The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
[1]https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
Government that smooths out the bumps. Provides some 'smoothing' to society so it doesn't crater and fall apart.
While also holding people accountable and criminally charging corporate executives.
It does seem like there is some reductionism to just crying 'nanny', since the same people that dislike the 'nanny' state also complain when the 'nanny' wants to hold people accountable, since they should be free to cheat. Yelling 'Freedom' anytime the state steps in.
You can't have both, complain when the state is a 'nanny' and helping, and then complain when the state disciplines people, the 'nanny' when stopping the child from doing things that will hurt itself.
Why weren't executives and boardrooms held liable? That would have been a great start. Actually putting teeth behind regulations, clawing back bonuses and invalidating golden parachutes and culpable executives going to prison, preferably for a long time. None of the executives involved should legally be allowed to work in finance again.
If I as an individual pulled the stunts they did, or a smaller organization did, they'd be labeled fraudsters and prosecuted to the fullest extent of the law.
What TARP and its aftermath proves is that if you're big enough, you escape all real liability for your actions, and the public and your employees get to suffer the consequences.
Why should executives and boardrooms be left off the hook while the American public pays the price?
Less than a year ago, we suffered the second, third and fourth largest bank failures in our nation's history [1]. Shareholders were zeroed.
[1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
No laws were changed. The FDIC always had broad discretion in managing assets and liabilities under receivorship. You are correct, however, in that a precedent was set.
Where you are incorrect is in the friends in high places bit. I was near (though not on) ground zero in those crises, and to the degree politics were involved, it was in the goodwill that would have resulted from visibly screwing certain Silicon Valley elites. If Signature hadn't failed, there is a good chance SVB's depositors would have been capped at the legal limit.
The government undoubtedly provided its backing to the banks. That "profit" is not commensurate to the risk that the govt took on.
> That "profit" is not commensurate to the risk that the govt took on.
That's because the bailouts was intended to stabilize the economy rather than to turn a profit.
What do you mean by this exactly? I don't know what this is in reference to.
Never mind the case, the biggest problem with TARP isn't the money per se, its the lack of substantially increased regulation and teeth to enforce it. Executives and boardrooms should have been bankrupted as the government should have clawed back pay, personal assets, and bonuses to pay for the damage that was done. In another words, boardrooms and c-suites should have been humiliated and fired en masse, with prison time for those culpable.
That would have been a good start. TARP funds were handed out with no teeth. The senate hearings largely ended up being for show, and only a few executives were held feet to the fire and even so, it was brief.
Not to mention, how the heck are these people still allowed to work in finance at all.
This was the CARES Act.
So over the 5 years of holding those assets, that's a rate of return of 0.7%?
If you ignore the "getting your money back" part yes.
> In total, U.S. government economic bailouts related to the global financial crisis had federal outflows (expenditures, loans, and investments) of $633.6 billion and inflows (funds returned to the Treasury as interest, dividends, fees, or stock warrant repurchases) of $754.8 billion, for a net profit of $121 billion.
> A 2019 study by economist Deborah Lucas published in the Annual Review of Financial Economics estimated "that the total direct cost of the 2008 crisis-related bailouts in the United States" (including TARP and other programs) was about $500 billion, or 3.5% of the United States's GDP in 2009, and that "the largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions."[92] Lucas noted that this cost estimate "stands in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the trillions of dollars."
Where it benefited was in potentially reducing economic harm, but the short term gain is offset by long term systemic issues.
However that also caused the greatest gap in income inequality ever. Those with assets got extremely wealthy and those living paycheck to paycheck got fucked. This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already.
The fact that people could afford houses in other areas seems to support that group-think and constrained supply is really at the heart of that issue. Also, affordability was an issue prior to the crisis (well, true affordability because the loans were too easy to get for many).
At what point in your career were you?
Anywhere in the Bay Area, or in the neighborhoods you were willing to live in? What weee your constraints?
This is one of those situations where there was no good way out. The least awful option ended up being the best out. The real issue was that Timothy Geithner, Ben Bernanke and Henry Paulson could not effectively communicate the economic issues during an election.
As much as I respect John McCain, his decision to end his campaign to ‘return to Washington’ was an unmitigated disaster. Both for the economy as a whole and for that manifestation of the Republican Party. We can draw a direct line from that stunt through the Tea Party and into today’s current populist climate.
