Silicon Valley Bank collapse and its effects

[MGuy]

Rich people from column A losing money vs rich people from column B losing money might be funny sometimes but it doesn't mean anything to me. Celebrity money isn't sacred. At best I'm ambivalent about which set of rich people lost money because a random dollar lost to them is not a dollar given to labor. It's money changing hands at the top end. I don't care that rich people are rich. It just happens to be that they either cause or enable the continued suffering of those who do not have such a privileged life. What happened with SVB isn't good and the fact that we bailed out yet another failed venture is arguably bad because we're one again proving that the major losses at the top will be socialized because gosh darn it for some reason these few people wield so much money we can't let it not work out for them.

Also regardless of if the Fed is backing off of raising rates 'now' the issues with the move were known and protested well before a bunch of rich suits decided to explain how raising it makes their position slightly more difficult (oh and also it hurts labor too!). The cruelty (raising unemployment and disciplining labor) in this case was explicitly the point. Now we have yet another situation where the intentional suffering of the regular citizen is ignored but when big finance decides to complain almost in unison only then are the brakes fucking tapped. Not a total stop just a pause likely so that people who complained can adjust their portfolios so that future increases won't hit them.

I don't even care that the person heading it is a republican appointee because, just like the guy they allowed to continue running the post office into the ground, I'm sure that everything he's done is completely in line with the administration. Hell, thinking cynically, it probably pays political dividends for this guy to 'not' be a Biden appointee so that he can become a hate sink that trails to the Trump administration while Biden only gets criticized with mere 'incompetence ' for not replacing him. There were plenty of economists writing think pieces about how raising rates is fine despite the downsides. Likely anyone this administration would have likely picked would have done the same things.

[Kaelik]

I don't even care that the person heading it is a republican appointee because, just like the guy they allowed to continue running the post office into the ground, I'm sure that everything he's done is completely in line with the administration. Hell, thinking cynically, it probably pays political dividends for this guy to 'not' be a Biden appointee so that he can become a hate sink that trails to the Trump administration while Biden only gets criticized with mere 'incompetence ' for not replacing him. There were plenty of economists writing think pieces about how raising rates is fine despite the downsides. Likely anyone this administration would have likely picked would have done the same things.

He's a republican appointee, but also a democratic appointee.

https://www.whitehouse.gov/briefing-roo ... ice-chair/

He is in fact a Biden appointee.

[Comprehend13]

I love how Kaelik started this thread with

I don't know too much about finance

but then proceeded to confidently argue, at length, about the likelihood of various events if the banks were/were not "bailed out".

Like when Kaelik (and co) say things like this

Secondly, if people lose their jobs because svb companies go under they can just fucking get unemployment insurance and then get a new job in the extremely tight job market.

it makes me think that they might not have a good mental model of what happens in non-equilibrium states. And when they say things like this

All of economic collapses come from rich people gambling aggressively with other people's money and then trying to be the person not holding the bag

it reminds me that they probably don't have a very good mental model for the economy at all.

[Kaelik]

Many of comprehend's statements are very stupid, but as a starting point I would ask comprehend to comprehend who posted what in the first place.

[Comprehend13]

I had trouble telling your commentary apart since they showed the same level of understanding.

Though admittedly you are much quicker to reach for ad hominems rather than, you know, actually have a discussion on the merits.

[Comprehend13]

As a followup (for Kaelik to bark at some more) - when you strip away the (signature) Kaelik strawmans and personal insults from this discussion, Kaelik's main contention seems to be that letting SVB fail (only backing the insured deposits) will almost certainly not result in a domino effect, and therefore it should it should be allowed to fail as comeuppance for risky decisions made on the bank's part.

Yet no further supporting evidence on why a contagion/domino effect is unlikely is ever supplied, despite this being the crux of their disagreement with deaddm! This is the off-topic board of a niche gaming forum (so the standard of evidence is quite low), but Kailek literally has nothing to back up their arguments with other than "I pulled these probabilities from my ass" and "I will bury you in ad hominems".

[Kaelik]

Though admittedly you are much quicker to reach for ad hominems rather than, you know, actually have a discussion on the merits.

This is extremely funny coming from you, someone who exclusively posted in this thread to make ad hominems without addressing substance.

