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And yes it was a bailout.

It was a bailout of multi-billion dollar Venture Capital/Private Equity firms.

Lots of people tried to spin it like all of these startup companies were going to go under if depositors were not made whole. I heard more than a few talking heads on TV saying that we cannot let the most innovative sector of the economy fail due to a bank failure. The thing is though, all of those startups are owned by VC/PE firms. Those VC/PE firms were not going to let their prized startups (that could potentially be worth billions in the future) fail due to cash problems.

Take Mark Cuban. He was saying that depositors needed to be made whole because there were lots of startups that could go under. He then made it clear that the startups he is invested in are ok because he won't let them go under. He will use his own personal money to keep them afloat. Why is he going to keep them afloat? Is it because he is a nice person? No (even though I do think he is a nice person). He will keep them afloat because these companies have value as investments so he isn't going to let them go under.

My wife works at a semi-startup that is owned by a PE firm. When the news about SVB broke she received a companywide email from the CEO telling the employees that although the company had its funds at SVB, no one should worry because the parent PE firm would step in and cover any shortfalls. In fact, the biggest worry of the management of the company wasn't how to make the next payroll. The biggest worry was contacting all customers about outstanding invoices. Telling customers not to pay outstanding invoices until a new banking arrangement could be set up.

I have a friend from college who works for a fairly well-known startup. Even though I hadn't talked to him in a few years, I reached out to him and asked him if his company banked with SVB. He said yes, but he wasn't worried because the VC of his company already told his company that they would do what it would take to keep the company afloat.

The point is, most of the startups that had funds at SVB have someone like Mark Cuban, or some VC or PE firm behind them. Those people won't let most of the startups fail if they feel like they are still worth something as ongoing concerns.

Sure, VCs or PE firms may look at their portfolio of companies and decide that they do not have enough funds to keep all of their companies afloat. They may have to make some tough choices and let some of their weaker companies go under, but isn't that what capitalism is all about?

Bottom line, if a startup looks to be worth something as an ongoing concern, someone is going to give money to that startup to help keep them alive. It could have been the VC or it could have been a new investor. Instead it looks like the government is going to come to the VC\PE investor's rescue and provide the funds.

If I am not mistaken, Mark Cuban said the companies he had invested in had $8 to $10 million dollars of exposure to the SVB wreck. I don't know if that is before or after FDIC coverage and expected future payouts after SVBs assets are sold off. Either way, it doesn't matter. Mark Cuban will not have to go into his own pockets to help keep his own investments going. The government will do it for him.

I don't think anyone knows exactly how it will shake out, but it seems like SVB has the assets to cover deposits, and there won't be too much expense to the government in the long run. The government intervention will just keep things moving along for the depositors in the short term despite the liquidity crunch SVB was in.

Seems a reasonable use of governmental power to me.

I think the government stepped in to stem the risk of runs at other banks, which would have created a much bigger problem. The moral hazard was collateral damage and insignificant compared with what could have been an immediate nation and world-wide banking crisis.

Hopefully, with the time bought, people will wake up and get their acts together. It certainly threw light on a lot of issues about the regional banks that have been hiding in plain sight.

Seems a reasonable use of governmental power to me.


I basically agree. You hear a lot of people saying "they privatize the profits and socialize the losses", but that's a bit of an exageration, I think. The irresponsible bank owners lose everything, both shareholders and bondholders, as it should be. The silicon valley startup customers get their deposits back, even beyond the $250,000 that is FDIC guaranteed, which I guess is what people are upset about, and I guess if I had one thing I would change in this plan, it would be to have some penalty, even if it is minimal, for these corporate clients having not done their homework about how reliable the Silicon Valley Bank was. Like "you get your deposits back, but with a 10% haircut, and you'll get the 10% over the next year or two if the liquidated bank ends up having been solvent enough to cover that."

Rationalwalk thinks a startup with $10 million should have had guaranteed $250,000 accounts in 40 different banks, or set up treasury bond ladders, and should have been reading the bank's balance sheets, rather than just plopping their cash into an SVB savings account, and while I admire all these ideas, I don't think they are realistic expectations, and it is probably not what bank customers should be focusing their attention on.

At least the principal that bank owners don't get bailed out (the way GM and Chrysler shareholders got bailed out, for instance) will be reinforced by this weekend's actions. The idea that bank customers would lose funds beyond the $250,000 FDIC-insured limit was probably toast already. And the feds have indicated they want a higher guarantee (like $10m) that would make this guarantee explicit rather than just implicit and unfair to bank customers who exercised more diligence in choosing their banks. I would give the government an A- on this one.

dtb

Based on the US financial history, regulations can never be fool-proof and periodic crisis is inevitable. Perhaps nationalized large banks isn't a bad idea.

' Rationalwalk thinks a startup with $10 million should have had guaranteed $250,000 accounts in 40 different banks, or set up treasury bond ladders, and should have been reading the bank's balance sheets'

I'm not saying they should have been reading bank balance sheets but I am saying that there were simple alternatives such as sweep accounts and, yes, treasury bills. I'm blown away that CFOs didn't take basic steps here and even more blown away that sophisticated VC firms did not oversee their investments in these startups more effectively.

This was a bailout of the VC industry that should not have taken place. Over the weekend there were stories of founders writing checks to keep things afloat and VCs planning equity injections into their promising startups. The FDIC was going to make initial payments on uninsured deposits and provide certificates for uninsured deposits that would receive substantial recovery over time. The system was working as it should.

The system was working as it should.

Really? What do you think would have happened if the Fed had done nothing? Or, as before the emergence of the Fed a hundred years ago? I'm thinking 'the system' would have seen a contagion of runs on many banks, whether they were sketchy or not, since people don't really know how their bank is run, what the annual report says, or if they did, what it means.

The system requires trust. Trust can be easily shattered, as we have seen with just a few individuals on the inside cashing out quickly, a few others (Thiel) advising clients to exit, and everyone else left holding the bag.

[I would like to see, as mentioned upthread, a minor haircut for those with supra-large deposits who 'should have known better', say on the order of 3%-5%, but even that I suppose would cause everyone to engage in a flight to safety - so it would produce the same eventual result, perhaps just more slowly and/or to diminished degree.]

Anyway, back to 'trust'. It's the same thing that lets airline companies proper: not every passenger has to talk a walk around the aircraft before every flight, we trust that someone else is watching (and even if we didn't, we wouldn't know what we're looking for anyway, to complete the 'walk around your bank's annual report' analogy.)

I'm glad they moved to contain the problem. Moral hazard, for sure. I don't know what else I would have done, were I one of those with the financial levers.

Am in agreement with Goofyhoofy. Methinks Griffin was commenting from his hedge fund perspective much like Warren's remarks in 2020 when all the stimulus money was suddenly on the scene. Griffin and Buffett both were in a position to capitalize on the evolving situation and were thwarted by government moves. I, too, am glad the bank run contagion was halted (we think) as it had dire consequences on business activities should a cascading effect occur primarily through fear and trust issues suddenly slowing economic activity across the spectrum.