Long rambling explanation short, I don’t believe there were other options. Decisions were made in real time and in many cases, they had to be made overnight. Two major deals that would have dramatically altered the response to the subprime crisis both fell apart over night on a weekend. Ben Bernanke was (and remains) one of the world experts on the Great Depression. His education lead him to take policy steps that would prevent another Great Depression.
Maybe we’re worse off, maybe we’re not. But I’m glad I didn’t live my entire thirties under a depression.
Whether TBTF banks should be split up is still being debated. With size comes resilience (and fewer books to look over).
In terms of improved regulation, the fact that we're less than a year out from the second, third and fourth largest bank failures in our nation's history with seemingly no memory of it seems to speak for itself [1].
[1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
Other things (ie - derivatives) were not properly regulated. If you’re interested in what one form of regulation could have looked like, you should look up Brooksley Born. Most specifically, what happened to her when she proposed regulation.
Ben Bernanke spent so much time testifying and was so bothered by his experience that he used to be a registered Republican. Now he’s independent.
Its a tragedy through and through. She faced harassment from all sides and her expertise was brushed off carelessly. Its really truly sad.
The same thing happened to Raghuram Rajan from the IMF. He delivered a paper criticizing the financial sector entitled "Has Financial Development Made the World Riskier" which argued that disaster loomed. The paper, which proved accurate, was aggressively criticized by Larry Summers, who served as the director of the National Economic Council in the Obama Administration. He was also ostracized for expressing a legitimately dissenting opinion on how financial markets in their then current form were a great risk the global financial system
[0]: https://www.sfgate.com/business/bottomline/article/Brooksley...
It’s quite interesting because we can look back in time and find some excellent people who sounded the alarm bells. They all got trounced.
I think if we can take any solace, it’s that Larry Summers did not serve as Obama’s Secretary of the Treasury. It went to Tim Geithner instead.
Granted, hypotheticals are always tricky, and one can’t predict what sort of malignant reaction a McCain administration would have provoked.
These are some pretty big things to posit without some citations.
Simply put I don't remember anything of this nature, at all, with the exception of the prevalence of racism.
I'm not saying Obama and his administration didn't have faults (they sure did) but like I said, other than the prevalence of racism, nothing else rings true.
They really should be common knowledge. Among many other examples: the Chrysler bailout violated the Takings and Due Process clauses; the use of the IRS to persecute political foes violated equal protection; he started his political career with a fundraiser in the home of two violent terrorists, the founder and leader of the Weather Underground (this on its own should have disqualified him as a candidate for any civically-minded party); he is noted for such gaffes as referring to ISIS as the ‘jayvee [junior varsity] team’ and mistakes such as the premature 2011 withdrawal from Iraq which opened the door for the Islamic State, as well as for such poor domestic politics that his party lost over 1,000 seats.
Not all criticism of or disagreement with him was well-founded or well-motivated — as I noted, I failed to recognise at the time how many of his foes had racist motives — but he really was a profoundly bad president.
edit: grammar
Also, I would argue that Trumpism, at least from his base's point of view, is about challenging the Establishment. Sure, Trump is nasty and in no way deserving of the anointment as challenger of the Establishment but he's skillfully bamboozled his supporters into believing it.
Trumpers are right about one thing: the Establishment are an absolute abomination.
In that spirit, I think we could have done something/ written the laws to force something like the following to happen: 1. wipe out shareholders, convert bonds to common stock. 2. if the loss is so gargantuan that converting the bonds still leaves the bank insolvent, then wipe the bonds out too and offer shares up to certain value to depositors as conversion. If not enough convert then haircut depositors over a certain threshold for the rest up to a reasonable percentage of the negative equity and make up the rest with a government loan program at that point.
The expectation should be that if you own a big bank and it does stupid things you are going to lose your money, if you are a bond holder of a big bank and it is doing stupid things you should expect to be converted and possibly lose money. The expectations as a depositor is you will have all your deposit up to a threshold protected and you may lose some above that temporarily but are likely to get it back with a nice return in time.
There were better options. But it's unclear we would have found them in time. That's why we explored and enacted them aftewards. Which is what let First Republic, SVB and Signature fail last year, with investors being wiped out and no depositors impaired, so smoothly that it's no longer in popular memory.
There was never any meaningful regulation that came to pass afterward that split the banks up.
