The author ignores that behind the downfall of SVB was a climate of excess liquidity on the markets, a bonanza created by the authorities that made SVB see itself with a glut of funds. Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.
Someone could argue that they could have foreseen that this abundance of liquidity in the markets, along with the supply chain issues, would eventually lead to inflationary pressures and that once inflation has shown its ugly face, those bond's market value would be discounted, and that they could become vulnerable to a bank run.
But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
That said, please don't confuse me with a libertarian; I am just raising a somewhat contrarian point. Being called a libertarian would be an enormous source of shame and disgust for my mom.
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause.
That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."
> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this.
All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations.
SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.
Any investment strategy will require addressing various forms of risk and making tradeoffs, but it is a choice. SVB did not properly hedge against this risk which, as soon as interest rates started rising, should have been a priority for their leadership to have a plan to address.
Could they have done better? Sure. Hindsight is 20/20.
Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run.
Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place.
This isn't a hindsight thing, this is a well-understood risk in finance. The lead time on rising interest rates was also significant enough for SVB to have shifted their investment strategy. Regulatory bodies in the US are both underfunded and hamstrung in their ability to regulate, and for a bank of SVBs size, they would not have been a prime target for regulators.
Well, I'll take issue with your post as you captured the problem with the others. Where SVB was different than other banks is the absence of hedging. SVB's tier 1 capital was basically wiped out by a mark of the HTM portfolio, unlike other banks who suffered hits but far, far smaller.
See p6: "Larger banks are the predominant users of derivatives. ... Banks facing higher likelihood of financial distress manage their interest rate risks more - both by maintaining lower maturity GAPs and by engaging in higher derivatives activities. Consistent with the predictions of Froot et al. (1993), I find that the high growth banks and banks with less liquid assets engage in higher hedging activities"
More problematically it would create uncontrolled swings in their regulatory capital ratios.
But those assets are typically hedges against long term fixed rate bonds issued by the bank, or are funded by a diversified (and mostly retail, ie more stable) deposit base with a large enough liquidity pool to sustain a period of stress, as mandated by liquidity regulations.
I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as inflation became even a whisper, but if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.
> I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it.
Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
They had 13b in cash going into this year and other highly liquid assets, those evaporated as the draw downs happened. Its not like they tucked away all assets into 10 year lockups (or higher risk loans). Even the bonds they did lock up -- in what would be considered 99% "normal" markets given the last few decades a sell off of those bonds would not have been highly problematic. It became problematic when they were so low return needing to be sold to reblalance the 10/90 rule when market rates were much better and they needed to be discounted due to the huge rate hikes.
SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more.
I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
They had a customer base that would knife them at the first hint of a liquidity issue, then they had a liquidity issue. Of course a different approach would have reduced their returns, but then they’d still be in business.
Deposits from financials are treated as disappearing at the first opportunity from a regulatory point of view. Corporate deposits are considered volatile but less volatile. So the behaviour we have seen isn’t entirely unexpected.
It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day, you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.
If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.
Exactly right. I do think the speed of deposit growth in a low rate environment made that challenging though.
Like if it were me, I'd grudgingly buy long-dated assets to keep the doors open, but also look toward reducing maturity as rates increase and start acquiring customers. Problem is that, very roughly speaking, those things only work if rates increase more slowly than you can acquire new customers.
but ... they could have charged customers to hold their money. or put it into money market funds. sure, less glamorous, but also less risky. of course they were also a startup, so making money was a bit more important than safety. it's just valley things.
The whole argument is whether uninsured deposits should be provided by the FDIC. I have no problems with the insured amount being returned to customers.
The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
The other good news is that it will probably net out to costing little to nothing in the long term as they had enough assets to cover liabilities -- it was a liquidity crunch. Seems very much relevant to what the FDIC was created for -- to make depositors whole and stop contagion. It would be different if the bank was not properly asset backed.
Banks are not being "bailed out." Depositors are. SVB no longer exists. Now, you can certainly argue over the merits of bailing out depositors, but disingenuously framing it as a "bank bailout" is not the position to start from.
On that point, the government does have an obligation to "provide for the common defense and the general welfare of the United States," and that is clearly one of the overarching purposes of the Constitution itself. I find it hard to argue that saving tens of thousands of jobs[0] but by making the depositors whole, when the assets of SVB, illiquid though they may be, can cover 60-90% of the cost, is at all the wrong thing to do. This is literally part of why we have a government, and why markets are regulated at all.
[0]: I couldn't find a good source on the number of jobs, but that seems like the correct order of magnitude, anyway.
This is really semantics to me. Customers gave SVB their money because they paid high returns and engaged in risky behavior. That money was used to fund exec and employee salaries. People who take risks should bear the responsibility. Whether the bank still exists or not doesn't really concern me, since the people who ran it into the ground can turn around and do the same thing tomorrow.
> "provide for the common defense and the general welfare of the United States,"
We'll have to agree to disagree that bailing out well-off startup founders and employees is the best way to provide for the general welfare of the United States. I'd start with people undergoing medical bankruptcy, then about a million other categories of people before I got to them. Either way, I'd prefer the accounting to be transparent. The FDIC isn't acting as a corporation here, so they shouldn't be a corporation.
"People who take risks should bear the responsibility."
Exactly. In Russia we had people who'd serially deposit money into the shadiest of banks offering highest returns. Deposits are ensured upto some amount, so they'd collect interest, get their money from the state after a bank bankrupts (while the bank owners are enjoying stolen money in a no extradition country) and go to the next bank.
SVB was a bank that mostly served corporate operations accounts for tehc nad healthcare startups and small businesses. People were not banking there for high returns. This is not at all about risky investments (ffs the bank liquidity crunch came from long term bonds being too illiquid -- not exactly exotic asset management). The accounts impacted are mostly payroll, daily operating accounts (for expenses/manufacturing expenses/real estate lease payments etc).
The bank managers and investors are not being bailed out -- they have already lost everything.
You seem to be attaching some kind of anger for some ill conceived and non existant "happy go lucky risk wall street bet" type of activity, when this is about buisnesses losing their operating accounts who did nothing wrong except for have accounts at this bank instead of the next bank over.
Also, if your entire clientbase is in a single groupchat, you should be much more prepared for a bank run. This is like common-sense stuff. The fact that this is a bad business model isn't really my concern.
> The bank managers and investors are not being bailed out -- they have already lost everything.
The bank managers will walk away having earned millions of dollars in salary and bonuses, funded by risky bets, and the investors will walk away without bearing the consequences of the risks SVB took. Their investments in SVB went to zero, but there's still money that's been lost.
It is not at all about risky investments! It’s about poorly managing risk, which is entirely different. The underlying instruments are among the lowest-risk securities on the planet, the risk that killed SVB was in the investment strategy.
You can call it whatever you want. They lobbied to not be subject to liquidity stress tests, and then didn’t have liquid assets when customers came looking for their money. That was risky. They could have invested in shorter term contracts but they didn’t.
You really think employees of SVB bank clients should bear the burden of decisions made by their employers without their input, likely without their knowledge, and very little reason to care 99.99% of the time? Quick, without looking at your paystub, what bank does your employer use?
I don't disagree that doing things like addressing medical debt are worthy ways to promote the general welfare, but let's not pretend it's an either/or, thing here, either. You don't seem to want to acknowledge the full context of the situation, which seems at least on the edge of disengenuousness. This as well, after you try to frame it as a "bank bailout" then backpedal when called on it.
I believe employees understand that working at a small, highly-leveraged startup is risky, whether or not they know which bank they use. The employees, by law, get 2 months wages guaranteed by the government (under the WARN act), and should have additional savings from their highly-paid SV tech job (which is partially highly paid because the employer engages in risky behavior) which I think is plenty of cushion to get their finances in order.
But the real problem I have is with special treatment. There's plenty of people out there who get screwed by their employer's negligence/malice but the only ones who get bailed out beyond the letter of the law are the ones with the networks, money, and influence to make noise about it.
> but let's not pretend it's an either/or, thing here, either.
But it is. You either spend money in 1 place, or you spend it in another.
> "bank bailout"
This isn't like a well-defined term as far as I'm aware, so 2 situations where banks/customers rely on the government to come to the rescue when risks don't pay out can both be called bailouts, whether or not the company remains in tact. You see plenty of media organizations and people calling this a bailout despite the fact that the bank is being dissolved, because it's a colloquial term.
Be honest: have you ever asked an employer what bank they use when you were interviewing? Is this your general policy? 10:1 says it's not, and you haven't. Even if you're the exception, I'm sure 99% of employees have literally never asked this question. Think about why that might be.
When I cared about stability I picked a big employer from which one would expect prudency. When I worked at a small company, I expected it to get ruined at any moment and planned accordingly. Since I became self-employed, I care a great deal about which bank I use and never put all eggs in one basket.
But, you didn't actually ask. And that is literally my point.
I care about stability in my employment situation as much as the next canine. I've worked at 4 startups, each with under 150 employees apiece. I've asked questions about funding, client base, growth plans, etc. All the normal "hard" questions you have to ask as a prospective startup employee. Not once have I ever asked where they banked. Not once has anyone I know asked where their employer banked.
I would submit that if the banking system becomes fragile enough that asking about such a thing is actually a good idea, we have bigger problems as a whole, which would make a prospective employer's answer to any such question irrelevant. And if that's the case, why ask?
Another way to put it: it's not employees and consumers putting "all eggs in one basket." It's the economy as a whole. If there's one thing that the 2008 financial crisis proved, it's that if the banking system gets gummed up, second and third order effects very quickly begin to set in and ruin things for everybody.
Now, if you know how to reconstruct the banking system to avoid this, I'd like to hear it. But as long as my employer's payroll funds aren't stored under the CEO's mattress, I think I'm good with that.
I understand, but my point is that most people don't need it -- they either use proxy for that or already accept startup-level risks. So bankruptcy of a startup due to poor bank choice is just one of many failure modes for startups.
"we have bigger problems as a whole"
I don't think so, at least based on Russia's experience. In the previous decade plenty of banks got closed with businesses losing money, but economy was ok and the banking ecosystem got healthier.
The only risk for other banks is opportunity cost: right now, there are much more productive uses of their money than buying old agencies at par. If you had $200b or whatever laying around, you could buy their portfolio and make about the lowest risk $10b there is. But if you just bought new agencies at the same durations instead, you could easily double that.
EDIT: To clarify, this is the primary risk at large banks, where they could absorb a chunk of the bonds without significantly affecting their average maturity. Smaller banks obviously risk replaying the SVB run.
> The only risk for other banks is opportunity cost
To be clear, if banks can improve their risk profile for free, they will do that (because it frees them to invest in other risky stuff). A no-risk 5% return while the fed is giving out sub-5% interest rates is a no-brainer. The reason no banks are coming in to help is because it would be a bad investment.
They are 5-10% total return, not annual. My point is that it is not a bad investment, it’s just a less-good investment than equivalent bonds with the exact same (extremely low!) risk profile at today’s rates. They were a perfectly fine investment in 2021-22, they just aren’t as attractive in 2023. Could very well be good again in 2024 though, who knows.
The FDIC charter:
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.
This feels like you're agreeing with me. Is that the case? Receiverships have a pretty specific meaning, which explicitly does not include resolving liquidity issues using third-party funding.
Yes, that would narrow the maturity gap and pass some rate risk on to customers. In SVB’s case, though, they would’ve needed to sell a lot of CDs relatively quickly, which means their rates (i.e., borrowing cost) would have to be high.
Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).
So, your plan is to do away with fractional reserve banking entirely ? How do you think that would impact GDP and the overall functioning of the economy?
Not who you're responding to, but I actually don't think getting rid of fractional reserve banking is as crazy as it may sound at first. Maybe people who need to borrow money for 10 years shouldn't be borrowing it from people who will freak out if the loan isn't paid back in a week.
On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
The whole point of banking is that you borrow money from your depositors at low interest rates, but at a variable term length (The depositor can always withdraw), and you lend money to borrowers at high interest rates, but at a fixed term length (The bank can't just call in your mortgage tomorrow.)
Borrow short, lend long. The latter necessitates 'locking money up'.
A well-managed bank will properly manage the risk of the short loans getting called.
A poorly-managed bank will go all-in on getting short loans from people who are likely all going to call them in at the same time (startups), while putting their entire lending portfolio into lending long in an environment where long-term loans are dropping in value.
I know you are generalizing but there are times the yield curve is the other way and it is better to lend short and borrow long. But a well managed bank takes care to duration(not maturity) match their assets and liabilities while also taking into account liquidity needs and buffers. Also, the above applies to use of their own capital as well.
Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money back eventually.
Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
It's not that they shouldn't have bought treasuries, it's that they shouldn't have bought such long dated treasuries, and if they did, they should have hedged against interest rates, and if they didn't, they should have realized the loss when it was smaller. But they did none of those things and it was fatal to them.
The Fed kept making it clear that it was raising rates, and it seems like SVB just slipped quietly into that good night without lifting a finger to save itself. Which is bizarre and confusing and there must be more to the story (and details are coming out, like the risk manager role remaining open for nine months), but it does seem like crazy risks were taken. But not in pursuit of additional gains, like we are used to seeing, but it's looking more like negligence or a misunderstanding of their position.
