $250k getting a new FDIC guarantee. The other part is the fed reserve promising to accept collateral at par instead of market value via the new BTFP. https://www.federalreserve.gov/newsevents/pressreleases/file...

Absolutely this... how is this not a bailout? Insofar as the amatuer hour banks that didn't buy swaps on the interest rate risk of their unmarked treasuries and mbs will now be saved from going under - for a year at least.

A bailout is when you rescue equity or bond holders. There aren't any specific people being rescued here.

And there aren't any other large banks doing that either. That was a SVB problem.

If a lending facility, only available to banks, at par for assets that are under par is not a bailout…

What would you call it?

It's not allowing the bank to continue to operate under its current owners. Equity holders are likely getting zeroed and debt holders are likely taking a haircut. It's deposit insurance, not a bailout (at least in the sense of how the term is normally used), and where the money is coming from is irrelevant to that.

Those are not the terms of the BTFP. Nowhere does it say that to access this facility you must go under FDIC receivership and wipe out shareholders and bondholders.

It’s not available to banks, only to used-to-be-banks.

False. Check the linked press release in my parent comment - the BTFP is available to all banks and allows them to use their under par assets as collateral for loans at par from the Federal Reserve.

“ Borrower Eligibility: Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program. “

Fair. Thought you were talking about making SVB depositors whole.

I’d call the BTFP a mechanism to stabilize the banking system in the US, given rising interest rates. I guess I don’t care as much about the semantics, though.

It wipes out losses accrued up to March 12, 2023 on eligible securities, for one year. It's taxpayer funded. Terms are super generous: only a 10bp premium. It's at least a bailout for one year. It may or may not get extended.

It also works against the Federal Reserves stated policy of shrinking their balance sheet due to inflation.

I do think it's somewhat clever. It basically lets the private banking sector control the pace of QT. If liquidity dries up somewhere in the system it does a one-year targeted QE.

I'd say it's bailout-y to value collateral above market value, but isn't totally free money and we haven't seen all the terms for it. At least the Fed is safer holding long term bonds than anyone else.

> If a lending facility, only available to banks, at par for assets that are under par is not a bailout… > What would you call it?

Obviously I'd call it a loan.

Depositors are just shareholders with higher priority and an apparently unlimited (previously capped at 250k) insurance policy

Unlimited insurance AND still keeping the profits from the juicy interests.

> Planes wouldn't have stopped to exist, cars wouldn't have stopped to exist. > The entities would have disappeared and new ones would get created.

That seems unnecessary considering how many jobs were at stake.

The airlines got bailouts specifically because they had union contracts that wouldn't have survived otherwise. It was for the workers.

Though, planes probably would've ceased to exist eventually, they need continual maintenance.

Isn't bailing out startups who pay employees a similar position?

Only if unemployment in the startup sector was a big problem and they were unionized.

How about, the government simply take an equity position in these companies. That way, when the inevitable unicorns come along, they can make the VC profit. Instead, the government is simply taking a pure loss... for what? Literally, an equity position is a net win. The loss is capped out at the equity position (which they're already losing now), while the gain is unlimited. Sure, there is every interest in protecting workers. But we're also protecting shareholders in these companies, and eliminating their risk, while not taking any of the reward. When these shareholders make money on the startups, they will be first in line to demand low taxes and lauding the 'free' market. How silly

Taking an equity position in a failing company that needs a bailout is obviously dumb. You want equity in the ones that don't need bailouts, i.e. you want a social wealth fund.

We the people don't need equity to make money from companies growing, though; we have income taxes.

Taking an equity position in all the startups that are banking at SVB is not a failing proposition at all. You misunderstood what I'm saying. I'm saying that the fed is bailing out thousands of companies that have huge upsides. By keeping those companies in business via the fund transfer, the fed is allowing the founders / investors to make a huge upside, while retaining no right to the upside. The fed just eats the loss. I'm saying, in exchange for providing liquidity for employee wages and invention (the supposed social goods we're paying for) the government should take an equity position.

In no way do I think the government should own SVB's assets, which is what is actually happening here, as the government is going to eat the cost of retaining SVB's assets while insuring them at full face value despite that being 15B over market value right now.

> we have income taxes.

Alas the investors and companies being bailed out are not known for being very good at paying those.

How is the bank “saved”?

All it’s assets seized, all shareholders removed, all leadership let go.

The banks customers are saved, the bank is dissolved.