There were some marginal improvements to solvency requirements (which ironically were the standard before de-regulation in the 1980s and 1990s) and on the consumer banking side there is a little bit more protections, but nothing truly meaningful that limits downside exposure from the broader public ever got passed, let alone debated. Everyone was so fast to get back to "business as usual" you'd think nothing happened.
What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole. By their own admission they did much the same in the 80s and 90s[0]
[0]: https://www.fdic.gov/resources/publications/crisis-response/...
Sure, populist shows of retribution weren't prioritised. Keep in mind the time frames within which TARP was passed.
In last year's failures, stockholders were wiped out.
> government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse
Based on what law did you want these binding legal agreements invalidated?
> never any meaningful regulation that came to pass afterward that split the banks up
Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
> Everyone was so fast to get back to "business as usual" you'd think nothing happened
If you didn't watch the picture, sure.
> What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole.
What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
I don't think anyone is asking for populist retribution[0]. I'm asking for fraud, gross negligence, financial impropriety and a host of other actual things that happened to be prosecuted to the fullest extent of the law, and that would mean going after executives and boardrooms, where the decisions were made. Even by this point fining corporations is a slap on the wrist. Culpability is with the decision makers. That means executives and boardrooms.
Conversely, upon further review, it also means at least a few dozen regulators needed to be removed from their posts and investigations should have been opened into those failures too, to a much broader extent than they were.
>Based on what law did you want these binding legal agreements invalidated?
They should have made it a condition of accepting the TARP funds. I'm not surprised it wasn't (though I'm getting conflicting information when I go to look this up, there appears to be an optional provision that allowed the government to elect to do so, but its unclear if it made it into the final bill), but its plain silly that we attached no real sticks to this. In fact, it was proposed at the time[1], that much is certain.
>Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
Their roles perhaps, and we could discuss that, but it isn't what I posited. The real question I have is: What meaningful reform happened? There has already been rollbacks of the Dodd-Frank bill in the intervening years[3] and I'm unaware of any regulatory teeth over the derivatives market, for example.
Whether the FDIC and The Fed have expanded regulatory scope isn't the same thing as passing meaningful reforms.
>It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
I will contend that splitting banks up where "main street" banks (traditional loans, checking, savings and other things traditionally associated with mainstream consumer banking) and investment banking should be split. There's no reason the holder of my deposits should also be actively exposing the core safety of the institution by making speculative investments in the derivatives market, for example. Separating concerns is how it used to be, and the only outgrowth of the M&A of the 80s and 90s in the banking sector seems to only be new ways to create riskier investment portfolios. I don't think having these very disparate activities under the same business is a good thing, as you risk the institutions stability, as we saw in 2008, and again, to a lesser extent last year.
Boring banks are good banks. Note however I'm not saying those risky financial opportunities are in and of themselves bad. They aren't, per se, but they should be a separate business entity entirely, and not allowed to cross-pollinate each other to the extent that they do today, if at all.
>What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
I said as much.
EDIT: I initially posited that the FDIC had similar authority prior to the events of 2008-2013. I incorrectly conflated the role of the Resolution Trust Corporation and the FDIC having management over that with the FDIC itself having authority to take a bank into receivership and to seek to sell its assets in-part or in-full, to make depositors whole. That's my memory failing me. I retract this assertion. This is indeed a post 2008 role it has assumed.
[0]: To me "populist shows of retribution" is more guillotine justice than simply enforcing the rule of law, and I think its intentionally combative. All anyone is really asking for here, as upset as I maybe regarding what happened in 2008[2], I'm only asking that we actually prosecute those responsible for the myriad of financial improprieties that took place. I don't know why this is controversial. To re-iterate, I have stated I want to see those culpable stand trial to the fullest extent of the law.
[1]: https://www.businessinsider.com/senate-can-claw-back-any-200...
[2]: To which I admit, I'm a bit combative over. Look at this way; We know the players, we know the causes, and we even know down to the groups of people who the actors were that were major influences on why things went the way they did, and they all get to walk away, head high? I'm saying that we know what crimes took place and even who committed them, and no case was ever opened, let alone prosecuted. In what other sector could crime happen at this scale, and we know the players, the whens, the hows, and we don't prosecute?
[3]: https://www.nytimes.com/2018/05/22/business/congress-passes-...
Most derivatives are now centrally cleared, which means centrally reported. SIFIs are held to tight stress testing and reporting standards. Banks have to maintain failure plans. That's just off the top of my head.
All of these components allowed First Republic, SVB and Signature to fail in a way they could not have pre-2008.
