The End of Silicon Valley (Bank) | Hacker News Reader

The End of Silicon Valley (Bank)

stratechery.com

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Any article, tweet, or comment section on this issue is rife with willfull ignorance of basic banking practices, chief among this being the strawman multiple bank accounts.

The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection.

The current dollar value of the cap also makes sense. Unlike what plenty people are trying to claim, there is no amount of money for which that current system is unsuitable. Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits). Money market funds provide short-term treasury exposure above that, and businesses with many millions liquid should absolutely be expected to invest in treasuries. If Bogleheads can do it in their retirement accounts why can't $10M+ startups?

Maybe the SVB depositor bailout was necessary in this case to prevent broader panic, but it sets a grim precedent for depositor behavior that ultimately makes the system more brittle and reliant on government handouts (which despite rhetoric to the contrary, will be paid for by the taxpayer/bank account holder).

> despite rhetoric to the contrary, will be paid for by the taxpayer/bank account holder

I see this spewed haphazardly but have seen no convincing rationale to back it up.

Where else does the money come from? Either there is no shortfall in which case there didn’t need to be a bailout, or the special assessment will be placed on banks, which will pass it on to consumers in the form of lower rates or increased fees. Just because there isn’t a “Silicon Valley Tech Bailout” line item on statements doesn’t mean it isn’t passed on.

As said in the Treasury Dept release yesterday (here: https://home.treasury.gov/news/press-releases/jy1337)

"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 this "special assessment" will be paid by all banks with FDIC coverage, and the cost will be passed on to the banking customers (us taxpayers).

most of the "startup bros deserve to die anyway" drivel I've read so far claims that the shortfall was minimal and the "bailout" was really unnecessary. In which case this special assessment will be small and likely to be covered by existing fdic reserves without those terrible fees passed on to the consumer.

My understanding is that the bailout cannot simply permanently pull from existing funds (which by the way were also paid by the depositor). There has to be a special assessment for any payout on uninsured deposits.

Their portfolio of startup loans is definitely not going to be sold for face value, I’d be surprised if bids are above 50. Unprofitable companies in a rising rate environment aren’t who you want to be lending to..

The banks aren’t going to lower their profit margins to pay for the bailout, the cost will be passed onto bank customers. This should be blindingly obvious.

> The current dollar value of the cap also makes sense.

How can a static number make sense given the existence of inflation? We've been told for the last year that inflation is "out of control," and yet in the case of the FDIC cap, $250K in 2012 dollars makes the same amount of sense as in 2023 dollars? To save anyone the work, $250K in 2012 is equivalent to $350K in today's dollars, so, a change of $100K, or 40%. Did TARP, which is repeatedly criticized for being passed too hastily, and also included this $250K cap, have secret future knowledge of interest rates and specifically intend for the cap to reduce in value by 40% over the following 10 years? The FDIC limit started at $2,500 in 1966 and has been increased several times. Have we magically arrived at the final number now?

> Deposit sweep accounts cover up to $3M (and diversify across banks, exactly the point of FDIC limits).

These numbers remain arbitrary. Your argument is only that there needs to exist an FDIC limit, not this particular limit. Why is $3M the right amount for sweep accounts? Saying "you can combine accounts to stack FDIC limits like video game power buffs" is true regardless of the base FDIC limit, it doesn't explain why this limit is correct, too high or too low. Look, it works for $50,000 too: "You can have deposit sweep accounts that cover up to $600K. Money market funds provide short term-term treasury bonds above that". And hey, it works for $500K: "You can have deposit sweep accounts that cover up to $6M. Money market funds provide short term-term treasury bonds above that". See, the surrounding multiplier system has nothing to do with justifying the base number. It seems much more likely that a number that was set 10 years ago when money was worth 40% more, and that has a history of needing to be raised, probably doesn't make sense today and needs another update.

> The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection.

If it is so critical to the integrity of the system, then why aren't accounts required by law to be sweeps above the FDIC limit, and not allowed past the "natural sweep multiplier FDIC limit" at all? You just said it yourself: the purpose is to reduce systemic risk. Then let's actually reduce it instead of "planting the seeds of reducing it if everyone gets sophisticated enough," and then getting angry when they fail to do it. The current system is like purposefully trying to create a tragedy of the commons, where individual mistakes are rarely very rarely punished but together contribute to bringing down the entire system. Allowing below FDIC limit accounts seems to be a weird landmine for both the depositor doing it, and for the larger system it operates in. It's the worst of both worlds. It's like when an API doesn't work, and instead of fixing the API, the author updates the documentation to include a workaround and is baffled why people keep running into this problem. Don't they read the docs? These uses are supposedly supposedly so smart but can't be bothered to find this simple workaround buried in my documentation?