The problem arises when you look past one bank and consider the banking system as a whole. When the next bank fails and its depositors are backstopped by the FDIC at 100%, then again and again, eventually the “fund” should run out. In theory.

In practice, of course, that will never be allowed to happen. FDIC insurance is now effectively infinite.

>FDIC insurance is now effectively infinite.

That clearly being the case, what does it mean for insurance premiums?

This is from the top HN post:

> 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.

So, going forward, are they planning to do a “special assessment” for every failure? Because before banks were paying premiums into the system, just like an insurance.

Yes, the premiums are called assessments.

Ok, that makes sense.

My question was more about mechanics of this. Do they plan to keep FDIC fund and grow it or maybe you wind it down and just assess “as needed”, since the other guy is now completely on the hook.

No insurance premiums will reflect estimated risk of total bank failures going forward.

You've got this backwards. The FDIC's actions are in part designed to limit its losses, since contagion risk will also be borne by the FDIC. By limiting the chance of runs they are limiting their liabilities.

The FDIC always had unlimited resources since it is backed by the US. It always sought to protect the entire banking system without limits. It's doing its job.

Lets just say the FDIC officially covers all losses at all banks. That means that the real danger, bank runs, are eliminated and so is the FDIC's risk in that regard. The risk is reduced to bank mismanagement which can be managed through examination and seizure of banks. That's essentially how too big to fail banks are handled.

I don't think we're in disagreement -- I support the actions of the FDIC, Treasury, and FRB on this issue. A few hours from now, hopefully we will not see runs on other exposed institutions.

The decision was made that if the Deposit Insurance Fund [1] was drained as a consequence of this new mandate to protect all depositors while collecting insurance premiums calibrated to the previous $250k limit, the government will backstop the FDIC ("full faith and credit"). Good.

My contention is that the future of the DIF itself is murky -- I suspect that it's no longer necessary. If it were still relevant, then shouldn't FDIC dramatically increase insurance premiums going forward? Without getting into too much detail, I find that extremely unlikely because FDIC insurance expenses are already quite high. If FDIC won't increase premiums to the level necessary to fund the DIF properly at the new (unlimited) level of protection, Congress should eliminate the requirement for banks to carry this insurance.

> While the DIF is backed by the full faith and credit of the United States government, it has two sources of funds: assessments (insurance premiums) on FDIC-insured institutions and interest earned on funds invested in U.S. government obligations. Revenue from assessments and interest on investments add to the DIF balance (or fund net worth), while losses (primarily from bank failures) and operating expenses reduce the balance.

[1] https://www.fdic.gov/resources/deposit-insurance/deposit-ins...

> this new mandate to protect all depositors

I don't think that exists. They're walking the line between theory (250K max) and reality (want to preserve everyone's deposits in most cases). For smaller banks they routinely sell the failed institutions whole to achieve the later. For larger banks like SVB they may need to get creative.

So making it official would be a problem (congress is unlikely to approve unlimited coverage) but handling it on a case by case basis works out and avoids moral hazard.

If it didn't exist 16 hours ago when you last responded, after today, I'm pretty sure it exists now. Rough day for private banks.

Depositors are backstopped, but shareholders are hosed.

Isn’t the market pruning bad banks good? I would be more concerned about the consolidation of small banks into larger ones.

It's all the other banks with MBS or bonds which they hold for deposits - that have devalued due to interest rate increases. Big banks > 250 billion are required to buy swaps to protect themselves against interest rate risk. But apparently smaller banks are not? Or the regulators just don't bother to check? Either way - this means a tonne of banks like SVB which don't have enough liquid assets to match their deposits 1-1 would likely have folded over the next week as depositors commenced the mother of all runs. Now they can borrow the shortfall for a year. Thus creditors of these banks have been spared. Thus it's a bailout. Commenters here claiming the contrary are straight up wrong.

Furthermore - folks are saying not to worry about the big banks because they do have interest rate swap protection on their hold-to-maturity assets. Cept - cast your mind back to 2008. Who was providing swap protection back then? And what exactly happened to them? How do you spell AIG?

Central bank providing liquidity is not a bailout. It’s a central bank function.

Again - wrong. This is not a liquidity crisis. It's a solvency crisis. These banks have debts (i.e. deposits) that exceed their assets (the mbs and bonds that are now worth less than their hold to maturity value).