> the FDIC has always had this power, and it was well exercised in the S&L crash and its aftermath between 1987-1994
No, it did not. No competent banking lawyer would allege as much.
And the S&L crisis famously involved depositors losing money because the FDIC was hamstrung [1]. The FDIC did not have the power to bail out e.g. AIG in 2008.
> Boring banks are good banks
I strongly recommend an introductory money and banking text [2]. Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
[1] https://www.fdic.gov/bank/historical/history/167_188.pdf
[2] https://www.amazon.com/dp/0134733827?ref_=cm_sw_r_apin_dp_NC...
Which is a lower pool of banks, because of rollbacks to Dodd-Frank, which designate a much smaller class of banks as SIFI. In fact, the Federal Reserve pointed the finger at these rollbacks as an important piece of how SVB managed to fail in the first place[0][1]
If I understand correctly, being exempted of the SIFI status in practice means that regulators are much more lax in stress testing and enforcement of the tighter Dodd-Frank provisions.
When you say failure plans, we are really talking about reserves, there has always been some reserve / loss requirements, they were tighter until the de-regulation of the 80s and 90s, IIRC, and the only thing that has happened there is that some of that same tightness in regulation was restored, but its not net new in the sense that it pushed broader regulation, it only restored some aspects that were actually already in place at prior to the aforementioned de-regulation, IIRC
>Most derivatives are now centrally cleared, which means centrally reported
I'm unsure if this is meaningful or not, particularly since the conditions that caused LTCM to fail (and really drove much of the 2008 failings) still exist[3]
>No, it did not. No competent banking lawyer would allege as much.
And you're right. I conflated the role of the Resolution Trust Corporation and the FDIC (at some point, the FDIC was in charge of the RTC I think) which played a similar enough role in my memory that I ended up conflated here. I edited the post to reflect my errors. I should revisit this time period at a later date.
> Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
That isn't really consensus of multiple agencies. They were negligent in managing their risk[1][2]
I don't think that's "boring bank" activity, to be repeatedly mismanaging risks. Unless textbook case of mismanagement by the bank[2] is a boring bank activity.
[0]: https://www.reuters.com/business/finance/us-fed-points-finge...
[1]: https://www.newyorker.com/news/q-and-a/the-regulatory-breakd...
[2]: https://www.federalreserve.gov/publications/files/svb-review...
[3]: In my research, Warren Buffett of all folks maintains these risk are alive and well, "a ticking time bomb that will serve to poison markets", to paraphrase. I'm unsure what to make of it (Buffett by his own admission isn't the foremost authority on economics, though its hard to dismiss the guy given the track record) but it is interesting never the less.
There is no reason the decision makers at the top should have been able to use TARP cash to pay themselves bonuses.
Its not all about the money, at the end of the day. Its what you do with it.
It should have had more strings attached. The banks should've been broken up again to undo the nonsense de-regulations from the 1980s and 1990s that exposed "main street' to such speculation in the first place.
Mind you, if individuals or smaller organizations did what the banks did, we would call them pyramid schemes and fraudsters and arrest all of them and prosecute them to the fullest extent of the law, not bail them out to continue business as usual
Some major employers in the United States were about to miss payroll. The most famous story was a McDonalds franchisee who was not going to be able to make payroll. They didn’t hold cash on hand and needed banks to keep rolling paper. When McDonalds franchisees cannot make payroll, there’s a potential for tent cities.
If they had years, I’m sure things would have been different.
Incidentally, Ben Bernanke got so sick of that line of questioning that he is no longer a registered Republican. He’s one of the people who pulled us back from the brink of recession and I don’t know he’s treated with the appropriate respect.
>To me, the strongest piece of evidence in favor of the recession causing the housing crisis rather than the housing crisis causing the recession is the fact that prices snapped back up, in similar geographic configuration, after the economy has recovered
This is unsurprising, its where all the good paying jobs still are. The centers of employment as it were, are in the areas with the most housing demand, and spillover from that will drive adjacent markets up as people at the top and wanting to move sell and move to LCOL areas. Fundamentally this is the issue with housing that I think is readily apparent to anyone who has looked at the market with any seriousness.
Now with w/r/t 2008 it was faulty mortgages and mortgage backed securities that caused the recession, not housing construction. That is accurate to say, if you want to paint in broad strokes, but the defaults on NINJA loans and variable mortgages leads to a depression in home buying as credit tightens up and losses mount. I don't see how you don't end up with some depression in the housing market as a result of this, even if its uneven in whom it affects. Alot of collateral is tied up in real estate and that assumes "up and to the right" value of real estate holds constant. You have to square that too.