You can `s/treasuries/mortgage-backed securities/g` into my comment and it doesn't change much, but my understanding is that they had a lot of treasuries (not to the exclusion of having MBSs).
> To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries.
All your link shows is that Guardian, Reuters, and others have equally as bad reporting as commenters here, just parroting each other constantly...
SVB's actual announcement says "Additionally, earlier today, SVB completed the sale of substantially of its available for sale securities portfolio. SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023."
I haven't seen any evidence that there were substantial Treasuries sold, I just see MBS on their balance sheet.
So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors?
Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine.
In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
>Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors?
But that's literally what they did. They put it in 10 year treasuries that they had to sell for 87 cents on the dollar because every "thought leader" in Silicon Valley had the same idea at the same time and triggered a bank run on their own bank.
Everybody who has deposits will get 100 percent of their money back and everybody who holds equity in SVB will be (mostly) wiped out.
The depositors are getting 100% of their money now because the FDIC has guaranteed all deposits, including deposits in excess of the usual $250k limit. Any shortfall will be socialized among all participating banks. The SVB's shareholders didn't get bailed out, but their depositors absolutely just did.
If the SVB had been forced to recognize its loss sooner, then this government bailout wouldn't have been necessary. Perhaps they'd have succeeded in raising more capital, and survived as an operating business; or perhaps their shareholders would still have been zeroed and their creditors would have seen a partial recovery. The depositors would have been fine either way though, no government bailout required.
The depositors are getting 100% of their money because the fed is lending against their assets at par. [1] The FDIC can be confident that they'll be able to make everybody whole because their assets exceed their liabilities. The Fed is going to hold the assets to maturity and get paid back by the Federal Government. "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." is legalese, nothing more.
> The depositors are getting 100% of their money because the fed is lending against their assets at par.
And FMV is less than par, so that's an undercollateralized loan. That's another component of the subsidy to SVB depositors, and also a subsidy to shareholders of other banks that overexposed themselves to long-term debt (though too late for the SVB shareholders). There's no rational economic basis for this change in policy, and it goes against all modern central banking theory.
I hope you don't think holding the bond to maturity somehow means the loss isn't real? All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of a bond is ultimately determined by the value of those cash flows to that person; so if the FMV went down, then that should be a clue that value was fundamentally lost, regardless of who holds it.
The SVB's problem was that their HTM accounting treatment didn't model economic reality. The government is leaning into that fiction somewhat here, out of some combination of favoritism and concern for systemic risk. That doesn't make the fiction true though, and it doesn't mean the loss disappears; it just means the loss gets socialized.
Correct. And they failed at it. Swap bonds for magic beans and see if it’s defensible. We know the bonds were worth less, but it doesn’t obviate failing to manage the half of the business that isn’t people handing you money
Correct. I think you are being blinded by the word "bonds" when evaluating the proportions you assign to mismanagement vs. being blindsided. I feel inviting swapping in a word that is anything except bonds may be a way to continue this interesting conversation
this is inherent to fractional reserve banks and maturity transformation. any bank would be vulnerable if there's a bank run. this is a basic thing to understand before making claims on this issue imho.
You made the case that how you value it depends on the plan. So what was the plan?
The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
The plan in a normal bank operations is to hold a mixture of long, medium, short, and liquid assets proportionate to a normal heavy withdrawal of funds. No bank stays liquid enough to survive the drawdowns they saw, because they’re not required to by law. They operate within the regulatory construct they exist in. The way they pay interest on deposits is by investing them to begin with, and if they’re invested in anything other than cash or treasuries, they face liquidity risk. That risk is not zero. It’s actually not even insubstantial. And risks are what the word implies, a risk. In an unlikely situation, they are insolvent while they liquidate assets - and often their long terms assets must be liquidated at a loss. This is literally how every bank operates. This is also why the government was able to step in and restore bank operations in a few days. They know how banks work too, they wrote the rules. So they know exactly what to do in this situation - because since it’s a risk of banking business, it can and will happen.
You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
> If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market
The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV.
However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.
This is only true for treasuries which are risk free. Any other bond includes other confounding risk factors impacting price which come out in MTM. These were agency bonds so would include duration/prepayment risks. But you also can face substantial liquidity risks in a fire sale, if you mark your assets to the full liquidation value, you need to mark against an order book to the depth of your holdings. Simple HTM NPV assumes you don’t face these pricing risks because you are holding for par+interest, discounted at risk free rates.
This is the right answer. Everything that has a market should be marked to market. This should be the default decision until some kind of good reason it's given to do otherwise.
> If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it.
If you hold a bond to maturity, you get it's Net Present Value at maturity which is actually Net Future Value. Mark to market of treasury bonds is essentially the NPV of the bond, considering current interest rates. When interest rates are near zero, sure, a dollar today and a dollar tomorrow are the same, with significant interest rates, they aren't. And there's the problem.
You can't give a depositor a $100 treasury bond, due in 2028, when they want $100 now. That's only worth $85 today (or whatever the value is, I dunno).
Aren’t the order of operations here incorrect? They were experiencing a lack of deposits due to VC pullback due to the interest rate rise, while depositors did not cut spending. This led to a liquidity crunch where they needed to sell discounted bonds to fill the gap. When the gap was conveyed to shareholders, the run began. If this is true, isn’t marking to market providing feedback about a potential liquidity crunch much earlier, ideally before the crunch even begins?
The “when the gap” bit is the piece that’s suspect to me. This isn’t an irregular occurrence in the world. The events are a little fishy to me because this isn’t crisis material. Banks go public precisely for the purpose of having access to additional liquidity in situations like this. The balance sheet hole was tiny compared to their assets.
Liquidity calculations for banks definitely include mark to market for HTM portfolios. But even then they were legally deemed sufficiently liquid. The run on the bank wasn’t expected or normal behavior.
this is why imho I see the pull out of the clients especially those that happened before the sale offer even came to term as an orchestrated ploy to tank the bank and then be in a position to offer shark bridge loans to those impacted. These were not naive clients making the move early -- and to me it seems less to do about the actual bank asset state and more to do with wanting blood in the water for wringing out equity and loan shark rates on those bridge offers.
> If you hold a bond to maturity you get it’s NPV.
Which, if you are being at all honest, means you calculate its present value by applying a discount rate in line with current risk free returns over the relevant time horizon, which will be a number suspiciously similar to the Treasury yield curve, and you will end up with something quite close to the mark-to-market value.
(And it has to be this way. Otherwise you could go buy two-year-old long dated bonds at a discount on the secondary market and make a killing, because the transaction would have an immediate NPV gain of 30% or more.)
Banks are a bit unique in that they can generally borrow at a cost much lower than the risk free rate due to the existence of non-interest-bearing and low-interest accounts, but IMO those should be thought of as a variable source of future profits, not as a reduction in the risk-free rate to be used for financial projections.
You say it takes a run, but all it really takes is an aggregate change in deposit behavior.
Like, for instance, your disproportionate share of startup clients easing off the cheap loans you had been offering them, because they’re no longer so cheap, and instead drawing down on (or moving) the balances that you had insisted they keep with you as collateral. Trouble was brewing on both sides of the business, not just on the asset position.
That’s what led up to the need to create more liquidity. The run happened after that when depositors spooked and drew down faster than the bank could liquidate assets. They were never, even MTM, under water. They just couldn’t raise enough cash in a single day to pay out all the withdrawals. But the cause of the run is the suspicious part to my mind. It feels orchestrated, and I have heard rumblings that Theils founders fund was spreading a whisper campaign against SVB while shorting.
This is completely false. If the SVB (or any other bank) had been adequately capitalized on a MTM basis, then they could have borrowed from the Fed to withstand any bank run. The SVB was not:
The hold-to-maturity accounting allowed them to pretend otherwise, disregarding losses on long-term bonds when interest rates increased. They--and their regulators, since such accounting is perfectly legal--hoped this would let them ignore the problem until they could earn their way out of the hole. Instead interest rates increased further, the hole got deeper, and the SVB blew up.
It's not impossible that Thiel somehow benefitted from the collapse, though I'm not aware of any evidence for that yet. It's also possible that he simply didn't want his money in an insolvent bank.
>> But the cause of the run is the suspicious part to my mind.
I've heard multiple reports that one of their large investors got wind of their attempts to get a $2B loan so they wouldn't lose that money in their bond investments and thought it was a huge red flag and was the first to take out all of their money. The theory goes it was a large SV company, and news travelled on social media and the SV financial circles about they did and their belief that the bank was about to implode.
This created a long line forming on Friday morning of companies wanting to get their money out as well.
I agree, I'm not sure if the rumor was enough to spook people, or an orchestrated move by several companies, once one company found out what they were doing - but its very suspicious. Add in the founders were busy taking money at the same time they were liquidating their positions, which I'm sure the SEC will have something to say about as well.
Add in all the people who may have found out early and took out short positions as well who are now poised to possibly make a good chunk of money in all this chaos.
If you hold a bond to maturity you get the par value of the bond, typically "100"
They were not holding sufficient tier 1 capital against a run or they would still be here today. The did, on the other hand, have enough to exceed regulatory requirements.
They apparently did not hedge at all and additionally, they invested heavily in mortgages which are well known to decline more in value in rising rate environments due to extension risk.
As an earlier poster noted, the primary reason to have a HTM portfolio is to avoid wild swings in reported earnings each quarter from a mark to market as their is no counter on the balance sheet that rises/falls in a similar manner.
You are probably correct in that if there was not a run it likely would be rear view. They would have done their capital raise and probably taken additional measures to improve their ability to withstand such an event. Of course, this all was trigger by a ratings agency and a few bloggers calling into question the unrealized losses in the HTM portfolio.
Then again, had the stress tests still be in place it is unlikely to have even gotten to the capital raise point.
> if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.
This is it. People are quick to point out mismanagement at svb, but it's only because of the run and the following collapse. After the fact, it's easy find data points to explain away anything. Holdkng on to low yield treasuries, really now, this is the telltale sign of a failing bank?
History still needs to be written on this one, don't discount the human factor, debtor's panic because of gossip run wild is not too far fetched.
This is flawed logic. The NPV is not a real, tangible dollar amount. It is a calculation, based on the presumed yield of a theoretical set of alternative investment opportunities, of the Net PRESENT (today, right now) Value of the bond. This number is less than the sum of the bond's future payments, because the NPV is attempting to determine the current value of payments scheduled for receipt in the future.
In other words, if you are owed $1000 to be paid on Christmas Day of this year, the Net Present Value is less than $1000.
> Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6, $6 and $7 (fair value
of $76,169, $77,370 and $97,227), respectively
> December 31, 2022 | September 30, 2022 | December 31, 2021
> 91,321 93,286 98,195
This shows that they had assets on 12/31/22 with an amortized value of $91bn and a fair value of $76bn
SVB told the world about it’s potential losses back in Nov
> It’s true that investors had been aware at the latest since its 10-Q filing on Nov. 7 that it had sustained unrealized losses among its held-to-maturity (HTM) portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. While this would theoretically render it insolvent were they to materialize in full, SVB Financial was dismissive of the risks.
And they wouldn't have been able to do that, if not for the regulations being rolled back (from $50B to $250B by a friend of Thiel and lobbying by SVB). Lots of sowing and reaping going on.
at the time they bought them the Fed was saying they had no plans to increase rates. You can blame SVB somewhat for not hedging but they took the Fed at their word and got burned for it, not exactly something that builds confidence in the financial system. The Fed bowed to political pressure related to high inflation rather than following the plan they laid out
The Fed never said they wouldn't raise rates for 10 years, which is the duration that SVB bought mortgage-backed securities for. The Fed didn't bow to political pressure, they are following the plan which is their dual-mandate for 2% inflation and maximum employment. They had rates at 0 while employment numbers were bad, now that employment #'s are good and inflation is bad, it was time to raise rates. It's a balancing act.
They did not buy everything in one day long before the Fed moved. The moves by the Fed were well telegraphed in advance and once the initial hike was done it was off to the races so to speak.
SVB had many opportunities to do hedge and honestly, why on earth should bank or anyone else "take the Fed at their word". People make mistakes, institutions make mistakes, people misunderstand and on and on.
They had no plans, things changed, plans changed. It is completely valid to blame SVB for not hedging. It is valid to blame them for lobbying to loose up regulation over how much risk they can take too.
If anything is damaging trust, it is banks and investors lobbying to loosen up regulations, claiming the banks are too small to pose systemic risks and then ask for special exceptions the moment it does not work out.
Here's another source of the problem...Pumping trillions of active currency into the economy, over heating the CPI, and ignoring demand-side inflation (hey it's "transitory") for ideological reasons.
You fail to understand the actual reason for their insolvency. Their risk team chose to buy 10 year treasury bonds instead of 1 year treasury bonds. This is because 10 year bonds offered a higher interest rate (more profit for SVB) but at a much much higher risk. The losses were then unrecognised, hoping the market would turn. Only when it was too late did SVB admit defeat. With their equity gone, they attempted a band aid with an equity raise but the market quite rightly recognised the bank’s shares were worthless.
Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail.
Don’t blame SVB’s failure on a bank run. SVB caused their own failure with their own risk management policies and it’s insolvency was probably inevitable for months.
They could be jailed for insider trading for selling all their stocks within the past few months. And the funds from those sales should absolutely, at least, be clawed back and then some for their responsibility for their decision making.
I'd, for a change, like to see those responsible for massive business failures held to account personally and financially. The limitations on corporate liability are meant for investors, not executives or board members. And TBH, those accounts with over 100MM in deposit should probably lose the 10% or so under normal rules for this kind of thing, not be bailed out by the Fed, who will in turn likely need to be bailed out by taxpayers, or worse if this happens another couple times in the next couple years.
It nearly killed billions of dollars in real value and required untold thousands of taxpayer-funded employees working through the weekend to unfuck the situation.
If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.
that might (or might not) be arguable from a moral viewpoint, but it definitely isn’t arguable from the actual statistics. about half of the US state prison population is there for non-violent crimes.
or like being in possession of a gram of meth for personal use: something a person might legitimately believe isn’t “wrong”. the meth user didn’t get into jail for violating his own moral code: he’s there for an error in judgement, this error being that he didn’t understand how strongly the people around him would react to actions he thought were not that big of a deal.
sibling comment does good by calling attention to driving: enough people text while drive that it can be considered normal behavior, that people who do this don’t actively think they’re doing wrong. but that doesn’t save them from culpability when they roll the dice poorly and hit a pedestrian.
what’s the difference between “manslaughter” and “murder”: it’s intent. our justice system does consider intent, but it doesn’t require it.
Directly, nobody was injured. Proximately, we really have no idea. I am in favor of strict liability for a broader variety of negligent behavior. Losing one's career over bad judgment is of course a kind of deterrent, but realistically lots of people fuck up and then go on to have moderately profitable second careers by writing a book and giving talks with titles like 'Learning Hard Lessons'. If they're entrepreneurial they can become stars of the MBA circuit.
Strict liability for negligence would just mean sending business overseas where that rule isn't in play, and chilling it domestically.
No one is interested in the deal "if you get it right, you make some money; if you get it wrong, we obliterate you".
The move from caveat emptor to caveat venditor has coincided with everyone legally ringfencing things with corps & LLCs. People find ways back to a fair deal.
Your understanding of the HTM portfolio (and reasons for it) are clearly not complete and no, not anyone in risk management will say their risk team should be in jail (excepting the case of documents proving the failure to hedge was done specifically to increase executive compenstation/bonuses). Calling into question the lack of hedging or use of MBS is fair game and not something most other institutions would have done.
For the record, "1 year treasury bonds" are 52 week Treasury Bills. They would not be buying off the run old debt.
As a libertarian, I'm perfectly fine with letting a business fail, and holding the management and board to personally account/liability for their actions.
The issue with that is that there’s often no adequate compensation for damages done. Individuals can get extraordinary rewards for high risk behaviour and positive tail outcomes but there is a limit how much you can take from them in case of a catastrophic (societal) outcome. Regulation is really the only way manage this asymmetry.
"Regulation" is what created those limits... Of course, the true limit being, the loss of their wordly posessions and assets, and possible jail time for anti-trust action. Lack of regulation defaults to common law, which is as much as possible restoring those harmed by those responsible.
The actual "letting it fail" would be to pay up looses only for those insured. Those who did not insured would not be paid looses in "let it fail world".
Exactly... they liquidate the bank's assets, payout the FDIC insured, and most of the depositors only lose about 10%... the shareholders would lose more... and the executives and board potentially lose everything to pay shareholders. That's how this is supposed to work under existing rules.
Why didn't the fed decide that course of action in this case?
Seems the difference is small. Shareholders still lost everything, depositors lost nothing instead of 10% but that's a minor difference.
Guess one difference is how long it'll take before depositors can access their money. Now they'll get it immediately. If they were waiting for liquidation of the banks assets, that would probably take longer.
The difference is that the thought of losing 10% is enough to make everyone else consider withdrawing the money they have with their banks. And that initiates a bank run that would spill over all the banking sector. The bailout is not to protect SVB; that's already gone. Fed is now trying to avoid having people stress testing other banks, because they probably won't handle it.
Well, I’d argue that they should have hedged their rates risk especially as inflation started to tick up. They just don’t have good risk managers. But that said, if there hadn’t been a run the causal issues would have been a foot note in a quarterly filing. Everyone is acting as if SVB were Lehman or Bear Sterns. They just got caught with their pants down and everyone ran over to take a picture and post it on Twitter.
It was worse than not having good risk managers... They didn't have a CRO at all for 8 months, until 2 months ago.
> In the run-up to all this, SVB’s proxy statement, filed earlier this month, reveals that the firm’s chief risk officer stepped away from her role early last year, and the bank did not hire a replacement until this past January.
They had no chief risk officer for 8 months. They argued publicly against stress testing banks. Their complete absence of hedging guaranteed that time bomb that would have gone off now or later.
I agree 100% up to the point of the necessity of a bank run. I think they faced some serious quarterly losses for some time to come, but many banks see that without a run on the bank. That’s why I suspect someone large and influential in the startup world operated a bank run whisper campaign for their personal benefit. I’ve no proof, but I’ll wager $5 on it.
It's entirely possible, but they wouldn't have been a random target. They put themselves into a very precarious position with the unhedged bets they made and the very selective client base they held. Consider that (nearly) all other banks weathered the storm just fine so far through correct risk management.
Why hedge when we privatize the profits and socialize the losses? SVB execs sold tens of $millions in stock before the failure. Are the execs going to be forced to return the compensation they received for showing higher profits by not hedging?
Yes. It’s called clawback provisions. They were summarily fired and their compensation was clawed back.
And how are the losses being socialized? The assets of the bank are collateralizing the lines of credit they’re getting to stay solvent. It won’t cost anyone a thin penny, other than bank management and shareholders.
The FDIC is guaranteeing all SVB deposits, including deposits above $250k. Any deficit will be paid from the FDIC's insurance fund, which if necessary will be topped up by a special assessment on all participating banks. So the losses (if any) won't be socialized over taxpayers, but they will be socialized over some combination of bank owners and customers.
> So the losses (if any) won’t be socialized over taxpayers,
I mean, a “special assessment” is just a different word for a one-time tax, and it being directly on all banks and indirectly on everyone who banks, or does business with entities who bank, makes distinguishing the payers of this tax and “taxpayers” ludicrous hair-splitting.
I imagine taxpayers did pay at least something in the form of treasury and fed employees working over the weekend and getting paid overtime. Or is that not how it works?
I'd say they are. And I agree with you that it's necessary overhead. The action is what "cost the taxpayers money" because it required enforcement action. Crime is actually a great example: we all pay when crimes are committed, so we should all take interest in preventing crime rather than just reacting whenever it happens. The same is true for things like rail freight safety, air travel safety, and banking.
Do you have a link that supports your assertion that all of the proceeds from stock sales by SVB execs while they were mismanaging risk in 2022-23 are being clawed back?
This is the time of the year when banks pay bonuses for the prior years work. My understanding is it was scheduled annually at the same time and happened to occur the day they went insolvent. Frankly I’m down with Nancy in client confirm generation getting her bonus. The senior managers all got fired and their comp clawed back, so seems legit.
I've no problems with Nancy, she's pretty cool. Firing isn't really enough, loss of license and industry bans should be on the table as well as criminal investigations for fraud and negligence of custodial funds.
You seem pretty emphatic that senior managers have had their compensation clawed back but have posted absolutely zero proof that this is the case. Care to show any reason we should believe you?
I think it's rather telling that they were run on, and pushed over the ledge instead of bolstered by those now calling for bailout. And now they get what they really wanted, a crosspoint to the Fed rate hikes, and cover under the "too big to fail" umbrella... This won't lead to better practices until people are jailed and or bankrupted over these kinds of actions.
I saw on another HN thread that when a bank has bonds designated as "hold to maturity" they are not allowed to hedge against rate risk--because there isn't any! The bonds will be held til expiration for purposes of the coupon, not to trade.
You can chase root causes all the way back to some Roman prelate if you want.
But at some point, there was a cause very close to the material problem you’re looking at. In this case, that’s the compounded risk that SVB took on in courting a concentrated clientele and trying to balance their books with unusually long-term purchases.
If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.
>If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.
I think it's time we stop imagining that financial institutions will ever do anything that they are not legally required to do. This was a failure of regulation. Calling it personal responsibility is about the same as getting mad at the dog for getting into the garbage. It's our fault for not taking out the trash.
I think the failure, in terms of regulation, is holding accountability in the first place when they violate existing laws and SEC regulations. Not to mention, ever actually holding executives and boards to account in terms of liability against their personal wealth.
It used to be that the likes of accountants and lawyers weren't allowed to be limited liability corporations - they had to be run as partnerships, with unlimited personal liability. (Sadly, this rule was done away with, and shortly after that we got Enron). Maybe the same should apply to banks.
I don't know much about finance and have never worked in banking but anyone more than 40 years old should know that fed rates can go into double digits. It's not like a black swan. It's happened before so I'm a bit surprised people are so shocked by the feds moves.
Not taking the side, but there is a strong belief that the fed can't raise rates much more as it needs to inflate away a large portion of debt to get the economy back on track. It's unlikely we will see a volcker economy halting maneuver anytime soon.
>decided to go the conservative way and buy bonds.
Just because government bonds are unlikely to default, that doesn't make acquiring them "conservative". If you're a bank, with an entire function dedicated to making sure that assets match liabilities ("treasury"), and that ought to be aware of things like "DV01" and "duration risk", then you're supposed to know this.
You understand the fundamental problems here and have chosen to share your insights for free. Banks have professional employees who are paid decent money to make these kind of risk assessments even more rigorously. Why would we accept the idea that they can get by with being less objective? I am not an investor at all and even I understand that when the Fed is raising rates to control inflation portfolio owners need to rebalance their asset mix as the financial environment changes.
Stop giving these guys a pass just because of your residual (and justifiable) skepticism about fiscal/monetary policy. I have similar doubts about how government manages public finances, but I also know that depending on a low-yield bond purchased before a pattern of graduated interest rate hikes is gonna leave you with a cash flow problem.
Indeed. Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed, up until last Friday. If anyone had some insight about what federal monetary policy was doing, he should have.
No. The Federal Reserve regional banks each have an independent board drawn from a mix of member banks and community stakeholders. Becker resigned or was ousted from his Fed seat on Friday, and ld not have taken part in negotiations - which would not, in any case, be conducted by the board.
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision.
As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things).
Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was absent. It's like monocrop farming: A pest that comes in and attacks your one crop can wipe you out more easily than if you grow a variety of crops.
"It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities"
And I kind of agree. Yes, the mistake was not hedging MBS and treasuries interest rates.
But are they really the only bank in the world doing that mistake?
What truly made it fatal is the VCs. That's also why nobody is coming to buy them. The speed at which the bank run happened, showed exactly how much they valued the bank.
If you're swimming with sharks, it's a big mistake to bleed. But let's not pretend the sharks are innocents. Bleeding isn't usually so fatal.
Which is why I don't think the sharks deserve a bailout.
> But are they really the only bank in the world doing that mistake?
I’m not sure that looking to the financial sector for examples of fiscal responsibility is actually reasonable, but I’d guess that they’re the only bank that’s “too-big-to-fail” that could possibly fail because of a single slack discussion.
Meh. Larry Fink could probably kill a non-big-four bank single-handedly if he really wanted to. Wealth is concentrated right now, and power even more so.
>decided to go the conservative way and buy bonds.
While strictly true, they did decide to go with long dated bonds that would tie up those funds for years potentially. Typically banks will buy bonds of shorter duration.
SVB however couldn't resist the higher interest rates of those long dated bonds. IIRC they had an average maturity of six years, whereas most banks are typically under one year.
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.
They did try to originate more credit, but couldn't.
But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds.
EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.
It's fascinating how so many of these unfortunate events seem to be explained as "You can't seriously expect us to have a professional understanding of financial risk. We're just a bank."
SVB locking money they might need access to is the FEDS fault do I understand you correctly? Did they hold a gun to their head? I'm not saying they're doing anything different than their competitors, but that's a stupid excuse.
The only thing that's broken is the financial system. A customer should be aware when depositing money that that money might be locked away, and agree to those terms, and get a cut.
This is SVB gambling and losing the bet, simple as. Everything else is just a pathetic excuse, don't enable it.
Just look at the term "excess liquidity", that's newspeak. I expect the bank to have my 100$ the day I ask for it. I'm not a using bank because I want to, but if I store it under my bed I get to deal with the IRS. They make themselves necessary to live, then expect my deposits to work for them.
CTR and/or SAR and/or form 8300 and/or Fincen 105 when you actually spend it, either directly or they investigate and find you're the second link back.
And if you escape civil action by IRS, the fed or local government can simply take it as civil asset forfeiture without accusing you of wrongdoing.
