SVB shows that there are few libertarians in a financial foxhole
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Someone could argue that they could have foreseen that this abundance of liquidity in the markets, along with the supply chain issues, would eventually lead to inflationary pressures and that once inflation has shown its ugly face, those bond's market value would be discounted, and that they could become vulnerable to a bank run.
But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
That said, please don't confuse me with a libertarian; I am just raising a somewhat contrarian point. Being called a libertarian would be an enormous source of shame and disgust for my mom.
'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes
http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
'What this means going forward
An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years.
If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable.
As shown in https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been.
The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds.
If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021).
And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?count...
But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
This point is lost on everyone. They will get their money back, in 10 years. That's why it's a called 10 year note.
They messed up not considering they'd need the money sooner, and failed to seriously consider that no one would want to buy their notes if interest rates went up, because there would be much better deals out there.
They made a 10 year bet that interest rates wouldn't go up significantly. They bet wrong.
Note that Planet Money is intended more for accessibility and entertainment than hard hitting economic news... but they still get their facts right.
Wrong. You're forgetting about inflation. Interest rates increased because inflation spiked. In 2022 alone, that nominal payout at maturity has lost 8% of its real value.
However, it will still pay out exactly what it said it would pay out when it was purchased. Compare this to buying a stock in say... RBCN (went bankrupt and delisted in December) where any of the stock you had is worth nothing.
There is no risk that a bond won't pay out the amount that it says (other than the government really messing up and defaulting).
I will certainly be willing to say "a purchase of 10 year bonds would be short sighted and failed to account for possible risks from changing cash flow or increased rates over the next 10 years."
And yet a bond is still going to pay out what it says on the label when it was purchased when it pays out.
Now, if its not a hold to maturity type portfolio and you want to trade them, then its a whole 'nother ball game where prices will go up and down as it becomes easier or harder to make money in various markets. And whoever holds a $100 ten year note at ten years time will get paid exactly that amount.
And how are the losses being socialized? The assets of the bank are collateralizing the lines of credit they’re getting to stay solvent. It won’t cost anyone a thin penny, other than bank management and shareholders.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
I mean, a “special assessment” is just a different word for a one-time tax, and it being directly on all banks and indirectly on everyone who banks, or does business with entities who bank, makes distinguishing the payers of this tax and “taxpayers” ludicrous hair-splitting.
They had no chief risk officer for 8 months. They argued publicly against stress testing banks. Their complete absence of hedging guaranteed that time bomb that would have gone off now or later.
It was worse than not having good risk managers... They didn't have a CRO at all for 8 months, until 2 months ago.
> In the run-up to all this, SVB’s proxy statement, filed earlier this month, reveals that the firm’s chief risk officer stepped away from her role early last year, and the bank did not hire a replacement until this past January.
https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...
No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause.
That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."
Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
Exactly, so don't lock it up. Glad you agree with me.
Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine.
In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
But that's literally what they did. They put it in 10 year treasuries that they had to sell for 87 cents on the dollar because every "thought leader" in Silicon Valley had the same idea at the same time and triggered a bank run on their own bank.
Everybody who has deposits will get 100 percent of their money back and everybody who holds equity in SVB will be (mostly) wiped out.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
If the SVB had been forced to recognize its loss sooner, then this government bailout wouldn't have been necessary. Perhaps they'd have succeeded in raising more capital, and survived as an operating business; or perhaps their shareholders would still have been zeroed and their creditors would have seen a partial recovery. The depositors would have been fine either way though, no government bailout required.
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
And FMV is less than par, so that's an undercollateralized loan. That's another component of the subsidy to SVB depositors, and also a subsidy to shareholders of other banks that overexposed themselves to long-term debt (though too late for the SVB shareholders). There's no rational economic basis for this change in policy, and it goes against all modern central banking theory.
https://twitter.com/DanielaGabor/status/1635167154042716161
I hope you don't think holding the bond to maturity somehow means the loss isn't real? All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of a bond is ultimately determined by the value of those cash flows to that person; so if the FMV went down, then that should be a clue that value was fundamentally lost, regardless of who holds it.
The SVB's problem was that their HTM accounting treatment didn't model economic reality. The government is leaning into that fiction somewhat here, out of some combination of favoritism and concern for systemic risk. That doesn't make the fiction true though, and it doesn't mean the loss disappears; it just means the loss gets socialized.
The Fed kept making it clear that it was raising rates, and it seems like SVB just slipped quietly into that good night without lifting a finger to save itself. Which is bizarre and confusing and there must be more to the story (and details are coming out, like the risk manager role remaining open for nine months), but it does seem like crazy risks were taken. But not in pursuit of additional gains, like we are used to seeing, but it's looking more like negligence or a misunderstanding of their position.
> To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries.
https://www.theguardian.com/us-news/2023/mar/10/silicon-vall...
All your link shows is that Guardian, Reuters, and others have equally as bad reporting as commenters here, just parroting each other constantly...
SVB's actual announcement says "Additionally, earlier today, SVB completed the sale of substantially of its available for sale securities portfolio. SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023."
I haven't seen any evidence that there were substantial Treasuries sold, I just see MBS on their balance sheet.
Borrow short, lend long. The latter necessitates 'locking money up'.
A well-managed bank will properly manage the risk of the short loans getting called.
A poorly-managed bank will go all-in on getting short loans from people who are likely all going to call them in at the same time (startups), while putting their entire lending portfolio into lending long in an environment where long-term loans are dropping in value.
You made the case that how you value it depends on the plan. So what was the plan?
The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
If it cost nothing with no risk, surely a larger banking institution would have been willing to step in to solve it.
> Seems very much relevant to what the FDIC was created for
The FDIC was created to be an insurance corporation, not to bail out banks at their discretion.
EDIT: To clarify, this is the primary risk at large banks, where they could absorb a chunk of the bonds without significantly affecting their average maturity. Smaller banks obviously risk replaying the SVB run.
To be clear, if banks can improve their risk profile for free, they will do that (because it frees them to invest in other risky stuff). A no-risk 5% return while the fed is giving out sub-5% interest rates is a no-brainer. The reason no banks are coming in to help is because it would be a bad investment.
On that point, the government does have an obligation to "provide for the common defense and the general welfare of the United States," and that is clearly one of the overarching purposes of the Constitution itself. I find it hard to argue that saving tens of thousands of jobs[0] but by making the depositors whole, when the assets of SVB, illiquid though they may be, can cover 60-90% of the cost, is at all the wrong thing to do. This is literally part of why we have a government, and why markets are regulated at all.
[0]: I couldn't find a good source on the number of jobs, but that seems like the correct order of magnitude, anyway.
> "provide for the common defense and the general welfare of the United States,"
We'll have to agree to disagree that bailing out well-off startup founders and employees is the best way to provide for the general welfare of the United States. I'd start with people undergoing medical bankruptcy, then about a million other categories of people before I got to them. Either way, I'd prefer the accounting to be transparent. The FDIC isn't acting as a corporation here, so they shouldn't be a corporation.
I don't disagree that doing things like addressing medical debt are worthy ways to promote the general welfare, but let's not pretend it's an either/or, thing here, either. You don't seem to want to acknowledge the full context of the situation, which seems at least on the edge of disengenuousness. This as well, after you try to frame it as a "bank bailout" then backpedal when called on it.
Maybe they should care. Why shouldn't an employee care about financial stability of their employer?
As I said: maybe they should.
I care about stability in my employment situation as much as the next canine. I've worked at 4 startups, each with under 150 employees apiece. I've asked questions about funding, client base, growth plans, etc. All the normal "hard" questions you have to ask as a prospective startup employee. Not once have I ever asked where they banked. Not once has anyone I know asked where their employer banked.