>The federal government’s action is, in my estimation, the right thing to do for this moment in time. There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Banks, meanwhile, are now motivated to pursue even riskier strategies, knowing that depositors will be safe.

I don't believe this is a binary issue, but a lot of the "pro-bailout" rhetoric is essentially "well of course we need to know we'll get our money back if we deposit it in a bank." This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!

Could get the best of both worlds with a small, but symbolic haircut. Like 95% back.

Now everyone knows that money in bank is not risk-free, and you limit any systemic fall out.

> This is clearly the best ideal. But that's not how it works!

The “systemic risk” exceptions that are in the legislation and announcements over the weekend mean this is exactly how it works.

My guess is that this will be continued - perhaps even publicly formalized - or small banks will cease to exist very quickly in favour of those that are too big to fail.

It's essential a thousand times over that money goes to banks instead of mattresses. Letting bank runs erase savings is a really terrible idea that would be a repeat of the 1920s era mistakes.

> This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!

The FDIC limit is basically useless at this level. 250k for SVB given their clientele really seems futile.

So I'm not sure even discussing it would serve much value. What I fund more interesting was the UK branch of SVB was actually higher in assets than liabilities and was making profit. It's just so strange to me still how this seems to have happened so quickly and seemingly, made worse by some people just getting worried.

There is something called the risk-free rate. It used to be 0, but not any more.

Limits were not "ignored", the companies simply have no other choice. The problem is systematic and by design. A medium sized startup/business handling only 25 million would need to bank with 100 different banks, obviously that's inconceivable in practice.

And now look at some of the more prominent customers. Pinterest, Shopify, CrowdStrike Holdings, Beyond Meat, Andreessen Horowitz, Founder's Fund, Circle. The latter is of particular interest because they are confirmed to have had around 3.3 billion dollars with SVB (of the $40 billion they manage in total). So some quick math, they should have used 160000 different banks to be safe, no problem. Apart from the fact that there are less than 5000 FDIC insured banks in all of the US.

There is a straightforward hierarchy of cash management techniques that safely handles large sums of money. If Boglehead retirees can figure it out then why can't startups?

Deposit sweep cash management accounts offer FDIC sweeps up to ~3M (note that this is not just abusing some technicality, it reduces systemic risk by diversifying investments. The whole point of the FDIC is to prevent bank runs in the first place). Money markets provide short-term exposure to treasuries beyond that. In the 25M range, companies should absolutely be expected to manage purchases of treasuries. Again, if Bogleheads can figure it out for individual retirement savings then why can't businesses?

> If Boglehead retirees can figure it out then why can't startups?

Because every dollar spent on keeping your investors' dollar safe is a dollar not spent on moving fast and breaking things. /s

So isn’t this one of those cases where the market is supposed to respond?

If FDIC genuinely topped out at 250k, and there exist customers who have more than 250k they wish to deposit, the market should be able to respond by providing private insurance for cash balances over 250k.

Your premium would presumably depend on the balance and the risk profile of the institution where you’re keeping the balance. Insurance providers would want to audit institutions at which their customers are holding those balances to make sure they have a risk profile consummate with the insurance premiums they’re collecting.

You, know, like insurance companies do.

Should lead to private banking accreditations that have the same imprimatur value as ‘FDIC insured’, but privately funded, right?

Now people might say ‘too big to fail policies are why that kind of product doesn’t exist’; but it’s not like products like that were in widespread use before 2008… has the banking industry just always assumed that federal insurance is effectively unlimited?

The above explains how the system is flawed and the solution is not to throw public funds at banks to in a way reward risk taking. I don't generally support bailouts.

Again, the system is intentionally made this way. Insurance would not even be needed if safer banking models were approved, which they're not.

The article describes exactly what the safe choice is: short term treasuries. The option that SIVB ignored in order to yield chase.

Of course they have a choice: money market funds and T-Bills. If you're handling millions in cash, you're supposed to know about these.

