Hacker News Reader

Comment by Dalewyn | Hacker News Reader

>bailing out the banks

My understanding this time around is the depositors rightfully got bailed out (both to maintain peoples' trust in banking, and because losing your money to others' failures fucking sucks), but the banks themselves were left out to dry.

View on HN

By "banks", I mean 90% of the other banks in the country that would've failed, absent the SVB depositor bailout.

If the FED didn't step in, every regional bank in the country would experience a bank run as people would withdraw everything and deposit in the "too big to fail" banks for safety.

Why I think the depositors should've suffered a haircut: What the FED did, was implicitly guarantee the deposits, this incentivize banks to become even riskier with deposits as they get to keep the profits if their risky bets payoff and get bailed out if they fail. This is like a real life cheat code for bankers and unfair to the rest of us regular folks who has to suffer the consequences of our actions.

>banks to become even riskier with deposits as they get to keep the profits if their risky bets payoff and get bailed out if they fail

This isn't true, is it? While they do get to keep profits, if the bets don't pay off, the bankers - shareholders, bondholders, employees, executives - all get wiped out (as happened with SI, Signature and SVB). The depositors get bailed out.

They get to keep profits if they win, but lose everything if they don't. No moral hazard, right?

The bankers are closet creatives; they're probably going set up structures where the equity-holders are on paper running something that looks like a charity and there is a class of "depositors" who are making suspiciously high returns. They just need to figure out how to get the money into their sphere of control as a deposit rather than as equity.

Indeed, in the SVB case there is probably an interesting story around why all these startups were banking with this one bank. It suggests complex relationships between entities and it wouldn't be that weird if it turns out the people being bailed out and the equity holders going broke are the same physical people.

So they should be told not to do that and be put in prison if they persist. We (the people) make the rules, but the regulators are rather too cosy with the bankers.

I'd start by stopping any securitization and having the banks keep all their loan assets on their own balance sheets.

We don't make the rules. They do.

If sensible people made the rules the financial industry would be stable and boring, inequality would be far lower than it is, prosperity would be far wider, and life would generally be more pleasant and financially successful - not just for a small cadre of middle class programmers, but for everyone.

How often we've heard these sentiments. "If only sensible people (meaning the ones who agree with me) made the rules..."

I'm not quite sure what your point is. We ask exactly that question to voters at each election.

I think there's some sort of clipping effect distorting things. If your losses are limited at your assets, then the bet (heads: I gain 2X my assets, tails: I lose 2X my assets) has positive EV.

It's not just banks, this is how limited liability works.

> as happened with SI, Signature and SVB

I concur...While this might be true for smaller banks, the same cannot be said about the "too big to fail" banks.

Convincing people not to bank run every single bank is not a bailout of all those banks, jeez.

And are you talking about people with more than 250k, or everyone else?

The former wouldn't destroy banks, and if you think insurance for everyone else is a problem then why has it taken 90 years to be such an issue?

There's some interesting wheels-within-wheels of moral hazard here. In particular, it sucks to be a sedentary depositor that did not contribute to the bank run, to let those depositors cook is to make it much better to be twitchy and contribute to runs.

Do depositors have some sort of moral superiority to investors, or simply a legal priority?

Citibank equity holders (one of the the more egregious bailouts from the GFC) 15 years later are still down 90%. So it’s not like in the bad old days of 2008 investors were getting off scot free.

> Do depositors have some sort of moral superiority to investors, or simply a legal priority?

Depositors don't stand to benefit from a bank engaging in stupid risky bets with depositor money.

Investors do (on the upside of those bets).

This is why depositors should (and do) have moral priority for their money.

Investors also are able to directly control the degree of stupid risk-taking behaviour taken by the bank, by virtue of their control of the board. Depositors have no such leverage.

If you make depositors (or the public at large) pay for the sins of the bank's management, you get a classic conflict of interest problem. If you make investors pay, it goes a long way towards aligning their interests with keeping the bank running well.

While I largely agree, it could be argued that banks engaging in risky behaviour might attract depositors with higher interest rates than a more responsible bank.

If depositors know that their money is fully covered, you incentivise them to move their money from responsible banks to irresponsible ones. It's easy to imagine a knock-on effect where responsible banks are incentivised to behave less so in order to retain custom, with the whole system becoming more fragile as a result.

You can make that argument, but just like a spherical cow, it has no bearing on reality. SVB and it's ilk offered the same non-existent interest rates as any other non-distressed bank.

Sure the depositors that had more than 3x my annual salary just sitting in their account.

Of all the "evil" things one could do with gargantuan wads of cash, having it sit in a bank account is just about the most innocuous thing I can think of to do with it. It seems like a wise, cautious move actually, and it seems like it'd be bad to punish businesses for being cautious with their money

Their money is being used to make investments and they're getting paid interest for it. If their deposit was above the amount insured by the FDIC then they knew it could all be lost if the bank collapsed. I wouldn't call lending more than 250k to a bank "cautious" (that's what you do when you "deposit" your money in a bank), they could have bought Treasury bonds instead. But maybe they were smart and had guessed that in this third world financial system, if your bank is too big to fail, depositors get bailed out by the government anyway.

It kinda depends on scale doesn't it? For an individual 250k in cash seems like a lot (although can easily happen just before or just after a large purchase.)

For even a "small" business though it's quite small. We're small (<50 employees) but payroll is around 1.5m per month. We keep about 2m as "working capital". This is cash that is literally flowing all the time.

In this context 250k is tiny, and wouldn't cover our day to day balance.

I guess you'll have to wait for The Narrow Bank to become operational. In the meantime the best you can do is lend your money to an institution that is too big to fail.

Accounting for inflation, the interest paid is several percent negative.

Reply on news.ycombinator.com