I would submit that if the banking system becomes fragile enough that asking about such a thing is actually a good idea, we have bigger problems as a whole, which would make a prospective employer's answer to any such question irrelevant. And if that's the case, why ask?
Another way to put it: it's not employees and consumers putting "all eggs in one basket." It's the economy as a whole. If there's one thing that the 2008 financial crisis proved, it's that if the banking system gets gummed up, second and third order effects very quickly begin to set in and ruin things for everybody.
Now, if you know how to reconstruct the banking system to avoid this, I'd like to hear it. But as long as my employer's payroll funds aren't stored under the CEO's mattress, I think I'm good with that.
"we have bigger problems as a whole" I don't think so, at least based on Russia's experience. In the previous decade plenty of banks got closed with businesses losing money, but economy was ok and the banking ecosystem got healthier.
But the real problem I have is with special treatment. There's plenty of people out there who get screwed by their employer's negligence/malice but the only ones who get bailed out beyond the letter of the law are the ones with the networks, money, and influence to make noise about it.
> but let's not pretend it's an either/or, thing here, either.
But it is. You either spend money in 1 place, or you spend it in another.
> "bank bailout"
This isn't like a well-defined term as far as I'm aware, so 2 situations where banks/customers rely on the government to come to the rescue when risks don't pay out can both be called bailouts, whether or not the company remains in tact. You see plenty of media organizations and people calling this a bailout despite the fact that the bank is being dissolved, because it's a colloquial term.
Exactly. In Russia we had people who'd serially deposit money into the shadiest of banks offering highest returns. Deposits are ensured upto some amount, so they'd collect interest, get their money from the state after a bank bankrupts (while the bank owners are enjoying stolen money in a no extradition country) and go to the next bank.
The bank managers and investors are not being bailed out -- they have already lost everything.
You seem to be attaching some kind of anger for some ill conceived and non existant "happy go lucky risk wall street bet" type of activity, when this is about buisnesses losing their operating accounts who did nothing wrong except for have accounts at this bank instead of the next bank over.
Please stop repeating this. It is 100% about risky investments. https://www.theguardian.com/business/2023/mar/11/silicon-val...
Also, if your entire clientbase is in a single groupchat, you should be much more prepared for a bank run. This is like common-sense stuff. The fact that this is a bad business model isn't really my concern.
> The bank managers and investors are not being bailed out -- they have already lost everything.
The bank managers will walk away having earned millions of dollars in salary and bonuses, funded by risky bets, and the investors will walk away without bearing the consequences of the risks SVB took. Their investments in SVB went to zero, but there's still money that's been lost.
This feels like you're agreeing with me. Is that the case? Receiverships have a pretty specific meaning, which explicitly does not include resolving liquidity issues using third-party funding.
Like if it were me, I'd grudgingly buy long-dated assets to keep the doors open, but also look toward reducing maturity as rates increase and start acquiring customers. Problem is that, very roughly speaking, those things only work if rates increase more slowly than you can acquire new customers.
Plenty of banks compete on benefits other than yield.
SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more.
I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
Like, for instance, your disproportionate share of startup clients easing off the cheap loans you had been offering them, because they’re no longer so cheap, and instead drawing down on (or moving) the balances that you had insisted they keep with you as collateral. Trouble was brewing on both sides of the business, not just on the asset position.
I've heard multiple reports that one of their large investors got wind of their attempts to get a $2B loan so they wouldn't lose that money in their bond investments and thought it was a huge red flag and was the first to take out all of their money. The theory goes it was a large SV company, and news travelled on social media and the SV financial circles about they did and their belief that the bank was about to implode.
This created a long line forming on Friday morning of companies wanting to get their money out as well.
I agree, I'm not sure if the rumor was enough to spook people, or an orchestrated move by several companies, once one company found out what they were doing - but its very suspicious. Add in the founders were busy taking money at the same time they were liquidating their positions, which I'm sure the SEC will have something to say about as well.
Add in all the people who may have found out early and took out short positions as well who are now poised to possibly make a good chunk of money in all this chaos.
This is completely false. If the SVB (or any other bank) had been adequately capitalized on a MTM basis, then they could have borrowed from the Fed to withstand any bank run. The SVB was not:
https://www.bloomberg.com/news/articles/2023-03-10/the-balan...
The hold-to-maturity accounting allowed them to pretend otherwise, disregarding losses on long-term bonds when interest rates increased. They--and their regulators, since such accounting is perfectly legal--hoped this would let them ignore the problem until they could earn their way out of the hole. Instead interest rates increased further, the hole got deeper, and the SVB blew up.
It's not impossible that Thiel somehow benefitted from the collapse, though I'm not aware of any evidence for that yet. It's also possible that he simply didn't want his money in an insolvent bank.
Liquidity calculations for banks definitely include mark to market for HTM portfolios. But even then they were legally deemed sufficiently liquid. The run on the bank wasn’t expected or normal behavior.
The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV.
However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.
If you hold a bond to maturity, you get it's Net Present Value at maturity which is actually Net Future Value. Mark to market of treasury bonds is essentially the NPV of the bond, considering current interest rates. When interest rates are near zero, sure, a dollar today and a dollar tomorrow are the same, with significant interest rates, they aren't. And there's the problem.
You can't give a depositor a $100 treasury bond, due in 2028, when they want $100 now. That's only worth $85 today (or whatever the value is, I dunno).
They were not holding sufficient tier 1 capital against a run or they would still be here today. The did, on the other hand, have enough to exceed regulatory requirements.
They apparently did not hedge at all and additionally, they invested heavily in mortgages which are well known to decline more in value in rising rate environments due to extension risk.
As an earlier poster noted, the primary reason to have a HTM portfolio is to avoid wild swings in reported earnings each quarter from a mark to market as their is no counter on the balance sheet that rises/falls in a similar manner.
You are probably correct in that if there was not a run it likely would be rear view. They would have done their capital raise and probably taken additional measures to improve their ability to withstand such an event. Of course, this all was trigger by a ratings agency and a few bloggers calling into question the unrealized losses in the HTM portfolio.
Then again, had the stress tests still be in place it is unlikely to have even gotten to the capital raise point.
Which, if you are being at all honest, means you calculate its present value by applying a discount rate in line with current risk free returns over the relevant time horizon, which will be a number suspiciously similar to the Treasury yield curve, and you will end up with something quite close to the mark-to-market value.
(And it has to be this way. Otherwise you could go buy two-year-old long dated bonds at a discount on the secondary market and make a killing, because the transaction would have an immediate NPV gain of 30% or more.)
Banks are a bit unique in that they can generally borrow at a cost much lower than the risk free rate due to the existence of non-interest-bearing and low-interest accounts, but IMO those should be thought of as a variable source of future profits, not as a reduction in the risk-free rate to be used for financial projections.
This is flawed logic. The NPV is not a real, tangible dollar amount. It is a calculation, based on the presumed yield of a theoretical set of alternative investment opportunities, of the Net PRESENT (today, right now) Value of the bond. This number is less than the sum of the bond's future payments, because the NPV is attempting to determine the current value of payments scheduled for receipt in the future.
In other words, if you are owed $1000 to be paid on Christmas Day of this year, the Net Present Value is less than $1000.
This is it. People are quick to point out mismanagement at svb, but it's only because of the run and the following collapse. After the fact, it's easy find data points to explain away anything. Holdkng on to low yield treasuries, really now, this is the telltale sign of a failing bank?
History still needs to be written on this one, don't discount the human factor, debtor's panic because of gossip run wild is not too far fetched.
When circumstances changed, they changed their plan. What do you normally do?