Yet no further supporting evidence on why a contagion/domino effect is unlikely is ever supplied[.]

Could you describe what you think the evidence supplied for why a contagion domino effect is likely to occur is?

[Comprehend13]

I have the humility to recognize that I am not an expert in "bank runs" or "estimating the risk of recessions", so instead of confidently arguing from a position of ignorance, I will defer to the perspective of those with more expertise. Deaddm's perspective lines up with those of economists I follow - that the risk of a contagion effect was/is believed to be non-negligible, and that letting SVB fail was risky (in terms of potential economic fallout). Even if you calculate impact very differently from the government (e.g. you don't care much about the welfare of billionaires), I will note that recessions are much less kind to low-income than high-income people.

But honestly, I think at this point that the onus should be on you to provide evidence in favor of your position. The past three pages are filled with you confidently advancing the same argument, evidence-free. The default state of the world is not "Kaelik is correct". So...give a reason to believe your claim that the contagion risk is negligible. Perhaps you're an economist at the Fed, as well as being a lawyer? You're a mathematician specializing in game theory (not the D&D kind), and can walk us through how bank runs are typically modeled? Something else - please share!

[Kaelik]

So in other words, the evidence presented is "deadDM said so" and since you found that incredibly convincing, you decided that you need a lot of evidence from me to counteract the very strong argument of "deadDM said so"?

Maybe if you considered this for a few minutes, you might discover why it is relevant. Hell, you could have just read the things I typed, instead of reading the things Pseudo said and attributing them to me, things like:

Maybe the guys who directly stand to benefit from recieving large piles of government money are not the best equipped to determine if we need to give them large piles of government money to stop a catastrophic meltdown of the economy!

Sure it's true that if we give them large piles of money to bribe all the regulators, it will constantly look like we need to keep giving them large piles of money to stop all the unregulated banks from possibly maybe losing money and any time they lose money the rich people who stand to benefit from government money might decide to do a bank run on purpose like they did for SVB, but what I am proposing is: What if your plan to keep pouring infinitely large money sums into the people who bribe regulators the most is actually creating some BAD incentives that result in a GREATER likelihood of all the banks having a catastrophic bank run at some future point, where having a single poorly diversified bank go under once without a massive bailout might have prevented the very activity that will guarantee a collapse of the economy at some future point.

...

Could a tech bro VC investment bank that had a bank run happen because all its investors decided in a group chat to intentionally have a bank run cause the entire economy to collapse because people with less then 250k who are insured suddenly panic and start a bank run in every single bank in the entire economy? It's possible. Guess we have to give the people who intentionally caused a bankrun billions of dollars.

...

One is no more likely to cause a massive economic destruction then the other, but we don't generally proceed from making up a possible thing with no evidence to then acting based on that hypothetical without some intervening work.

...

Every time you post "allowing any rich person ever to lose even a single dime will result in a total collapse of the economy and also the economy is perfect right now which is why we need to make things worse for everyone poor and funnel more money into the bankers hands so they keep lending money to people who can buy houses" you are skipping the part where you provide any reason at all to believe that this is actually going to cause a banking collapse.

...

I could stupidly post like you do by saying "obviously the biden bank bailout is catastrophically destroying the retire economy and causing no one in the entire country to ever be able to buy a car because giving bankers carte blanche to gamble with depositors money knowing that they will always be 100% fdic insured with no caps means they could create the situation where they all overbet and lose money in the future, and since we know that if a catastrophe is possible if we do something then it also definitely 100% will happen and we have to take steps to prevent it. And that's why the biden bailout is bad." But I don't because it's the analysis of a fucking child. It's stupider then that either the particle accelerator causes a black hole or it doesn't, so its 50/50, guy.

You can continue to defend deadDM's confident argument for a specific extreme bailout policiy based on no evidence at all while characterizing criticism of this evidenceless assertion as for being too confident if you want, but since you appear to be living in an alternate universe reading alternate posts, I'm not sure what response you want from the people from this multiverse.

[Comprehend13]

No, the evidence presented is "people with actual credibility/expertise said so". Deaddm has already provided explanations and sources (very patiently I might add), I'm not going to dig up more examples of consensus opinions on why it made sense to bail SVB out. Recognizing that you have limited expertise in a subject, and deferring to experts (within reason*) is actually a good thing.