Circle needs those dollars highly liquid because otherwise they'd run into issues with their own customers. Exchanges can't give the customers T-Bills when they trade for dollars.

Also startups do not get paid in Treasury Bills when they strike deals. Clearly this system is flawed and prone to bank runs, which happen again and again. Because business people especially are aware of how banking works, they know the bank doesn't actually have the money in full. When there are issues, it's a risk leaving your funds with the bank instead of pulling them out.

I don't know much about Circle and hold no resentment towards them, but this sounds very much like a "them" problem.

If you're operating a business that requires millions or billions of dollars sitting in a bank account, you can't plead ignorance around FDIC insurance and claim that you're just a small business trying to scrape by. Your business is open to a big risk, and there are well understood techniques for managing that risk. If you're a disruptive company who's trying to change the world and you don't fit into traditional finance, you find a creative way to deal with the risk. But if you _do nothing_ and keep all your money in a bank hoping they don't collapse, sorry, but that's accepting the risk.

I don't see this is a systemic failure. The system is set up to protect individuals and small businesses, with the expectation that larger companies can pay people to manage these risks. If Circle's CFO and finance team couldn't come up with a better solution than parking all their money at SVB, I'd argue it's a sign of Circle not being a viable business rather than a sign of some fundamental flaw with the banking system.

Banks will extend all the credit you need if you have billions of t-bills as collateral. No need to actually have millions (let alone billions) in actual deposits.

The answer seems pretty simple. Don't invest much more than you're ready to lose. I'm sure that even in the US there's a way for a business to open an arbitrarily large risk-free zero interest i.e. no investment bank account.

What do you mean "invest"? Most of this bank's customers are running a business and need a bank account, it's not an investment.

It’s quite simple, really. Startups should buy hundreds of millions in gold, then stash that under 160,000 different mattresses to diversify risk of a systemic bank collapse.

If Bogglehead retirees can figure that out, why not startups?

A poor straw man.

There are better monetary instruments (like short term Treasury Bonds) to keep money at scale. Most startups don't have a team (CFOs etc) but I am sure the larger ones don't keep cash like that.

There are many ways a business can practically manage cash to avoid bank risk.

This has been pointed out so in the past 48 hours that I am beginning to think people are just willfully ignoring it.

Companies could insure funds over the $250,000 limit

What would it take to formally increase this limit to USD 250 million for everyone?

Probably negative interest rates for customers

> depositors are a bank's creditors, who are compensated for lending money to the bank;

this is simply not true. if anything the bank charges me money to hold my funds.

You should currently be getting at least 3.3% APY from your savings account. If you're not, it would be in your financial interest to move it to an account (possibly even at the same bank) where you do.

>But that's not how it works!

I would imagine the people advocating for a 'bailout' (using the most generous possible definition here) want this to become how it works.

Like how in Germany the government guarantees every German bank balance.

I have enough problems, I don't want to have to worry that my bank balance will disappear unless I spread it around in order to abuse a technicality.

Spreading deposits around is not abusing a technicality. The limit incentivizes diversifying deposits because it reduces the risk of a single bank. Retail banks benefit immensely from the fact that much of their deposit base is smaller accounts that are less correlated. A bank handling only large deposits from a small number of highly correlated depositors is exactly what FDIC caps ought to prevent.

> Like how in Germany the government guarantees every German bank balance

… up to the amount of 100k per customer, so less than the FDIC guarantee.

There are additional, voluntary, insurances given by groups of banks. These are also limited and customers are not legally guaranteed a payout.

> Like how in Germany the government guarantees every German bank balance.

Up to 100.000€, they don't guarantee it without limit, and they don't guarantee it for anything that isn't insured.

Greensill's insolvency recently got lots of media attention since local governments deposited large sums and were not (fully) covered by the normal mechanisms that protect private and business customers.

Same 100k limit applies in Switzerland too

> Like how in Germany the government guarantees every German bank balance.

It does? I didn’t know about that, and looking it up brings me to 100k per person guaranteed. Do you have a source for unlimited?

I don't want to have to worry that my bank balance will disappear unless I spread it around

If you have enough money to worry about having to spread it around, you have enough money to buy additional insurance for it, and/or enough money to hire someone to take care of those things for you.