SVB had many opportunities to do hedge and honestly, why on earth should bank or anyone else "take the Fed at their word". People make mistakes, institutions make mistakes, people misunderstand and on and on.
If anything is damaging trust, it is banks and investors lobbying to loosen up regulations, claiming the banks are too small to pose systemic risks and then ask for special exceptions the moment it does not work out.
All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations.
SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.
Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run.
Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place.
It just wasn't part of anyone's threat model.
But those assets are typically hedges against long term fixed rate bonds issued by the bank, or are funded by a diversified (and mostly retail, ie more stable) deposit base with a large enough liquidity pool to sustain a period of stress, as mandated by liquidity regulations.
That appears to be untrue; the other banks hedged interest rate exposure.
https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-0...
See p6: "Larger banks are the predominant users of derivatives. ... Banks facing higher likelihood of financial distress manage their interest rate risks more - both by maintaining lower maturity GAPs and by engaging in higher derivatives activities. Consistent with the predictions of Froot et al. (1993), I find that the high growth banks and banks with less liquid assets engage in higher hedging activities"
Banks are subject to daily reserve requirements, so everything they invest in should also be market priced (aka mark-to-market) each day.
It did not hide them. This was in their financial statements (https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... at page 15):
> Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6, $6 and $7 (fair value of $76,169, $77,370 and $97,227), respectively
> December 31, 2022 | September 30, 2022 | December 31, 2021
> 91,321 93,286 98,195
This shows that they had assets on 12/31/22 with an amortized value of $91bn and a fair value of $76bn
https://www.reuters.com/article/us-usa-trump-dodd-frank/trum...
Funny that should come up. Minnesota Attorney General Kieth Ellison is blaming Kia and Hyundai for our rash of auto theft and associated crime.
https://www.startribune.com/minnesota-minneapolis-keith-elli...
> It’s true that investors had been aware at the latest since its 10-Q filing on Nov. 7 that it had sustained unrealized losses among its held-to-maturity (HTM) portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. While this would theoretically render it insolvent were they to materialize in full, SVB Financial was dismissive of the risks.
"SVB collapse highlights $620 billion hole lurking in banks’ balance sheets" -https://archive.is/qnwYh
Also short sellers worked it out a while back too
"A Silicon Valley Bank short seller explains how he knew the bank was in trouble months ago" - https://archive.is/XaKkt
That's revisionist and silly[1]. Spending all your liquidity on long term bonds isn't "conservative" if you're a bank. It's not your money! It's your customer's money that you're just holding for them, and you just dropped it all in a vehicle that doesn't mature for 10 years. What if the customers want their money back? Yeah, we just found out.
No, the conservative option if you can't invest it is just to sit on it. That's what banks do. They sit on other people's money. That they are allowed to spend some of that money on speculation is a reasonable optimization, but it's just that. Obviously just sitting on it wasn't going to get the returns they'd promised to investors though. So they placed bets instead.
[1] And I'm not going to touch the idea that the "authorities" somehow forced them into this. No. Just no.
Well this “safe bank” actually falls foul of US banking regulation - there are regulatory requirements for minimum levels of “speculation“ as a bank.
Now clearly SVB got in over their heads here with risk. But just sit on all the money isn’t a legal alternative.
However once the VCs panicked started a bank run, they folded. Just like literally any bank would. ~45b of net withdrawals in a single day is going to cause any bank significant trouble.
Instead, they were the ones buying the MBSs and taking on the long-duration risk.
But at some point, there was a cause very close to the material problem you’re looking at. In this case, that’s the compounded risk that SVB took on in courting a concentrated clientele and trying to balance their books with unusually long-term purchases.
If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.
I think it's time we stop imagining that financial institutions will ever do anything that they are not legally required to do. This was a failure of regulation. Calling it personal responsibility is about the same as getting mad at the dog for getting into the garbage. It's our fault for not taking out the trash.
While strictly true, they did decide to go with long dated bonds that would tie up those funds for years potentially. Typically banks will buy bonds of shorter duration.
SVB however couldn't resist the higher interest rates of those long dated bonds. IIRC they had an average maturity of six years, whereas most banks are typically under one year.
Admittedly, I still don't fully understand the link between investing too cautiously and seeing poor returns and there being a run on the bank.
I agree it’s peculiar to phrase it as the government is to blame. Except perhaps to the degree that the government in 2018 relaxed risk test requirements that would otherwise have included SVB, those requirements were originally set after and in response to the 2008 collapse.
But ultimately the blame lies with the bank executives.
As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure that's going to be a fun situation should they face even a slight liquidity crisis of, say, more retirees pulling money out than there are young people depositing into pensions and whatnot.
Just because government bonds are unlikely to default, that doesn't make acquiring them "conservative". If you're a bank, with an entire function dedicated to making sure that assets match liabilities ("treasury"), and that ought to be aware of things like "DV01" and "duration risk", then you're supposed to know this.
The only thing that's broken is the financial system. A customer should be aware when depositing money that that money might be locked away, and agree to those terms, and get a cut.
This is SVB gambling and losing the bet, simple as. Everything else is just a pathetic excuse, don't enable it.
Just look at the term "excess liquidity", that's newspeak. I expect the bank to have my 100$ the day I ask for it. I'm not a using bank because I want to, but if I store it under my bed I get to deal with the IRS. They make themselves necessary to live, then expect my deposits to work for them.
And if you escape civil action by IRS, the fed or local government can simply take it as civil asset forfeiture without accusing you of wrongdoing.
.gov really really hates big piles of printed currency and if they find out you have it the temptation for them to take it can become overwhelming to various entities that survive off of the taking.
Because criminals/tax evaders do that.
The game is rigged. Give me a bank where I just deposit my funds, and nobody touches it and I'm happy to pay for the service. Maybe I want a portion of it to grow and I'll allow it to be lended, for interest.
The bank should work in my interest, not their investors.
Sure but they could have bought shorter bonds instead of a bunch of ten years, there's no reason to take so much duration risk.
Every intro to financial engineering class includes a "build a Treasury ladder" exercise, it's not rocket science.
The above scheme requires far less government regulation as well, but it does need some, mostly an extension of the idea of theft to encompass fractional reserve banking.
But you are not your mom. you don't have to share on the disgust and shame, however you may chose to do so if you want.
the points being: the disgust is your mom's not necessarily yours. whether to partake on your parent's shame of being called a libertarian is a choice.
therapy for me has been about finding subconscious choices like those
on the other hand, sorry for you... why would one choose to feel negative emotions like shame?
From SVB's bio of President and CEO Greg Becker at https://www.svb.com/profile/greg-becker:
"He is a Class A Director for the Federal Reserve Bank of San Francisco"
The fact that many other banks were prescient disproves this point handily.
They bet billions on zero interest rate policy and didn't hedge that bet.
Glut or no glut, would have failed just like LTCM or any other huge bets that failed to consider tail risk.
I wish to see the proof of reserve implemented for traditional banks, or the trust will just keep eroding...
They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds.
The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.
The problem is they bought a bunch of long dates securities yielding 1.5-2% and when the deposits flooded in they started paying more than 1.5-2%.
They have been better off buying T bills or something else without duration risk and paying something less than Fed Funds. This is what most banks do.
Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail.
Don’t blame SVB’s failure on a bank run. SVB caused their own failure with their own risk management policies and it’s insolvency was probably inevitable for months.
Jail seems extreme for an error in judgement that neither killed nor maimed anyone.
If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.
I'd, for a change, like to see those responsible for massive business failures held to account personally and financially. The limitations on corporate liability are meant for investors, not executives or board members. And TBH, those accounts with over 100MM in deposit should probably lose the 10% or so under normal rules for this kind of thing, not be bailed out by the Fed, who will in turn likely need to be bailed out by taxpayers, or worse if this happens another couple times in the next couple years.