Thank you for compiling your supporting arguments. A few points:

• AFAICT the depositors (customers) are the one getting bailed out. The bank's shareholders are not. So I don't entirely follow your points about bad incentives, because the people getting bailed out (depositors), and the people who were in charge of managing risk (the bank, which is not getting bailed out) are two separate groups.

• Depositors are not making money off of the bailout - they can't be guaranteed more money than they had deposited with SVB?

• The bailout comes from an insurance fund that banks have to maintain.

• Bank contagion being a thing is a very mainstream economic view. I don't really see the point of giving you links to papers, because it seems like you view mainstream experts as slanted. There obviously isn't going to be any public facing estimates of "probability that SVB will cause a domino effect and collapse the economy", but the government was worried enough about it to back all of the deposits. Probably unrelated, but to make that decision it drew from the expertise of people who advanced beyond undergrad econ.

Since you seemingly can't resist referencing my first quote where I misattributed what PS said to you, I will happily recant what I said. I completely believe you think you view yourself as highly informed on this topic. Which I think leaves us at an impasse, because I view people with actual expertise on this subject (e.g. economists) with more credibility than uh, Kaelik, just some guy who is very confident on the internet (TM).

[MGuy]

I don't see how any of these points refute what kaelik posted. It seems like an incident where you're prepared for certain arguments but not for anything sufficiently nuanced.

As for the points you made...

1. You don't want to bail out large scale depositors who decide to go with banks that advertise to these people as a mechanism to slip past regular banking checks because you let them know that as long as the pot of big enough investing in these kinds of banks will be insured by the government. Not being an expert myself I'd make an educated guess that these restrictions exist to discourage people from providing the investments necessary for these card houses to exist upon. If you can still get investors there is incentive to do it. If potential investors think there's no risk then they go for them and the cycle continues.

2: kaelik didn't say anything about them making money from the bailout. Though likely they did just not from the bailout itself. What kaelik pointed out was incentives and making sure that rich people aren't losing money.

3: This does not mean the government isn't the one bailing them out.

4: Banks fail all the time and heck part of the DIF's job is to resolve failed banks. The "concept" of a thing existing does not means it happens in all cases. The issue is that no one actually defacto says it would happen. A lot of l the language is couched in 'ifs' and 'it coulds' but nothing of substance I've seen draws a clear line to it. The fact that the government was concerned doesn't mean much either. They are having hearings about 'wokeness' in Congress so appeal to government authority isn't really factor here. There were concerns that this exact thing would happen and the government didn't see fit to replace or strengthen guards against it.

Additionally, due to the nature of bank runs, and in fact what happened with this bank run from what I've read, they can happen just because a bunch of people say it will happen and then act in unison to cause it. Government then could've spent is time pointing out that these were uniquely bad banks who's failure would not reflect on other, better management and more legal banks. Our system runs on a confidence engine so part of maintaining it would be to build confidence in it and prevent nay sayers and those adjacent to them (especially those looking to buck the law) from causing people to lose faith in the system.

[Sashi]

No, the evidence presented is "people with actual credibility/expertise said so".

Paul Krugman is just the establishment's pocket Keynsian who's job is to be resoundly mocked by the Very Serous People for his relatively milquetoast center-left hot takes until the moment rich people need some helicopter money and decide they, too, are Keynsians for exactly as long as it takes to funnel as much government cash into their pockets as they can.

Same with Warren, who's suddenly a "credible expert" when government intervention means dump trucks full of cash, but will go right back to being a wonkish Pollyanna when the topic is a $15 minimum wage or universal healthcare.

And of course banks advocate for expanded FDIC coverage (as long as there's no increased oversight) why the hell not? In other news, 100% of foxes agree there's no reason to lock the henhouse door.

[Kaelik]

No, the evidence presented is "people with actual credibility/expertise said so". Deaddm has already provided explanations and sources (very patiently I might add), I'm not going to dig up more examples of consensus opinions on why it made sense to bail SVB out. Recognizing that you have limited expertise in a subject, and deferring to experts (within reason*) is actually a good thing.