"Oh, no! I have $250,000 in savings and now I might have to open another bank account to hold even more money! Woe is me!"

Can you even hear yourself?

I can also pretty much guarantee that very few individuals with >$250K of savings are keeping it in a bank. It's in a brokerage account in some combination of bonds, money market, and equities.

>Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest.

That's not why I have a bank account. It's how you avoid paying fees to get checks cashed. If you want interest, you put it in a savings account, or a CD, also in a bank. The only safe alternative is savings bonds.

If you want to gamble the money, then you invest in stocks, bonds, etc.

"depositors lend their money to a bank, for which they are paid interest, and banks lend that money out"

... isn't how banking actually works.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Yeah, it's the "and banks lend that money out" part that is wrong, and it's why banking is way, way more complex than people realize. There's a lot of "it's all very simple" going around (here and elsewhere). It is not simple.

Those free services are the "interest" you receive in return for your deposits.

Don't give me interest then. Just store the money.

If I want interest I'd then switch to another type of account, that I explicitly allow to lend them out for this purpose.

In fact, they should have seggregated isolated-from-others-in-default accounts, with different fractional reserve percentages...

This is how the banking system works.

As fiduciaries responsible for managing millions of dollars in capital, founders/VC have a responsibility to understand the parameters of the financial game they're playing.

Any competent financial risk manager has a well-worn playbook of solutions to the problem of "how do we put money in short/medium/long-term storage?", that are appropriate in accordance to how big the pile is and how liquid you need it to be.

If we disagree with the rules of the game, the proper solution is to lobby to have them changed and debate the merits in the court of public opinion, not to live in ignorance of the rules and cry "contagion" to be made whole, when we're faced with the consequences of ignoring those rules.

CDs are more valuable to banks because they prevent you from making a bank run by requiring you to keep your money deposited for a set amount of time. They're still investing that money. They also invest the money in savings accounts.

Putting your money in a bank is essentially the same as investing it, but with a few more safeguards that you're exchanging for losing out on profit.

Random internet tip: if you have any significant savings, and you don't need liquidity, it's been waaaay more profitable to buy 6 month treasury bonds

That was true last week. https://www.marketwatch.com/investing/bond/tmubmusd06m?count...

Oof! Still hard to find a savings account that pays > 1%.

https://www.nerdwallet.com/m/banking/standout-online-savings...

Get 3.3%, at least.

Marcus by GS has been paying 3.75% since mid-February! They've been pretty good for a while, now

I have this innovative idea for business. Imagine you charge money from depositors for keeping their money in a big safe vault. No trading or lending their money. You just keep it safe.

That's just a waste of capital and leads to zero business investments. It's exactly what happens in crypto because it's deflationary, and it's the main reason there is no crypto economy beyond the price speculation.

Yes, this is essentially correct. Every few months the idea of narrow banking is re-discovered and presented as a magic cure-all.

What played out over the past week was all fine. The FDIC and Treasury worked.

The contagion was the VCs freaking everyone out. It was a bad week for “leaders in tech” fomenting FUD when they could have been calming the situation down.

SVB had safe assets. They mismanaged interest risk. The government stepped in. It’s fine.

Thank god for centralized financial systems.

No it just increases the hurdle rate for valuable investments. It just means that entrepreneurs have to prove that their ideas are worth more than the security of knowing your money is safe. Is that so bad??

If you expect individuals to evaluate investments, then you're nuts - but if you're saying that the bank should do it for them, then you're suggesting the same system that already exists.

So by keeping my money with you I lose spending power at a rate of your fees PLUS inflation? Where do I sign up?

Well in that case you must be ok with losing money that comes with the risk. Which many people surely are not ok with(Want bailouts).

Makes perfect sense to me. If you are ok with the risk of losing it all. You go in for an investment vehicle. Or you go in for a vault.

Or I understand the insured limits on my accounts and make arrangements accordingly.

It's not that weird. It's basically a checking account. Lot of countries those have fees attached. It's also the historical origin of banks. strong men with vaults to store your coins. It's no longer attractive because of fiat currency, which has strong inflatuonary pressure; and because of the fish-in-water effect of two centuries of capitalism, people no longer can distinguish between savings and capital, the divider between those two conc3pts is no longer part of the mental model of forms of wealth.