Especially in a business such as finance where the job literally is to estimate risk, someone will make the (in hindsight) wrong decision.
No one is interested in the deal "if you get it right, you make some money; if you get it wrong, we obliterate you".
The move from caveat emptor to caveat venditor has coincided with everyone legally ringfencing things with corps & LLCs. People find ways back to a fair deal.
https://en.wikipedia.org/wiki/Incarceration_in_the_United_St...
or like being in possession of a gram of meth for personal use: something a person might legitimately believe isn’t “wrong”. the meth user didn’t get into jail for violating his own moral code: he’s there for an error in judgement, this error being that he didn’t understand how strongly the people around him would react to actions he thought were not that big of a deal.
sibling comment does good by calling attention to driving: enough people text while drive that it can be considered normal behavior, that people who do this don’t actively think they’re doing wrong. but that doesn’t save them from culpability when they roll the dice poorly and hit a pedestrian.
what’s the difference between “manslaughter” and “murder”: it’s intent. our justice system does consider intent, but it doesn’t require it.
Seems the difference is small. Shareholders still lost everything, depositors lost nothing instead of 10% but that's a minor difference.
Guess one difference is how long it'll take before depositors can access their money. Now they'll get it immediately. If they were waiting for liquidation of the banks assets, that would probably take longer.
SVB is down ~10% but that doesn't mean everyone would have actually been made whole from the money.
For the record, "1 year treasury bonds" are 52 week Treasury Bills. They would not be buying off the run old debt.
And I kind of agree. Yes, the mistake was not hedging MBS and treasuries interest rates.
But are they really the only bank in the world doing that mistake?
What truly made it fatal is the VCs. That's also why nobody is coming to buy them. The speed at which the bank run happened, showed exactly how much they valued the bank.
If you're swimming with sharks, it's a big mistake to bleed. But let's not pretend the sharks are innocents. Bleeding isn't usually so fatal.
Which is why I don't think the sharks deserve a bailout.
I’m not sure that looking to the financial sector for examples of fiscal responsibility is actually reasonable, but I’d guess that they’re the only bank that’s “too-big-to-fail” that could possibly fail because of a single slack discussion.
Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision.
As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things).
Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was absent. It's like monocrop farming: A pest that comes in and attacks your one crop can wipe you out more easily than if you grow a variety of crops.
They could have taken a look at inflation and the glut of liquidity and bought shorter dated bonds but instead they locked them money up for 3-10 years at paltry interest rates.
No, they bought MBS, yielding 1.6% at the time, which aren't conservative. What they should have done is bought 1 month - 1 year Treasuries, yielding 0.10%. Then they couldn't give out above-market interest returns, in excess of 0.5% compared to other banks, which SVB depositors pocketed during the upside, and then failed to realize the risk during the downside, being bailed out by the government.
Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. However, in the above case, the depositors would not have been at risk.
SVB would have lost equity value, but would be a going concern. Instead, once SVB's unrealized losses piled up, SVB rolled the dice hoping things would turn and effectively bet depositor money.
This is not the customers/depositors' fault.
This is not the government's fault.
This is not the Fed's fault.
This is the fault of bank management, specifically risk+accounting+exec teams.
To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
Note that many customers had their excess funds not in bank deposits, but in US treasury bills / short term bonds via a Money Market Sweep Account. Except it turned out the assets of the MM account were not in their name but in SVB's name via a custodial account, and hence is locked up, and would have been locked up in bankruptcy.
They did try to originate more credit, but couldn't.
But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds.
EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.
As I understand it, the reason they failed is because they gambled on interest rates staying low and chased returns to maximize profits to shareholders.
Shareholders deserve to lose money when they are pushing - or even remaining silent on - increasingly risky corporate behaviors as absentee owners.
That's not clear to me.
I think the purpose of banks is to handle funds well. If a bank is "made" to "see itself with a glut of funds" it's needs to be able to figure out how to handle that.
I'm not endorsing the last several decades of federal monetary policy, but regardless, it doesn't make senses that it should necessarily focus on making things simple for regional banks.
No it's not.
SVB bought 10 year MBS a couple of years ago to hold capital. They could've instead just rolled 90 day Fed debt and thus have been largely immune to interest rate changes. What they did was they took a risk with custodial assets. This is 100% the bank's fault.
Why did they do that? Because 10 year MBS had a higher yield than 90 day debt. So they took a risk. Why? For the benefit of executives and shareholders.
SVB did this to themselves, possibly with Thiel instigating a bank run for whatever reason.
Stop giving these guys a pass just because of your residual (and justifiable) skepticism about fiscal/monetary policy. I have similar doubts about how government manages public finances, but I also know that depending on a low-yield bond purchased before a pattern of graduated interest rate hikes is gonna leave you with a cash flow problem.
Indeed. Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed, up until last Friday. If anyone had some insight about what federal monetary policy was doing, he should have.
Isn't this like a massive conflict of interest? How is this legal?
Are most people here too young to remember the Global Financial Crisis of 2008?
It couldn't because that's not how banks works. Banks create deposits by making loans.
When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves.
What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price.
Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door.
Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.
I never believed in the talk of “let the market decide”, “we invested in that startup to change the world”, “disruption”, “good product will win” and other nonsense.
Everything revolves around money, money and money. And there's nothing wrong with that, the problem is the bulshit not to assume it.
For now, every time someone starts with this kind of bullshit, I will submit the YCombinator petition to the government.
VC/Startup bullshit is literally hn's business daddy though, that's what the domain it lives on does.
You might be ready for https://lobste.rs.
I agree with GP that the startup stuff can get a bit dominating at times though; a way to filter out say all submissions regarding YC startups would be the icing on the cake, for what has quickly become my favourite online forum.
Do you have any recommendations?
Without a bailout, each customer would have $250K today (if they had that much n deposit) and probably another 10-20% this week, as assets were sold off. The FDIC could have worked a deal so that depositors were paid off in a few weeks, but in Treasury bonds with 5-10 years to maturity, to match the maturities of SVB assets. Depositors who really had to could sell their bonds immediately at a discount. That would have given time to liquidate SVB's loan portfolio. Depositors probably would have lost 5%-20%.
How does this kind of thing function? I assume the bank pools all the money and buys various investment products. Is there just another wild level of abstraction where"you own X% of this investment product. Feel free to sell your share to someone else" ?
A better offer from the FDIC would be to offer Treasury bonds instead to those who want them, at a discount based on the FDIC's valuation of SVB's assets. The FDIC is well placed to sell off illiquid assets slowly. That's what they do after a bank failure. Depositors would have quick liquidity if they wanted, but it would cost them something.
Is SVB's balance sheet, from the FDIC, out yet?
Instead of everyone getting their piece of the frozen pie, starving as it thaws (possibly having to sell it at a steep loss of degrees to the radian), the FDIC just says, "I'll hold on to the whole pie and hand out slices from my backup pie stash. Then once it thaws, I'll add it to my backup pie stash."
For reason. This is far from over.
Bank runs are quite often a crisis of unreason, and I think this one is mostly caused by poor communication. The contagion effect is as much a mental virus as it is an assessment of liquidity.
If you held the same portfolio as the bond, you too would not be able to withdraw at full face value.
You are believing a lie if you think a ten million dollar deposit can be immediately withdrawn anywhere in its entirety.
> You are believing a lie if you think a ten million dollar deposit can be immediately withdrawn anywhere in its entirety.
This is true, by your own admission. A bunch of startups did; some did not. Thus, it is empirically true, by your own reckoning that you cannot withdraw large deposit accounts in their entirety. To say 'you CAN do X' means that your ability to do X is not conditioned on some probability. For example, when I say I can walk, I mean I certainly can walk; not that I can walk with 20% probability.