Why is it a solvency crisis? The 10 year bonds, if held to maturity, cover the assets, no? It’s that they can’t offload the bonds in the current environment because there are more attractive bonds of the same duration.

All of these assets and accounts have to look extremely attractive to the largest institutions that can absorb them without increasing the risk to their own books.

A ten year wait till maturity is not a short term funding shortfal... lol

> Insofar as the amatuer hour banks [...] will now be saved from going under [...]

That's the exact opposite of what's happening. Signature has, in fact, gone under.

The bank isn’t saved, it’s gone. Shareholders wiped out, anybody like executives paid in stock will have lost millions and soon many will be unemployed. A new bank will be found to buy all of the assets.

It is somewhat of a bailout of depositors, but only in so far as the fed is going to print a little money to buy some securities (er, use them as collateral for loans) somewhat above a firesale market rate.

Banks are still going to lose money but are being protected from a panic collapse at no real cost to taxpayers.

Do most banks hedge that risk? I could imagine that being pretty expensive. Who takes the other side of a bet like that?

> One part of the bailout is depositors over $250k getting a new FDIC guarantee.

Not really. It's not like the FDIC would normally give everyone $250k and then light the bank's remaining money on fire. If there is money left over after depositors all get their $250k, the depositors have a claim on that money too.

Thought experiment: Consider a bank with only one customer. Let's say that customer had a million dollars in an account. The bank fails. That customer gets $250k. The FDIC finds out that another half a million is left over. The customer gets that too. The shareholders get shafted because they don't get anything because the depositors have precedence over the shareholders. Shareholders are the last ones to get paid, if there is anything left.

This is not a bailout. It's the way things normally work.

100% of deposits will be covered now tho, instead of 95%

It always works that way in practice, but I still think announcing the guarantee so early may have been a thing to calm the market. It is likely they just looked at the assets and figured out how to cover it all without dipping into some other gov $$, as part of the sale of the business. And something to do with finding a buyer for the mortgage security that they had (just speculating).

Looking at your thought experiment, the difference is whether that customer gets $500K (all of the bank's assets are sold to make him whole[1]) or $1M - all the banks assets are sold, and also he gets another $500K from the FDIC.

[1] - the $250K insurance is normally only supposed to apply if there are insufficient assets to cover it. Unless I'm misunderstanding your wording and the bank in the thought experiment has $750K in assets.

Your claim appears contradictory to what being reported in financial news though.

[0] https://twitter.com/colbyLsmith/status/1635061613920395264

That's supporting the second part of simple-thoughts's comment. It's unclear to me whether twblalock was arguing against that or not.

To me it seems like it is confirming the quote that he was arguing against.

Also, here is a POTUS tweet taking credit for a literal depositors “bailout”.

[0] https://mobile.twitter.com/POTUS/status/1635080376572956672

The President never used the word “bailout”. And that’s because this is not a bailout. Taxpayers aren’t on the hook for a penny, and the money is going to depositors not the people who caused the problem.

Now, I have no knowledge if Biden himself tweeted that.

But would you retweet something that calls your actions “bailout”? Especially if you don’t want it to be called as such?

The NYTimes tweet also says federal officials closed a bank, when it was state officials who closed the bank. I don’t think the Biden administration is endorsing the NYTimes weekend social media person’s summary.

The article says the Treasury wanted to emphasize that this action is not a bailout.

You would think that there are people around POTUS who would understand PR, but maybe it’s just doesn’t matter anymore?

There’s nobody left on Twitter except bots shouting at each other, so does it really matter?

Are you arguing about against just the first part of simple-thoughts's comment, or against both parts?

The federal reserve purchasing securities at par is money printing/debasement, since those securities have lower fair market values.

The increased insurance on everyone else to cover actual losses to unsecured deposits is just a small tax on every other banking customer

The second part you mention doesn't apply to Signature Bank, or SVB, but it applies to other banks that haven't failed yet.

So it might be accurate to say SVB and Signature Bank weren't bailed out, but other banks are getting bailed out.

"The Department of the Treasury, using the Exchange Stabilization Fund, would provide $25 billion as credit protection to the Federal Reserve Banks in connection with the Program."

Where did the Treasury find this $25 billion?

The ESF is nothing new.

https://en.wikipedia.org/wiki/Exchange_Stabilization_Fund

https://home.treasury.gov/policy-issues/international/exchan...

That wasn't what I was asking. I wanted to know how the ESF is funded. It looks like it is taxpayer money, insofar as it comes from budget appropriations.