An interesting viewpoint I came across last night is with this bank funding "stopper" is that this enables the Fed to keep raising interest rates as they trundle towards the goal of stopping inflation while not breaking the banks.

I'm not saying they should have been reading bank balance sheets but I am saying that there were simple alternatives such as sweep accounts and, yes, treasury bills. I'm blown away that CFOs didn't take basic steps here and even more blown away that sophisticated VC firms did not oversee their investments in these startups more effectively.


Your idea of owning treasury bills instead of putting the VC money in a bank account makes sense, but whether you're a startup CFO or a VC fund, I can't believe it is realistic to expect people to be assessing the solvency of a bank. Even the feds didn't realize SVB was insolvent, for goodness sake. A bank is supposed to be a safe place to put your money, so that if you put $1 million in the account, you can get it back in a few months, along with a pittance of interest. Two years ago, when 5-year treasuries were at sub 1% anyways, it would hardly make sense to bother with owning treasuries directly, so why go to all the trouble, unless you were worried about your bank's solvency?

In fact, part of the liquidity crisis may have been that sophisticated startups and their VC overlords started deciding that earning 0% in a SVB banking account was leaving money on the table - all of a sudden, the 5y treasury that earned 0.5% is making 4% now, so why not withdraw cash from your account and invest in a safe bond that actually earns something? Then you discover that your bank is insolvent because IT has been investing in those sub-1% treasuries. You were de facto invested in treasuries without knowing it, and with expiries that were inappropriate to your cash needs.

I think the result of all this is that the right people have been punished (the banks and their shareholders and bondholders) and the right people have been protected (bank account holders who trusted the bank), and there's a good chance there will be useful systemic corrections that come out of this mess, like expanding FDIC insurance for accounts bigger than $250,000 and having the feds more closely monitor the non-SIB banks like SVB (which were previously thought to be not systemically important, but because of the risk of further bank runs, turned out to have systemic importance after all!) Banks that are too close to being insolvent like SVB was will probably have to raise capital, at low valuations to boot. The moral hazard you and other sensible people worry about, i.e. reassuring bank depositors who will not concern themselves with their bank's solvency, I think is a job better suited for regulatory agencies, not account holders.

Anyways, whether we like it or not, it looks like that's the way the banking world is going.

dtb

I've written about the situation at length on my website (which I am in no way trying to promote, but also do not want to reiterate at length in a message board format).

As I see it, the system was working as designed on Friday evening when the FDIC issued this press release regarding Silicon Valley Bank:

https://www.fdic.gov/news/press-releases/2023/pr23...

At this point, the plan was for all insured deposits to be made whole on Monday morning, up to the $250,000 limit. The FDIC clearly stated the following with respect to uninsured deposits:

"The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."

Uninsured depositors were to receive an advance this week along with a receivership certificate and would receive recovery of funds over time as the FDIC wound down operations.

This news caused venture backed firms with concentrated uninsured deposits to raise hell -- on social media, with politicians, with regulators, the works. They were joined by billionaires like Ackman. All kinds of hyperbolic comments like losing a generation of the finest minds in the valley due to missing a payroll were parroted out relentlessly. All weekend. By Sunday, the government announced a bailout of unlimited deposits because the clamor had gotten to the point where Ackman and his ilk were predicting widespread bank runs if the government didn't act.

In my view, the resolution announced on Friday would have worked absent the manufactured panic over the weekend. There were already stories of founders coming up with their own funds (new capital) to make payroll. VC firms were going to inject equity in their most promising startups. There was no way in the world VCs were going to allow otherwise promising startups to lose all value by abandoning them in a liquidity crisis.

Over time, the startups would have made substantial recovery, as the bank did have assets that even at fair market value would have funded significant recovery. And founders and VCs would have woken to the fact that they should use more prudent money management approaches.

By backstopping all depositors, the government really bailed out the VC industry. The situation has also precipitated a widespread easing of monetary conditions as treasury rates have plummeted and the Fed is being pressured to halt rate hikes or even ease. I suspect this was a motivation of many of those fomenting panic.

I never said that the FDIC should have done nothing -they were acting as appropriate. Nor did I suggest that we would be better off in the pre-Federal Reserve era (a total straw man).

I regret having started posting here and will not make that mistake again. Honest debate is fine. Distortion and straw man arguments are not. Life is too short. I have no incentive to get into that kind of crap, not here, not on twitter, and not anywhere.

Best of luck to all.

Rw, thanks for sharing your thoughts in a way that friends and family can understand the issues. You make life easier for many of us, take care man. One needs a very thick skin to engage on these boards. Hc

Hi RW, sorry Goofy's nasty reply got to you, and perhaps you won't respond to this but just in case -

You make a good point that these VC startups are not like ordinary bank depositors, and maybe should have assumed a bit more responsibility for verifying the solidity of their banking arrangements, and perhaps no bailout was necessary, given that the losses for clients would have been small and their VC backers could have probably made up for any shortfall with minor additional financing. But whether that is the case or not, there is also another problem that I believe the government was trying to address with its guarantee of deposits, and that is the effect that loss of deposits would have on clients at other, non- systemically important banks (non-SIBs).

If you are a depositor at First Republic, for instance, and its shares are down, and it is looking for capital infusions, and if you know that SVB depositors got bailed out, maybe you sit tight. But if the SVB depositors took a haircut on their deposits, even if it is just 3%, why not just transfer funds to a bank trhat you are fairly certain will not be allowed to fail, like Wells Fargo or JP Morgan?

The possibility of contagion, with other banks failing because depositors don't want to take any chances, would become much more real. And even if no other regional bank actually fails, you still don't want a massive centralization to the bigger banks.

As long as banks are not insolvent, guaranteeing deposits should have no cost to the government. And if banks are not solvent, they should be shut down by the government. It's hard for me to see how this rescue is not in the interests of everyone.

dtb

I read through the posts trying to find the disconnect. Straw man arguments and distortions are common debate tactics, but hopefully we can avoid them here. Of course, no one should expect perfectly worded posts either.

What do you think would have happened if the Fed had done nothing? Or, as before the emergence of the Fed a hundred years ago?

These are straw man arguments. Waste of time.

Rationalwalk thinks a startup with $10 million should have...

Distorting what other people think is poor form and meaningless mind reading unless you have a quote to back it up. A quote or a link would be useful to readers.

' It's hard for me to see how this rescue is not in the interests of everyone.'

It sticks in the craw. These vultures, like Ackman, are celebrated as risk taking job creators, heroes of the American way of life, but the truth is they can't lose. The political system they finance won't allow it. It truly is socialism for the rich and nasty, brutish capitalism for the rest.

I don't want my life savings wiped out in a financial crisis, but I also don't like billionaires being backstopped while the rest of us are wiped out from a health crisis, or buried under student debt bondage, or have our pensions erased when a vulture pilfers pensions they manage (2/20 with little taxation), or closes pension funds of companies they bankrupt.