Narrow banks are no longer attractive because lending out depositors’ money has positive externalities. It’s used to fund mortgages and small business loans. That’s a positive.

Are there downsides? Sure, but what we saw this past few days is that the system worked. SVB was dumb, the federal government stepped in to save deposits, management was fired because they did dumb things, and the shareholders were likely zeroed out because they owned the company doing dumb things.

Yes, we could pull money out of the financial system, but that might well be worse for everyone.

I have a checking account. I only keep a small portion of my money in there.

Combine it with another novel idea: the gold standard.

I know it's very trendy to advocated for that, but we do know that the removal of the gold standard was an attempt to keep the United State economy from melting down too, right? It's not actually a solution to all our economic woes. Sure, removing the gold standard created a new class of problems but going back isn't going to stop the ones we used to have.

>I know it's very trendy to advocated for that, but we do know that the removal of the gold standard was an attempt to keep the United State economy from melting down too, right?

I'd rather it was let to melt down, learned the lesson, and we went for a more sustainable model.

This is very easy to advocate for when it's never actually going to come to pass.

You're very close to how it works.

In big business it's called Treasury, which derives from Trezor or Safe.

For example Apple will have a Treasury department to manage it's cash. They don't put it in safes anymore, because, well you seem like an honest person, but your predecessors had a tendency to steal the money from the safe.

You generally don't put it all in one Bank either as they have a tendency to either steal it or gamble it on the markets.

A treasury I worked at had software that would pull money from banks across the world into more trusted banks. That's called cash pooling.

Then traders in the treasury market would buy up government bonds from stable governments.

This costs money and is big business.

So perhaps there's a market for treasury as a service (TAAS).

Interestingly, even the current, very inefficient and clunky set of popular cryptocurrencies can fit that role quite well. You can quickly buy and sell millions in BTC and ETH and no bank can go and gamble with it even if you leave it there for years. The only obvious problem is volatility, but that goes both ways.

It's called "narrow banking" or full-reserve banking.

It's been tried, and was rejected by the very same regulators who now had to bail out SVB: https://www.econlib.org/why-does-the-fed-oppose-narrow-banki...

> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee. Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.

This does not sound like keeping all the cash in a vault, this looks like reselling a service of the government not meant for this use.

It could be interesting to see if a service oriented to very low interests (or even negative) rates would be (in theory) feasible.

in case anyone is wondering, it's called a custodian bank

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

I dont know a great many who would pay for that service.

I imagine that people are paying for insurance for these kind of things. A less risky bank is worth at least a fraction of that.

I'll add on to that idea. What if that is considered a basic human right. One line in a database with your name and a number. And governments, the most powerful entities on earth offer it for free. Doesn't seem very expensive to offer compared to the amount of times we have to bailout banks....

The problem there is the idea of "money". You can keep your float variables safe in a big vault called a distributed acyclic graph, but there's not much we can do about how people view what those numbers mean compared to the price of a toilet seat.

You're talking about the gold standard, there's better things to do with gold. These crisis are like car crashes, they happen. But in the end, it's still fun to drive cars really fast, overloaded on wet, winding roads at twilight.

Why?

You can recklessly make money off it for years then when you eventually get it wrong the government will step in and fix your "Oopsie"

That sounds way more profitable.

I can go buy a fireproof safe for a few hundred bucks. Or rent a safe deposit box. My money becomes less valuable the longer it sits in either.

Your money becomes less valuable in a bank too, as a bank account is not an investment vehicle anyway. It's just that now you also have the added risk of the bank defaulting like SVB.

If you want to invest, invest. If you don't, you shouldn't have the added risk tied to your "sitting in the bank" money, just inflation.

This is one of the better articles written about the whole debacle…

Also demonstrates VCs shortcomings (lack of diligence?) in the affair… which is probably why VCs are shouting about it and pointing fingers at others rather than examining their own failure in this

Maybe startups shouldn't blindly follow Silicon Valley recommendations and make their own decisions on operational matters like who they hire, where they bank, and what systems they use. There's too much groupthink and cult-following especially in the Silicon Valley venture community, where the investor's word is taken as Gospel to be followed to the letter. A bit of independent thinking goes a long way.

> There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?

Because if the bank doesn't give any interest, people will keep the money in either a competing bank that gives interest or in cash or in other instruments that pay interest.

