EDIT: I think a lot of people misunderstood me. Wiping out the shareholders was absolutely the correct thing to do; I just meant worse from the perspective of people whose value is in the equity.
But its a concept otherwise known as Risk.
But it shouldn't. Cash should be riskless no matter where you stash it.
If anything, it's the people on the other side of the discussion who generally think depositing money into banks should be risky because they argue that the government ought to not bail out depositors.
This should be spelled out in law rather than relying on the existing provision being used ad-hoc, though.
In my opinion it's really rather arbitrary at a point. If an individual or corporation has a lot of money that they need to store, they need to consider risk and return regardless. Deposits have FDIC reducing risk, but don't earn much interest. There are government bonds which a different risk and earning profile, and stocks with a different risk profile again.
I feel it's rather narrow to focus only on deposits when in a practical sense it's pretty unlikely that anyone with any meaningful amount of money will keep it all in deposits. Similarly I also have sympathy for small share holders who lost money as part of their pension funds or otherwise. Not sure why hacker news commenters appear so gleeful about these people losing. It's not like bank failures are a "normal" occurrence in any sense.
1. (Main reason) We insure deposits is to keep bank runs from happening. That's why it was done here.
2. Insuring stocks costs more money, and creates far more moral hazard.
3. Most people/companies have far more diversified stock portfolios than deposits.
FDIC is not funded by taxes.
https://www.fdic.gov/about/what-we-do/
“The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage.“
Should deposits have an associated risk, so that companies prefer to pay their employees in cash and require cash paper bills to settle accounts? If physical cash were required, our economy would be much less efficient.
The FDIC is not an absolute guarantee. The government could decide that it doesn't want to honour it, or could itself collapse. Both scenarios are very unlikely to happen in the near term, but the same is true for the largest and most stable banks.
It’s probably the most fundamental axiomatic assumption underlying any normal discussion of financial risk.
In other countries, it isn’t. “How can we manage a complete collapse of the Filipino government?” Is a reasonable question.
If the US government collapses, Coinbase won’t have a market to operate in so further discussion doesn’t matter.
If you round the risk of the US government collapsing (or refusing to honour its obligations) down to zero, you should probably do the same for many private banks.
Share holders are owners in the company. They are rewarded financially when the company does well, and risk losing money when the company does poorly. In what world are customers equally subject to the same risks? They obviously do not get the same rewards.
Or do you mean in general? In that case, it's not particularly interesting. There's risk in walking outside.
It is more than fair to say that the FDIC insurance is common knowledge, and yet, depositors were bailed out despite understanding that risk. Furthermore, depositors have benefited from quite the entanglement with the bank that, in normal business, simply wouldn't fly.
The issue was the bank putting all of its deposits in illiquid long-term bonds that were worth substantially less if sold pre-term, and compounding that problem by becoming insolvent selling a large chunk of those bonds per-term at a huge loss to cover immediate liquidity needs.
You're blaming depositors (specifically VC-funded startups) for "benefiting" from a relationship with SVB they were forced into by VCs, and want to deny making all of SVB's depositors whole on the basis of a bank relationship that, for many, was not their choice. Worse, you want the fact that VC-funded startups over-depositing their cash reserves in a single-bank to be used against non-VC funded depositors (i.e., other businesses in the SV area) to deny making them whole on the basis of a "special relationship" that was simply "geographically closest bank willing to provide a loan and banking services."
As some others have said in this thread: I'm just trying to talk about what happened, within my limited understanding. I'm not talking about who was right or wrong at all.
Perhaps not the same risk, but risk nonetheless. People forget what banks truly are. They are institutions you give money to and hope they leverage ( fractional lending ), invest, etc it well so that you can take out the money out eventually. And maybe even earn some interest along the way.
> There's risk in walking outside.
No. The very real and actual risk that the banks managing your money may not be competent and gamble your money on risky loans, investments, etc. In this scenario, the depositer would lose part or all of their money.
It's amazing how well the industry PR has worked that people lose the sight of what banks really do. They fundamentally take your money, "gamble it" and hope it pays off. And if it doesn't, oh well, the government ( taxpayers ) bail them out. There is a reason why historically, people shied away from handing over their hard earned cash to banks.
There is a very well-legislated and well-litigated priority of claims agains a business that goes bankrupt.
It's roughly: first pay 100% of employee's payroll, then apply what's left to secured creditors (for a bank, I'd expect depositors to fall here), then what's left goes to unsecured creditors, then, preferred shareholders, then common shareholders.
Moreover, for all kinds of debt and equity, there are slices of the slices of different risks that can be setup to provide greater return (w/greater risk) or greater security (with lesser return).
Expecting the common shareholders to have anything resembling "equal" risk as the depositors is pure ignorance.
we are _forced_ to use banks because of the need for cashless transactions. if government had a bank that 1) did not engage in lendigg or investment; 2) offered no interest payments on deposits; 3) only settled cashless transactions -- i would use that, and i bet most people would.
Not since 1933, in the US. Our financial institutions have been oriented around protecting depositors since then, and everyone knows it.
There is a long list of people who get to make claims on the assets of a business when it fails -- depositors, bondholders, etc. Shareholders are always in last place or close to it. Everyone knows that too.
This isn't the wild west. There are longstanding rules and institutions here.
It's sad that depositors could lose money that was supposed to be guaranteed. But not as tragic as the scenario that the OP seemed to suggest, where retirees lost a large portion of their fixed income.
As they should be. They took a risk and lost.