.gov really really hates big piles of printed currency and if they find out you have it the temptation for them to take it can become overwhelming to various entities that survive off of the taking.
Others have already answered but the proof of guilt is the inverse, I have to prove my money is legit, or it will be confiscated. Then when I deposit it in a bank the bank gambles and looses the money anyways, because excess liquidity.
The game is rigged. Give me a bank where I just deposit my funds, and nobody touches it and I'm happy to pay for the service. Maybe I want a portion of it to grow and I'll allow it to be lended, for interest.
The bank should work in my interest, not their investors.
They do care where it comes from though. And you have to prove it with a bullet-proof paper trail or it's assumed to be criminal gains. I didn't claim I couldn't prove it, but I'll still have to deal with the headache and make my case.
Bonds of any kind are not safe if you need the capital before they mature (which SVB did) in the face of interest rate increases. The longer duration the bond, the harder it hurts when interest rates increase.
There are financial instruments like interest rate swaps specifically for banks to hedge against this exact scenario.
Let’s not extrapolate some simplified personal finance advice to financial professionals who should have known better
If I can't access my funds because they're invested without my approval I don't give a fuck if you invested in immortality. I don't have to explain why I want it right fucking now. I'm buying hookers and coke why do you care give me my fucking money. Also I want my cut.
They didn't buy treasury bonds, they bought mortgage-backed securities with average duration of ~10 years (risky), why are people still wrongly repeating this?
Loading up on bonds when rates are rock bottom instead of bills is asking for trouble. Sure, when yields are at averages or historic highs, back the truck up; otherwise, there's not much difference between yielding 0% and 1%, but a lot of difference in liquidity.
As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure that's going to be a fun situation should they face even a slight liquidity crisis of, say, more retirees pulling money out than there are young people depositing into pensions and whatnot.
Can you explain the difference between bills and bonds and why the difference was significant in this case? For myself and probably a lot of engineers reading this comment, it seems like inside baseball.
Bills are shorter duration, bonds are longer duration. You can look up the terms to get exact time ranges. When the yields for both are very low, there's next to no upside to holding onto the low yield for longer. The downside is that if one is in critical need of cash immediately, nobody wants the old low-yield (compared to current yields) bonds and will only buy them at a discount. For bills, due to the shorter duration, extra liquidity is built-in.
> it is clear that the root cause of the problems is the actions of the government and the FED.
No it's not.
SVB bought 10 year MBS a couple of years ago to hold capital. They could've instead just rolled 90 day Fed debt and thus have been largely immune to interest rate changes. What they did was they took a risk with custodial assets. This is 100% the bank's fault.
Why did they do that? Because 10 year MBS had a higher yield than 90 day debt. So they took a risk. Why? For the benefit of executives and shareholders.
SVB did this to themselves, possibly with Thiel instigating a bank run for whatever reason.
It’s not a matter of being prescient. They made an explicit bet. “Rates won’t go down, so let’s get as much yield as possible via long term securities”
They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds.
The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.
They also had to pay out significant interest to depositors. The graph of those outflows looks like a hockey stick. So seeking a high return on their assets wasn't unreasonable. Presumably if they had paid low interest on deposits, depositors would have moved their money to some other institution, leading to the same outcome.
> it is clear that the root cause of the problems is the actions of the government and the FED
That's not clear to me.
I think the purpose of banks is to handle funds well. If a bank is "made" to "see itself with a glut of funds" it's needs to be able to figure out how to handle that.
I'm not endorsing the last several decades of federal monetary policy, but regardless, it doesn't make senses that it should necessarily focus on making things simple for regional banks.
>> even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED
>> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. However, in the above case, the depositors would not have been at risk.
SVB would have lost equity value, but would be a going concern. Instead, once SVB's unrealized losses piled up, SVB rolled the dice hoping things would turn and effectively bet depositor money.
This is not the customers/depositors' fault.
This is not the government's fault.
This is not the Fed's fault.
This is the fault of bank management, specifically risk+accounting+exec teams.
To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
>> To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
Note that many customers had their excess funds not in bank deposits, but in US treasury bills / short term bonds via a Money Market Sweep Account. Except it turned out the assets of the MM account were not in their name but in SVB's name via a custodial account, and hence is locked up, and would have been locked up in bankruptcy.
Just saying not all other banks are collapsing like SVB. They were over leveraged and played a risky game. That came to bite them. So it’s important to point blame at the issue and if 98% of other banks didn’t engage in this behavior then it’s not fed issue or systemic issue.
"Now, SVB, loaded with money, could have tried loaning it like crazy"
It couldn't because that's not how banks works. Banks create deposits by making loans.
When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves.
What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price.
Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door.
Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.
They had other choices - they could have lowered the interest rate they return to account holders as more and more deposits came in. They could have lowered their profit guidance to shareholders instead of taking actions that wiped them out.
As I understand it, the reason they failed is because they gambled on interest rates staying low and chased returns to maximize profits to shareholders.
Shareholders deserve to lose money when they are pushing - or even remaining silent on - increasingly risky corporate behaviors as absentee owners.
> Being called a libertarian would be an enormous source of shame and disgust for my mom.
But you are not your mom. you don't have to share on the disgust and shame, however you may chose to do so if you want.
the points being: the disgust is your mom's not necessarily yours. whether to partake on your parent's shame of being called a libertarian is a choice.
Reasonably, the least we could expect from a bank is to keep the money we give to them, instead of gambling it. But even that, despite all the audits, is not a given, as a matter of fact.
I wish to see the proof of reserve implemented for traditional banks, or the trust will just keep eroding...
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.
That's revisionist and silly[1]. Spending all your liquidity on long term bonds isn't "conservative" if you're a bank. It's not your money! It's your customer's money that you're just holding for them, and you just dropped it all in a vehicle that doesn't mature for 10 years. What if the customers want their money back? Yeah, we just found out.
No, the conservative option if you can't invest it is just to sit on it. That's what banks do. They sit on other people's money. That they are allowed to spend some of that money on speculation is a reasonable optimization, but it's just that. Obviously just sitting on it wasn't going to get the returns they'd promised to investors though. So they placed bets instead.
[1] And I'm not going to touch the idea that the "authorities" somehow forced them into this. No. Just no.
Do you really think putting it out as mortgages would lock the money up for a shorter duration? SVB had a reasonable amount of liquidity for normal stresses. They'd gotten close to breaching their regulatory cushion for spare capital which was why they were trying to recapitalize.
However once the VCs panicked started a bank run, they folded. Just like literally any bank would. ~45b of net withdrawals in a single day is going to cause any bank significant trouble.
If SVB were originating mortgages then, yes, that should have helped because then, like every other originator, they would have immediately sold the mortgage into the secondary market where it would be turned into a Mortgage-Backed Security and SVB would have cash on-hand and unloaded the long-duration risk.
Instead, they were the ones buying the MBSs and taking on the long-duration risk.
Again that's revisionist. They booked a huge loss (something like $1.2B) last week, before the bank run, precisely because they lacked liquidity to handle routine withdrawals. The bank run is the effect, not the cause.
The government actually wants banks to speculate with customer funds. You might think that the safest bank would be one that doesn’t do anything with customer deposits, just sits on them.
Well this “safe bank” actually falls foul of US banking regulation - there are regulatory requirements for minimum levels of “speculation“ as a bank.
Now clearly SVB got in over their heads here with risk. But just sit on all the money isn’t a legal alternative.
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.
They could have taken a look at inflation and the glut of liquidity and bought shorter dated bonds but instead they locked them money up for 3-10 years at paltry interest rates.
I appreciate you're just playing Devil's Arbalest here, but this feels like the least libertarian take possible. It's the government's fault that my customers are handing me so much money to manage and I managed it poorly?
Admittedly, I still don't fully understand the link between investing too cautiously and seeing poor returns and there being a run on the bank.
The link is that the investments went down in value and so the bank couldn’t sell enough of them when they suddenly needed a lot of money to pay out deposits.
I agree it’s peculiar to phrase it as the government is to blame. Except perhaps to the degree that the government in 2018 relaxed risk test requirements that would otherwise have included SVB, those requirements were originally set after and in response to the 2008 collapse.
But ultimately the blame lies with the bank executives.
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
The fact that many other banks were prescient disproves this point handily.
Putting aside the glut of misallocated cheap money, isn't the deregulation that allowed this (which SVB pushed for, along with many other banks/Wall Street parasites) precisely the type of policy that Libertarians advocate?
like always, the market is still insufficiently free to work its true magic. woulda been fine if the fed hadn't been screwing around and ruining things
Definitely not. Most libertarians I've encountered want hard money i.e. full reserve banking with no central bank money printing. In FRB you cannot have bank runs and with a restricted central bank which can't print more money you can't have ZIRP and the wild swings all over the financial system that it had caused. Instead you have a system in which bank accounts don't pay interest but that's acceptable in many cases because there also isn't any inflation, and if you want a return you invest in a fund that exposes the liquidity constraints in its terms.
The above scheme requires far less government regulation as well, but it does need some, mostly an extension of the idea of theft to encompass fractional reserve banking.
I suppose some or even most libertarians would agree with that, although that system is just rigidly regulated in a different way. I think the classic Libertarian model would be private banks, totally disassociated from government. Further, full reserve banking and fixed supply monetary systems are the stuff of fantasies. Totally infeasible in the real world.
They're both entirely feasible. The usual canard is that without fractional reserve there is no lending or not "enough" lending, but with full reserve there is still lending of course because people would like a return on their assets. There would be less bad lending but that's what we want, even if it leads to a temporary drop in GDP.
Wasn't the main concern that a fixed quantity of money chasing a constantly increasing quantity of goods/services would eventually cause severe deflation?
Whenever a contradiction of capitalism arrises like this, the problem is always too much interference in the markets, and the solution is always more unfettered capitalism.
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this is a lie, you are trying to deflect blame on to the Fed to cover for the incompetence of the VCs their companies and the SVB bank. and the upvotes show how all your stupid peers in the tech world would rather tell themselves these lies than face up to their collective ignorance and hubris.
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.
No, they bought MBS, yielding 1.6% at the time, which aren't conservative. What they should have done is bought 1 month - 1 year Treasuries, yielding 0.10%. Then they couldn't give out above-market interest returns, in excess of 0.5% compared to other banks, which SVB depositors pocketed during the upside, and then failed to realize the risk during the downside, being bailed out by the government.
It was their unwise bet on ten year T bonds that got SVB into difficulties, a far larger societal economic issue than is being acknowledged.
'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes
The bonds are worth exactly what they thought they'd be worth if held. There is no bet on that part.
The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable.
As shown in https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been.
The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds.
If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
> The bonds are worth exactly what they thought they'd be worth if held.
That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
Has the amount that it pays when it reaches maturity changed?
The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021).
And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?count...
But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
> But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years
This point is lost on everyone. They will get their money back, in 10 years. That's why it's a called 10 year note.
They messed up not considering they'd need the money sooner, and failed to seriously consider that no one would want to buy their notes if interest rates went up, because there would be much better deals out there.
They made a 10 year bet that interest rates wouldn't go up significantly. They bet wrong.
> The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
Wrong. You're forgetting about inflation. Interest rates increased because inflation spiked. In 2022 alone, that nominal payout at maturity has lost 8% of its real value.
The value of the amount that it will pay out has lost money.
However, it will still pay out exactly what it said it would pay out when it was purchased. Compare this to buying a stock in say... RBCN (went bankrupt and delisted in December) where any of the stock you had is worth nothing.
There is no risk that a bond won't pay out the amount that it says (other than the government really messing up and defaulting).
I will certainly be willing to say "a purchase of 10 year bonds would be short sighted and failed to account for possible risks from changing cash flow or increased rates over the next 10 years."
And yet a bond is still going to pay out what it says on the label when it was purchased when it pays out.
Now, if its not a hold to maturity type portfolio and you want to trade them, then its a whole 'nother ball game where prices will go up and down as it becomes easier or harder to make money in various markets. And whoever holds a $100 ten year note at ten years time will get paid exactly that amount.
What is the larger issue? That people buying bonds don't understand that their value drops when interest rates go up and that if you might need the money from the bonds before the bond matures you need to hedge for that?
An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years.
If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
Don't see how that means it's the fed's fault, though. Anyone who has even halfway paid attention to markets over the just the past few decades should be acutely aware that markets can change very quickly. Expecting current conditions to last forever, or that you will always have notice that change is afoot, is just insanity or incompetence.
At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time.
Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
Central banks have been telegraphing rate increases for over a year. Your statement might have been true on the day of the purchase but SVB had an entire year to fix their mistake and failed to do so.
I read a lot of hackernews, for the technical part. But I never liked or believed in the VC/Startup bullshit. If HN had a filter just for technical stories, that would be great.
I never believed in the talk of “let the market decide”, “we invested in that startup to change the world”, “disruption”, “good product will win” and other nonsense.
Everything revolves around money, money and money. And there's nothing wrong with that, the problem is the bulshit not to assume it.
For now, every time someone starts with this kind of bullshit, I will submit the YCombinator petition to the government.
There are plenty of good technical boards out there, but there are few good startup communities. I'd rather have the startup discussions over everything else.