"Just like many of the banking titans after the global financial crisis of 2008, tech tycoons appear to favour the privatisation of profits and the socialisation of losses. There are few libertarians in a financial foxhole."
I'm not suggesting that corps should have managed every last penny to prevent an uninsured balance but the vast majority of their free cash should have been and sadly easily could have been insured and still readily available.
No tax revenue is being used to bail out the depositors, but every American with a bank account is paying for it. They're just applying a new fee to every Bank in the country to cover the losses
It is still socialized losses.
Re: the fee, where do you see that?
It’s a fascinating deep dive into an attempt to create a sort of libertarian utopia in a small town called Grafton, New Hampshire. The speed at which they arrive at “we need government services” after they eviscerate government services is… unsurprising.
10/10 I highly recommend it for anyone that’s interested in real-life examples of libertarianism as applied to real populations in the real world.
https://www.goodreads.com/book/show/50358538-a-libertarian-w...
https://grist.org/regulation/arizona-groundwater-cochise-cou...
But libertarianism has been obviously illogical to me since I was about 15, half my lifetime ago. Since then I've spoken to some very intelligent libertarians at length and... nope, it still doesn't make any sense. It makes less sense than ever, in fact. At least when I was 15 I just thought they must be stupid, but no, not necessarily. Now my operating theory is that it's similar to how some people become completely engrossed in a fictional universe and wish it was the real world.
“There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs."
Libertarians are stuck in a pubescent state-of-mind and are wholly incapable of viewing the real world as it is. Hence their absolutely insane "political leanings".
Bit of a tangent, but it continues to amaze how relevant Tolkien continues to be to this day considering he started developing his legendarium almost a century ago now. Gender issues, sexism, addiction, free will, the allure of power and wealth, all explored in an amazingly prescient way that still stands up to scrutiny today.
Although diving deeper into the legendarium, there is the fact that the southrons and easterlings were corrupted by Sauron to worship him as a god. So you could choose to view those descriptions as consequences of that rather than perceived racial or cultural inferiority. And indeed the "fair and beautiful" Numenoreans were at one point corrupted by Sauron in very much the same way.
But yeah, you definitely have to give Tolkien a lot of help on this one, and it's not terribly helpful in the context of reading to your children :/
I wouldn't be surprised though because this does seem to be the modern leftist agenda, to turn every brown person into a victim incapable of helping themselves.
Maybe explain to your daughter it's based on Nordic mythology and turn it into a positive history lesson. OH! And you could tell her that her skin color really isn't the most important thing about her. Just a thought.
https://twitter.com/davetroy/status/1478017765927788555?s=20
Less extreme and more subtle expressions of his fascist agenda are revealed here, where he employs the administrative state's euphemisms, to advocate for a surveillance state along the lines of what the PRC is instituting:
https://twitter.com/davetroy/status/1458537983649333252?s=20
The euphemisms in question are "demand transparency" and "KYC", which in practice mean imprisoning any one who don't give up their privacy.
His strategy for cloaking his fascistic aims is to accuse those he wants to subject to state violence of being the fascists. It's a preemptive deflection tactic.
That's why in the above tweet he makes the vague but emotionally charged accusation that "distributed zero-trust databases" are being "co-opted for historically fascist aims" by some nebulous set of parties within the crypto sector.
Anything in the extreme is bad. Can any system work if everyone acts perfectly rationally and and the same time with full empathy? Sure, but such people in reality are few and far between so instead we need to account for the edge cases of which there are many. And as any good software engineer knows you end up spending 80% of your time chasing down the last 1% of your edge cases.
Libertarianism on the other hand is hardly even an ideology, but based on the ill-conceived notion that if we purposely make no collective effort to have a better society, it will somehow magically fall into place for us.
If libertarianism was a software project methodology, it would be the one where you just lock a bunch of programmers into an office with some computers and let them fend for themselves.
Bad example. This is how just about every technical breakthrough in the industry has happened.
This is literally what I said and is also true for libertarianism, your false analogy notwithstanding.
I didn’t “do” libertarianism? I recommended a book that I found interesting that’s related to the topic of the article that this discussion thread is in response to.
Socialism has been brought up a couple times in response to my book recommendation and I’m a little confused by that. Is the assumption that the reporter that spent years meticulously researching, interviewing, and documenting the factual record of events is a socialist? Am I a socialist for having read it?
Is this like an amish thing where everybody outside of the orthodox group is called “english”?
Anyway, it’s a good book and I stand by my recommendation!
My view is simply this: there are numerous different consensus methods in our society. Democracy, academia, courts, markets, bureaucracy, technocracy, and hierarchical command structures. They all have strengths and weaknesses for different problems on which a consensus must be reached. But democracy sits above all these and plays the important role of slowly figuring out where these should be applied and how they should be weighted. This is a very hard problem, no ideology has a self-contained solution. Democracy must be an evolutionary process. The ideas that work stick around after a change of power, and the ones that don't go away, ideally.
Based on this it's crucial for democracy and therefore the government to have some measure of regulatory power over all of these. This is where libertarianism really breaks down. It's far too corrosive to the usefulness of democracy, which is the only thing keeping everything together in the end.
Does it? Isn't Earth's political system libertarian? The emerging conflict/cooperation between nation states is a market phenomenon. The UN is akin to a chamber of commerce.
Democracy has, at most, continental reach (EU).
I will say every time I’ve engaged someone here who got defensive about not being a socialist, even when I never implied they were, usually turned out to have heavy sympathy for socialist and communist ideals. To the point where it would be inappropriate to call them anything but a socialist.
Again, I never engaged with you at all in this conversation you inserted yourself into a conversation and got upset about something that had little to do with you.
"Once upon a time, a group of libertarians got together and hatched the Free Town Project, a plan to take over an American town and completely eliminate its government ... They built a tent city in an effort to get off the grid. The bears smelled food and opportunity."
Nobody who knows anything about libertarians and is trying to accurately represent it would write that, because the whole reason it exists as an independent thing from anarchism is that libertarians do not want to eliminate the government. They have very clear ideas about what exactly the government should do and that role is much less expansive than in a socialist country or even in America of today, but it's not literally nothing and it certainly doesn't involve living in tents. That's much closer to the Occupy Wall Street crowd in behaviour than libertarians.
Anarchists will often identify as Libertarians, as there are also left-leaning Libertarians that I don't really get as well. I'm a bit more pragmatic in terms of a from where we are standpoint in that I think there are less intrusive solutions to many problems than full regulation or more government. I think the crux is starting by holding those that are responsible for these things (corporate or banking execs and boards) liable for their decisions and actions, which doesn't happen currently, and most Libertarians I know would celebrate.
of the anarchists i’ve met i have yet to hear any accept the label of “Libertarian”. most of the handful i know used to be Libertarian but then passed through that into anarchism as they chased some ideal of rights/freedoms that turned out to be incompatible with the Libertarian views toward property rights.
I just feel there's plenty of room for closer to libertarian solutions without expanding govt, and in some cases actually reverting to prior state in terms of dealing with certain issues. The lack of accountability is probably the single biggest issue I've seen in the past few years. The lack of limits on patents and production around patent protection, extension and licensing is also very concerning.
It’s a very rich and complex story about many different people, and arguing with a handful of sentence fragments from a summary does nothing to impugn the quality of the journalism.
It’s a very rich and complex story about many different people
It's about "a barely populated settlement with one paved road" that was taken over by anarchists. Not surprisingly they ended up living in tents, as anarchists are wont to do.
