Comment by capybara_2020 | Hacker News Reader

Comment by capybara_2020 | Hacker News Reader

Just an observation.

In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money in what was essentially a regional bank that experienced a sudden surge in deposits over the past two years. They put their money there because it offered better terms. When it went belly up they wanted to be made "whole" again. They put money in without understanding the risks.

On the other hand, as the article says, lots of these bonds were bought by Asian banks for their wealthy clients who were looking for better returns and considered these bonds safe. Who in theory sound like a similar demographic as the VCs and founders. But the comments here go on about how the investors need to lose everything.

The contrast in commentary is fascinating.

Maybe these are all just indicators that the financial market has become way too complicated with risks hidden away and no one is really able to wrap their head around all the risks. This complexity might actually be a good thing for everyone. With the central banks bailing out banks/financial instruments It is a case of reap the rewards while the going is good and then once things go bad, just shout about how the risks were not understood and get your money back.

As a side note, I am not personally invested in either of these cases.

> In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money...

Depositors are not investors. They don't have equity in the bank.

You're supposed to do your research on a business when you invest in it. You're not supposed to have to do research into a bank's financials when you're just using it as a bank. You're supposed to be able to trust government regulators.

It's the same way you're not supposed to have to research the construction of each bridge before you drive over it.

Depends if it’s a bail-in or a bankruptcy and depositors don’t get to pick which one is applied to their bank.

I don’t understand how VC funds can be in the billions and yet outsiders must assume they do not know anything about: 1. bank failures in the US in the last 100 years 2. deposits being on a bank’s balance sheet, hence the terms credit and debit cards 3. creditor subordination in event of default

Believing #3 especially makes no sense to me given the liquidity preference clauses I hear VCs have been writing into investment agreements with startups over the last few years.

These two realities, naive depositor and liquidity preferenced multi-billion dollar VCs, do not square up in my head.

FDIC protects naive depositors, not sophisticated financial professionals entrusted with billions of dollars of investment funds.

> I don’t understand how VC funds can be in the billions and yet outsiders must assume they do not know anything about: 1. bank failures in the US in the last 100 years 2. deposits being on a bank’s balance sheet, hence the terms credit and debit cards 3. creditor subordination in event of default

Without offering judgment: VCs are concerned with many things that can kill the companies in their portfolio across multiple different verticals. I would assume a big part of how this happened is that of all the things that could kill their returns, banks were low enough on the list that they weren't regularly thinking about it.

IMO there's a legitimate question about whether we believe it's good for one of the things VCs have to consider is bank failure risk as it will necessarily take attention away from other concerns more related to business and innovation.

Hedge fund manager here. Depositors and banks are counterparties, and every financial institution & fund I’ve ever encountered does significant and ongoing diligence on their multiple banking relationships.

It’s hard to imagine how irresponsible these VCs and startups were.

These 'startups' include small businesses like wineries and restaurants. They're not in finance and are not going to want to spend time becoming experts in banking due diligence.

If we insist that they take on their bank's solvency risk as depositors, the rational decision for most of them will simply to be move to a systemically important bank that the govt will likely never let fail (Citi, BofA..). There's no reason for them to keep their business at a small bank and take on risk they don't need to. Regional banks would then wither, and the banking industry would become even more concentrated with a few too-big-to-fail banks becoming even more powerful. It would be a bad outcome for everyone.

BTW, for anyone wondering which banks are considered to be 'systemically important', here's a convenient link to the list:

https://www.fsb.org/wp-content/uploads/P211122.pdf

And here's a link to the group that decided who goes on that list:

https://www.fsb.org/

Do SV restaurants have millions in cash? Cause up to 250k they were guaranteed.

Those people I know who run restaurants basically have zero cash at hand and are constantly repaying some debts.

These are more like “prime brokers” rather than “counterparties” in trade.

How often do you assume that your prime broker will go out of business before your hedge fund does? Unless you’re a big one (Citadel, Millenium), probably “never” (it’s the same with startup companies).

It's obviously different if you work in finance and you're dealing with hedge-fund-sized quantities of money. Making money off risk is your core competence.

For the vast, vast majority of startups that's not their business. Storing a few million dollars should not require expert due diligence into a bank's holdings when you're in a developed country, due diligence that these business owners don't even know how to do. It's not irresponsibility, it's focusing on the things a small business should focus on rather than distractions.

What do you mean you're supposed to trust government regulators though? Regulators don't prevent bank failures. What account holders can (more or less) trust is the deposit insurance scheme to insure them for a well-known amount.

If somebody deposits significantly more than FDIC in a bank account, would you advise them to research the bank's financials or not?

If you are setting that as the bar for depositor competency, congratulations, you've just guaranteed that every single business and HNW individual will only bank with a too-big-to-fail bank.

Access to some basic understanding of financials and risk is not out of reach of many businesses and "NHW individuals" that would be inclined to deposit that much. Your assertion is false.

You would do well to be quite certain of what you're talking before you try being snarky.

And I am not setting any bar. That is the bar which has been set by the reality of things as they are. Don't complain to me if you don't like it.

Depositors are investors, they're just not equity investors.

No they're not, that's not how the word is defined.

You deposit money into a checking account, you don't invest money in a checking account.

The same as when you deposit a retainer with a law firm you're not an investor in the firm. Or if you have a security deposit with your apartment's management company you're not an investor in that company.

Words have definitions.

I read somewhere that over 50% of all deposits in the US are uninsured. Making SVB depositors whole had much less to do with making hapless VC's whole, and much more to do with preventing wide spread contagion.

Also, practically speaking, the "consequences" for SVB depositors was likely that they would get a small haircut on their deposits, probably in the range of 0-10%. While not a great outcome, that by itself would not have been too problematic. The bigger issue was that getting access to those funds could take weeks or months, which would have been a huge issue for companies trying to make payroll.

> Maybe these are all just indicators that the financial market has become way too complicated with risks hidden away

I totally agree. And for the most part I have not seen too many folks on HN defending the SVB VC's, but more so arguing that there really is no practical reason why we can't have zero risk deposits (see discussion regarding narrow banks). And regarding the CS situation, we should also probably stop banks from selling bonds that don't really behave like bonds. At the end of the day, the vast majority of financial products can be boiled down to "get money now, pay more later" and "give money now, get more back later". And all of the complexity that gets tacked on top almost always seems to be ways of dealing/arbitraging risk. The more complexity we allow, the more likely it is someone will package and sell that risk to unsuspecting investors. We shouldn't make everyone whole when things go south, but we should absolutely correct these behaviors with regulations to prevent it from happening again.

Reply on news.ycombinator.com