There are many great technical boards indeed, but if you know of one that's as eclectic as HN I'm all ears. It's the only forum I've found where I've had interesting discussions with intelligent(often more so than me, which I crave) peers on pretty much every major or minor interest I have. And the "forum mechanics" are very well tuned to avoid various degenerate states I see forums in. Anything compartmentalized into subforums is pretty much a no go for me because the thinking in each subforum gets so constrained.
I agree with GP that the startup stuff can get a bit dominating at times though; a way to filter out say all submissions regarding YC startups would be the icing on the cake, for what has quickly become my favourite online forum.
Without a bailout, each customer would have $250K today (if they had that much n deposit) and probably another 10-20% this week, as assets were sold off. The FDIC could have worked a deal so that depositors were paid off in a few weeks, but in Treasury bonds with 5-10 years to maturity, to match the maturities of SVB assets. Depositors who really had to could sell their bonds immediately at a discount. That would have given time to liquidate SVB's loan portfolio. Depositors probably would have lost 5%-20%.
There would have also been massive bank runs. Check out regional bank stocks, tons of them were down 30% this morning for no reason and a lot are still down. The rich panicked, which destroyed Washington Mutual and Wachovia in 08 and caused both the Great Recession and Great Depression
Bank runs are quite often a crisis of unreason, and I think this one is mostly caused by poor communication. The contagion effect is as much a mental virus as it is an assessment of liquidity.
It's kind of obvious from this that either deposits should be guaranteed by law (because in practice FDIC does that now anyway) or the law has to prohibit banks from investing deposits (unless the account holder instructs the banks to do so, of course).
Okay well banks are not owed existence. If the banks went out of business give the deposit holders the choice of holding the underlying assets or the choice of selling them on the market.
If you held the same portfolio as the bond, you too would not be able to withdraw at full face value.
You are believing a lie if you think a ten million dollar deposit can be immediately withdrawn anywhere in its entirety.
Startups were in fact able to withdraw large amounts of money from SVB. That's why it collapsed, they did this to the tune of 42 billion, and lots of the pending transfers completed.
In my book, having your bank fail when you withdraw large amounts of money is an equivalent statement to 'you cannot withdraw large amounts of money from your bank'.
Sure, but at the end of the day, a bunch of these startups withdrew large amounts of money successfully. Claims that you can't do that are simply false, at best conditionally true.
I never claimed that some startups didn't withdraw successfully. Not sure what you're arguing about. I said
> You are believing a lie if you think a ten million dollar deposit can be immediately withdrawn anywhere in its entirety.
This is true, by your own admission. A bunch of startups did; some did not. Thus, it is empirically true, by your own reckoning that you cannot withdraw large deposit accounts in their entirety. To say 'you CAN do X' means that your ability to do X is not conditioned on some probability. For example, when I say I can walk, I mean I certainly can walk; not that I can walk with 20% probability.
> Depositors who really had to could sell their bonds immediately at a discount.
How does this kind of thing function? I assume the bank pools all the money and buys various investment products. Is there just another wild level of abstraction where"you own X% of this investment product. Feel free to sell your share to someone else" ?
The normal FDIC procedure would be that depositors get receivership certificates which represent a share of SVB's assets. Those are hard to trade, though.
Somebody would offer to buy them, but at a deep discount.
A better offer from the FDIC would be to offer Treasury bonds instead to those who want them, at a discount based on the FDIC's valuation of SVB's assets. The FDIC is well placed to sell off illiquid assets slowly. That's what they do after a bank failure. Depositors would have quick liquidity if they wanted, but it would cost them something.
Ahh okay. So the FDIC is doing that big government thing of acting collectively in everyone's interest, I suppose?
Instead of everyone getting their piece of the frozen pie, starving as it thaws (possibly having to sell it at a steep loss of degrees to the radian), the FDIC just says, "I'll hold on to the whole pie and hand out slices from my backup pie stash. Then once it thaws, I'll add it to my backup pie stash."
The key line says it all about how the US (in agreement with tech tycoons) does things:
"Just like many of the banking titans after the global financial crisis of 2008, tech tycoons appear to favour the privatisation of profits and the socialisation of losses. There are few libertarians in a financial foxhole."
Indeed. This entire Fed action has been a bailout of uninsured depositors who really should have known better. So now "uninsured by FDIC" has the implicit meaning "insured by the Federal Reserve".
I'm not suggesting that corps should have managed every last penny to prevent an uninsured balance but the vast majority of their free cash should have been and sadly easily could have been insured and still readily available.
Didn’t they announce HSBC is buying SVB. And they specifically said that no tax payer funds would be used here. The only loses here are for the shareholders of SVB. Did the gov broker the deal, sure, but it sounds like most of that brokering happened on the other side of the ocean. Basically it sounds like exactly the sort of thing a libertarian would support.
An actual libertarian I would point out that HSBC is only buying the UK branch of SV Bank and the line about no taxpayer funds is evasive language and a borderline lie.
No tax revenue is being used to bail out the depositors, but every American with a bank account is paying for it. They're just applying a new fee to every Bank in the country to cover the losses
This reminds me of one of my favorite books from the past couple years, A Libertarian Walks Into a Bear.
It’s a fascinating deep dive into an attempt to create a sort of libertarian utopia in a small town called Grafton, New Hampshire. The speed at which they arrive at “we need government services” after they eviscerate government services is… unsurprising.
10/10 I highly recommend it for anyone that’s interested in real-life examples of libertarianism as applied to real populations in the real world.
I know a few libertarians, and I've never heard any of them say "we don't need government services". I think that's the straw man version of libertarianism, the one that's easiest to dismiss.
It's always a question of which services are best provided by the government, and which are best provided by private entities, or partnership of the two. Different libertarians arrive at different definitions of "state capacity".
I really don't think of that philosophically as being quite as simple as it's portrayed a lot of the time. In fact, I'd say it's harder to predict what a libertarian believes, since that group has more than its share of contrarians.
I'm probably wrong more often than I'm right when it comes to politics on average.
But libertarianism has been obviously illogical to me since I was about 15, half my lifetime ago. Since then I've spoken to some very intelligent libertarians at length and... nope, it still doesn't make any sense. It makes less sense than ever, in fact. At least when I was 15 I just thought they must be stupid, but no, not necessarily. Now my operating theory is that it's similar to how some people become completely engrossed in a fictional universe and wish it was the real world.
He calls for violence against all advocates of cryptocurrency, based on outlandish and outrageously defamatory conspiracy theories alleging cryptocurrency is really a plot to globally implement eugenics:
Less extreme and more subtle expressions of his fascist agenda are revealed here, where he employs the administrative state's euphemisms, to advocate for a surveillance state along the lines of what the PRC is instituting:
The euphemisms in question are "demand transparency" and "KYC", which in practice mean imprisoning any one who don't give up their privacy.
His strategy for cloaking his fascistic aims is to accuse those he wants to subject to state violence of being the fascists. It's a preemptive deflection tactic.
That's why in the above tweet he makes the vague but emotionally charged accusation that "distributed zero-trust databases" are being "co-opted for historically fascist aims" by some nebulous set of parties within the crypto sector.
Anything in the extreme is bad. Can any system work if everyone acts perfectly rationally and and the same time with full empathy? Sure, but such people in reality are few and far between so instead we need to account for the edge cases of which there are many. And as any good software engineer knows you end up spending 80% of your time chasing down the last 1% of your edge cases.
I didn’t “do” libertarianism? I recommended a book that I found interesting that’s related to the topic of the article that this discussion thread is in response to.
Socialism has been brought up a couple times in response to my book recommendation and I’m a little confused by that. Is the assumption that the reporter that spent years meticulously researching, interviewing, and documenting the factual record of events is a socialist? Am I a socialist for having read it?
Is this like an amish thing where everybody outside of the orthodox group is called “english”?
Anyway, it’s a good book and I stand by my recommendation!
I didn’t reply to you so I’m not sure why you’re victimizing yourself here.
I will say every time I’ve engaged someone here who got defensive about not being a socialist, even when I never implied they were, usually turned out to have heavy sympathy for socialist and communist ideals. To the point where it would be inappropriate to call them anything but a socialist.
Again, I never engaged with you at all in this conversation you inserted yourself into a conversation and got upset about something that had little to do with you.
There is an increasing tendency to interpret these things in false dichotomies, I've found. If you criticise libertarians you must be a socialist and vice versa. I had a similarly frustrating encounter the other day, where my critique of the interaction between capitalism and democracy in the US was constantly construed as some sort of glorification of socialism, even when I never mentioned it. My patience for this type of thinking is worn pretty thin these days.
My view is simply this: there are numerous different consensus methods in our society. Democracy, academia, courts, markets, bureaucracy, technocracy, and hierarchical command structures. They all have strengths and weaknesses for different problems on which a consensus must be reached. But democracy sits above all these and plays the important role of slowly figuring out where these should be applied and how they should be weighted. This is a very hard problem, no ideology has a self-contained solution. Democracy must be an evolutionary process. The ideas that work stick around after a change of power, and the ones that don't go away, ideally.
Based on this it's crucial for democracy and therefore the government to have some measure of regulatory power over all of these. This is where libertarianism really breaks down. It's far too corrosive to the usefulness of democracy, which is the only thing keeping everything together in the end.
Does it? Isn't Earth's political system libertarian? The emerging conflict/cooperation between nation states is a market phenomenon. The UN is akin to a chamber of commerce.
Socialism is not a great ideology if it's applied indiscriminately, but at least it has useful real world applications in some areas.
Libertarianism on the other hand is hardly even an ideology, but based on the ill-conceived notion that if we purposely make no collective effort to have a better society, it will somehow magically fall into place for us.
If libertarianism was a software project methodology, it would be the one where you just lock a bunch of programmers into an office with some computers and let them fend for themselves.
It is not true for libertarianism simply because it is far too enamoured with the Smithian ideal of the self-interested rational actor. While this has been a useful model in economics, it is not an actual description of the world, which economics has had to come to terms with as a field. That's why libertarian ideals only makes sense in fantasy land and don't map onto the world. Most people are not acting only in self interest.
“There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs."
Libertarians are stuck in a pubescent state-of-mind and are wholly incapable of viewing the real world as it is. Hence their absolutely insane "political leanings".
Who's that quote from? It's funny you should use that one, I happen to be an avid Tolkien nerd, starting around that age :D
Bit of a tangent, but it continues to amaze how relevant Tolkien continues to be to this day considering he started developing his legendarium almost a century ago now. Gender issues, sexism, addiction, free will, the allure of power and wealth, all explored in an amazingly prescient way that still stands up to scrutiny today.
It hasn't aged well in some other ways. I was a die-hard Tolkien fan from an early age -- I think I read LotR at around age 10 or so. But ... it's kind of hard to read to your beautiful brown daughter when you constantly have to stop and do teaching moments because Tolkien goes on and on about how fair and beautiful all the good guys are, and how swarthy etc. the nasty Southrons are.
Although diving deeper into the legendarium, there is the fact that the southrons and easterlings were corrupted by Sauron to worship him as a god. So you could choose to view those descriptions as consequences of that rather than perceived racial or cultural inferiority. And indeed the "fair and beautiful" Numenoreans were at one point corrupted by Sauron in very much the same way.
But yeah, you definitely have to give Tolkien a lot of help on this one, and it's not terribly helpful in the context of reading to your children :/
It's not, unless you're pointedly telling your daughter she's a "dirty" Southron and should be ashamed because her skin color matches the descriptors in LOTR.
I wouldn't be surprised though because this does seem to be the modern leftist agenda, to turn every brown person into a victim incapable of helping themselves.
Maybe explain to your daughter it's based on Nordic mythology and turn it into a positive history lesson. OH! And you could tell her that her skin color really isn't the most important thing about her. Just a thought.
Or you could just explain that fair and beautiful refer to the content of their character and swarthy is a synonym for smarmy, or evil and has nothing to do with skin color at all.
Pretty much every letter Tolkien wrote that touches on racial issues was quite anti-racist. He condemned the nazis, and yet also condemned racist anti-german propaganda in England during the war. He also expressed sympathy with the treatment of black people in South Africa in a letter to his son Christopher.
This is the same reason communism doesn't work. "Oh the people will control everything!" Except humans always give someone power... and that power will want more power if you allow it, until you end up in a terrible spot.
The trick is to not let any one big group have too much power. It is not possible to create a society without groups taking charge and without those groups vying for power.
One thing Libertarians have right, is the idea that many government services are out of control with spending and not doing anything to actually help the people they supposedly serve.
> One thing Libertarians have right, is the idea that many government services are out of control with spending and not doing anything to actually help the people they supposedly serve.
How many of those services were purposely broken by libertarians, so that they could be targeted for privatization? I've worked in government, and have yet to see a service run more efficiently or cheaper after it's been privatized. The quality of the service is almost universally worse.
When something is privatized, it's usually given a monopoly via bid. Now you just have a different set of people, with less experience, running the same service, with a percentage of the cost of running the service being siphoned off. There's also an incentive to provide less of the service, or run the service at a worse quality to maximize profit. The government has the option of running the service at a loss, but a private entity does not, further reducing the service quality level, often at the times you need it the most.
