In my last note in regard to the Silicon Valley Bank fiasco I said that in general people were not stupid, were often ignorant, illogical and irrational, and that the latter three I’s were responsible for most of the world’s problems. After watching a lot of the commentary on SVB, much coming from conservatives who should know better, I am revising my opinion to some extent–there are a lot of people who are willfully stupid. Some politicians and pundits keep referring to this as a “bailout” of rich investors, etc. This is pure hogwash. SVB was a publicly held bank; it was owned by shareholders. Some of the shareholders were wealthy. Many were ordinary people, directly or indirectly through pension funds, ETFs, etc. Wealthy or not, every shareholder is wiped out. No shareholder got a “bailout”.
The banks depositors likely included some individuals, like the Governor of California, and some of them were likely wealthy. But the vast majority of money deposited at the bank was from companies. These funds were there to be available to pay employees and vendors to the companies. If the funds aren’t available, employees don’t get paid, vendors don’t get paid, the company basically has to shut down or severely limit operations and that has a cascading effect through the economy. The people who are hurt the most are not wealthy people but ordinary workers and small businesses.
The bank was poorly managed; executives should be punished. But part of the problem is the phenomenal amount of money the federal government pumped into the economy, facilitated by the Federal Reserve. Someone had to buy all that debt the government issued, and they were happy to see banks like SVB do it. And then when this fiscal irresponsibility led to inflation, the Federal Reserve had to raise rates to try to limit the pain. The mess was created by the government. And the Federal government, and the states, have regulators that supposedly are constantly checking on banks’ financial condition and their management of risks, including those stemming from interest rate changes. The regulators failed to do their jobs. But that is because government hiring is now based on ideology, race, gender, sexual orientation, etc. and very intentionally not on competence. So you have a bunch of incompetent woke idiots in government supposedly watching over a bunch of incompetent woke idiots at SVB. The result was pretty predictable.
Refusing to make depositors whole is blaming the victim. Individuals and businesses have a right to assume that a heavily regulated industry like banking is safe. They have a right to trust government to ensure that banks are safe. The government breached that trust, as it always does these days. No depositor, no matter how sophisticated, should have to do a constant check on the liquidity or financial reserves of a bank and they won’t have access to information to do that. So it is just stupid to call this a bailout of wealthy depositors, or a bailout at all. The government has specific funds available to address these situations–tens of billions of dollars funded by assessments on financial institutions. Given that it caused the problem, certainly seems right for the government to fix it by making sure depositors don’t lose their money.
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As kevin notes in the 3rd paragraph – “The bank was poorly managed; executives should be punished. But part of the problem is the phenomenal amount of money the federal government pumped into the economy, facilitated by the Federal Reserve. ”
Likewise there are numerous myths regarding the cause of the 2008 financial crisis (and all financials crises for that matter). Numerous studies, books, articles etc point to the cause of the 2008 as being predatory lending, lax credit standards, etc. What is omitted in the multitude of analysis’s is ultimate underlying cause was the massive increase in money available for lending. Thanks Alan Greenspan & the Fed. As more money becomes available to be loaned, the credit standards and risk criteria drop simply because lenders have to go deeper into the creditor pool to find borrowers.
As a completely serious question, How would a bailout look different from what is being done?
Bailout is a pejorative term. if you put you money in a bank, you expect it to be safe, in large part because the federal and state governments are supposed to be comprehensively evaluating and overseeing their activities. The feds have a huge fund, created from assessments on financial institutions, designed for exactly these kinds of situation. At the end of the day we don’t yet even know that the assets in the bank won’t be equal to or exceed the liabilities to depositors. Liquidity is a different issue than solvency. you can be illiquid but very solvent. At the end of the day I expect that SVB probably won’t actually have less assets than liabilities, now that it has been protected from irrational runs on funds which forced sales of assets at a big loss.
Shareholders take a known risk when they invest. They lost on this one. I’m sure I lost some money on this through my fund holdings in Vanguard. However, when the FDIC guarantees only to $250k, those with more than that should not be made whole, as seems to be done in this case. You can get $1M coverage if married & split your money into savings & checking for the 2 of you at one bank. But beyond that, the FDIC is encouraging a moral hazard in that everyone, everywhere, will be expecting to be made whole all at once. So the rules are not the “real” rules.