In the US, real estate is in a tug of war between being two views: One is as an investment vehicle / asset. The other is as a commodity to which we all need to live because its required for housing. Those two don't square very well.
One thing is for sure, homeowners want the value of their home to appreciate, and they fight tooth and nail to make sure it does. I think in context, we as a society over-invested in "real estate is an asset and can be your nest egg cause they ain't making more!" type narratives, and would do well if we shifted toward "real estate is only as valuable as it is used productively for society"[0]
[0]: In reference to Georgism: https://en.wikipedia.org/wiki/Georgism
I don't think that's inconsistent with "the Fed has overreacted, and should have kept rates low/lower". It just means that probably more people would have been able to make the monthly payments, the depression would have been smaller.
And of course your implicit point is that letting too many bad loans fester could have (would have) cratered a sizeable portion of the financial system anyway.
But instead of treating this as an asset bubble we ended up with an understimulated recession. (It's completely ridiculous that US real estate with a growing population was seen as 'toxic assets' even by the government. Just put it on the balance sheet of some random agency and sell it later, when convenient. Or use it as social housing, whatever. But of course ... politics emerges from culture.)
Everyone wins, even the government profited 10 million!!!
Did I just invent an infinite money hack to make everyone a millionaire?
Privatizing profits but socializing losses creates perverse incentives, besides being deeply unfair.
Sure. But the reforms enacted thereafter do.
The second, third and fourth largest bank failures in the nations history weren’t actions?
I state that one of the observations you can make about TARP and its aftermath is that banks weren't forced to do business differently and the bulk of the TARP money didn't go to help average Americans. There were other paths than TARP.
The fact it "didn't cost the government anything" is a red herring, in that it didn't produce the desired behavior or outcomes that were intended as the TARP money was suppose to have strings attached.
All I see is reasons for strong regulation and breaking up the banks so that "main street" banking is wholly separated from "wall street" banking, so losses can't cascade the same way, even if is at the expense of some marginal profits. Why should deposits and traditional lending be exposed to wall street speculation? This what happens when you allow speculative finance, corporate investment banking[1] and (for lack of a better term) regular banking to co-exist in the same institution.
Boring banks are good. We used to have a lot of them before the M&A sprees of the 1980s and 1990s, which was purely fueled by consolidation which in turn, those consolidated assets were invested in riskier and riskier financial markets and other endeavors. I will continue to argue it was not a benefit to the American public.
[0]: Though not all costs are directly monetary, or even monetary at all. One outcome of TARP and that time period is everyone is now comfortable with the idea of "too big too fail" and seemingly, governments are willing to bailout risky financial speculation of N size[2] with no consequences for those who made the decisions to participate in that speculation in the first place.
Keep in mind too, as noted elsewhere in this thread, its still up to debate whether that is strictly true or if the total cost has not been calculated correctly
[1]: I don't know where to draw the line here because "investment banking" is a really broad term, that covers everything from M&A finance to market making to individual investment services under the umbrella term. For arguments sake, I'm sticking with "corporate investment banking" to hopefully add clarity
[2]: N = whatever the minimum threshold is that financial institutions can convince the government to bail them out for while arguing not doing so will cause "a disproportional economic downturn"
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
There is no good solution.
And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
But if its coffers run dry, the US treasury pays out.
Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.
If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.
Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.
Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
Practically, no, the FDIC set the precedent last year of full depositor coverage.
I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.
Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties.
> FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency
No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago).
https://news.bloomberglaw.com/daily-labor-report/biden-to-un...
>No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was.
Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
“The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC.
“FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury.
[1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The....
[2] https://www.fdic.gov/resources/deposit-insurance/brochures/i....
It holds enough capital to cover something like only 2% of insured deposits.
It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.
This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.
They absolutely did [1].
[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html
Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?
Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people.
Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.
Which depositors were screwed for not having the right connections?
> FDIC limit is theoretically a lifetime limit per individual
No. It’s not even a limit at the same institution, just per ownership category.
That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones.
That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.
Less than one year! We had three banks fail—the second, third and fourth largest in our nation’s history—less than one year ago [1]!
None were TBTF, let alone big five. Every deposit was covered. I get that the headline reads hysterically to a lay reader, but less than one year!