But people with actual credibility mostly haven't been cited. Deaddm has linked to a nobel economist saying "actually SVB was a uniquely badly managed bank and there's not going to be a bank run because it goes under, but if the Fed keeps raising rates more banks will go under regardless of if we bail out SVB" which is you will note, the literal opposite of his argument, and he cited to a bunch of bankers moving money around and a bunch of bankers asking for more money, and a bunch of bankers saying they are worried about contagion.... I'm noticing a theme. And also Elizabeth Warren saying we should lift the FDIC insurance cap, but not to 100% which isn't even really an argument for the thing being argued for.

Which is related to my point. Yeah, we all read other people. I certainly did not know a special bank for Silicon Valley techbro libertarians existed 2 months ago. But if the people you read are "bankers who say they need more money" then you are going to get very stupid ideas.

Thank you for compiling your supporting arguments. A few points:

This is not a compiliation of my arguments. This is a compilation of just the times I pointed out that deadDM's entire argument is "It is possible X might happen if we don't do Y. Since X is possible, it is likely, nay inevitable. Therefore we must do Y to stop X." Which is a very stupid argument and the only one he has made at any point in this thread. Because there is no evidence that this intentionally triggered bank run on SVB was going to cause an economic collapse. No one can even kind of point to the ghost of evidence of this claim.

• AFAICT the depositors (customers) are the one getting bailed out. The bank's shareholders are not. So I don't entirely follow your points about bad incentives, because the people getting bailed out (depositors), and the people who were in charge of managing risk (the bank, which is not getting bailed out) are two separate groups.

The bankers got to bribe regulators with other people's money, then give themsevles fat bonuses with other people's money, then gamble with other peoples money. The bankers are fine.

But the bankers aren't the only bad actors here. In this specific SVB case, many of the "depositors" are the EXACT SAME PEOPLE as the "bad investments" made by the bankers. So if the bank gives 100 million dollars to a techbro, who then deposits 10 million back in the bank, and then later he pulls out all the money because he and all his friends coordinated a bankrun in a slack chat, which in turn means now the bank gets seized, and all the "Depositers" are made whole (and avoid the possibility of the bank that lent them the money REALLY needing it back) then the depositer who is also the lendee of the bank who also triggered the bankrun is winning on both ends.

• Depositors are not making money off of the bailout - they can't be guaranteed more money than they had deposited with SVB?

I guess see the above section about how SVB designed it's loans.

• The bailout comes from an insurance fund that banks have to maintain.

I'm not even sure what this is supposed to be addressing? You know that the insurance only covers up to $250k? If you take money from some fund and give it to people who aren't entitled to that money, you gave them government money. Money is fungible and which specific government location it comes from is not particularly relevant.

• Bank contagion being a thing is a very mainstream economic view. I don't really see the point of giving you links to papers, because it seems like you view mainstream experts as slanted. There obviously isn't going to be any public facing estimates of "probability that SVB will cause a domino effect and collapse the economy", but the government was worried enough about it to back all of the deposits. Probably unrelated, but to make that decision it drew from the expertise of people who advanced beyond undergrad econ.

Bank contagion is a thing that has happened more then zero times. It does not follow from that it happens 100% of the time. We developed a system of laws designed to protect the people who we think SHOULD be protected from bank runs, called the FDIC insurance. We did that on purpose so that if a bank run happened most people would be fine and to work against contagion from people worried about their money.

To take the position that all bank deposits should be 100% FDIC insured is to throw away the economic consensus passed into law and instead, adopt a new much more radical position. That the only way to stop contagion is to 100% insure millionaires and billionaires who are too stupid to diversify their portfolios. You can, if you try, have millions of dollars FDIC insured and accessible from a single account. It's a not uncommon practice. Almost no one has a non prestige reason to have their money in huge uninsured deposits. That doesn't mean no one is subject to any loss, but it does mean almost no one is subject to deposit loss unless they deliberately choose to be. SVB depositors deliberately choose to be for various reasons (contractiually required to as part of taking a loan from SVB, libertarian techbro arrogance, prestige hunting) but for that same reason it is extremely unlikely that the contagion of "depositors fearing for their deposits" would spread. Now investors have a lot of fears! But investors are not depositers, and it's good actually for investors to sometimes lose money on investments.

