Silicon Valley Bank Depositor Bailout Makes Mockery of ‘Too Big to Fail’
nationalreview.com
nationalreview.com
SVB investors were wiped out 100%, this includes most of the net worth of the leadership team. Moral hazard is definitely still in play.
All we need to see after this is is Basel III and Fed regulation extended to cover all banks of any size, not just those with over 250B in assets.
Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future).
The only people that lost here are investors in SVB and temporarily the other FDIC members will lose a small amount of money to additional FDIC special payment to replenish the insurance fund (but they will "get it back" later).
This is completely ignoring the time value of money. Money today is worth more than money in the future. We are transferring real value today and thus making the public, through the other less risky banks, eat the haircut that will happen no matter what. The losses are real.
What this has done is create the following incentives:
For depositors:
1. Bank with the riskiest bank possible since all deposits are covered.
For banks:
1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way.
The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
The simplest, and first thing to do is to lower the threshold for systemically important banks back down to the original $50Bn before it was raised to $250Bn in 2018.
Depositor risk has never been a consideration of the bank except as far as it relates to the banks ability to grow shareholder value (if investors are wiped out, the bank doesn’t give a shit whether depositors are also wiped out)
> The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
Strongly agree tbh. There’s social reasons why it won’t happen but I’d much prefer this
Yeah, I think we had that argument as a society a looooong time ago.
Your incentive for banks doesn't follow either. Shareholders got wiped out. This sure wasn't in their interest, previous dividends or no. Management may get bonuses clawed back, and even if they don't, they're not going to find a job that pays as well ever again.
I think that the risk went into higher profits, not higher rates to depositors. So, not really an incentive to depositors.
> SVB investors were wiped out 100%, this includes most of the net worth of the leadership team.
The CEO's base pay is >$1m/year in cash and he's sold over $40m in SVB stock since 2018 https://www.secform4.com/insider-trading/1259867.htm I can't see how this would wipe out his net worth.
The people being protected here aren’t SVB. It’s the customers.
Gregory Becker, CEO, sold 11% on Feb 27, 2023. Before the collapse, executives sold shares.
Gregory Becker, CEO, sold 11% on Feb 27, 2023.
Michael Zucker, Counsel, 19% on Feb 5.
Daniel Beck, CFO, 32% on Feb 27.
Michelle Draper, CMO, 25% on Feb 1. Michael Zucker, Counsel, 19% on Feb 5.
Daniel Beck, CFO, 32% on Feb 27.
Michelle Draper, CMO, 25% on Feb 1.
https://unusualwhales.com/news/numerous-corporate-executives...
Becker was a member of SF Fed and led anti Basel III regulation for SVB.
Unless we change the status quo about rewarding CXXs with huge amounts of stock AND giant salaries AND allow them to cash those stock grants out before retirement I don't see that changing.
How is that not being held responsible?
And the customers who didn't want to ask questions how they were paying 5% interest on cash while equity was going down and bonds all-time low...
They benefited from the scheme as well, they are not victims.
The real victim is the taxpayer (or indirectly other bank customers through insurance mechanism) that is going to cover the losses.
This is just "cost of doing business" that can be factored in. Management had amble time to sell and reinvest their ill-gotten gains.
Someone should go to jail for this -- that would be real responsibility.
Yeah yeah, taking responsibility in a way that he is mostly not personally affected.
Taking responsibility would entitle pouring back the billions he cashed out back into the company.
Oh maybe you meant the shareholders who funded this activity? Oh, the ones who were wiped out?
The shareholders are wiped out. But the bad management made out great. They don’t have to repay any of those ill gotten gains.
SVB Securities' CAO served as the CFO for Lehman Brothers' Investment Bank https://news.ycombinator.com/item?id=35122311
> These billionaire VC's started a bank run on their own bank and then immediately pivoted to screaming for a government backstop. Incredible stuff.
> It's really not even clear SVB was in such terrible shape on the merits. Was def squeezed, for sure, but really looks like their little group chat knocked it over!
Several said that if SVB didn't get 100% depositor coverage that they would assume any regional bank could fail, and thus everyone should move to something safe like JP Morgan. By the time they started to say this publicly they already instructed portfolio companies move out of regional banks. Many were in the process of doing so.
The Fed / FDIC can see this happening and now are over a barrel. So the VCs managed to start one run, then jump up and down yelling to be saved OR ELSE we are going to actively start a series of runs by undermining trust. It's super cynical, and basically allowed the banking system to be held hostage.