There must be a way for these risk takers to be held accountable for taking risk, or maybe we should backstop the health and well-being of families in the same way we backstop billionaires money.

The worst part of this is that the wealth the government backstopped will be used to finance campaigns against 'big government'.

If a bank needs bail out help, again, all stock based compensation issued to execs for the past five years should be clawed back. The proceeds from stock sales for the past five years , should be forfeited as well. Then, this will never happen, again. Simple.

I'm an aging Boomer and still working in our family business. The reason I bring this up is we are continually having to change and adapt. It has been that way since our beginning in the 1980s and has been in hyperdrive adaptation mode in recent years. Competition, marketing trends, generational aspects, staffing, supply chain disruptions, remote work, Covid, inflation and other aspects requiring continual adaptation. My understanding is Darwin's famous line: "Survival of the Fittest" is best interpreted as "survival of the best adapted".

My impression is everything is always in adaptation mode. Banks recently adapting or failing to adapt to changes in their ecosystem is an example. Investors adapting to evaluating changes in the larger financial ecosystem and so forth. A long list of adaptations underway affecting our investments/potential investments would likely take several pages to list

This is why the comments shared on this wonderful board have value. Sometimes I find value in seeing herd aspects in comments. Herd values can sometimes be a good signal within the noise and sometimes can be a contra signal. I would remind everyone of Cialdini's exposition of Social Proof. I subscribe to several magazines/newspapers, two curated daily investment news feeds and daily view assorted investing or business related podcasts. Lots of learning going on together with heavy mental commitment to filter and/or balance differing points of view. I suspect there are many others on this esteemed board who similarly follow this type of information collecting path.

All this is to say I appreciate what is posted on this board. A special big thanks to those who take the time to assemble Berkshire evaluation numbers.

Uwharrie

<At this point, the plan was for all insured deposits to be made whole on Monday morning, up to the $250,000 limit. The FDIC clearly stated the following with respect to uninsured deposits:

"The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."
>

That's not enough to stop market panic because people don't know if the Fed would continue to do that for other banks.

I don't want my life savings wiped out in a financial crisis, but I also don't like billionaires being backstopped while the rest of us are wiped out from a health crisis, or buried under student debt bondage, or have our pensions erased when a vulture pilfers pensions they manage (2/20 with little taxation), or closes pension funds of companies they bankrupt.
****

I feel that is pragmatic, and well put.

Sticks in craw is right - and certainly I didn't want a meltdown - doesn't go us any good.

However, my parents - in their mid to late 70's - are well aware of FDIC limits, and spread their nest egg out evenly.

I, being retired with 2 kids who hopefully will start college in a few years - make sure I am not over the FDIC limit on accounts and if I am - it's honestly by a small amount at most.

For 20 years I owned a few small businesses. While I didn't own Google - I did have at least 40 full time employees at all times, and we did anywhere from $40 million-$60 million in yearly sales. Again - not Google. Button a lemonade stand. Our weekly payroll money was in a separate institution from our operating account. Admittedly the operating account was over FDIC limit - I plead to that one.

However - I needed a real estate loan. Bank A wanted a sizable deposit from me - well over FDIC limit. Bank B --- made no such requirement - -- however my rate was .70% higher.....and yes, I took the higher rate because I was scared to put too many eggs in a basket.

In SVB there were people in some cases much richer, in most cases more educated (unless my high school diploma beats them)....and they had no worries to be over FDIC. Capitalized on the nice benefits. Couldn't be inconvenienced to spread the funds out. And when the grim reaper came knocking, a weekend slumber party with tons of tweeting got the job done.

But this is how it goes. It's all relative. Higher up on the totem pole you are, the more leeway you have.

Sadly, poop runs downhill....so those lower on the totem pole have no choice but to take what they are given.

I don't see that this will ever get fixed. Human nature never changes.

And yes, as Phoolish described - there are dichotomies all over. "Creative, innovating founders" wanted to be "left alone to innovate" -- but certainly wanted the government. Conversely many decry "government regulations" and usually string together a noun, a verb, and "free market" as answer to everything - -- yet they were fine to socialize losses.

What do you think would have happened if the Fed had done nothing?

These are straw man arguments. Waste of time.

Here's What the Wall Street Journal was saying last Saturday :

But if SVB was doomed, it is bet­ter to let it fail than have the gov­ern­ment bail it out, de­spite what one hedge-fund lord sug­gested this week. Didn't we learn from the 2008 cri­sis that the feds' res­cue of Bear Stearns en­cour­aged every­one to be­lieve that Lehman Broth­ers would be res­cued too?

There doesn't ap­pear to be any ob­vi­ous systemic risk to the fi­nan­cial sys­tem from the SVB and Sil­ver­gate fail­ures, and mar­ket dis­ci­pline needs to pre­vail un­less there is dan­ger of a larger fi­nancial break­down. SVB in­vestors and cus­tomers ben­e­fited from the gov­ernment's easy money. Why should they also ben­e­fit from a gov­ern­ment life­line af­ter tak­ing risks with that easy money?

Straw man? I don't think so. I saw this viewpoint echoed in several places, it was a common theme among the Austrian economists who apparently still haven't learned the lessons of 1930.

Or as before the emergence of the Fed over a hundred years ago

I guess I can forgive the ignorance of some of the actors in 1930, but to continue the adherence to a doctrine so fundamentally destructive a century later is head-scratching, to say the least.

Liquidate labor, liquidate stocks, liquidate real estate,' Treasury Secretary Andrew Mellon may or may not have told Herbert Hoover in the early years of the Great Depression. 'It will purge the rottenness out of of the system.' This is what has since become known as the 'Austrian' view (although most of its modern proselytizers are American): economic actors need to learn from their mistakes, 'malinvestment' must be punished, busts are needed to wring out the excesses created during boom times.

Within the economic mainstream, there is some sympathy for the idea that crisis interventions can create 'moral hazard' by bailing out the irresponsible. But the argument that financial crises should be allowed to wreak their havoc unchecked has few if any adherents. As Milton Friedman put it in 1998:
https://hbr.org/2013/09/why-we-didnt-learn-enough-...

In other groups I have used Berkshire's immense cash hoard, rolling over mostly with short term liquidity as an example of how this sort of risk should have been managed . That it wasn't by some supposedly sophisticated bankers pains me, and I hope that the shareholders will be wiped out and the accelerated bonuses clawed back, but I don't see the point in punishing 'innocent' bystanders, even if they are not as perfectly innocent as one might hope.

It sticks in the craw. These vultures, like Ackman, are celebrated as risk taking job creators, heroes of the American way of life, but the truth is they can't lose. The political system they finance won't allow it. It truly is socialism for the rich and nasty, brutish capitalism for the rest.