"The government was worried about the domino effect" is not something we can derive from the governments actions. If a bunch of rich donors show up and say "Oh no the sky is falling, and also we don't have any money to donate to your political campaign" we actually can't derive that the politicians are actually concerened that the sky might fall.

because I view people with actual expertise on this subject (e.g. economists) with more credibility than uh, Kaelik, just some guy who is very confident on the internet (TM).

No, you believe whatever deadDM tells you about people with "actual expertise" without even reading it, which is why you don't know that of the two economists he cited one of them said "yeah no, there's no risk of this spreading because SVB is uniquely poorly designed. The only risk is the fed will do something that causes more banks to have runs no matter what happens here."

[deaddmwalking]

So this article may be the best explanation that I've read for what happened at SVB and why you should care.

Kaelik has talked about irresponsible activity at SVB, but one of the things this article explains is why investing in long-term bonds based on the Fed's guidance is standard for the industry as well as the implications to other banks.

At a fundamental level, banks pay you for depositing money with them. To function they must earn money on your deposit. Besides treasury bonds, banks lend money at interest. When you loan $500k at 2% interest for 30 years (a mortgage during the pandemic) but interest rates rise suddenly, banks have to find a way to generate higher profits to offset those losses - but selling bonds before they mature means taking a loss. Since every bank invests most of the deposits, they're all vulnerable to a run. Banks try to mix investments to balance a potential need for liquid assets versus what are usually safer long term investments. If SVB had known that the Fed would raise interest rates 4,700% more than they anticipated (and provided guidance) they would have chosen different investment mixes.

I recommend reading the article.

[Kaelik]

And yet interest rate risk is an old and expected issue and svb's over indexing its liquid assets into treasury bonds and then flagging them as held to maturity bonds violated existing regulations about liquid asset retaining.

The fact that many banks made investments based on interest rate forecasts does not mean that they all did it with assets they are required to keep liquid and then deceptively accounted them to avoid that reflection, no matter how much inflammatory (and false) language a writer puts in their first few paragraphs about how it's just good sense to break the regulations.

[MGuy]

The article is just about the effects of raising interest rates. No one was really discussing rising interest rates outside of dead bringing up because bank executives and their friends are complaining about it now as opposed to the labor advocates that were decrying the move when it was announced as a move to discipline labor. If an article is desired about the context of SVB I like this one.

[Thaluikhain]

Since Comprehend13 wasn't here when last I asked, assuming it is the correct move to give failed banks lots of government money to stay afloat, why should they be bailed out rather than bought out? You failed as a private business, now you get to be nationalised.

[Kaelik]

The article is just about the effects of raising interest rates. No one was really discussing rising interest rates outside of dead bringing up because bank executives and their friends are complaining about it now as opposed to the labor advocates that were decrying the move when it was announced as a move to discipline labor. If an article is desired about the context of SVB I like this one.

My favorite part of this article is where he explicitly names the techniques and programs that I couldn't remember the name of which easily insure larger amounts of money.

Companies manage this small risk of bank failure through recognized insurance strategies. There are private-sector solutions like Intrafi’s Insured Cash Sweep, which essentially cuts up large accounts into $250,000 pieces and splits them across the banks participating in its network. CDARS, another Intrafi product, is a less liquid option that segments cash into CDs. Some prior FDIC officials have expressed anger at these schemes, but there also are cash management accounts with a “sweep” feature, or additional insurance to take out (this Forbes story has several examples).

[GnomeWorks]

Since Comprehend13 wasn't here when last I asked, assuming it is the correct move to give failed banks lots of government money to stay afloat, why should they be bailed out rather than bought out? You failed as a private business, now you get to be nationalised.

Probably something to the effect of "something something sOcIaLiSm BaD."

[PseudoStupidity]

Another one bites the dust, First Republic bank just got seized and is being bought up by JPMorgan Chase. This purchase should mean taxpayers won't need to bail out the deposits of First Republic, so this doesn't sound bad at all.

[deaddmwalking]

So it's been about a year and banking hasn't really been in the news a lot lately. Even though it's from December, here's an article talking through what happened and what actions the Fed took as well as some of the Trump era changes that contributed to the failures.