When I worked in government, we had a software platform that was privatized. Every few years the contract to run the platform was put up for bid. To improve the likelihood of winning the bid, the vendor made the code purposely incomprehensible, wrote the minimum amount of documentation required, and kept most of the system maintenance manual. They most likely had in-house automation for most of the manual tasks, but that wasn't included with the contract. This also kept the bid price extremely high. When the contracts did switch hands, you'd end up with major operations issues after switchover, and numerous downtime events (this also made it harder for them to win the bid next time). Eventually it was considerably more expensive to contract out, but nothing is ever brought back from privatization.
> Umm none? I don't recall a Libertarian ever being in power.
A pretty good percentage of the republican party considers themselves libertarians, and libertarians vote for republicans who hold views strikingly similar to them.
The post office is a great example of a (previously excellent) government service that's been purposely degraded so that it can be made a target for privatization.
The public school system has already started going through this with charter schools, which are mostly an unregulated mess filled with thieves.
> Yes, a bid from the government....
I'm not sure what point you're trying to make with this. Yes, the government makes a work spec, and puts that up for companies to bid on. A single company will win that bid. This isn't a capitalist arrangement where there's multiple companies providing the same service and competing against each other. It's literally just a worse form of government with someone taking a profit.
The anti-libertarian arguments generally consist of these strawman caricatures, to avoid dealing with pretty much unassailable mainstream libertarian criticisms of major contemporary government policies, like socializing deposit losses with taxpayer-funded FDIC insurance, guaranteeing $1.5 trillion worth of mortgage backed securities every year through the GSEs, and bailing out banks that engage in high-risk lending practices.
The boring non-libertarian (political realist, non-radical) arguments about those are that doing the bailout is still better than the other possibilities. Also note that the bailouts tend to have positive financial returns to the government (because they get a lot of financial instruments at a very low cost, and then either sell them when they turn a profit or hold them to maturity, which again tend to be profitable because of low inflation in general).
Would it be better to change the current system so that the bailouts were unnecessary? Yes. And depending on the ideology of who you ask you get different wishlists.
Doing the bailout prevented the financial sector from being restructured through bankruptcy and market share reallocation. Systemically, it seems extremely implausible that preventing the normal function of the market, which incites good behavior and allocates capital to the best stewards of it, could ever be the right call.
The too big to fail financial market is already in a pathological state, it's too small, not enough competition, etc.
Yes, just brushing things under the carpet is bad, but whatever restructuring would have happened in that chaos would not have been an improvement.
It's unfortunately very much politics. For example see how the FASB tried to eliminate HTM accounting, but had to back down (and that chair resigned).
Yet! If the market already doesn't give enough shit to check the stuff in parentheses in a report for a 200B bank, then I suspect it's more of a theater than we like to admit.
Maybe the restructuring would have been chaotic, and undoubtedly would have been painful, but it's the only way to teach market actors to behave.
If Congress had gotten out of the way, other capitalized parties, like Walmart, were ready to step into the financial sector to add some much needed competition in the wake of the financial crisis:
This book isn't about libertarians. It's about anarchists.
"Once upon a time, a group of libertarians got together and hatched the Free Town Project, a plan to take over an American town and completely eliminate its government ... They built a tent city in an effort to get off the grid. The bears smelled food and opportunity."
Nobody who knows anything about libertarians and is trying to accurately represent it would write that, because the whole reason it exists as an independent thing from anarchism is that libertarians do not want to eliminate the government. They have very clear ideas about what exactly the government should do and that role is much less expansive than in a socialist country or even in America of today, but it's not literally nothing and it certainly doesn't involve living in tents. That's much closer to the Occupy Wall Street crowd in behaviour than libertarians.
OK, but US style right-libertarianism is also known as anarcho-capitalism [0], and the line between that and anarchy - which resists hierarchy, not organisation - is pretty thin. The main difference is that anarcho-capitalism, unsurprisingly, deeply favours those who own property.
Just because you say it isn't, doesn't mean it isn't. And if you read the link that I referred to, which talks at length about the relationship between anarcho-capitalism and libertarianism, maybe you wouldn't be so glib with your arguments.
While there may be differences between libertarianism and anarcho-capitalism, I've struggled to see them in practice, and in my experience the definition of these terms can be varied depending on who you talk to.
In any case, the two systems are birds of a feather, and neither of them are appealing unless one already holds substantial material wealth.
"While there may be differences between libertarianism and anarcho-capitalism, I've struggled to see them in practice"
I don't think either are actually implemented in practice at the moment, although you can argue that certain aspects of certain politicians or their agendas lean libertarian, and that some societies have in the past been a lot more libertarian than they are today.
The primary difference is this: anarchists of any kind, ancap or not, see no role for the state whatsoever. Libertarianism requires a state to exist, but has a very clearly defined set of roles for it such that anything outside those roles is considered more properly the role of the private sector. At a minimum, the state is expected to implement:
- [Border] defense (armies, navies, passports)
- A violence monopoly within their territory (police, courts, jails, laws against murder, abuse, etc). Yes, this doesn't always sit easy with the US specific gun culture, but the "out" is to say you can own a gun only for self defense, hunting and overthrow of an out of control state, which doesn't infringe on this principle.
- Contract law (civil law courts, ability to levy financial penalties)
- Property rights (land registers, stock markets, bond markets and other financial infrastructure, also quite often IP rights)
- Sufficient taxation to fund those things and subsequent state functions
- Anti-monopoly enforcement
And a bunch of other things that are less well agreed on, but in some interpretations might involve attempts at limiting externalities.
So a libertarian state still has a relatively extensive civil service, it would still have a parliament or congress, tax authorities and so on, but it's smaller and more tightly focused than a non-libertarian state. It is actually implementable in the real world, today, without violating any of the known basics of human nature or government. Libertarians accept that some current roles of the state have evolved for sound reasons but propose that those roles can be done equally well or better by the private sector (e.g. instead of bank bailouts you have narrow banks). We know such countries can exist because they have also existed in the past, for example the early US government was much closer to this ideal than the current one.
Ancaps on the other hand propose a theoretical society that has no government at all yet is also peaceful and prosperous. No such society has ever existed, not even anything close to it, and there are many obvious open questions with no known answers. It's very different.
FWIW, the book synopsis that you quoted does not say that libertarians built a tent city, it says that freedom-loving citizens built a tent city. New Hampshire’s state motto is “live free or die”, and that value of freedom is one of the reasons that NH was chosen by the libertarians to build their utopia.
It’s a very rich and complex story about many different people, and arguing with a handful of sentence fragments from a summary does nothing to impugn the quality of the journalism.
Yes it does. Why do you insist on stupid word games? The entire book claims to be about libertarians who moved to one specific place - that is literally in the title - and is using "freedom-loving citizens" to refer to them. It's literally about a "town" where nobody else is living, who else is it going to refer to?
It’s a very rich and complex story about many different people
It's about "a barely populated settlement with one paved road" that was taken over by anarchists. Not surprisingly they ended up living in tents, as anarchists are wont to do.
I edited out a comment in my original post asking why some people insist on lying about libertarianism but then took it out, thinking it was overly harsh. Now I wish I'd left it back in. I don't believe you're arguing in good faith, the misrepresentations in that post are just so blatant.
I think that government should exist to implicitly ensure essential infrastructure. What is essential is up for debate, but generally can include, common defense, upholding contract law and enabling transportation, trade and commerce. In this day and age, I think internet, telephone and radio communications would be included as well.
Anarchists will often identify as Libertarians, as there are also left-leaning Libertarians that I don't really get as well. I'm a bit more pragmatic in terms of a from where we are standpoint in that I think there are less intrusive solutions to many problems than full regulation or more government. I think the crux is starting by holding those that are responsible for these things (corporate or banking execs and boards) liable for their decisions and actions, which doesn't happen currently, and most Libertarians I know would celebrate.
> Anarchists will often identify as Libertarians, as there are also left-leaning Libertarians that I don't really get as well.
of the anarchists i’ve met i have yet to hear any accept the label of “Libertarian”. most of the handful i know used to be Libertarian but then passed through that into anarchism as they chased some ideal of rights/freedoms that turned out to be incompatible with the Libertarian views toward property rights.
Yeah... I'm moderately active in some Libertarian groups, so do see a lot of left-libertarian and anarchist views, though I don't quite share them... I'm probably a bit more conservative/statist than a "pure" libertarian, again on the point of pragmatism. But I do believe we've become so statist, and I feel propping up corporations is an extension of the state, not limited because of it (executive/board liability especially).
I just feel there's plenty of room for closer to libertarian solutions without expanding govt, and in some cases actually reverting to prior state in terms of dealing with certain issues. The lack of accountability is probably the single biggest issue I've seen in the past few years. The lack of limits on patents and production around patent protection, extension and licensing is also very concerning.
There are always few (people who subscribe to an ideology that if applied universally would benefit their usual circumstances) in a (circumstance where applying that ideology would not benefit them)
Depositors aren't though, which is the issue. FDIC will cover losses that weren't actually insured (above $250K). The money doesn't come out of the "taxpayer" but instead from the banks, but guess from where the banks get money from?
They are getting it from liquidating the assets of the Bank. There are three parties who are "owed" here. The depositors, holders of debt and investors. Depositors are being made whole. Anyone who holds secured debt will get what's left. Owners of unsecured debt and investors are left out. Which is fine by me.
> Owners of unsecured debt and investors are left out. Which is fine by me.
Also fine by me.
The distinction I attempted to make in my comment was that there are actually something like four parties in this case: Holders of debt, investors, insured deposits and uninsured deposits. I find it absurd the FDIC is going to realize a loss to cover uninsured deposits, because that's simply not what they should do if they followed their own standard. Remember, even though it's state-owned the FDIC is a company, Americans should be worried if the FDIC takes actions that could ultimately put in risk money that _is_ actually insured. If they run dry, they will have to tap into the government's pockets and that's when shit truly hits the fan.
Those assets may take years to liquidate. Nobody wants to be in the business of holding the bag on an interest free loan for that length of time. Especially when that totals to >$150B.
That's like saying that any time any one makes a loss, it's everyone _else's_ loss, because guess where their money comes from. What do you suggest should happen here?
I suggest that the FDIC does what it should do and cover all losses that were insured, and let the uninsured losses be realized, as they should be normally. There's a gigantic moral risk in the FDIC covering uninsured losses, because that's a value judgement, and if next week my bank fails why shouldn't the FDIC cover all of my uninsured losses too?
The value judgement that was done here is that if they didn't do it this bank collapse would generate contagion, which I believe is understandable, however if that is the case there should be other ways to prevent this kind of thing such as regulation that prevents banks from putting customer deposits into mortgage-backed securities (what the actual fuck, I still can't believe they've done this, it's like the world has learned nothing from 2008).
Specifically I note that around 2018 there was regulation passed that reduced the amount of scrutiny banks such as Sillicon Valley Bank would receive [0], which we all know now how well that worked. Everyone needs to be taken accountable to the same degree, there should be no special cases or "exceptions". And if a need for those appears that should indicate a systemic problem instead of simply a isolated one-time event.
> I suggest that the FDIC does what it should do and cover all losses that were insured, and let the uninsured losses be realized, as they should be normally.
And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail, per your suggestion FDIC still does nothing, then another couple dozen banks and couple thousand business fail ...and next week you're back in 2008.
> And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail, per your suggestion FDIC still does nothing, then another couple dozen banks and couple thousand business fail ...and next week you're back in 2008.
That is already in motion. Every company that had yet to do it is now looking into its liquidity management.
You are echoing bullshit driven by the VC freak out over the weekend. There are literally hundreds of ways that actual small businesses could have bridged this disruption. Those that failed this basic risk-management exercise would have richly deserved what they got. How else are they going to learn?
> And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail
Why the hell should a bank fail if people take their money out of it? THAT's the problem. It's just not a thing in other parts of the world _even with fractional banking_. The fact a "bank run" can generate losses for depositors is simply a consequence of a lack of regulation. The further fact this can generate a "contagion" is a consequence of the banking system simply not hedging their investments correctly and not applying simple risk-management mechanisms, and they do it for the same reason: lack of regulation that keeps the accountable.
Again, this kind of problem simply doesn't exist elsewhere. Just look outside the United States and the solution is simple: either you deregulate or you regulate, you can't have your cake and eat it too.
> I suggest that the FDIC does what it should do and cover all losses that were insured, and let the uninsured losses be realized, as they should be normally
To which someone like would you say "but who's paying for that? the other banks? and guess where their money comes from?
That is ok as long everyone plays by the same rules. The problem I have specifically is the fact they are making a "special exception" for Silicon Valley bank, but haven't done for other bank collapses. This case of course had the potential to generate contagion, but if that's a thing that happens too often, then there is a systemic issue with how banks are regulated in the United States. I should note this is my point of view as an outsider. Outside the United States issues such as the one we are discussing simply aren't a thing because banks are held to much larger scrutiny, and thus spending depositors money into MBS is not really a thing.