I edited out a comment in my original post asking why some people insist on lying about libertarianism but then took it out, thinking it was overly harsh. Now I wish I'd left it back in. I don't believe you're arguing in good faith, the misrepresentations in that post are just so blatant.
While there may be differences between libertarianism and anarcho-capitalism, I've struggled to see them in practice, and in my experience the definition of these terms can be varied depending on who you talk to.
In any case, the two systems are birds of a feather, and neither of them are appealing unless one already holds substantial material wealth.
I don't think either are actually implemented in practice at the moment, although you can argue that certain aspects of certain politicians or their agendas lean libertarian, and that some societies have in the past been a lot more libertarian than they are today.
The primary difference is this: anarchists of any kind, ancap or not, see no role for the state whatsoever. Libertarianism requires a state to exist, but has a very clearly defined set of roles for it such that anything outside those roles is considered more properly the role of the private sector. At a minimum, the state is expected to implement:
- [Border] defense (armies, navies, passports)
- A violence monopoly within their territory (police, courts, jails, laws against murder, abuse, etc). Yes, this doesn't always sit easy with the US specific gun culture, but the "out" is to say you can own a gun only for self defense, hunting and overthrow of an out of control state, which doesn't infringe on this principle.
- Contract law (civil law courts, ability to levy financial penalties)
- Property rights (land registers, stock markets, bond markets and other financial infrastructure, also quite often IP rights)
- Sufficient taxation to fund those things and subsequent state functions
- Anti-monopoly enforcement
And a bunch of other things that are less well agreed on, but in some interpretations might involve attempts at limiting externalities.
So a libertarian state still has a relatively extensive civil service, it would still have a parliament or congress, tax authorities and so on, but it's smaller and more tightly focused than a non-libertarian state. It is actually implementable in the real world, today, without violating any of the known basics of human nature or government. Libertarians accept that some current roles of the state have evolved for sound reasons but propose that those roles can be done equally well or better by the private sector (e.g. instead of bank bailouts you have narrow banks). We know such countries can exist because they have also existed in the past, for example the early US government was much closer to this ideal than the current one.
Ancaps on the other hand propose a theoretical society that has no government at all yet is also peaceful and prosperous. No such society has ever existed, not even anything close to it, and there are many obvious open questions with no known answers. It's very different.
It's always a question of which services are best provided by the government, and which are best provided by private entities, or partnership of the two. Different libertarians arrive at different definitions of "state capacity".
I really don't think of that philosophically as being quite as simple as it's portrayed a lot of the time. In fact, I'd say it's harder to predict what a libertarian believes, since that group has more than its share of contrarians.
The trick is to not let any one big group have too much power. It is not possible to create a society without groups taking charge and without those groups vying for power.
One thing Libertarians have right, is the idea that many government services are out of control with spending and not doing anything to actually help the people they supposedly serve.
How many of those services were purposely broken by libertarians, so that they could be targeted for privatization? I've worked in government, and have yet to see a service run more efficiently or cheaper after it's been privatized. The quality of the service is almost universally worse.
When something is privatized, it's usually given a monopoly via bid. Now you just have a different set of people, with less experience, running the same service, with a percentage of the cost of running the service being siphoned off. There's also an incentive to provide less of the service, or run the service at a worse quality to maximize profit. The government has the option of running the service at a loss, but a private entity does not, further reducing the service quality level, often at the times you need it the most.
When I worked in government, we had a software platform that was privatized. Every few years the contract to run the platform was put up for bid. To improve the likelihood of winning the bid, the vendor made the code purposely incomprehensible, wrote the minimum amount of documentation required, and kept most of the system maintenance manual. They most likely had in-house automation for most of the manual tasks, but that wasn't included with the contract. This also kept the bid price extremely high. When the contracts did switch hands, you'd end up with major operations issues after switchover, and numerous downtime events (this also made it harder for them to win the bid next time). Eventually it was considerably more expensive to contract out, but nothing is ever brought back from privatization.
Umm none? I don't recall a Libertarian ever being in power.
"When something is privatized, it's usually given a monopoly via bid."
Yes, a bid from the government....
A pretty good percentage of the republican party considers themselves libertarians, and libertarians vote for republicans who hold views strikingly similar to them.
The post office is a great example of a (previously excellent) government service that's been purposely degraded so that it can be made a target for privatization.
The public school system has already started going through this with charter schools, which are mostly an unregulated mess filled with thieves.
> Yes, a bid from the government....
I'm not sure what point you're trying to make with this. Yes, the government makes a work spec, and puts that up for companies to bid on. A single company will win that bid. This isn't a capitalist arrangement where there's multiple companies providing the same service and competing against each other. It's literally just a worse form of government with someone taking a profit.
Would it be better to change the current system so that the bailouts were unnecessary? Yes. And depending on the ideology of who you ask you get different wishlists.
Yes, just brushing things under the carpet is bad, but whatever restructuring would have happened in that chaos would not have been an improvement.
It's unfortunately very much politics. For example see how the FASB tried to eliminate HTM accounting, but had to back down (and that chair resigned).
Yet! If the market already doesn't give enough shit to check the stuff in parentheses in a report for a 200B bank, then I suspect it's more of a theater than we like to admit.
https://blogs.cfainstitute.org/marketintegrity/2023/03/13/th...
If Congress had gotten out of the way, other capitalized parties, like Walmart, were ready to step into the financial sector to add some much needed competition in the wake of the financial crisis:
https://www.nytimes.com/2007/03/17/business/17bank.html
(archived copy: https://archive.is/aJC3Y)
The value judgement that was done here is that if they didn't do it this bank collapse would generate contagion, which I believe is understandable, however if that is the case there should be other ways to prevent this kind of thing such as regulation that prevents banks from putting customer deposits into mortgage-backed securities (what the actual fuck, I still can't believe they've done this, it's like the world has learned nothing from 2008).
Specifically I note that around 2018 there was regulation passed that reduced the amount of scrutiny banks such as Sillicon Valley Bank would receive [0], which we all know now how well that worked. Everyone needs to be taken accountable to the same degree, there should be no special cases or "exceptions". And if a need for those appears that should indicate a systemic problem instead of simply a isolated one-time event.
[0]: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/0...
To which someone like would you say "but who's paying for that? the other banks? and guess where their money comes from?
Again, regardless of your political stance or economical, I recommend you read the linked Forbes article about the "Reform Act" I linked to previously [0].
[0]: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/0...
That also doesn't count possible insider trading for recent stock sales.
And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail, per your suggestion FDIC still does nothing, then another couple dozen banks and couple thousand business fail ...and next week you're back in 2008.
That is already in motion. Every company that had yet to do it is now looking into its liquidity management.
> And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail
Again, this kind of problem simply doesn't exist elsewhere. Just look outside the United States and the solution is simple: either you deregulate or you regulate, you can't have your cake and eat it too.
Any account used for business operating expenses needs to be mandated to have premium insurance on it. That same insurance should be available for all depositors.
The next time this happens if you do not have that insurance you receive your receivership certificate and wait for your dividends. Like everyone else.
I'm not saying prevent the contagion is a bad thing. We all know what happens when contagion becomes a systemic problem (2008). What I'm suggesting is that the fact a bank like this can even fail in a way like this is absurd. I'm mostly someone who defends less regulation over more, but if we are going to regulate banks we need to hold everyone to the same standards, and make sure everyone is accountable for their mistakes and risks taken. If that requires the FDIC raising the amount of deposits that are insured, sure, go with it, but creating "exceptions" every time a medium-sized bank fails is sure to create moral problems, corruption and increase inequality systematically.
What I'm talking about is thing such as the "Reform Act" from 2018, which was basically what allowed this Silicon Valley Bank disaster to happen [0].
[0]: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/0...