I don't think you have a realistic understanding of "taxpayer money".

You know the budget hasn't been balanced in years, right?

Let's guesstimate that over the last 20 years, for each dollar taxed, the government has been spending 5 more.

Those 5 dollars came from private investors and commercial banks. They gave USD money to Treasury, and received an IOU note from the Treasury. So:

1) The money is national debt, not taxpayer dollars.

2) The QE and other "unusual" things done by the Fed in the last decade means many of the Treasury notes are now held directly by the Federal Reserve. Treasury can and will magically convert the notes to USD currency over time, which the Fed disposes of by sending USD back to ... the Treasury.

3) The debt and Fed actions don't necessarily cause inflation. Also, inflation is a form of a "sales tax", which isn't what people consider "taxpayer money" (in the US, there is no general sales tax, only federal income tax)

[1]: https://fred.stlouisfed.org/series/TREAST

[2]: https://www.brookings.edu/blog/up-front/2022/06/01/what-if-t...

[3]: https://stephaniekelton.substack.com/p/how-do-you-solve-a-pr...

I understanding this perfectly well. Every bailout was monetized in this way. Nobody paid a special assessment on the tax form called "bailout". Doesn't change the fact that they will be paying and this is happening again. All you are saying is that it is not only literally taxpayers who pay but also everyone who holds US dollars.

Now what did that pedantry get this conversation?

You're being pedantic, and you didn't read my bullet points, because the money literally disappears. It doesn't get "paid" by anyone.

> Where did the Treasury find this $25 billion?

They used this obscure keyboard shortcut: Ctrl + P

This seems okay. Even at par value the Fed is not at risk for losses. Their Operation Twist is largely responsible for creating the mess in the first place. This is almost like a closet Operation Twist bailout.

The word "bailout" is a distraction and red herring. For example, FT and Yellen use it as a weasel word here[0].

I notice several articles and threads derailing into conflations of semantic arguments around what a bailout is with specifics of the topic.

This is a trend (and, I suspect, tactic) on other topics and it only serves polarization. Try to not fall into this trap. It can be possible to call it out in a way which does not further derail the conversation.

(Saying it's a trend does not mean it's merely a recent thing BTW)

https://en.wikipedia.org/wiki/Weasel_word

https://en.wikipedia.org/wiki/Equivocation

https://en.wikipedia.org/wiki/Essentially_contested_concept

https://en.wikipedia.org/wiki/Persuasive_definition

Whether the statement "this is a bailout" is true or not is actually irrelevant.

[0]: https://archive.is/Yyu4S

Here’s POTUS being okay with it called a “bailout”. Can we move on to discuss substance?

[0] https://mobile.twitter.com/POTUS/status/1635080376572956672

One could think of it as the FDIC stepping in to solve the prisoners’ dilemma. While depositors may only face theoretically tiny losses, the ones exiting first get paid in full, while the ones staying are left holding the bag. It’s a small cost to the other banks to backstop the bank run through FDIC, compared to potentially costly capital raises they may have to go through if there is a systemic loss of confidence. The downside is the moral hazard: will depositors think they have implicit unlimited insurance from now on?

There is a persistent misunderstanding here. The equity of the bank itself is not particularly interesting, given its usually a small fraction of deposits managed. No, the bailout part is them covering deposits over $250k, the limit plain to see for anyone that has ever entered a bank.

It's worth remembering that not every "bailout" wipes out equity holders. Citigroup and AIG were both bailed out during the financial crisis and their equity survived (although with heavy losses).

That is why those were bailouts and this is not. Shareholders are not being protected.

Many things can be a bailout. I'm just calling it how I see it: this bank has assets that are likely less than the sum of its deposits. To make them whole despite this is a bailout, and particularly so when it's above the previously agreed on limit.

Maybe you just have an unnatural aversion to the word or something.

The bank is gone, it’s not being bailed out it no longer exists. It has in entirely been taken by the fdic and will be parted up and sold for the benefit of those the former bank owed money to (to wit, those who deposited money with it)

No. The banks are charged for that insurance. They provide the funds. There is no bailout. Using the equity buffer for coverage is _the whole point_.

The premium is set for 250k. Not unlimited. I'd have no problem with unlimited insurance schemes for deposits so long as the premiums are priced to reflect that

The FDIC has not identified any loss assistance required for the “unlimited” guarantee. That is: the equity buffer covered it.

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