Again, regardless of your political stance or economical, I recommend you read the linked Forbes article about the "Reform Act" I linked to previously [0].
I'm inside the US and generally agree. Those that had deposits over 250k should be prepared to lose the estimated ~10% or so... as for the shareholders, they should be prepared to lose all... and the executives and board members who drew fat bonuses or sold stock in the past few months should see it clawed back and be held personally liable for the losses, and if that bankrupts them, so be it.
That also doesn't count possible insider trading for recent stock sales.
So, what's the point of having an explicit insurance limit?
Any account used for business operating expenses needs to be mandated to have premium insurance on it. That same insurance should be available for all depositors.
The next time this happens if you do not have that insurance you receive your receivership certificate and wait for your dividends. Like everyone else.
The banks get their money from their profits. Same as how they would have taken an even bigger loss to their profits if this contagion had been allowed to spread.
That would all be ideal and ok if fractional banking wasn't a thing. Your bank makes money out of investing your money. That's just how it works. But for some reason, some banks are more privileged than others. Citibank can't stop receiving bailouts every 50 microseconds because their management sucks. Silicon Valley Bank depositors receive back money from _uninsured_ deposits. Ultimately, someone has to pay the bill.
I'm not saying prevent the contagion is a bad thing. We all know what happens when contagion becomes a systemic problem (2008). What I'm suggesting is that the fact a bank like this can even fail in a way like this is absurd. I'm mostly someone who defends less regulation over more, but if we are going to regulate banks we need to hold everyone to the same standards, and make sure everyone is accountable for their mistakes and risks taken. If that requires the FDIC raising the amount of deposits that are insured, sure, go with it, but creating "exceptions" every time a medium-sized bank fails is sure to create moral problems, corruption and increase inequality systematically.
What I'm talking about is thing such as the "Reform Act" from 2018, which was basically what allowed this Silicon Valley Bank disaster to happen [0].
Fractional banking has been a driving feature of capitalist growth for several centuries now.
As to "exceptions", there isn't any exception here. Standard practice in every bank collapse after IndyMac has been that depositors (including uninsured depositors) are made whole. It's just not something the FDIC will commit to because they don't want to commit to making depositors whole and be on the hook if an obviously risky and disreputable bank collapses and depositors want their money back.
Libertarianism, socialism, capitalism etc. all fail to take into account human nature and that's where all the conflicts come from.
Regulation is necessary to ensure that people who manage to get into position of power, who have certain kinds of personality disorders and other issues won't be able to game the system to their own personal advantage or satisfaction.
In most cases whether it is socialism or capitalism, while they have good intentions, they are always ruined by corruption and other other undesirable behaviours that typically people climbing to the top have.
"To look at people in capitalist society and conclude that human nature is egoism, is like looking at people in a factory where pollution is destroying their lungs and saying that it is human nature to cough." - Andrew Collier
That's catchy simplification of how complex human nature is, borders on ignorant.
In every culture and political system you will have people climbing to power using universally unethical means and then use their position to inflict suffering on the people they see as beneath them or use that power for other types of personal gain or gain for the group they represent at the expense of others. It does not mean that every person is like this. It is a spectrum. Majority of people just want to live their lives in peace, but they have to navigate their lives through the whatever system has been created for them.
You will have corrupt civil servants in a communist country just as in capitalist country and the elites are very much the same. I have lived in both systems and each system exploits slightly different groups of people. Sometimes it is hard to tell the difference.
A while back, a small regional coop bank defaulted here in India and could not pay its depositors. The depositors had to protest and camp outside the bank for several days. Most of these were ordinary folks, many retirees, who were just trying to keep their savings in a neighborhood bank.
Of course, since this was a political issue and the depositors were innocent, the government stepped in and promised to make them whole.
While this move was welcomed, even in a country with deeply entrenched socialist values like India, there were quite a few voices asking: "why did you keep your money in a tiny bank like that and not a major national bank?"
I understand that SVB was doing a lot for Silicon Valley, but when it was one of the few (perhaps only) that allowed anyone to open a bank account without visiting the country (it was also a part of Stripe Atlas), one should have asked if they were practicing proper risk management. If no other bank does this, but you do, it does indicate that there's a certain approach to risk in your entire business operations. And that approach can eventually manifest in making some very poor bets without adequate hedging.
The question is, now that we have computers and money is just an entry in a database, why are banks even necessary for storing and moving money?
The whole small bank and big bank issue is moot. Technology has long solved this problem so the government could roll out a solution where no one ever risks any deposits, no FDIC is needed, and no bailouts are ever needed.
It's not a technological problem. The Fed doesn't want narrow banks that only only keeps deposits safe and are deliberately blocking their formation. John Cochrane speculated that the Fed is forcing deposits into risk taking lenders in the believe that it makes lending to businesses and consumers cheaper:
This is the argument for CBDC. the Fed taking over deposits.
The issue comes when you want to get a loan or mortgage. How does the Fed know if you're financially stable? How on earth can the Fed know how to centrally decide?
In general the answer is: split the savings and investments in two different entities. One entity that saves but has forbidden to invest, and an independent entity that invests.
If the government essentially guarantees all deposits and generally decides who gets a mortgage … I am not sure what the main point of banks is for consumers apart from maybe charging exorbitant rates on credit cards.
Yes. If you want to invest your money with a chance you will lose it in exchange for earning interest, invest it into a bank savings account.
If you just want an electronic money account with which you can send and receive and store electronic funds, and not risk losing it, keep it with the government.
And add legislation with it that requires the government to provide everyone with an account, even criminals, and it cannot be closed, and any seizures have to be from court orders, but the ability to transfer/store money electronically remains an inalienable right.
He's correct in that you'd get a loan or mortgage from a bank still, but incorrect that banks lend out deposits though - a bank loan directly creates new money, so if everyone was using a CBDC and had their money kept in their digital wallet you would no longer need a bank account for storing money, but the only thing that would change about getting a mortgage is that repayments would come from your wallet, not your bank account.
You're talking about buying bonds as "lending to the government" which is a pretty odd way to describe it, but it still isn't the bank lending to clients, which creates new deposits and a matching loan asset.
https://t.co/kw7ykC3763 returns a 301 to https://on.ft.com/3Jy8UBY
https://on.ft.com/3Jy8UBY returns a 301 to https://ft.trib.al/b2FR72U
https://ft.trib.al/b2FR72U returns a 301 to https://www.ft.com/content/ebba73d9-d319-4634-aa09-bbf09ee4a03b
There's certainly some magic with going from the t.co link - going to the other two direct hit the paywall.
:method: GET
:scheme: https
:authority: www.ft.com
:path: /content/ebba73d9-d319-4634-aa09-bbf09ee4a03b
{cookie with lots of stuff in it redacted}
Accept: text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
Accept-Encoding: gzip, deflate, br
Host: www.ft.com
User-Agent: Mozilla/5.0 (Macintosh; Intel Mac OS X 10_15_7) AppleWebKit/605.1.15 (KHTML, like Gecko) Version/16.3 Safari/605.1.15
Accept-Language: en-US,en;q=0.9
Referer: https://t.co/
Connection: keep-alive
Yep, there's a referer in there.
Curling the page gets the trial text (ghads that's verbose html).
curl --referer https://t.co/ https://www.ft.com/content/ebba73d9-d319-4634-aa09-bbf09ee4a03b | less
It's just Google Tag Manager, that's also why if you have JavaScript disabled or ClearURLs (or similar) it won't work as they won't be able to see the UTM tag.
I consider myself to be pretty libertarian but the idea that an intervention was going to cost the government any amount of money that didn't equate to a rounding error is ridiculous. Coupled the contagion it could have caused, this was an easy decision. They had enough in assets to cover 95% of deposits. They weren't just super liquid.
Are we really comparing treasury bonds to pokemon cards now?
Treasury bonds are guaranteed by the government with the worlds largest economy. US treasuries are pretty much the safest investment instrument in the history of mankind.
In 10 years, they WILL pay out at face value, unless the USA suffers complete collapse. In which case your dollars in the bank are worthless anyways.
What gains? Depositors weren't getting gains, they were storing money in very low interest (far below inflation or money market yields) checking and savings accounts.
Depositors were getting gains (4.5% interest rate which is very high compared to similar banks, and for something that’s supposed to be risk-free). The reason these rates were achievable is because SVB lobbied to remove regulations and allow them to engage in risky behavior.
What specific risky behavior are you referring to? Everything I’ve read points to the fact that they bought a ton of long term US treasury bonds at a low interest rate. Obviously this worked out very poorly for them, but I wouldn’t call this risk seeking behavior.
SVB lobbied congress to not be subject to liquidity stress tests and got caught with their pants down. They didn’t have to buy 10 year bonds. They also didn’t have to buy volatile mortgage securities, which they did. They were obviously playing fast and loose with the rules (or making their own rules as they went).
This reminds me of the bad faith argument that libertarians should not take social security, or that communists should not ask for a paycheck.
It is bad faith because it willfully ignores the fact that neither person currently lives in a libertarian or socialist society. The libertarian still has to pay SS taxes they don't want to and the communist still has to pay rent.
While libertarian tendencies may be more prevalent in the VC community, they seem to still be a small minority (or at least that’s my perception).
I for one undoubtedly think the treasuries actions create real moral hazard, but also am grateful that the depositors potentially affected by this won’t be harmed…
I put as much effort in as you did. Calling Libertarianism equal to opportunism is about as bad faith of a take as calling mainline Democrats socialists. Reading that you're the type to say, "Russia didn't really practice communism" just made the cake that much sweeter.
I don’t care about what political party they belong to. Do they regularly argue to slash regulations on the basis of government=bad? Do they routinely try to convince people that technology companies should be in charge of social organization rather than the government?
Great, so sounds like we've found the actual culprit then. Technology companies and investors, despite their political affiliations, actually like a hands off environment.
Do you understand how that's a little different from your Libertarian strawman?
Wanting a hands off business environment automatically puts one and the same tendency as libertarianism, as a fellow traveller. Neoliberals, deregulator Reaganites/Thatcherites, Grover Norquist "starve the beast" types, etc. they're all adjacent to libertarians. Even Bill Clinton and the New Democrats are not that far from libertarianism, as they were comparatively fiscally conservative than earlier versions of the Democratic Party and pushed for financial deregulation and championed market-based solutions!
And even a cursory glance at the OpenSecrets list shows that the two party dichotomy is a false one. For instance, Marc Andreessen at least nominally supported Romney in 2012, then Carly Fiorina in 2016. Does that sound like a far leftist who is against libertarian ideals?
Libertarian is not just a political party. It’s a set of ideas and beliefs. VCs and founders in SV routinely espouse these beliefs and try to pull both major parties in their direction.
There are plenty of communists out there voting for democrats but that doesn’t make them not communists.
Is there a term for someone that is libertarian inclined, but does believe in a minimal level of government regulation and intervention? A "Lite-Libertarian" of sorts.
I do not think there is a label that accurately represents even one individual person's views.
I would suggest you try not to think in labels and embrace the reality: no person is a democrat/republican/tory/labor/whatever. Those are political parties, sure, but what happens when a person disagrees with the platform of that party? Are they no longer a 'whatever'? No, they were never a part of the party to begin with, they just identified with the group that most closely aligned with their views.
Yes, this is the definition of neoliberals. In their view the government should only ever operate and enforce market rules (which includes protecting the market from external threats via military). The government should have no opinion on anything and just let the world unfold as the market dictates.
Of course there are no pure neoliberal politicians as such a being would have no policies except cutting popular things and privatizing them. Hard to get elected. So we have neoliberalism with left or right characteristics as the mainstream ideologies.
Classic liberal. That was at peak around 100 years ago, when there was more freedom and way less tax in the countries that lived it (Europe). One can argue that in a very limited way it was similar in US in the period of 1800 to 1900, but that is a bit different.
The more modern way (still in Europe) is seen as reasonably minimal level of government regulation, but strongly applied. For example the libertarians I know are for minimal government (and associated taxes), but very strong consumer protections - this is because individuals have very little power against huge corporations, so it is just leveling the field.
I consider myself to be economically liberal in the "laissez faire, laissez passe" sense to a large extent. No government should pick winners or losers, no government should protect uncompetitive businesses.
But I believe that the government must protect the free market against capitalism's inherent tendency towards monopoly, and that likewise, it must protect consumers against exploitative business practices (which arguably, a properly competitive free market could help achieve).
In theory libertarians might be into that, but I don't exactly see prominent libertarians calling for antitrust action. An actual political group that is ostensibly pro-market but also big on making sure rules are followed to keep the market in optimal condition are German ordoliberals.
I was going to say neoliberal. But then I have to remember self-confessed neoliberals pushing for war in Iraq and basically giving a blank check to the military industrial complex. And needlessly expanding government on the war on terror. So that term isn't apt either.
"Libertarian" is a sliding scale from basically anarcho-capitalism to traditional Republicanism.
While it has been humorous to see these faux-libertarians say in one breath they want small government, but in the very next breath demand to be saved, tankies and other far-left extremes have used this as an opportunity to lump all libertarians into the same boat.