As to "exceptions", there isn't any exception here. Standard practice in every bank collapse after IndyMac has been that depositors (including uninsured depositors) are made whole. It's just not something the FDIC will commit to because they don't want to commit to making depositors whole and be on the hook if an obviously risky and disreputable bank collapses and depositors want their money back.
> Owners of unsecured debt and investors are left out. Which is fine by me.
The distinction I attempted to make in my comment was that there are actually something like four parties in this case: Holders of debt, investors, insured deposits and uninsured deposits. I find it absurd the FDIC is going to realize a loss to cover uninsured deposits, because that's simply not what they should do if they followed their own standard. Remember, even though it's state-owned the FDIC is a company, Americans should be worried if the FDIC takes actions that could ultimately put in risk money that _is_ actually insured. If they run dry, they will have to tap into the government's pockets and that's when shit truly hits the fan.
Oh, I know this one! https://breckyunits.com/the-great-bank-robbery.html
What's going on here is the fed is deciding that certain creditors are too big to fail.
Regulation is necessary to ensure that people who manage to get into position of power, who have certain kinds of personality disorders and other issues won't be able to game the system to their own personal advantage or satisfaction.
In most cases whether it is socialism or capitalism, while they have good intentions, they are always ruined by corruption and other other undesirable behaviours that typically people climbing to the top have.
Name a society where no one is in power.
In every culture and political system you will have people climbing to power using universally unethical means and then use their position to inflict suffering on the people they see as beneath them or use that power for other types of personal gain or gain for the group they represent at the expense of others. It does not mean that every person is like this. It is a spectrum. Majority of people just want to live their lives in peace, but they have to navigate their lives through the whatever system has been created for them.
You will have corrupt civil servants in a communist country just as in capitalist country and the elites are very much the same. I have lived in both systems and each system exploits slightly different groups of people. Sometimes it is hard to tell the difference.
Of course, since this was a political issue and the depositors were innocent, the government stepped in and promised to make them whole.
While this move was welcomed, even in a country with deeply entrenched socialist values like India, there were quite a few voices asking: "why did you keep your money in a tiny bank like that and not a major national bank?"
I understand that SVB was doing a lot for Silicon Valley, but when it was one of the few (perhaps only) that allowed anyone to open a bank account without visiting the country (it was also a part of Stripe Atlas), one should have asked if they were practicing proper risk management. If no other bank does this, but you do, it does indicate that there's a certain approach to risk in your entire business operations. And that approach can eventually manifest in making some very poor bets without adequate hedging.
The whole small bank and big bank issue is moot. Technology has long solved this problem so the government could roll out a solution where no one ever risks any deposits, no FDIC is needed, and no bailouts are ever needed.
The issue comes when you want to get a loan or mortgage. How does the Fed know if you're financially stable? How on earth can the Fed know how to centrally decide?
In general the answer is: split the savings and investments in two different entities. One entity that saves but has forbidden to invest, and an independent entity that invests.
If you just want an electronic money account with which you can send and receive and store electronic funds, and not risk losing it, keep it with the government.
And add legislation with it that requires the government to provide everyone with an account, even criminals, and it cannot be closed, and any seizures have to be from court orders, but the ability to transfer/store money electronically remains an inalienable right.
Just look at the balance sheet of SVB
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
If the government essentially guarantees all deposits and generally decides who gets a mortgage … I am not sure what the main point of banks is for consumers apart from maybe charging exorbitant rates on credit cards.
https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...
Without paywall courtesy of FT twitter post
I'll still post a humble archive link as well.
Garnered from https://twitter.com/FT/status/1635265357048082435
I like them for this, but I don't see a lot of other news outlets doing this. Most other places simply post links to their paywalled articles.
https://t.co/kw7ykC3763 returns a 301 to https://on.ft.com/3Jy8UBY
https://on.ft.com/3Jy8UBY returns a 301 to https://ft.trib.al/b2FR72U
https://ft.trib.al/b2FR72U returns a 301 to https://www.ft.com/content/ebba73d9-d319-4634-aa09-bbf09ee4a03b
:method: GET
:scheme: https
:authority: www.ft.com
:path: /content/ebba73d9-d319-4634-aa09-bbf09ee4a03b
{cookie with lots of stuff in it redacted}
Accept: text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
Accept-Encoding: gzip, deflate, br
Host: www.ft.com
User-Agent: Mozilla/5.0 (Macintosh; Intel Mac OS X 10_15_7) AppleWebKit/605.1.15 (KHTML, like Gecko) Version/16.3 Safari/605.1.15
Accept-Language: en-US,en;q=0.9
Referer: https://t.co/
Connection: keep-alive
Curling the page gets the trial text (ghads that's verbose html).
curl --referer https://t.co/ https://www.ft.com/content/ebba73d9-d319-4634-aa09-bbf09ee4a03b | less
https://johnhcochrane.blogspot.com/2023/03/silicon-valley-ba...
https://twitter.com/CliffordAsness/status/163512097142539468...
https://twitter.com/RepThomasMassie/status/16350699533753425...
Treasury bonds are guaranteed by the government with the worlds largest economy. US treasuries are pretty much the safest investment instrument in the history of mankind.
In 10 years, they WILL pay out at face value, unless the USA suffers complete collapse. In which case your dollars in the bank are worthless anyways.
It is bad faith because it willfully ignores the fact that neither person currently lives in a libertarian or socialist society. The libertarian still has to pay SS taxes they don't want to and the communist still has to pay rent.
I for one undoubtedly think the treasuries actions create real moral hazard, but also am grateful that the depositors potentially affected by this won’t be harmed…
This conjecture about Libertarians in tech is dated. Might've been true in the 90s, but the industry has been captured since then.
Housecats are convinced that they are fully independent and do not need "you" for anything.
Of course there are no pure neoliberal politicians as such a being would have no policies except cutting popular things and privatizing them. Hard to get elected. So we have neoliberalism with left or right characteristics as the mainstream ideologies.
I would suggest you try not to think in labels and embrace the reality: no person is a democrat/republican/tory/labor/whatever. Those are political parties, sure, but what happens when a person disagrees with the platform of that party? Are they no longer a 'whatever'? No, they were never a part of the party to begin with, they just identified with the group that most closely aligned with their views.
The more modern way (still in Europe) is seen as reasonably minimal level of government regulation, but strongly applied. For example the libertarians I know are for minimal government (and associated taxes), but very strong consumer protections - this is because individuals have very little power against huge corporations, so it is just leveling the field.
But I believe that the government must protect the free market against capitalism's inherent tendency towards monopoly, and that likewise, it must protect consumers against exploitative business practices (which arguably, a properly competitive free market could help achieve).
While it has been humorous to see these faux-libertarians say in one breath they want small government, but in the very next breath demand to be saved, tankies and other far-left extremes have used this as an opportunity to lump all libertarians into the same boat.
There's no such thing as a "true" libertarian as most libertarians believe in small government, but what that government can do, is generally up to interpretation in all but the most extreme cases. A major central belief the non-aggression principle. However social issues tend to be more wishy-washy.
Prior to the balkanization of America Libertarian-lite could probably be approximated by a classical liberal.
Libertarians have been increasingly confused with anarchists and specifically anarcho-capitalists, neither of which believe in government.
There are a few outspoken ones, sure. But just a few.
-- The Onion
-- Babylon Bee (better Onion)
I can't find any source for the "no libertarians in a bank run" part before this weekend.
https://www.belfercenter.org/publication/no-atheists-foxhole...
2008 pub date
Satoshi Nakamoto released bitcoin with "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" recorded in the first block which is clearly a political statement against them.
It means that people who are in a situation where they stand to directly benefit from a bailout (depositors, bondholders, shareholders) will lean away from libertarian views, based on their own needs at the time. It doesn't claim that libertarians are for/against bailouts in general.