There have been a host of articles from last fall to today talking about how the economy is good but we're in a 'vibecession' - where people don't feel good about the economy. Here's an AP Article talking about the economy but that public sentiment is still gloomy (but less than it was). Here's an article from a conservative contributor to the New York Times discussing vibecession and why they think it's ending (no paywall).

Perhaps unsurprisingly, change in per capita income is one of the strongest predictors of whether the incumbent party wins an election or not. This is a 'lagging indicator' in that if your income increases it may take some time before you start benefiting. So for this reason that change up to 3 months before the election is probably most significant.

It looks like real wage growth is now leading inflation. What I think is interesting, however, is that we tend to benchmark prices and anything above that benchmark seems expensive. For your grandparents that meant that candy bars were a nickel, and maybe they were $1 for you. That means that if it's $1.29, it FEELS expensive because it's above your benchmark. So even if you're making 30% more than you were when you established it cost a dollar (ie, it's just as significant or insignificant a purchase relative to your income). With gasoline projected to decrease in cost 5-10% (average $3.52 per gallon in 2023 and average $3.31 per gallon in 2024 - highly variable from region to region), that may also help people feel better about the economy.

[MGuy]

By the metrics presented in that axios article 59% of Americans saw no significant increase (if I accepted that 5% is significant) in wages compared to this year's inflation. Near 50% are still under. I don't think that just feelings are the reason Americans aren't responding to it given their own numbers. If a significant portion of your population is not seeing the benefits of the bounty then it makes perfect sense why a significant portion of the people aren't acknowledging it. Frankly, given how this chart goes things are hovering at about how things were in 2016 (only a little worse percentage wise) which people were loudly complaining about wages then as well.

Unless there's some other set of numbers I'm missing I don't even see how 3 years of falling behind is made up for by 1 year of struggling to play catch-up.

[Kaelik]

A fun fact is that americans are, in the lower 50%, materially less well off now then they were 2 and 3 years ago.

"real wage growth is slighly outpacing inflation" would tell you if people had more money if wages were the only source of money, but they aren't! Fun fact! People have experienced massive welfare cuts during the Biden presidency and they feel bad because they have less money then very recently.

[deaddmwalking]

It would be nice if you shared your data. Official sources haven't completed their analysis of 2023, let alone 2024. I think it is a travesty that we discontinued social programs that worked to bring children out of poverty because of the inflation bogeyman, but the data I see looks like official poverty measures have held steady while the SPM spiked as Covid programs ended. That is to say, poverty is exactly where it was pre-pandemic instead of notably lower which was a real possibility with monthly child credits.

Anyways, the reason I revived this thread is there is some discussion of whether New York Community Bank will fail. Currently, there is no indication that their deposits are in jeopardy (ie, no run on the bank), but the bank declared significant losses on a commercial property loan portfolio. Since depositor sentiment is the major factor in whether people pull their deposits and I don't see any reports of major issues, I think that it is most probable that there is no collapse similar to last year. On the other hand, with the bank's portfolio losses, I wouldn't be surprised if the FED steps in and transfers the deposits to another bank. On January 26th the stock was trading at $10.42 and it closed at $4.20 yesterday. That's effectively the loss of $4.5 Billion in perceived value in a week. The current valuation is about $3 billion.

[Kaelik]

It would be nice if you shared your data. Official sources haven't completed their analysis of 2023, let alone 2024. I think it is a travesty that we discontinued social programs that worked to bring children out of poverty because of the inflation bogeyman, but the data I see looks like official poverty measures have held steady while the SPM spiked as Covid programs ended. That is to say, poverty is exactly where it was pre-pandemic instead of notably lower which was a real possibility with monthly child credits.

Why would you cite a completely irrelevant stat that is unrelated to the point at hand (I mean we know why) "the number of people before or above a specific threshhold" is not relevant to the fact of welfare cuts resulting in people having less money. Headcount poverty has been an obvious accounting trick for 20 years now. It's almost like it doesn't tell us whether people have more or less money!



https://www.peoplespolicyproject.org/20 ... mic-system

Official sources haven't completed their analysis of 2023, let alone 2024.

Wow really! Well then I guess we just have to assume that all the polls in 2023 saying people felt the economy is bad because of the 9 trillion percent increase in income in 2024 from the stats that haven't been compiled!

Or we could just use the data that exists, and say "people have less money then they did 2-3 years ago."