What a full backstop removes from the interest is a risk premium. You already see that at Chase or BoA accounts. The risk premium is zero so the interest they pay is much lower than other banks. But this is where other banks get an opportunity to compete for deposits.

The only "interest" I've gotten from a bank in probably decades is a free checking account which money can be deposited into and withdrawn from (via paper check or a couple different online payment mechanisms), the very rare notary service, and ATMs (also increasingly rare). I regularly sweep any significant excess cash to a brokerage account. I understand companies keeping larger pure cash accounts but how many individuals are keeping $500K in a bank deposit account?

Do people chose banks for interests rates in saving accounts?

Like do people make the financial decision to use saving account rather than stock/bonds/hedge funds as investments?

As far as I understand no reasonable bank anywhere offers interest higher than inflation.

Yes, people do make such decisions. Why? Because they expect stocks to fall and bonds to expose them to interest rate risk. They'd rather keep the money liquid and ready to sweep in to buy assets.

People also use savings accounts for impending expenses. Human stuff such as pregnancy, kids, car repairs.

Parking money in liquid savings with 3.5% interest is a very viable hedging strategy for humans. Perhaps not for institutions.

At least Bank of America is still effectively 0 interest (excuse me 0.01%) on savings accounts. I'm not sure why anyone would bother to maintain a separate account beyond a checking account buffer. My brokerage sweep account is over 4% right now and transfers can be done online and just take a few days.

I assume the only reason for the savings accounts is to convince some people that they can save at their bank without bothering with another account somewhere else. (And, of course, until recently money market sweep accounts paid very little as well.)

Is that 3.5% an actual figure or just an example? I admit that it is much higher than I would have expected (which was on the order of 0.1% ~ 0.01%), did SVB offer that kind of interests?

https://www.nerdwallet.com/best/banking/savings-accounts

I assume all of those are money market accounts like a brokerage sweep account as opposed to a regular bank savings account which, at my bank at least, are still paying 0.01%. Which may be a reasonable risk/reward tradeoff as 4% on, say, $100K isn't nothing.

Those are really savings accounts. I myself created accounts in them to take the benefit.

Interesting. Marcus for example is explicitly covered by FDIC.

I guess a lot of regular banks have decided that they'll just continue to pay the "dumb money" basically nothing rather than trying to compete with the banks and brokerages paying reasonable interest rates.

There is a market for it. Not every human sits everyday watching interest rates, stock prices or other financial signals. I, for one, am glad that banks are competing for money with any interest rate.

Definitely. For so long, $100K or whatever sitting as a cash or near-cash reserve, it really didn't matter much whether that was in a checking account, a savings account, or a brokerage sweep account. But getting 4-5% on that kind of money at very low risk is getting to be real money at current interest rates and it's worth actively managing how much you have in a checking account.

There's a huge leap taken by this piece with distressing casualness.

"This action effectively means the $250,000 FDIC limit is meaningless: all deposits in any bank are presumably insured by the full faith and credit of the United States."

Exceptional circumstances sometimes call for exceptional measures. A bank with 85% of its accounts over the $250k limit where most of the depositors are contractually locked-in companies is not normal. Moreover the contagion nucleus in this network were a few culpable super-spreaders with exceptional power. Other banks don't face that threat either.

Banking policy must be written to include exceptional circumstances, but the idea that all banking policy needs to be rewritten to burden smaller banks with situational precautions which are impossible for them to encounter is dangerous idiocy. Don't write housing codes that require 9.0 earthquake tolerance in areas primarily hit by hurricanes!

Furthermore it's dispiriting to see generous tit-for-tat given such a cynical portrayal. If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down.

This situation was exceptional, and the panic was triggered by people with outsized network influence who should have known better. So maybe, just maybe, we deal with the reality of the situation rather than assuming it must be a harbinger of total change.

>If two people have knives to each others throats you don't win by just not being the first to cut, you win by putting the knives down.

Strictly speaking there are 4 outcomes, according to John Nash. The cooperate outcome is globally the best, but the 2 defect outcomes are much better for the individual winner. The 4th outcome, 'they fought and badly wounded each other, but both lived', is what's going on here, and the FDIC medics are coming in. This helps now but has the perverse effect of increasing the chances of defect behavior in the future, IMHO.