It doesn't sound like the Bill Ackman I am familiar with. He is not a vulture, he is not really celebrated very much, and he is not even a job creator. He is an investor, he has taken a public position in this debate which makes sense to me (let the weak banks fail, give nothing to their shareholders and bondholders, guarantee deposits up to much larger amounts than $250,000, and now worries that the government not guaranteeing depositors' accounts at other small banks will cause a migration to the big banks, and that is undoubtedly happening as we speak). It is not because he has VC investments with deposits at SVB, it is because he believes that there is a systemic risk of failure of other small banks. And because he doesn't seem to think that 'brutish capitalism' should be for anyone, even if it doesn't affect his own investments.

You can agree with him about this or not, but I don't see why he has to be characterized as a vulture or as an insider defending the interests of the rich.

dtb

"At this point, the plan was for all insured deposits to be made whole on Monday morning, up to the $250,000 limit. "

IMHO, there should be no limit on FDIC insured deposits. Part of a government's job is to protect its citizens. If a bank is federally chartered and insured, the government should guarantee the return of those deposits. Failure to do so implies that they failed to provide sufficient oversight of the standards for being chartered and insured, or that those standards are not sufficient - in which case, they should be changed.

Note, that applies to deposits only, not investors or management (indeed management should be replaced and possibly fined).

David Sirota


Between this & Yellen today, it's now definitively A BAILOUT.
It's one thing to extend universal deposit insurance to all Americans.
But it's a BAILOUT when insurance is ONLY extended to Too Big To Fail Banks & SVB & then SVB MARKETS that privilege.


quoting statement by Mayopolous on conference call...


cant post the text here as it was sent to me as an image , basically marketing that SVB is now safest bank in the USA as backstopped by Guv'mint..

My issue with many governmental monetary numbers including tax brackets, FDIC and more, is they are not indexed to inflation. The $250,000 maximum reimbursement was set in 2008 (moving from $100,000 to $250,000). If a 3% annual inflation rate were applied from 2008 to our present time in 2023, the maximum FDIC protection would be approximately $400,000.

Uwharrie

Amen. I also don't like billionaires being backstopped while the rest of us are wiped out from a health crisis,

The only defense "we the people" have is to eliminate income to the point of near-bankruptcy, and then we can get the scraps the politicians are beaten into offering for unemployment, Medicaid, SNAP, AFDC, ACA, SSDI, etc.

I wasn't, openly, a fan of Obama or certainly Pelosi - but I'm very thankful for the ACA even despite its warts.

There you go again.

Really? What do you think would have happened if the Fed had done nothing? Or, as before the emergence of the Fed a hundred years ago?

RW: Distortion and straw man arguments are not.

Whatever.

< Yellen says not all uninsured deposits will be protected in future bank failures>

https://www.cnbc.com/2023/03/16/svb-signature-bank...

For many decades my material liquid cash. family cash, and cash held by public companies I was affiliated with, has been parked in vanguard money market funds. The MMFs were linked to a BAC account and money could be wired , overnight, free,if needed. I have no idea why anyone keeps serious money, at a bank? Even if a retail investor is a CD buyer, use several banks. Liquid cash should be in high quality MMFs, which haven't broken the buck at vanguard in 40 years.

I wonder what Buffett and Munger think about this? '' The banking space sees another rescue deal in just a matter of days, with the nation's biggest banks agreeing to deposit around $30 billion with troubled First Republic Bank (FRC). The big banks -including JPMorgan (JPM), Bank of America (BAC), Citi (C) and Wells Fargo (WFC) - will contribute $5 billion of deposits each. Goldman Sachs (GS) and Morgan Stanley (MS) will provide $2.5 billion each. PNC Financial (PNC), BNY Mellon (BK), Truist (TFC), U.S. Bancorp (USB) and State Street (STT) will each contribute $1 billion.
''

Bill Isaacs former FDIC chair was on Bloomberg. He said when he was leaving FDIC that he proposed insurance for non-interest bearing commercial accounts (payroll, working capital) but that was rejected. I think at the very least that's a good place to start with improving FDIC insurance.

'' Billionaire investor Bill Ackman, who said he has no investments in the banking sector, criticized the move, and said it spreads the First Republic default risk to the largest U.S. banks. 'Spreading the risk of financial contagion to achieve a false sense of confidence in First Republic Bank is bad policy,' he said in a tweet.''

Ackman tweet, ''I am hearing that @BankofAmerica is going to buy Signature Bank on Monday. Unless and until we can protect uninsured deposits, the cost of capital is going to rise for smaller banks pushing them to merge or be acquired by the SIBs. I don't think this is good for America.''

Our dry powder is at Fidelity, they automatically take care of keeping cash spread around at different banks to keep under the limit.

Joe

lizgdal objects to straw man arguments and gives 2 examples, from GoofyHoofy and from me:

1. (GH) What do you think would have happened if the Fed had done nothing? Or, as before the emergence of the Fed a hundred years ago?

These are straw man arguments. Waste of time.

2. (me) Rationalwalk thinks a startup with $10 million should have...

Distorting what other people think is poor form and meaningless mind reading unless you have a quote to back it up.


Rational Walk didn't like the first comment, because he never said the Fed should do nothing - he said that the Fed's traditional response (lending generously against good assets, taking over an insolvent bank, providing liquidity, etc.) was appropriate, without bailing out unsecured depositors. Goofyhoofy responded by saying that other people had suggested abolishing the Fed, allowing banks to fail, etc., which is true, but by asking RW "What do you think would have happened if the Fed had done nothing?", he did make it sound like that was RW's proposal.

As for my comment, that RW believed businesses should have been more aware of SVB's finances, or that only $250,000 was FDIC-insured, and so should either invest directly in a Treasury-ladder corresponding to their projected cash needs, or divide assets among numerous banks so that all were guaranteed, this is exactly what RW did propose:

Instead, it would have been very easy to purchase $1 million of treasury bills maturing every week this year to cover cash flow needs. Instead of having $50 million sitting in the bank at the start of the year, the startup would have kept $1 million in the bank for immediate liquidity. Every week, a treasury bill would mature and be deposited in the bank providing liquidity for next week. The CFO might have even opted to split the $1 million into four fully insured FDIC accounts at separate banks. https://rationalwalk.com/fragile-capitalists/


I agree with most of RW's thinking on the need to maintain responsibility, among corporate bank account holders, who, beyond a certain amount of money, are not just bank deposit holders but actually investors, who must take responsibility for their investments. What is that 'certain amount'? One proposal I have seen, that makes sense to me, is to say that any account with 0% interest is essentially a bank account and not an investment; I think if you are a small business that has raised $10m in venture capital, you either buy a Treasury ladder, or you plock your money in a bank account with zero interest, and then you have guaranteed access to the cash, with no timing constraints, and that should be guaranteed. Getting people to split that into 40 different $250,000 accounts is not only a pointless waste of their time, but it ends up guaranteeing all the money anyways.