[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
Correct. The comment I responded to claimed unlimited coverage was limited to the Big 5. We're less than a year from non-TBTF (we let them fail for god's sake) non-big-five banks (a) failing and (b) receiving unlimited depositor coverage.
> That said, the FDIC ignored their playbook and rules to try to calm things down last March.
There's the SOP and there's what they did, there was no relation between the two which means we have no clue what they might do next time.
The intention behind that intervention was clearly to stave off a sector wide run. What held true then and there is by no means guaranteed or even likely to hold true in the event of an actual panic.
As far as I know that is not true. Why do you say that? FDIC limits are applied per bank, per individual, per account type, but there is no individual lifetime limit, and a common "cash management" account technique is to distribute your money to multiple banks so you can take advantage of each bank's limit.
https://www.fdic.gov/resources/deposit-insurance/brochures/d...
I don't know what section of the Federal Register to consult to see if that is actually backed up by something enforceable
What rule are you referring to? FDIC coverage has never had a lifetime limit. That would mean someone who gets an FDIC payout at one bank should rush to pull their deposits at others.
but the government is owned and that will never happen.
If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.
This is not correct.
Loans create money. So the creation of money involves the creation of the loan. But if the loan is poofed, the currency doesn’t go away. (Think: loan to buy a house makes money, seller gets the money, buyer defaults, loan is impaired.)
The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
No, but the seller’s bank does.
Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
True - what I meant was they can't just have a house on the books and loan out 100% of the difference between its value and what's still owed on it, because if the loans start defaulting they need a margin of error in case they can't sell the house for what they thought it was worth at the time of buying.
Also the seller is now less a real asset. Their liquid asset worth hopefully went up in the sale. But their total net worth should be around the same, minus any fees they paid during the transaction.
Mortgages are assesed on risk-based metrics in terms of how much equity a bank must hold against each dollar loaned, and how much liquidity as well.
Apologies. The comment you're responding to makes multiple fundamental errors [1], so the discussion is a tad tough to follow.
[1] Banks have enough capital to absorb these losses, capital isn't cash, loss reserves aren't cash, there is no chain reaction of defaults in basic lending, bank failures and rescues aren't inflationary
If the house burns down in a fire, the bank is still owed its $200k, assuming it's a full-recourse mortgage. Same if the house's value drops to zero for some other reason. The money owed to the bank is separate from the house (again, in a full-recourse mortgage).
Of course, you can't sell the house and keep the mortgage, but that's only because the bank wants to be sure it will get its money; it's not because the bank owns a share of the house. Same story with the bank forcing you to insure the house.
So I think it's wrong to say that the bank owns a share of the house. Which raises the question: what, precisely, is the asset that's on its balance sheet?
(Hopefully I'm being clear that I'm not asking what GAAP says. I mean what does the bank have that it didn't have before?)
EDIT: this problem doesn't arise with a non-recourse mortgage, where the bank's asset is pretty clearly a share in the house. If the house burns down, the bank loses its money.
The asset is a debt instrument, with everything implied by the specifics of that instrument.
If I own stock in Microsoft, it means I own a percentage of all its assets (real estate, intangibles, etc), along with a right to a percentage of its revenue streams. Plus I run the risk of my asset being worthless if Microsoft fails. So I know what that means.
Similarly, if I own Microsoft bonds, it means I have a right to a fixed revenue stream from it, and further, can claim a proportion of its assets if it stops paying me. So I can be said to 'own' a proportion of its assets, insofar as I have certain rights over them. And again, I run the (smaller) risk of my asset being worthless if Microsoft fails.
If I have lent Bob money on a non-recourse basis to buy a house, it's a similar story: I have the right to a fixed revenue stream from Bob, and can claim his asset if he stops paying me. So again, I can be said to own a proportion of the house, less whatever I'd pay him if I seized it. And again, I run the risk of the house burning down, etc etc.
In all three of these examples, my balance sheet asset refers to something real.
But if I've lent Bob money on a full-recourse basis, what is the asset? Not the house -- we've established that. Not the cash -- the cash is gone. So what is the debt instrument in my balance sheet based on?
The full-recourse loan instrument gives you access to any other assets Bob may have (including future assets such as wages).
They may start existing at some point in the future, or they may not.
How can I claim ownership over something notional?