The angle I want to know more about is Peter Thiel. He's already demonstrated the willingness and ability to execute complex plans to destroy enemies (e.g. Gawker). He likes Trump, so not a fan of self-restraint or basic morality. Is it possible that Thiel has a bone to pick with SVB? Or maybe it's bigger, and Thiel, who famously hates competition, saw a way to hurt ALL startups, including some that might one day threaten him and his businesses. It's the old story about the orphan who makes it, recognizes the positive influence the orphanage had on his success, and then burns the orphanage down to ensure no others get its benefits and challenge his power.

"the old story about the orphan who makes it, recognizes the positive influence the orphanage had on his success, and then burns the orphanage down to ensure no others arise to challenge his power."

This would be a really interesting villain. Someone who wasn't subject to the fundamental attribution error and had an unlimited appetite for destruction.

It sounds interesting to me, and worth trying, but I'd be worried that such a villain would be uninteresting to watch on film. No cackle? No monologuing? They would be pure self-interest, executed calmly and without pity (including self-pity), would do crime but never brag about it, never get caught. Such a one would not be terribly interesting to watch because the villain basically has the mind of a spreadsheet.

Sounds like the plot to "There will be blood" to me. :)

That was one of the best plots/executions of a plot that I've ever seen!

Love "There Will be Blood" (and PTA), but I don't see how it fits. Plainview as a villain was great because his extraordinary, single-minded ambition motivated him to attempt kill his own humanity. But Plainview failed. His humanity was still in there, in long-abused, long-neglected agony and rage, which had its final, full, disgusting eruption in the final scene of the film with Paul Dano's character. It was evidence that Plainview couldn't kill his own humanity. This made him interesting. My spreadsheet villain succeeds in fully killing his own humanity. I don't know if this is even possible, but given the plasticity and variation in the human mind, it probably is. But I still don't think it would be interesting to watch!

That's a fair point!

I guess the most searing part of the film, in my memory, is the first / middle thirds of the movie. But maybe I only remember the first two thirds because it's balanced so effectively by the ending. :D

I'd watch your movie, but I agree it'd probably be criticized as boring because the anti-hero doesn't "develop". Maybe it'd be better if you focus on their childhood/adolescence, i.e. the experiences that sparked the intent to crush their own humanity. Godfather 2 vibes.

That's Voldemort, he did burn down his own orphanage.

Can someone shine some light on[1][2]?

If true, it would seem that some of this panic would have been engineered in order to save VC capital at the expense of the rest of us?

---

edit: We really need an analysis of @Jason and @DavidSacks w.r.t [1][2]. They were touting Doomsday on their AllInPodcast[3] but with [1][2] I'm starting to wonder...

[1]: https://twitter.com/innoc_bystander/status/16347730533046108...

[2]: https://twitter.com/ddayen/status/1634925785550319616

[3]: https://m.youtube.com/watch?v=CEee7dAk25c

Yes, and VCs have been exposed for the leaches they really are. Years spent being actively hostile to government and regulation, encouraging their companies to break the law at every turn, only to come begging when it all threatened to implode.

Has the low cost of online banking removed the need for fractional reserve banking? Why does a basic checking account need to have economy destroying risks?

Because money. Yes to any reasonable person your bank account is money not intended for gambling, but that's not how bankers see it. They're in an industry where appearance is everything.

As long as you drive a Tesla and never have to cook in your Italian marble kitchen (I don't know and don't care if it's a thing, just making a point) it doesn't matter if it's all debt. The entire point of our economy is to kick it downhill and have someone else pay for it.

Nothing grows indefinitely, we all know this, but we pretend economy is different.

In what way does online banking change things?

If the bank can't lend out your money that's in your checking accounts, then they'll have to make money another way. Online banking makes the cost tiny and easy bare.

Fractional reserve banking seems like an absurd way of paying for banking.

For one, an online bank can just be some servers and staff.

No physical locations, no actual tellers, no physical money stored, etc.

> "the answer will almost certainly be far more stringent regulation on small banks"

And that regulation won't look kindly on lending to anything new, different or weird.

A lending model like SVB's won't be supported by regulators.

They can always still lend on useful, productive, and with a chance of success, rather than using cheap QE VC money for BS business ideas...

The point is that if you make a bureaucracy responsible for 100% of deposits it will be very risk averse in the loans it will let a bank make.