The other argument for better guaranteeing account holders, is that the current crisis may lead to a massive outflow from small regional banks who are not too big to fail (TBTF), and this is not a desirable outcome. The government's tardiness in indicating that all real bank accounts will be guaranteed, not just the ones in TBTF banks (aka SIB, systemically important banks) is likely to lead to many more bank runs, as small banks end up needing to sell their long bonds at a big discount and themselves become insolvent. The government is very likely to end up bailing out more account holders after the fact, just because they have dithered at making sure contagion from the SVB/Signature failures does not lead to further regional bank failures.

dtb

Rational Walk didn't like the first comment, because he never said the Fed should do nothing - he said that the Fed's traditional response (lending generously against good assets, taking over an insolvent bank, providing liquidity, etc.) was appropriate, without bailing out unsecured depositors. Goofyhoofy responded by saying that other people had suggested abolishing the Fed, allowing banks to fail, etc., which is true, but by asking RW "What do you think would have happened if the Fed had done nothing?", he did make it sound like that was RW's proposal.

Disagree. You are imputing to me words I never said, nor said that RW said. I do understand how to use quotation marks. I asked a simple question for illustrative purpose, and I repeat it now: what do you think would have happened if the Fed did nothing? There is a wide range of possibilities - including what they eventually did do. I offer the thought process and hope to include all readers, not just one of those (who may or may not include RW) who have advocated positions all the way from 'get rid of regulations!' to 'insure everything!' kinds of answers.

Here. An illustration of quotation: The failure of SVB itself is not a systemic risk to the economy, but systemic risks could arise if the bank run on SVB becomes a stampede next week. Small depositors are protected due to $250,000 of FDIC insurance. Large depositors should view themselves as creditors and must accept risk of loss. It should go without saying that those who invest in stocks and bonds of banks should be prepared to bear losses. [italics added]
https://rationalwalk.com/the-fall-of-silicon-valle...

Of course if 'next week' had come around without action that 'could arise ' would surely have been a disaster, especially with the ease of moving money with a mouse now on every desktop. Heck, SVB had redemptions of $42 BILLION, 25% of capitalization in 36 hours at the end of the week. Maybe better not to wait until 'next week' in my view.

Counseling 'tsk tsk tsk' about how you must learn to accept the loss of funds may be morally upright theory but would be disastrous in practice. (So is moral hazard!) I agree with you there are better remedies than 'a bond ladder', which introduces needless complexities with mostly similar results.

I am not forgiving SVB for their stupidity (well, I guess I am by approving this bailout, even though I'm really trying to protect myself by not crashing the entire system), many things were done badly; the over-extended 0% rates, the high concentration of deposits in one volatile sector bank offset by an obtuse bet on long duration assets, the lack of a risk officer, the lobbying to avoid stress-testing and/or regulation, and so much more.

I will merely note that had we waited until Tuesday - instead of Monday - a large part of the bank world would have been tied in knots, perhaps as we saw in 2008. Slowly at first (Thursday night/Friday), then all at once (Monday morning.) How sudden was it? Bloomberg BusinessWeek, which goes to press Thursday night, had not a single word of it in last week's issue. This week it's the cover, of course.

Anyway, it will take some new thinking about this, it was not a situation very well contemplated even in the laws emanating from 2008. Sector concentration, liquidity needs, duration risk, FDIC limits ($250k is now $400k just via inflation, FWIW), and so on. I'm sure we will see a blizzard of proposals, some appropriate, many not. I expect I will chime in on part of that discussion should it arise here.

GH,

Of course it is fair enough to criticize people who were suggesting that the Feds do nothing. But that wasn't RW's proposal at all - he was only saying that the Feds should stick to their usual bailiwick, which is to do a lot, but not to go the additional step of guaranteeing explicitly non-guaranteed funds. In that particular context, with you specifically responding to RW's post, for you to ask "what do you think would have happened if the Fed did nothing?" ceertainly sounds like you are attributing this non-interventionist idea to him, hence his complainte about straw man arguments. If your rhetorical question was really directed not to RW but to others who were proposing that the Fed do nothing, then why use the pronoun 'you'? I know pronouns are becoming more and more confusing, these days, and them can be you, and you can be them, (along with many other possible meanings,) but in this case, it would have been clearer (and less insulting to RW) to say "those that call for less fed involvement should ask themselves what they think would have happened if the Fed did nothing?"

Anyways, we seem to agree on the main thing, with regard to SVB and how it should have been handled. And I suspect we might eventually end up believing (as does Ackman, for instance) that the Feds have not only not done too much, they have perhaps not done enough. A couple more bank failures will nudge them out of their relative inaction, maybe.

dtb

RW said not only this isolated sentence: "The system was working as it should."

It's the context that counts:
This was a bailout of the VC industry that should not have taken place. Over the weekend there were stories of founders writing checks to keep things afloat and VCs planning equity injections into their promising startups. The FDIC was going to make initial payments on uninsured deposits and provide certificates for uninsured deposits that would receive substantial recovery over time. The system was working as it should.

RW described that over the weekend the system "was working as it should" and used that as reason why the bailout "should not have taken place".

If one replies to that "Really? What do you think would have happened if the Fed had done nothing?" it's not just a simple question but clearly implies that the poster is of a different opinion regarding both, negating that the system was working as it should AND negating that the bailout should not have taken place.

That's the used language's logic for me, but as a non-native English speaker I might be wrong of course.

P.S.: What's the point? Life goes on. RW may or may not post again here, with me VERY much hoping he does (especially now that Mungofitch seems to be more busy to sleeplessly roam Monaco's streets at night), aware that there might be robust replies.

In case he doesn't notice: Jim, the above was a very subtle hint :-)

It sticks in the craw. These vultures, like Ackman, are celebrated as risk taking job creators, heroes of the American way of life, but the truth is they can't lose. The political system they finance won't allow it. It truly is socialism for the rich and nasty, brutish capitalism for the rest.


Can't lose ???? They lose if they invest in too many companies that don't make very much money, or not enough companies that make a lot of money. Which is as it should be. This knee-jerk name calling ("vultures, like Ackman") seems to me to be associated with a know-nothing approach to just being mad at people who do well. No one forces a start-up to take money from VCs, in fact by most reports they are DAMN glad to get it when it is offered. No one prevents anyone who thinks the VCs are just printing money to invest with the VCs and roll in the dough with them.

So yeah, I'm OK with a system that doesn't punish the VCs for failing to be better than the regulators at figuring out a bank is heading into trouble.

And I practically insist on a system that encourages the people who fund startup after startup, improving both the quality of my life through new tech and the quantity of my life through my own participation as a cog in the machine of technology development.

R:

There must be a way for these risk takers to be held accountable for taking risk, or maybe we should backstop the health and well-being of families in the same way we backstop billionaires money.

Ever had a family member on medicaid or medicare? It is pretty amazing the quality of health care that we can get as Americans when we need it. Not saying it is perfect so don't pretend I did.

R:

First note, limited liability seems to be one of the most important AND VALUABLE inventions of Western Civilization. It seems entirely possible to me that WE WOULD ALL be better off if the banking system worked like a platonic ideal system where the illusion that electrons in a computer memory somewhere, in the right somewhere that is, really ARE "good as gold." Better than gold, actually, since gold seems to have been replaced by fiat currency judging by the actual mass behavior of the world, which thinks the US Dollar is the reserve currency despite (because?) of its abandonment of the gold standard.