The whole point of a loan (of any kind) is that it comes with risks. Different types of loans have different risks, and allow ownership claims of more or less things distributed in time and space). But no loan is risk-free, and so the idea that a loan provides an ownership claim of something that only notionally exists doesn't seem particularly strange.
Obviously I have claimed a right to $200k of future revenue streams Bob is able to provide me with (plus interest).
So ISTM that the 'asset' I would claim to own is Bob himself. I don't own a house or company stock that provides me future revenue streams; I would claim to own a share in a person that provides me with the same. This seems the only logical way to understand the situation.
You lent Bob the money with (hopefully) a clear understanding that in so doing, you could end up not receiving back some or all of the principal and interest. You adjusted the terms in various ways to decrease the chance of that happening, but you did not do this by acquiring ownership of anything.
If I have a claim on Microsoft's future revenues, this implies that I own a share of Microsoft. If I have a claim on Bob's future productivity, this implies that I own a share of Bob.
And so it is with Bob, metaphorically speaking.
But this doesn't affect the argument. In fact, it looks as though you agree with my suggestion, which is that being owed money (on a full-recourse basis) by Bob has a very strong resemblance to being a shareholder in Bob.
Why would that happen?
Its probably not? Money is created as debt:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
You can really think through this yourself logically:
- There is nothing magic to lending money
- Interest paid back creates an incentive to lend money (not to borrow it)
- Borrowed money always (ALWAYS) represents risk, because the borrower may not be able to repay.
- Risk must always be measured. You can choose to ignore it, but it never goes away.
- If money is created as debt, how do you explain bankruptcies?
Interest compared to return on your use of money may not be any kind of disincentive (you profit by borrowing, that's the expectation)
Lent money always (ALWAYS) represents risk as well, for the same reason given above.
There's risk in anything, sometimes to proceed you accept it. Calling that 'ignoring it' doesn't make it any more important.
And I have no idea what the comment on bankruptcies is about.
But I agree on the main point, which is some armchair pundit like the OP finds it easy to draw a circle around a cherry-picked part of the economy-space and say "See! Some Obvious Conclusion!" and think they've said something. You have to look at all of it of course, as a complete system.
Banks typically loan money they don't have on hand (see fractional-reserve banking). And when they do that -- money is created out of thin air. Bankruptcies have nothing to do with it.
Retail banks need to have the money on hand to lend. That can come out of deposits (leaving a portion in reserve for liquidity, should the deposits need to be redeemed. (hence, fractional-reserve)) or other capital. There's a ledger that has to balance.
A Central Bank (at least one that is in control of its currency) can lend money and have it essentially come from thin air.
Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings.
> all money is someone else's debt
All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created.
> if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money
Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation?
Please clarify this contradictory reasoning.
There's no good solution after the fact once the horses have bolted.
You can address it up front with regulation and don't leave the barn door open all the time.
We have a system that publicizes risk and privatizes losses. I don't think that's going away any time soon.
Trying to create a "stick" will be met with complaints of government overreach. Those same complainers will put on a show of holding their noses while filling the feedbag with as much carrots as will fit.
There are enough people in Congress that want to carve some sticks. But when it comes down to it, they don't have the guts to watch the herd starve just to make a point. If I were a member of Congress, I'd probably cave too. It would be nice if we could have a system that punishes those who destroy our economy, but it's not worth letting innocent people suffer to make that happen (IMHO).
> Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Deregulation and lobbies did it, it's been documented over and over again. Deep down greed is the culprit but it could have been somewhat tamed.
Then the government is bailing out with FDIC, plus the economy explodes.
It's not as sexy as it sounds.
At least then it's bailing about depositors.
FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
how do you fix it?
If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here.
[1] https://www.fdic.gov/resources/deposit-insurance/brochures/i...
[2] https://www.fidelity.com/why-fidelity/safeguarding-your-acco...
(previous comment on the topic during SVB failure: https://news.ycombinator.com/item?id=35171289)
If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms.
When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
TL; DR What we did in March 2023.
First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later.
[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
Except now with the banks understanding that FDIC will make depositors whole, above and beyond the $250K limits.
The only thing this does is increase banks comfort with risk.
The stockholders care more about the stockholders than they do about the depositors. This is also true for most of the managers, maybe all of them.
Weren't those banks just sold without the government stepping in?
They were put into receivership under the FDIC before being sold in a structured process [1]. In any other country, and at any time prior to ~2012 in our nation’s history, March 2023 would have been a financial crisis.
[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html
FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.
SVB deposits were businesses.
