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Comment by cjtrowbridge | Hacker News Reader

SVB was never "unsound." They had plenty of assets to cover all their deposits and plenty of cash to cover normal withdrawals. If not for people like Peter calling for a bank run, SVB would still be in business today.

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> They had plenty of assets to cover all their deposits

No, they did not. If they did, then they could have immediately sold all their assets during this bank run, and there would have been no need for the FDIC to step in.

If they could not do that, then, by definition, they did not have enough assets to cover all deposits.

I mostly agree, but there are cases where someone can have enough assets but it's such a large amount of something that word gets out they have to offload it, and then good luck selling it all at anything but a big discount, then not too long after price does rebound.

That is obviously not a situation that one gets into without making some mistakes, but I think this is distinctly worse, though some are trying to act like it's the same. The actual fair market value of what they held, even removing SVB from the situation entirely, was down a lot. And it was down for very logical and predictable reasons, and will almost certainly never rebound.

They had the assets. Just that a good portion of them aren't available to be sold immediately

People need to stop repeating this, they had assets to cover most but not all deposits. They used accounting tricks to pretend they had more than they did.

This is False. They had the assets, but they declined in value until they were worth less than liabilities. Insolvency.

This is conflating liquidity with solvency, the parent appears to be arguing that SVB was solvent (which seems to be true) albeit not liquid.

If I owe you $10, and all I own is a house, and you ask for your $10 back, I may not be able to pay you even though the value of my assets way outweighs the debt owed. Selling a house isn’t instant.

Arguably the only purpose of a bank is that you have access to your money at any time you wish, if they can't honor that, they're not doing a good job to say the least.

That shows a lack of understanding of the true nature of banks because most banks can't withstand a barrage of everyone asking for their money at once. The underlying criticism of Thiel here is that he saw a liquidity problem and made it a solvency problem by encouraging everyone to pull their money immediately. If he didn't do that, there were potentially solutions that could have fixed the bank's liquidity problem without jeopardizing their solvency.

They were already insolvent, the bank run did not cause that. They used accounting tricks to pretend they had more assets than they really did.

I believe the point is the utter craven hypocrisy of ultrarich who savagely denounce government programs that help poor people and ordinary workers, who destroy and tear shit down for their own private profit, and then have the fucking audacity to scream and cry for other people to pay for their own investing mistakes. David O. Sacks I'm looking at you.

Banks are not investing. They are commodities. The share holders and bond holders who were investing were wiped out. Do you want to live in a world where only Bofa/WF/Citi/Chase exist? Because that is what you are advocating for.

> Banks are not investing.

Yes, they are. How do you think they make profits? How do you think this happened to SVB? Their investments were illiquid and they were not able to convert them into cash fast enough to return deposits to their customers.

This is literally the opposite of how banks work. If they keep everyone's money they would never be able to make loans, let alone fractional reserve leveraged loans. They need you to keep your money in an account and not need to access it that often, or at least keep most of the money there.

I guess what the bank needed and what the customers needed were fundamentally at odds then.

There was a run on USD coin due to this fiasco, it didn't have enough liquidity to pay all its customers, and yet people stopped their run on the asset because people figured that there was no way they weren't going to get something like 90+ cents on the dollar within 3 months so it was pointless to sell beyond that point, and because it became pointless to sell beyond that point it meant that the value was probably going to approach $1 so people pumped the price back up.

When I look at something like that, I really wonder if it's really so structurally impossible to make a bank where nobody has an incentive to do a run on you in anything but the most extreme of cases.

Maybe they should change their business model then if they need predatory loans to survive.

First of all, what about SVBs loan business do you consider "predatory"? The alternative business model would to charge customers to hold their deposits. I somehow doubt that would be very popular either.

Any usurious transaction is predatory by definition. Of course people don't want to talk about it. Someone submitted the wikipedia article about usury to HN about 12 hours ago but it got flagged apparently.

So you think banks should instead charge you to hold deposits? Would you use such a bank, if they promised to never engage in 'usury'?

Yes that's one possibility. Furthermore, there are ways to make money that are not usurious.

Why don't you go try to start something like that and tell us how your ideas work out in real life.

The FDIC cited liquidity _and_ solvency when they closed SVB.

I believe the two words have a bit of gray area in between them, but here's how I understand it:

If you issued a $100 invoice that is going through processing and will be paid to you in 30 days, but you owe someone $50 right now, you're illiquid.

If you have $100 long-dated bond that is currently worth $50 on the market, and you owe someone $60 right now, you are actually insolvent. Not just illiquid.

There is no gray area, just trickery. Your scenario is equivalent to saying if I have $70 in assets and $100 liabilities, then I am not insolvent if someone gifts me $30. People will not keep billions of dollars in your bank earning 0% while the rest of the world collects 4-5%.

Alternatively, if I am a bank in March 2023 and I have 70B in cash and 100B in liabilities, can I become solvent by buying these 1.5% yielding treasuries and MBS at market rate of 70 cents on the dollar and say, "don't worry, I'll have $100B in 10 years to pay everyone". Of course not.

These are both equivalent situations.

I wasn't arguing with you at all, you totally misinterpreted my comment. SVB was insolvent due to their long dated bonds.

Sorry.

SVB was insolvent

That's literally what they did that triggered the FDIC to take over. Assets are not always liquid though. It takes time to prematurely sell 46 billion of bonds, and it comes with a huge cost.

The value of their assets was enough to cover deposits. The liquidity of those assets was not.

False

Today maybe, but a year or two from now? They had 40% of deposits locked in for years at a low interest rate. They wouldn't have been able to offer depositors a competitive interest rate over the next couple years without bleeding money. So they'd have to hope that few would withdraw in spite of an objectively inferior service (which in itself would start raising alarm bells at some point).

Maybe a more gradual stream of withdrawals would've allowed them to make up money elsewhere to stay alive, but they demonstrated such horrible incompetence with this entire situation that I don't see that ending well.

Plus this kind of approach requires everyone to coordinate and not freak out, which is not gonna happen.

Then why didn't they borrow it?

People keep screaming "illiquidity not insolvency" as if bankers of all people didn't know what a loan is.

The answer, of course, is that no one was willing to loan them money due to solvency issues

Because that's not how banking works. They aren't allowed to get a loan to cover liquidity obligations. They have to sell assets which takes time. If Peter Thiel starts screaming for everyone to withdraw their money, the bank can't keep up, and the FDIC steps in.

This tweet thread from January https://twitter.com/ragingventures/status/161582608803847373... has some details.

Thiel did not call for a bank run. If he yelled fire, that's because there was fire. For some people, that could be seen as a public service. But of course, since Thiel is hated by the Blue Tribe, he must be painted as evil mastermind killing banks for fun.

That's the same thing.

Nope, someone else would have started a run.

By that logic, all banks are unsound. It's not turtles all the way down, and pretending the guilty party is blameless because "someone else would have done it" is nonsense.

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