Yes, the kind of conservatism that looks down its long nose into the past regrets going off gold, regrets making depositors whole, regrets a federal reserve system, regrets national health insurance and social security. Oh the moral hazard!

Meanwhile, the largest businesses in the history of the world exist today and are overwhelmingly organized as joint stock corporations with limited liability. It is not that this is a good or bad thing in the moral sense, or rather, maybe it is maybe it isn't but who cares? It is that more economic activity has been carried out under the limited liability structures put in place in the last few hundred years than in any other economic structure ever conceived by intelligence, artifical, natural or alien. There is something about limiting liability that just WORKS, in the sense of making if not all of us richer, certainly ALMOST all of us richer.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance? Why don't we do it that way?

I see deposit insurance the same way I see building codes, electric codes, automobile safety regulations, and a raft of other features of the modern political economy. The two things that make us rich are standardization and mass production, and actually they are both the same thing because standardization absolutely enables the possibility of mass production. And standardization means we are presented with a dizzying and confusing array of products and services that are no more complicated than they need to be. I don't have to know the hygiene habits of a guy running a restaurant in a city I rarely visit: this is America buddy, and the nanny state is successfully presiding over a remarkably low rate of people being poisoned by mishandled food, so there you go.

What is the bad thing that would happen if all these businesses who effectively need accounts with millions of dollars in them were to have that as a commodity they could count on, like water that doesn't make you sick, electricity at a predictable frequency and voltage, and cars that behave in remarkably safe ways when you crash them?

R:

'So yeah, I'm OK with a system that doesn't punish the VCs for failing to be better than the regulators at figuring out a bank is heading into trouble.'

We keep changing the rules to keep the wealthy wealthy. I'm not okay with that even if it means VCs lose because their bets can't make payroll. They gambled and lost, except they didn't because'backstops for the idiot rich.

Our system inches closer and closer to a political economy of class preservation. It's no wonder so many billionaires have lost confidence in democracy. It's a potential threat to the political preservation of their wealth. Just ask Macron.

'Ever had a family member on medicaid or medicare?'

Yes. You have to be poor or old to qualify. We don't have universal healthcare. If you're not poor or old enough to qualify, you're up schitt's creek without coverage. One medical emergency can ruin a family. We can't backstop families though. You know, personal responsibility and all that.

Getting people to split that into 40 different $250,000 accounts is not only a pointless waste of their time, but it ends up guaranteeing all the money anyways.

I think there are some bank and brokerage accounts that split cash balances among multiple institutions automatically. IIRC, E*TRADE did this with my brokerage account at one point. Whether it actually created any increased safety for the account owner was unclear to me, but it seems like there might be a market for such things if they do offer additional protection without the hassle of managing it yourself.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance? Why don't we do it that way?

I have wondered the same and would support an experiment to try. But I will say if bank executives know *everything* is guaranteed, it seems they might be more likely to push the risk envelope. Push risk in search of higher yields, you're able to offer better rates. Better rates attract more deposits, ad infinitum.

At some point the risks are wayyyy too much, and kaboom.

The kaboom for SVC was having so much cash (yes!) and putting it in illiquid assets. Now that's true of every bank, but not every bank is so highly concentrated in one narrow sector, and most sectors aren't as volatile in their core business financing.

I've been thinking about why Berkshire can sit on such a mountain of cash, achieve such good returns, and be the Gibraltar that people look to in times of stress - unlike, well, banks . It occurs to me (having seen 'It's A Wonderful Life') that banks are subject to runs when everything wants their cash NOW, whereas Berkshire is sitting on insurance cash which not everyone can or wants to access at the drop of a rumor. So BRK's 'cash demand liability' is constrained, whereas a bank's is not. Ironic then that banks invest in long assets like mortgages and bonds, while Warren keeps Berkshire's cash more liquid in short term rollovers, eh?

Oops, tangent, sorry. Anyway, if you guarantee everything I think you encourage more risk, which at some point has to explode, and not in a good way.

I've heard floated that SVB should have been able to borrow from the Fed at par against their long bonds, rather than sell them. The Fed can hold them to maturity, even as SVB gets hit by a redemption tsunami. Instead they sold the bonds at a loss, creating the shortfall which they then attempted to plug by going public with a planned stock offering. (I believe had they announced a solution before the problem they might have been OK.)

In this scenario all SVB would have to contend with is the short term interest of a (below market and perhaps variable rate) Fed assist, not the jump-off-the-cliff finality of selling the bonds.

<So BRK's 'cash demand liability' is constrained, whereas a bank's is not. >

There is another important catch: BRK doesn't need to pay interest on the cash liability, but banks do. Therefore BRK can afford to wait for better opportunity but banks can't.

Banks can wait as well if their CEOs and CFOs are okay with not hitting compensation metrics.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance? Why don't we do it that way?

It's a very bad idea. Why not just guarantee all investments? We could set a 10% minimum return. If you want interest on your account then you need to be the person taking the risk that an investment goes sour. The idea that the Govt should guarantee the principal of your investments doesn't work ... for obvious reasons.

People need banking services ... payroll or savings for example. You just want to pay a fee to the bank to handle these transactions or to hold onto your money. But, the way the system works now you're forced to lend your money to the bank so that they can make investments. I don't want the bank making investments with my money ... I just want them to hold onto it and I'll pay fees to make it worth their while.

We need some 100% reserved banks (they hold your cash in the vault) ... not more investment banks where the Govt is forcing them to buy treasuries and make bad loans to people who will never pay them back.

Also, as a former AIG investor, I worry that derivatives are an unexploded bomb under the whole system.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance? Why don't we do it that way?
=====
It's a very bad idea. Why not just guarantee all investments? We could set a 10% minimum return. If you want interest on your account then you need to be the person taking the risk that an investment goes sour. The idea that the Govt should guarantee the principal of your investments doesn't work ... for obvious reasons.


This is the right distinction, I think: is it a bank account or an investment? My $10,000 chequing account with 0% interest is pretty clearly a bank account, and should be guaranteed; I shouldn't have to worry about my bank's financial statements; rather, I should be able to count on the banking system, including account guarantees. Whereas a $10 million corporate bank account making 5% a year is pretty clearly an investment, whether it's called a bank account or not, and it shouldn't be guaranteed.

Where do you draw the line? One suggestion would be that any account with no interest, or let's say interest that is less than half a 3-month Treasury bill, might qualify as a bank account, fully guaranteed. Or you could say that amounts under $1 million are guaranteed, no matter what the return, with that $1 million amount indexed to inflation. Or you could say that you have to anyone who wants a guarantee should just pay for it, with the insurance premium based on risk - in this case, the riskiness of the bank's asset management. Insurance companies could offer a product like this to banks, and the bank client could choose to buy the insurance or not. Rates would probably be very low at conservative banks, and higher at banks that are over-exposed to devaluation, like the SVB was.