People who would not be directly helped, or who might even be harmed by a bailout (taxpayers), rail against them as being unfair, as in the examples you point out.
https://openthebooks.substack.com/p/the-silicon-valley-bank-...
1) have Congress+FDIC create a new form of deposit insurance that goes up to 10-25 million dollars[1] that is to be used for a new form of account legally dedicated to payroll; funded by a new set of fees since the private market clearly is not handling this issue well (Everybody knows about FDIC limits, and people who spend more than a fraction of time thinking about the risks can easily find out about third-party insurance and (newer) banking services that bundle your capital to multiple banks. )
2) impose interest rate stress tests against banks with much smaller amounts of capital (not the current $250 billion threshold which must mean only the top 10 banks are subject to it?) (Something that SVB lobbied to keep itself exempt from having to do, and avoided the expense of keeping its interest rate hedges up to date the last ~18 months, leading to their collapse.)
If you don't like one of those, then why not address a bit more of the root cause why businesses only do business with one bank:
3) require banks legally to not impose exclusive deposit conditions or benefits as a condition of granting loans (ie banks pressuring in any way their lendees to use their deposit services)
The recently revealed sort of moral-hazard/grey-area "backstop-all-deposits-but-only-for-critical-situations" is really anti-competitive if we don't address it. It ensures that startup/SMB business owners, unclear of whether their >250/500k deposits are fully protected or not, will want to move cash to the very biggest "too-big-to-fail" banks just so they don't have to financially architect around the cash flow risks. (Cash flow risks are the #1 cause of failure of small businesses.)
I would much rather have 1000+ banks in our ecosystem than 10; surely that is a more robust system.
To me, guaranteeing all deposits (not just 250/500k or even 10 million) is another form of moral hazard where banks "privatize the gains, socialize the losses"; But I think the payroll risk is a systemic societal risk that makes sense for us to develop a societal framework to protect.
[1] 250 employees at 250k each is a monthly payroll of $5 million. 6 months payroll is 30 million. If you're bigger than that, you have enough time/resources to put your eggs in more baskets and manage the complexity. I think I am being very generous here.
Such insurance exists on the private market already and is commonly used by businesses who have large sums of cash on deposits. Presumably, the depositors at SVB didn't do that because they didn't want to pay for it.
Wouldn't a libertarian prefer that over having the government do it?
I wish the US Govt had done closer to what Iceland and a handful of others did in 2008... No, we aren't bailing you out, you pay out domestic deposits first, and then if there's anything left, the rest. And no, you don't get to take/keep bonuses for it.
Modern corporate structure and liability shields to the level they exist in the US is anything but libertarian. You make bad choices, you live with the consequences.
In the narrow statement that I replied to, a proposal was made to have the federal government enact a kind of insurance that has long been available in the private sector. My understanding of libertarian perspectives (based purely on hearing what libertarians say) is that doing it in the private sector would be preferable.
Particularly considering that the problem for the depositors was that they weren't availing themselves of private-sector solutions, not that those solutions failed.
I may be complete wrong on this, though, as I am not a libertarian.
Perhaps I misunderstand the different strands of libertarianism, but what kind of libertarian prefers mandatory government insurance over voluntary private insurance?
I understand "libertarian in theory" ... I am waiting however for a libertarian from Silicon Valley to say that we should have let all these Silicon Valley entities fail for being stupid with their finances in this very real-world scenario. Help me understand a more moderate libertarian position.
We tried more libertarianism in the 2018 legislation that removed some of the need for hedging for SVB and look where it got us. How does libertarianism help us from here?
I don't mind a little libertarianism... But it seems to me if the savvy Silicon Valley folks can't manage their payroll risk with all their smarts, what about payroll for a bank in some more ordinary US city? I am not a fan of government intervention particularly and the moral hazard of guaranteeing all depositors disturbs me. But despite that, I also don't really consider SVB a one-off... it seems to me that SVB is just one of many (hopefully smaller) banks with this whole "class" of interest rate maturity risk that is far worse in an environment of raising interest rates. I remember in 2008 how much got sucked out of money market funds in a few days when the previously-theoretical-risk of breaking the buck in uninsured accounts started money moving at velocities that nobody was really prepared for. So while I would have preferred more guardrails around how much depositors were covered, I also can't bring myself to completely condemn FDIC risking moral hazard to ensure stability to try to avoid psychological contagion spreading to a LOT more banks.
The problem is that libertarianism and preventing bank runs just seems to me like problems with "unrestricted short selling" or "calling fire in a crowded theater"... if you don't impose checks on it, the incentives for malicious behavior are so great (and the costs to being malicious so small) as to be counter-productive. Why not go all the way to anarchy? Do you really think market forces will magically govern against abuse and malicious claims without the force of the state? It would seem to devolve to mafia land where powerful factions just agree not to mess with each other and you have to have "pull" to get protection... which is exactly the critique Ayn Rand had of socialistic governments.
I was curious to hear what people say and despite my post getting downvoted to -2 points at present (it wasn't worded particularly well to avoid misinterpretation) I do appreciate all the replies.
The bank has to cover it, but not today. And it's an agreement and not a surprise when it happens.
No, lets create a complicated mess, fractional reserves, excess liquidity and having money costs money, growth and more growth and ... and .. and. You're all falling for it because you're greedy and don't want to be left behind.
When is anyone going to realize the actual problem? How many times does it have to happen? I'll see you guys again in 10-15 years as we have the exact same discussion.
Would the execs get million dollar bonuses and fly jets? No, and I'm fine with that, I don't have to count on a financial crash once every decade or two.
What do you think would happen?
What? Insurance companies (in general) are some of the most capitalistic. They teams of actuaries calculating risk to leverage a large capital pool to generate more capital.
In the US you have low taxes but have to insure against everything. In the EU we have high taxes but insurance is not a thing unless mandatory (car/home). I don't even have the latter, stupid yes, but I would suck it up and not blame it on the FED.
It is possible to have a bank that just stores the money without touching it, but this bank would charge us for the costs of doing so, and it won’t be free, and it won’t be popular vs free options (which once every 10-20 years blow up).
Meanwhile they're closing offices to save money, and making billions every year. They can make it work, we just have to demand it.
1) have Congress+FDIC...
This made me chuckle. I thought Libertarians want gov _out_ of their lives. :)
https://en.wikipedia.org/wiki/No_true_Scotsman#:~:text=The%2...
Businesses putting their deposits in reputable regulated banks is a different matter. Nothing libertarian about that. They're following standard practice as expected by the government and the government rightly decided to make them whole and maintain confidence in the system to ensure businesses would continue to engage in normal banking behavior as desired by the government instead of trying to adhere to 250k limits on deposit sizes.
They weren't mitigating the risk of how they were using their deposit accounts. That's not following standard practice.
Splitting up deposits isn’t the intended outcome by regulators here. It doesn’t actually achieve anything meaningful.
So instead the government acts as a sort of "insurer of last resort" by promising they will do everything they can to protect depositors in the case of banking instability.
And yet, that is exactly how it's been done for a very, very long time.
There is, of course, enough money to insure all of the deposits, for the same reason there's enough money to insure all the buildings, all the ships, and so forth.
If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have done the same and split their deposits up - and stored some of them at SVB. So from FDIC's perspective, the total amount of deposits at every bank (and so the risk they take as an insurer) after this splitting is the same.
FDIC insurance limited to 250k and a banking system where everybody splits their deposits up into 250k/bank is the same risk profile for FDIC as unlimited FDIC insurance and no splitting up of accounts, assuming the same deposit distribution between banks.
If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank.
For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same.
So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.