There's no such thing as a "true" libertarian as most libertarians believe in small government, but what that government can do, is generally up to interpretation in all but the most extreme cases. A major central belief the non-aggression principle. However social issues tend to be more wishy-washy.
Prior to the balkanization of America Libertarian-lite could probably be approximated by a classical liberal.
Yes, lots. There's a fun meme going around where you take any random VC ""thoughtleader"" demanding a complete backstop for SVB depositors and search "bailout until:2023-03-09" on their Twitter account to see what they thought about bailouts and moral hazard before last Thursday.
Which is incredibly strange because I remember libertarians screaming to the hills against bailouts back then. Plenty of people who weren't in that camp were against it too. The 2008 bailouts directly led to Occupy Wallstreet which was a big tent of political affiliations.
Satoshi Nakamoto released bitcoin with "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" recorded in the first block which is clearly a political statement against them.
I think the "phrase" in question has a more limited meaning than you are trying to ascribe to it.
It means that people who are in a situation where they stand to directly benefit from a bailout (depositors, bondholders, shareholders) will lean away from libertarian views, based on their own needs at the time. It doesn't claim that libertarians are for/against bailouts in general.
People who would not be directly helped, or who might even be harmed by a bailout (taxpayers), rail against them as being unfair, as in the examples you point out.
Exactly there isn’t lots of libertarian depositors at SVB, quite the opposite most likely. It seems because of Thiel involvement the FT author decided it was enough to write a propaganda article.
Since the downvoters moved on to the next shiny thing, I'm paraphrasing it for posterity.
The poster I was responding to said something like: libertarians are like cats - fierce in their independence but utterly reliant on a system that they don't appreciate or understand.
1) have Congress+FDIC create a new form of deposit insurance that goes up to 10-25 million dollars[1] that is to be used for a new form of account legally dedicated to payroll; funded by a new set of fees since the private market clearly is not handling this issue well (Everybody knows about FDIC limits, and people who spend more than a fraction of time thinking about the risks can easily find out about third-party insurance and (newer) banking services that bundle your capital to multiple banks. )
2) impose interest rate stress tests against banks with much smaller amounts of capital (not the current $250 billion threshold which must mean only the top 10 banks are subject to it?) (Something that SVB lobbied to keep itself exempt from having to do, and avoided the expense of keeping its interest rate hedges up to date the last ~18 months, leading to their collapse.)
If you don't like one of those, then why not address a bit more of the root cause why businesses only do business with one bank:
3) require banks legally to not impose exclusive deposit conditions or benefits as a condition of granting loans (ie banks pressuring in any way their lendees to use their deposit services)
The recently revealed sort of moral-hazard/grey-area "backstop-all-deposits-but-only-for-critical-situations" is really anti-competitive if we don't address it. It ensures that startup/SMB business owners, unclear of whether their >250/500k deposits are fully protected or not, will want to move cash to the very biggest "too-big-to-fail" banks just so they don't have to financially architect around the cash flow risks. (Cash flow risks are the #1 cause of failure of small businesses.)
I would much rather have 1000+ banks in our ecosystem than 10; surely that is a more robust system.
To me, guaranteeing all deposits (not just 250/500k or even 10 million) is another form of moral hazard where banks "privatize the gains, socialize the losses"; But I think the payroll risk is a systemic societal risk that makes sense for us to develop a societal framework to protect.
[1] 250 employees at 250k each is a monthly payroll of $5 million. 6 months payroll is 30 million. If you're bigger than that, you have enough time/resources to put your eggs in more baskets and manage the complexity. I think I am being very generous here.
> have Congress+FDIC create a new form of deposit insurance
Such insurance exists on the private market already and is commonly used by businesses who have large sums of cash on deposits. Presumably, the depositors at SVB didn't do that because they didn't want to pay for it.
Wouldn't a libertarian prefer that over having the government do it?
+1 ... Until poor investment decisions have real ramifications, from personal liability on executives and boards even levelled to bankrupt and possibly including criminal conviction, things won't change.
I wish the US Govt had done closer to what Iceland and a handful of others did in 2008... No, we aren't bailing you out, you pay out domestic deposits first, and then if there's anything left, the rest. And no, you don't get to take/keep bonuses for it.
Modern corporate structure and liability shields to the level they exist in the US is anything but libertarian. You make bad choices, you live with the consequences.
Why does everyone conflate libertarians with ancaps? It's not the same thing. Libertarians accept that there is a degree of government that is necessary.
Is it not a libertarian position that it is preferable that things be done in the private sector than in the public sector?
In the narrow statement that I replied to, a proposal was made to have the federal government enact a kind of insurance that has long been available in the private sector. My understanding of libertarian perspectives (based purely on hearing what libertarians say) is that doing it in the private sector would be preferable.
Particularly considering that the problem for the depositors was that they weren't availing themselves of private-sector solutions, not that those solutions failed.
I may be complete wrong on this, though, as I am not a libertarian.
There is no conflation: parent very clearly pits private deposit insurance (which exists today) vs. a hypothetical government insurance for amounts >$250,0000 (which doesn't exist, proposed by gp).
Perhaps I misunderstand the different strands of libertarianism, but what kind of libertarian prefers mandatory government insurance over voluntary private insurance?
I get that a "true libertarian" (shades of "no true scotsman?") wouldn't want any of my suggestions about legislation and that private insurance is available (as my original post mentioned).
I understand "libertarian in theory" ... I am waiting however for a libertarian from Silicon Valley to say that we should have let all these Silicon Valley entities fail for being stupid with their finances in this very real-world scenario. Help me understand a more moderate libertarian position.
We tried more libertarianism in the 2018 legislation that removed some of the need for hedging for SVB and look where it got us. How does libertarianism help us from here?
I don't mind a little libertarianism... But it seems to me if the savvy Silicon Valley folks can't manage their payroll risk with all their smarts, what about payroll for a bank in some more ordinary US city? I am not a fan of government intervention particularly and the moral hazard of guaranteeing all depositors disturbs me. But despite that, I also don't really consider SVB a one-off... it seems to me that SVB is just one of many (hopefully smaller) banks with this whole "class" of interest rate maturity risk that is far worse in an environment of raising interest rates. I remember in 2008 how much got sucked out of money market funds in a few days when the previously-theoretical-risk of breaking the buck in uninsured accounts started money moving at velocities that nobody was really prepared for. So while I would have preferred more guardrails around how much depositors were covered, I also can't bring myself to completely condemn FDIC risking moral hazard to ensure stability to try to avoid psychological contagion spreading to a LOT more banks.
The problem is that libertarianism and preventing bank runs just seems to me like problems with "unrestricted short selling" or "calling fire in a crowded theater"... if you don't impose checks on it, the incentives for malicious behavior are so great (and the costs to being malicious so small) as to be counter-productive. Why not go all the way to anarchy? Do you really think market forces will magically govern against abuse and malicious claims without the force of the state? It would seem to devolve to mafia land where powerful factions just agree not to mess with each other and you have to have "pull" to get protection... which is exactly the critique Ayn Rand had of socialistic governments.
I was curious to hear what people say and despite my post getting downvoted to -2 points at present (it wasn't worded particularly well to avoid misinterpretation) I do appreciate all the replies.
Instead of all these complicated hoops, wouldn't a true libertarian expect his money in the deposits to be no-go for gambling. And a separate account for stocks. If the bank want's to gamble they would need the customers approval for that, IE lock your money with us for 10 years and get this interest. Insurance is socialist, even if it packaged as capitalism.
The bank has to cover it, but not today. And it's an agreement and not a surprise when it happens.
No, lets create a complicated mess, fractional reserves, excess liquidity and having money costs money, growth and more growth and ... and .. and. You're all falling for it because you're greedy and don't want to be left behind.
When is anyone going to realize the actual problem? How many times does it have to happen? I'll see you guys again in 10-15 years as we have the exact same discussion.
Our deposits are liabilities for the bank (the bank needs the infra to secure the money, make it available everywhere at every ATM, bank tellers and so on). Banks invest the money (and give loans) to both pay for these costs and also make a small return on top.
It is possible to have a bank that just stores the money without touching it, but this bank would charge us for the costs of doing so, and it won’t be free, and it won’t be popular vs free options (which once every 10-20 years blow up).
Yes and I'm happy to pay, I'm actually paying 50$ a year as it is for my personal account only. They call it online-banking fee.And still they gamble with my money. I also have 2 company accounts where they charge even higher fees, just for deposits. It's not that I'm not willing to pay, but I was never asked to put my savings as collateral.
Meanwhile they're closing offices to save money, and making billions every year. They can make it work, we just have to demand it.
You think there is complaining now, what do you think would happen if you lost 1-3% of your principal each year forever. And what do you think would happen to society of all that capital was sitting around doing literally nothing instead of being available for others to borrow and use on productive activities?
I think interest rates would increase and I would be incentivized to put it up for lending and create a healthy economy with our savings being safe while still being able to gamble. Money would get value again. If the banks themselves won't act as the middle-man the gig economy will fill that space in no time.
Would the execs get million dollar bonuses and fly jets? No, and I'm fine with that, I don't have to count on a financial crash once every decade or two.
> Insurance is socialist, even if it packaged as capitalism.
What? Insurance companies (in general) are some of the most capitalistic. They teams of actuaries calculating risk to leverage a large capital pool to generate more capital.
Yes, I'm being hyperbole. But my point still stands, the view that risk should be risk-free and someone should bail you out when shit hits the fan instead of sucking it up and writing it off as a bad bet is closer to socialism than capitalism.
In the US you have low taxes but have to insure against everything. In the EU we have high taxes but insurance is not a thing unless mandatory (car/home). I don't even have the latter, stupid yes, but I would suck it up and not blame it on the FED.
Libertarians invested in FTX and other crypto banks. They haven't demanded government bail them out.
Businesses putting their deposits in reputable regulated banks is a different matter. Nothing libertarian about that. They're following standard practice as expected by the government and the government rightly decided to make them whole and maintain confidence in the system to ensure businesses would continue to engage in normal banking behavior as desired by the government instead of trying to adhere to 250k limits on deposit sizes.
Splitting deposits to stay under the 250k limit is artificial behaviour that doesn’t change the overall risk profile for FDIC. The total amount of money covered by insurance is the same regardless of how it’s subdivided.
Splitting up deposits isn’t the intended outcome by regulators here. It doesn’t actually achieve anything meaningful.
Splitting deposits to stay under the 250k limit would have reduced funding for this specific, narrow focused bank with an exceptionally high duration risk. It's less likely that the customers would try to pull 250k from 4 bank accounts at once because they believe all of them are unsafe than 1M from a single account. How could that not change the overall risk profile for the FDIC?
If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have done the same and split their deposits up - and stored some of them at SVB. So from FDIC's perspective, the total amount of deposits at every bank (and so the risk they take as an insurer) after this splitting is the same.
FDIC insurance limited to 250k and a banking system where everybody splits their deposits up into 250k/bank is the same risk profile for FDIC as unlimited FDIC insurance and no splitting up of accounts, assuming the same deposit distribution between banks.
Ok, but since they now only have a small fraction instead of everything stored at SVB, they wouldn't have to withdraw all their deposits from all their different accounts when word gets out that SVB is unsafe. An being explicitly fully insured, a lot of them might not even have bothered to withdraw from SVB. How would that result in the same risk profile?
It's the same risk profile to the FDIC (risk as in the the risk that they have to pay out on the insurance). Unless you change the overall weighting of deposits between banks the total covered deposits at risk per bank is the same in both cases.
If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank.
For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same.
So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.
Splitting deposits isn't the only option and is often not the best one. There are a number of other solutions available, including buying your own insurance. FDIC insurance isn't the only insurance available (and isn't even intended primarily for businesses). It's just the free one.
There isn't enough money in the world to insure the bank deposits of every business. Think about how big insurers would have to be if they needed to insure all the deposits of every business. "Every business should have private deposit insurance" isn't the goal of regulators because it's not a workable solution.
So instead the government acts as a sort of "insurer of last resort" by promising they will do everything they can to protect depositors in the case of banking instability.
> There isn't enough money in the world to insure the bank deposits of every business.
And yet, that is exactly how it's been done for a very, very long time.
There is, of course, enough money to insure all of the deposits, for the same reason there's enough money to insure all the buildings, all the ships, and so forth.
I'm proudly libertarian - in fact, we have an explanation for these boom/bust business cycles via https://en.wikipedia.org/wiki/Austrian_business_cycle_theory.
Libertarians have criticized cheap/free money for a very long time so it's not surprising that an institution that had to invest excess deposits into 'safe' treasuries is in trouble once interest rates started to rise. There are likely many other banks, company's, and institutions in trouble right now because of operating assumptions build on free/cheap money are invalid.
Someone could argue that they could have foreseen that this abundance of liquidity in the markets, along with the supply chain issues, would eventually lead to inflationary pressures and that once inflation has shown its ugly face, those bond's market value would be discounted, and that they could become vulnerable to a bank run.
But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
That said, please don't confuse me with a libertarian; I am just raising a somewhat contrarian point. Being called a libertarian would be an enormous source of shame and disgust for my mom.