Now I am not someone who thinks there shouldn't be some kind of action to help out depositors. For me the biggest issue is cash flow, and if uninsured depositors can be helped very quickly to make sure their businesses don't fail (because they can, SVB has the assets) then the government should make that happen. But somehow that wasn't good enough for the VCs. They yelled that its 100% secured deposits or nothing. And it's really uncomfortable that we allow them to have that kind of leverage.
You have to wonder if any financial authority will step in order to investigate this. After all screaming "fire!" in a crowded theatre should be punishable, especially if you end up financially profiting from said action of screaming.
That's the risk you run investing in a bank. Better this than the 2008 bailouts when the banks ran themselves into the ground for profit and were still made whole. And, better this than spooking the entire financial system by not protecting deposits.
If everyone was talking to each other, and they’re so smart and rational, why didn’t they decide to have everyone take out a small amount to cover essentials like payroll? Was it maybe… greed? Lack of ingenuity? To be fair, bank runs do happen, but everyone who caused this one was in a big old group chat and they could have prevented it, and nobody had the idea.
If it was so rational, why did they continue to demand a bailout even after it became clear the FDIC would get them nearly 100% back? Was it maybe… greed? God forbid that anyone lose even a few cents of uninsured deposits. What happened to paying for extra insurance? Now they complain about contagion to get a bailout, contagion which they began and continued.
I am talking about the period just prior to when the bank ceases normal operation, when everyone is panicking and deciding whether to withdraw everything. People in bank runs are judging the behaviour of other participants. If you think everyone else is going to do that, then yes, it’s rational to do that ASAP. If you have all day to talk about it, and everyone relevant is in the room, then if possible you don’t do that. Because bank runs are bad! You might try to soften the blow, even out the damage, ensure nobody’s left behind, and then get the bank to go down gracefully. The people here acted as if they thought the bank run would go on until all the money was drained, or worse, as if bankruptcy meant getting pennies on the dollar. Of course that wasn’t going to happen. Maybe 20% got out, which amplified losses slightly for the slower reactors. Was the risk of a few percent worth causing a panic and threatening a larger one? No!
But no, it had to be run run run, full speed, and then threaten the government with more panic if they didn’t bail it out. This path is greedy and needy, and it will not make big tech any less of a pariah in the American psyche.
PS, I think much of this irrational behaviour may be attributable to the 250k insurance cap. Everyone sees that figure and sees the absolute worst case scenario, blinded to the actual likely amount they’ll get back from someone selling off the assets. When you have $10 million in there it looks really bad even if it’s really fine. If you have to force people to pay for 100% insurance coverage just so they don’t all act like idiots in the face of a run, then maybe that is worth it.
People hate this when I say it but ideology makes you a dummy. And that's what they were being because of their paranoid libertarian ideology.
Have you considered that rational decision may actually be a rational decision?
As in, something is actually wrong there, with the way banking is done?
It seems your thinking stops at "Rational actors would expose a problem with the current style of banking. Therefore, stop rational actors from acting, in order to PROP UP that same style of banking."
The moral hazard is real. People who point to it are simply one step ahead of you in how such actions necessarily pan out over time, not "missing the point by a mile".
Are they talking about short sellers talking up the bank run, or just companies that withdrew funds so they could pay their employees?
Having no consequence for those with a $3.3b balance creates too much moral hazard.
Edit: wording
If I was an US citizen, I would have exploited this as much as possible.
It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?
I mean, did svb offer higher rates/lower costs than average banks? If yes, depositors of more than 250k have to take a haircut, proportional at what was left in the bank (and honestly it seems like all deposit were backed, so even if founds aren't available now, there will be no losses)
And of course, by the time the regulator finds out, the damage is done.
I think its far better to cap the risk protection. That way you have customers doing their own risk management as well - avoiding what they perceive to be risky banks, diversifying deposits across banks, choosing alternative assets to store wealth, etc.
The wealthy and powerful only want welfare for themselves, not anyone else in society.
The mockery will be not holding anyone accountable. Just like they weren't in 2009.
Would conservatives suggest investors really should be paid back first? Unlikely to be popular.
It doesn't seem like the author is disputing the traditional order of repayment (depositors, bondholders, stockholders)
He's obviously not suggesting that, considering how he goes on to say "when liquidated, SVB has the assets to pay off 95 percent of deposits."
There's clear procedures for bankruptcy and equity holders would be on the bottom of the capital stack while depositors would be on the top.