Out of curiosity, did anyone ever believe the "rainforest" metaphor for Silicon Valley, that entrepreneurs and investors were more interested in global/"community" success than their own individual wins, and that they wouldn't react egotistically when real money was at stake?

Stratechery asserts this was "probably true" in 2012 but not longer true, and that Uber was one of the first cases where short term/individual wins became more important, even if they destroyed trust.

I find it hard to believe this "let's all of us win together" was ever true.

As somebody who grew up in SV, I think this mythos was incubated around the period between the Yahoo/Ebay IPOs ('96/'98) and the Google IPO ('08). The concept reached its peak (although it was already rotting from the inside) around the time of FB's IPO ('12).

It didn't exist much before, and it's (IMO) fully gone now.

You'd be surprised how many naive people exist, when it comes to such empty promises...

It's why all SV companies say their mission is "to change the world" and such BS

> Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest.

This may be how banks think about themselves, but I'm pretty sure that most consumers, even businesses, don't think about them this way. Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction?

> Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction?

That is what I always believed hedge funds are.

It might matter that (in my country) I will likely never have enough money to get net profit from my saving account (interests minus price of services), but if I were aiming for that I would invest, not deposit

"remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?"

No, depositors get interest to compensate for inflation.

The way capitalism works is this. Rich people have the responsibility of knowing what to do with their money. If they don't know what to do with it, it won't be long before they're no longer rich. Perhaps people are sympathetic towards FDIC deposits up to 250 thousand dollars. (That isn't capitalism, either.) But at some point people need to evaluate whether or not a bank — or anyplace else, for that matter — is a safe place for their money. If it isn't, the money shouldn't be there.

Of course, this takes work. That's called reality. This is now the second major banking crisis in 15 years. That's called death throes. The system we have is a mess. And bailouts aren't helping. With respect to the system, bailouts are doing the job of alcohol in staving off delirium tremens.

This post was #2. And 10 minutes later it's #44 on second page. SMH

We are sooooooooo screwed!

VC money is completely frozen. It's an insane tragedy. There needs to be a bank where we can put our funds above 250k that is insured but also heavily regulated.

This is still a better situation than 2008, where banks were bailed out to the extent that management even stayed (despite deserving prison), and shareholders lost nothing.

So that's the worst possible outcome, today's is probably second worst. But I don't see what would be better. Ben talks about loss of trust now, but we'd actually lose more trust if depositors weren't bailed out, and probably contagion would spread and many banks would fail.

Thinking about an endgame, I think extending this all out into the future, its hard to see banking remaining in any way a free market. Either it becomes state sanctioned and protected profit making, which it already is for the big 4 banks, or banking just becomes fully nationalised, and basically a state run commodity.

You can't get out of it being more and more centralised. I just don't see another way. And when it becomes fully centralised, the question is, does Jamie Dimon actually do anything, or is he basically a state actor with a billion dollar salary?

> probably contagion would spread and many banks would fail

I see this mentioned a lot, but I have still not seen a valid explanation of why this would be the case.

Do we think a lot of companies in random industries will run and pull out their cash from banks to put it... where?

Everything would get moved to the handful of "too big to fail" banks.

"Deserve prison"? Did they commit a crime?

In 2008? I think it was fraud yes. What would you call packaging mortgages you know are worthless in pretty wrapping to be able to sell them to the next bagholder?

That it temporarily works and it's how everyone does business isn't an excuse.

Prove they knew they were bad

What do you think?

yes, they 100000% did. They defrauded their clients, the government and each other. They committed multiple levels of fraud and all got away with it.

Is it just me or has Stratechery gone downhill in it's analysis (or at least put too much mindshare on mid-market B2B SaaS startups, AdTech, and B2C).

A number of the Stratechery articles I've read recently seem to remain in that whole echo chamber and don't seem to extend that well into other segments in the larger innovation industry.

What industry is that?

Stratechery seems to stick to the B2C, AdTech, Fintech, and mid-market B2B SaaS sectors, and at least for Biotech (loose term, Pharma VC is distinct from Healthtech VC is distinct from B2C health apps is distinct from ...) and Cybersecurity+Infra Startups, some of the analysis seems not as targeted.

I've worked in both those industries and the VCs, GTM, Operations, Personas, and Economics for those segments are different from how an early stage Stripe or Uber or Amplitude would operate.

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