But the starting point should be that banking and investing are just 2 ends of a continuum, and the system should seek to guarantee bank deposits and not guarantee investments. Guaranteeing ALL banking accounts is just creating more opportunity for abuse where I can park my money at a high return with a risky bank and then get bailed out by my more prudent co-citizens if things don't work out.

dtb

Where do you draw the line? One suggestion would be that any account with no interest, or let's say interest that is less than half a 3-month Treasury bill, might qualify as a bank account, fully guaranteed.

I would draw the line at being 100% reserved. You would have to pay the bank for these services because they will get zero investment income from your dollars. More like a safety deposit box than a savings account.

I would draw the line at being 100% reserved.

You could currently be fully reserved by either renting vault space and keeping your cash or other valuables there. I think there are already repositories of gold which will hold your gold for you and for which people can trade (if they want to) warehouse receipts for the gold rather than having to constantly go and get it and move the gold around physically.

You could also on a smaller scale (I guess) rent safety deposit boxes and keep your cash there.

It is hard to believe anybody stops someone from setting up a business where they would hold your money in vaults and provide you a certain level of protection for a fee. The fact that neither of us has ever tried to find such a service in the united states probably means that not only is there essentially no demand for such a "bank," but that even we don't really want such a thing.

R:

In Vegas , we had such a thing, guess what happened? https://m.lasvegassun.com/news/2012/apr/17/robber-...

This is a better explanation. https://www.reviewjournal.com/investigations/mr-el...

This is one of the 44% of the time I pretty much entirely agree with Goofy

You can't take away risk from anything having to do with capital markets or things will spiral into unsustainable.

I mean, isn't that self-evident? (I think the "Capitalism without failure is like sin without hell" quote has already appeared in this thread).

I'll add a few things:

1) a number of years ago I did a several thousand-page dive into the evolution of mediums of exchange: coinage, bills of exchange, letters of credit, paper monies. One of my broad conclusions from that was a) fiat currencies are unavoidable in a post-Industrial Revolution world; b)issued by a stable government with a robust economy, and well and wisely managed by mature adults, there is no reason that the Xanadu Blimpo (XBL), say, shouldn't be good forever, but c) people being people, however, they historically haven't been regulated that way and thus sooner or later the XBL will falter quickly, badly and very painfully and d) no one is quite sure where that limit is...until it's reached.

I think of enormous stimuli, long-term ZIRP and the like the way I think of investments in general - specifically as a large frozen lake, with thick ice near the low-yield shore, with ice thickness and yields varying inversely as the less mature, careful, wise adults choose to stride go further and further out. That cracking sound will come too suddenly and too late for the boldest.

(The FT had an article today: " Asia investors 'gobsmacked' by $17bn Credit Suisse bond wipeout". Gated, but crux was "the <AT1> instruments were popular with wealthy individuals who appreciated the brand names and the yields. A Credit Suisse bond issued last year and paying a 9.75 per cent coupon was particularly popular." And apparently a lot of those HNW/VHNW investors had those bonds leveraged(!) Ow ow ow)

2) sometime after the 2008 debacle I remember reading an ex-Wall Street banker who said something like, "We have to be regulated. We can't help ourselves".

I wish I could find the original. At the time it seemed a truism (as well as very like a line from (iirc) the Lutheran order of confession,"we confess that we are in bondage to sin and cannot free ourselves"

3) Sheila Bair (FDIC Chair during 2008 debacle) agrees with us, on this week's Stay Tuned (In Brief) podcast. Unfortunately, probably gated: https://cafe.com/stay-tuned/in-brief-when-should-b... Worth a listen if you can. She feels the let's-guarantee-everybody approach was an unnecessary and unwise intervention which contributed to the instability we've seen - the mature adults, above, giving into a tantrum as it were.

4) Finally, the concept of a much higher guarantee (not "unlimited", as that term gives me angina), but say xx million XBL for non-interest bearing deposits - e.g. payroll - I can see being appropriate.

- sutton
remembers being uneasy with >$250K - earmarked for payroll, short-term AP - in the bank

I think all deposits should be insured.

Individuals and corporations do not have enough information to evaluate the safety of placing deposits in a banks. I am a former bank CFO and I still have to make many assumptions to evaluate the safety of a bank to invest in.

The argument that it will increase risk taking by management is false IMO. I have been part of senior management for 3 banks. Risk taking is more a consequence of too many banks and not enough talent to manage them. The aren't 4,000 capable CEO to run these banks. Nor are there enough CEO's to run all of the major companies in the US. Many morons run companies in America! However, of course in a bank mistakes can be lethal. Bank balance sheets can be large and complex. I would guess that SIVB likely lacked a basic transfer pricing system for rates and had inadequate asset liability management. You don't use ST funds to buy LT bonds. It is an obvious mismatch. A train wreck waiting to happen. You also don't grow a bank 20% or more a year without some real headaches. That is why we have regulation and an insurance fund funded by the banking system. However, the regulation team is likely small, and not very sophisticated. They also lack real authority to change management decisions. They provide a CAMEL rating which the board should see, but it is never made public. Therefore, depositors will never get the information that they need. There will always be mistakes and stress will bring those too light. But a few basis points on $16 Trillion dollars will create a very large insurance fund. Currently banks don't pay into the fund for uninsured deposits. However, they likely have to pay up for the deposits because of the perceived risk. So pay a similar rate to the depositor and include these in the insurance calculations for the fund.

Some thoughts on banking. This might get a little detailed.

Rule #1: Banks are not in the business of interest rate risk! They are in the business of credit risk. Their goal is to manage interest rate risk to $0. However, this is impractical. Most balance sheets are either asset sensitive (assets reprice faster than liabilities) or liability sensitive (the opposite). Banks will have a range of tolerance (some percentage of net income). They use interest rates options and swaps to manage this risk down to a desired level. The is why rates can rise 300 basis points and Fannie Mae is not going under. They hedged their interest rate risk.

So SIGV making rate bets was totally inappropriate for a bank.

Banks measure and manage interest rate risk via a asset liability team. They have detailed contractual life's of most of all of the banks products at the customer level. They adjust these for accelerated prepayments or have to make assumptions when the contractual life is 1 day like a checking account. Most products however have contractual lives and banks model prepayment behavior so they can constantly make adjustments. These payment assumptions have to be constantly updated for changes in the overall level of interest rates.

I was in charge of the product assumptions for the transfer pricing system for First Interstate bank. I was also the CFO for the USC Credit Union. In something this small, I was also the "team" in charge of asset liability management. At USC, in our camel rating we got a 5 in asset liability management. This was about 10 years ago. The regulators told me that we were the only Credit Union they had ever given a 5 too. FYI, 5 is the best. My point is that many institution that you would think have great command of this issue, may not. It takes a combination of solid modeling and great understanding of consumer behavior. Most bank CEO's that I have worked with would not understand this information. They typically rise through the bank on the sales side. They may be a former commercial banker or head of the retail bank. They are networkers or handshake men or women. These are very different skills. Banks are complex financial organizations. When I worked at First Interstate 30 years ago, we had a balance sheet of $50 Billion. That is big. Bank are many times that size now.