“The people who are hurt the most are not wealthy people but ordinary workers and small businesses.” Well, we don’t know how many are ordinary workers or not, since the govt won’t be making that info available for a while.
I agree that the mess was created by the government – for inflation, the interest rate increases, and lack of accounting oversight. My cat was especially pissed – I had to give her a bottle of aspirin to relieve her headache from the eye rolls she experienced after she read the SVB reports. Her quote “#::>?/!?” – in catslan = Stupid f’ people.
what are businesses with millions of dollars in deposits supposed to do? Many of these are small growth businesses. Imagining that every company is capable or should even have to check on the liquidity and duration of assets of the banks they do business with is not realistic. The fundamental issue here is the state and federal regulators failure to do their job–they routinely look at banks and are supposed to catch risks like this. They don’t because they are filled with incompetent dodos. And the vast majority of employees at any company which had deposits at SVB were certainly just regular workers, no rich people. If they lose their jobs, that hurts.
You’re right in your analysis I think. My problem with the situation is that on top of the regulations the schmucks and regulators weren’t bothering with, there will be a new set of regulations and stuff added on to that, and of course it won’t matter. The same bad regulators and bad bank execs will run another bank into the ground. I also read that Union Square VC told it’s clients to get money out in November, and Peter Theil did something similar. They could see the problems but the board of SVB, their executives and the SFFED didn’t? It’s not fair to compare this to FTX, but the two share some really interesting similarities: social justice/woke nonsense seemed to come before basic business practice, and zillions in contributions to the right politicians and left wing groups. After all that’s happened over the last five years, I think it’s likely that the reason regulators and government didn’t see anything was because they weren’t looking.
Kevin rebuts criticism of the government’s response to SVB by writing “Imagining that every company is capable or should even have to check on the liquidity and duration of assets of the banks they do business with is not realistic.”
I wonder why not. Most people don’t attend classes at or have advanced degrees from Harvard or Stanford but they know they are very likely to be better schools than Northern Iowa or Southwest Missouri State. Most people are not mechanical engineers but they know that a Mercedes is likely to be better car than a Chrysler. Markets provide low cost information to people. The problem isn’t that business isn’t capable of knowing whether banks are doing things right; the problem is that the information is too costly to obtain because we don’t have a well functioning banking market.
If banks had stronger incentives to manage their risks in a more conservative fashion, then individual depositors wouldn’t have to expend significant resources monitoring them. FDIC insurance and the current “bailout” only weaken those incentives.
It’s really about tradeoffs. If as Kevin suggests all depositors be made whole in this instance, they are spared very real pain today. This is a short run benefit. To them. But if they are made whole, the incentives for all banks to engage in the behaviors that Kevin justly criticizes – including valuing DEI concerns over those of prudent risk management – only grow stronger. This is a long run cost. To us all.
You can never do only one thing.
I don’t know what businesses with millions of dollars in deposits supposed to do but that’s why they pay CFOs big bucks. Not to mention the VC firm’s giving them the money that all rich people and have a vested interest to make sure the money is safe. You have to be ignorant to think there’s no kickbacks or influence peddling involved. Anything over the documented insured amount is most definitely a bailout of the rich.
If they aren’t going to hold to the supposed $250k limit then why don’t they just say the limit is infinity?
There are bank products available that insure deposits in excess of the FDIC limits. As you would guess, these may involve fees and/or lower the yield in an account. If supposedly “sophisticated” companies are keeping millions of dollars in uninsured deposits, I do wonder about the incentives and the advice they were getting.
One of the fundamental questions here is how society manages a fractional banking system. The benefits to society of our banking system are immense, in my opinion. Yet the trade offs (periodic bank failures, e.g.) can be bracing. Public regulation has its flaws, yet private regulation had its ups and downs in the 1800’s. And in any event, how would the U.S. transition to a new form of oversight?
By its nature, a fractional banking system has vulnerabilities, which are likely compounded because the average citizen likely doesn’t understand it. I wish there were easy ways to “fix the system.” I think it’s more likely we get additional bandaids that do little to prevent future mishaps and ultimately stifle economic activity and/or drive it to unregulated areas.