You're ensuring every regional bank collapses and all businesses bank with Chase if you let SVB fail and don't bail out the depositors.
Maybe that's what you want.
It's not what the government wanted.
So they bailed out SVB.
SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market.
Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert.
You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid.
>but what SVB was doing wasn't irresponsible with the knowledge they had at the time. If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.
The point I was trying to make was that unfortunately the businesses were also taking too much risk if they were storing all their money in a single bank. Just as an individual I am spread across multiple banks as a means of derisking myself and ensuring that I'm fully protected by FDIC in the event a bank does something this epically stupid.
So bail out the customers / depositors and wipe out the equity investors? That's what they did with SVB...
TARP prevented the economy from collapsing. I was unaware the average citizen didn't need loans or a functioning economy.
I'm not sure how one can make this conclusion without having known what would have happened if there was no TARP.
Worst case: the contents of individual bank accounts poof out of existence. Riots and untold calamity ensues (it is difficult to say how bad this gets). Then another country steps in to buy up those assets at an even more steep discount. The subsequent housing crush the country is currently experiencing is worsened.
And Geithner saved us all as he was asked to do.
Is it the same people tasked with getting inflation down and whethering the induced bubbles this time? They have gotten inflation down, but they can't hide the unpaid expenses of "scorched earth" and "starve the beast" experts at this.
Geithner had nothing to do with TARP; the SEC was barely involved. This article has practically nothing to do with the SEC outside reporting requirements.
We’ve also gone through a round of bank failures, largely due to risk managers who couldn’t contemplate America raising rates, without moral hazard.
Yeah, having money markets lock up, half the businesses in the company unable to pay their payroll (because everyone depends on short term lending to smooth out yearly cycles) and ATMs stop delivering cash sounds like it would be much better for the average citizen. Don't stop until unemployment hits 25%+.
The end result of any systemic crisis is likely to be regulator-mandated buyouts of smaller banks and CUs and even more aggressive concentration of banking power amongst the top twenty or so BHCs, similar to SVB ending up part of First Citizens.
We’re less than a year from the last set of bank failures. Shareholders were wiped. Foreign affiliate depositors were wiped [1]. If you’re arguing for limiting depositor protection, sure, but we’re well past TARP as precedent at this point.
[1] https://www.wsj.com/articles/the-pain-of-silicon-valley-bank...
Did you also feel the same way when SVB needed a bailout?
The FDIC’s balance sheet is unlimited. It’s an explicit full faith and credit agency. It has, to date, never pulled on that credit by managing its risk through fees on member banks.
If so, interesting, I always sort of assumed the money would just come from the treasury at that point.
Last year's failures in March caused an assessment in December [1]. In a crisis, that isn't enough time.
The way the system is designed, the Treasury would write a cheque. Full faith and credit means those FDIC claims would have the same legal standing as e.g. Social Security payments or tax refunds. Treasury would probably structure it as a loan to be paid back by future assessments, again, for political reasons. But they'd have discretion on the specifics at that point.
[1] https://www.fdic.gov/deposit/insurance/assessments/specialas...
The real answer is that ZIRP was a a bad idea
We're still talking about the largest era of wealth generated across any territory or time in human history, the American post-War ascendancy, right?
Grandparent said "collapse," which is what Jenga towers do.
Here's the era, in two charts:
[1] https://tradingeconomics.com/united-states/government-bond-y... [2] https://www.cbpp.org/income-concentration-at-the-top-has-ris...
Out of curiosity, what are you seeing? Rates going down is bad?
Here's the last millenia [1]. You'll notice a long-term trend of decreasing rates.
[1] https://www.businessinsider.com/chart-5000-years-of-interest...
Sort of like Y2K mitigations, then, right?
They will let 1 bank fail to send a message but paper over the losses for everyone else.
If you hold cash and aren't invested in something, you're a fool. Stocks, real estate, hell even crypto is better than fiat.
I suggest episodes 1 (difference between currency and money) and 4 (how dollars are created) from the following series by Mike Maloney.
https://www.youtube.com/playlist?list=PLE88E9ICdipidHkTehs1V...
This is wrong.
Debt is regularly asymmetrically destroyed, we call it restructuring. And when a debt is destroyed we don’t destroy the correspondingly-created money. (Money is destroyed via separate mechanisms.)
That said, I suppose it’s neat seeing the gold bugs coming back on the crypto promoters [1].
It's not exponential.