I would reiterate. Growing a bank at a clip of greater than 15% a year is likely to have a bad outcome. You are likely to not have the sophistication for your new size and you may and likely will fund too many loans in a period that is not representative of an overall cycle. As the cycle progresses you will either have an outsized benefit or problem.

I would draw the line at being 100% reserved.

As Ralph says, this isn't much of a product - for the client, it would cost a fortune, and for the business, I don't think there'd be enough clients to make it work.

Imagine a bank with about 10% capital to asset ratio, let's say $900m in deposits and $100m in capital, a total of $1b in assets invested to keep the numbers simple, and paying 1% on chequing accounts and making 3% by investing those assets in appropriately short-term treasuries, and having to pay for employees, buildings, IT, connection fees, etc. on the difference. So they're making $30m in revenue, and paying out $9m in interest to depositors, and with the $21m difference they have to pay all their expenses plus make a little profit for their $100m in capital invested, say 8% or $8m. Now you remove they're ability to make any income on the $1b in assets, and they save $9m in interest paid on deposits, so they're immediately $21m in the hole, and if they are still to return 8% to investors, they're $29m in the hole. So they would need to charge you over 3% a year for this service. If you have a $10,000 deposit, instead of getting $100 a year back, you have to pay $322. Not an easy sell.

I'm not sure what you mean by 100% reserved, since banks already have to be >100% reserved by law, meaning they need to have more assets than liabilities; in fact, they need to have about 10% more, which is the bank owners' capital. In the case of SVB, they maybe fell to just 100% (borderline insolvent) and so investors were wiped out and the bank had to be shut down.

dtb

Individuals and corporations do not have enough information to evaluate the safety of placing deposits in banks.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance?

I agree that most people can't accurately assess bank safety. But there are private market solutions that provide additional deposit insurance: MaxSafe, Depositors Insurance Fund, and IntraFi Network Deposits. These are either excess insurance policies, or methods for splitting deposits between many banks. I prefer these methods over just providing millions of FDIC coverage to individual banks.

A large deposit is safer when split up between multiple banks. All of the banks are unlikely to all fail at once. This diversification would also make bank failures less likely, as one bank would not have to handle a large influx of deposits. SVB got a mountain of cash during the Venture Capital boom, and made some bad decisions that led to failure. In the case of SVB, the big depositors were getting benefits that encouraged them to keep large deposits at SVB. For example, a start-up could get a loan equal to their deposits.

If excess insurance is needed, that particular bank should pay for it. SVB was an unusual bank and could have purchased excess insurance. Higher FDIC insurance will be paid by all banks. Why should a small community bank pay for SVB's insurance needs?

Maybe an annual red flag letter is needed telling customers with accounts over $250k that they do not have full FDIC insurance and there are alternatives.

<I think all deposits should be insured.>

Elon Musk agrees with you.

https://www.thestreet.com/technology/elon-musk-has...

If you want to live like a Country Club Wall Street Republican....

Vote Liberal.

Apologies, wrong board. Tried reporting it.

Rear view mirror thinking. It has been a good idea to lend you money to a bank so that they can invest it for you to offset your banking expenses - it isn't anymore. 3% yield does not adequately cover the risks current depositors are taking with their money."Full faith and credit" doesn't mean what it used to. FDIC schmedDIC ... there's a thin veneer on top of a mountain of potential losses. Will the rest of the world be OK with the US using the reserve currency to paper over huge deficits and losses? Probably, but not certainly.

By 100% reserved I mean that I put 100K of USD or RMB or gold in the bank and they don't lend it out. They keep it in their vault (or somewhere safe) like a safety deposit box. Write a check against your cash, your balance goes down and you get charged a $1 fee.

As a depositor in the B of A we just loaned 5B to First Republic. I'm happy to pay 3% to not lend my money to First Republic. Or, for that matter to offer 30 year mortgages or buy govt debt at 1/2 the appropriate interest rate.

Someone posted that it was SVB's fault for buying a 10 year treasury and not hedging it. Who in there right mind would offer hedges at a reasonable price on 10 year treasuries with blowout deficits, high inflation and record low interest rates? .... Not me.

It was SVB's fault for not reducing their bond duration as the fed was raising rates. There was no doubt that the FED was in a tightening cycle, and replacing 10% of their long duration bonds with each raise and replacing them with 3 month bills would have closed the gap in their balance sheet well enough that they would still exist. Their vulnerability to a run was exploited because their risk management did not show up to work.

Jk

By 100% reserved I mean that I put 100K of USD or RMB or gold in the bank and they don't lend it out. They keep it in their vault (or somewhere safe) like a safety deposit box. Write a check against your cash, your balance goes down and you get charged a $1 fee.

I am curious what you think the business model is for such a bank. How do they pay rent? Employees? Utilities?

And couldn't you accomplish the same thing just by having a stack of dollar bills in your basement, or gold bars in a safe deposit vault (for which you pay a quarterly fee)? Why do you need to have a bank with a basement full of dollars when you can do that yourself?

I am curious what you think the business model is for such a bank. How do they pay rent? Employees? Utilities?

Fees. Charge fees for services. Obviously the big one would be for custody of your assets. No more free checking or ATM withdrawals. But, they could still offer credit cards and other services. They just wouldn't be able to mix their money with their customers.

And couldn't you accomplish the same thing just by having a stack of dollar bills in your basement, or gold bars in a safe deposit vault (for which you pay a quarterly fee)? Why do you need to have a bank with a basement full of dollars when you can do that yourself?

I want every service that the bank provides other than them lending my money out. I can't write a check or rent a car without a credit card.

The govt looks to have forced other banks to bail out First Republic after they couldn't raise capital or sell themselves. If that policy expands, then no bank is safe. I'd have liked to be on the phone when the administration told WEB that they were going to lend money from his banks to other failing banks instead of shutting them down.

If I were CEO of a bank today.

I would use the recent bond rally to lighten up on my highest duration bond holdings. Maybe sell 20% or more. 10 year treasuries have a yield of 3.80% ish. You could sell out, take a manageable hit to capital. This only applies to HTM portfolio. Then buy short term securities of similar risk. Portfolio yield, aka NIM, will actually increase, so will current earnings. Capital will be reduced.

For example. BAC has $850 BB in securities. $200 BB trading, $650 BB HTM.

BAC could sell $200 BB HTM and take a loss of $25 BB or so. $20 BB after tax. t will reduce Tier 1 capital by 1%, but significantly reduce portfolio duration and potential growth in future unrealized losses.

So as of 12.31. BAC had a $108 BB unrealized loss. Now likely below $90 BB from the recent bond rally. Could cut it to $65 BB with what I am proposing. This would go a long way to removing the prominence of this issue.

All the while reinvesting the $200 BB at 4.75% ish could add $2 BB pre-tax to annual earnings.

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