Silicon Valley Bank collapse and its effects

[PseudoStupidity]

The Silicon Valley bank has collapsed, leaving companies like Roku (which had huge deposits in the SVB) pretty screwed. Many start-ups used it too, so we'll be seeing a lot of little companies dying and probably some big hits to other companies (mostly tech and biotech it seems).

I don't know too much about finance, but I know when a big bank collapses it can cause a lot of knock-on effects and bring other institutions down with it. What's everyone thinking on this one? I don't think this is the beginning of the end for the economy like 2008 was, and I'm pretty happy we are not bailing SVB out. That's just me going off vibes and not thinking start-ups are very important, though.

[Kaelik]

Sorry the US government has already announced that Democrat Joe biden will bail out the banks again and that they will pay 100% of all depositors accounts no matter the amount.

So all those companies could stick around if they want.

[PseudoStupidity]

Fuck, why? They were literally uninsured deposits.

I just want to see one obscenely rich person lose all their money during my lifetime, is that really too much to ask?

[Omegonthesane]

So, there's some subtle distinctions, and some excuses, which tbh I haven't looked super deep into either.

The subtle distinctions amount to: while the account holders get all their money back, the actual institution of SVB doesn't get to continue existing, whereas the 2008 banks just got to continue existing in addition to having their obligations paid out with - ultimately - taxpayer money. (technically its coming from the FDIC which comes from the banks, but where do you think the banks got that money from.)

The *excuses* amount to some of the account holders being payroll that might have led to the little guy not getting his pay check, which means we can't do means testing just this one time where it might actually be a remotely defensible idea depending on how little research you've done instead of just obviously bad on its face like all the times we actually do means testing.

[Kaelik]

Part of the problem is that SVB isn't a normal bank, it's specifically the prestige bank of techbro startups and venture capitalists.

So when you look at what corporations need to "make payroll" it's all a bunch of horrible things we should hope go out of business who's CEOs deliberately made the decision to run accounts out of SVB because choosing that bank meant you were a cool libertarian, instead of like, because it was an actually useful bank.

It's not that no one would suffer from all those companies going under, it's just that it would be way cheaper to fund a nationwide no fault unemployment wage for 12 months to get all those people to move to actually productive work then it is to refund every single failed tech venture founded on funny money.

[Koumei]

Also, in case anyone was worried about the poor owners of the bank who through no fault of their own now lost a bank after making a series of incredibly bad decisions, then you'll be relieved to know they managed to award themselves a bunch of bonuses just before it collapsed, as their final "most important" action.

[deaddmwalking]

When you deposit money in a bank, the bank invests that money. You earn a return in the form of interest payments. In the event that the bank fails, your deposits, up to $250,000, are insured by the Federal Government, so you, as a normal person, don't need to worry about whether the bank fails. When I was younger, the amount of protection was $100,000. The increase originally occurred in 2008 after the start of the Financial Crisis and was originally supposed to end in 2009, but has been continued.

Businesses often have more than $250k in their bank account. If a company has 1000 employees and they're each earning $5k via bi-weekly paycheck, you need to have $5,000,000 in your bank account when the paychecks are due. That's a lot more than $250k.

If you own a business and you think your bank may go bust, you have every reason to pull all of your deposits from the bank and either put it in your mattress or move it to a bank that is so secure that you don't have to worry about them 'failing'. When you (and every other business) pulls their money out of the bank, that's called a run.

In the first paragraph, we talked about how your bank has invested your deposit. If you demand your money back, that's not really a problem unless you're their largest depositor. But if everyone pulls their money (a run) there's no chance that the bank will be able to return all those deposits in a timely fashion. The bank can sell some of those investments, but often when you sell in a hurry you lose money on those investments. In the case of Silicon Valley Bank most of their investments were in long-term treasuries. When they bought the treasuries, getting 2% return was good. But now you can get a 4% return on your deposits pretty easily. If your bank was giving you 0.05% interest and you can get 4%, you're going to want to pull your bank and deposit with a much higher return.

I've got mixed feeling about SVB. There's a good chance that if the government didn't guarantee the deposits that it would have stuck it to a bunch of billionaires that have been abusing the system - karmic retribution that is impossible to get upset about. But it's also possible that it would cause a cascading run against the weakest banks who would each fail in turn. Not only would that affect a bunch of corporations we all hate, it would hurt a bunch of employees and the people that they depend on. Trying to figure out how bad it COULD be isn't easy, but it COULD BE REALLY BAD. And so the government decided to make a quick decision and guarantee the full deposits.

Since the government is guaranteeing the full deposit, if you're at a bank like any of these under review by Moody, you're not going to immediately pull your money and move it to a more secure bank. If you (and all other depositors) did, that bank WOULD DEFINITELY FAIL. Moving money from riskier banks to safer banks is referred to as 'flight to quality'. So there's a question about whether many small banks is better or a few really big banks.... Generally I think most people now think 'too big to fail' is bad, so flight to quality has some problems in the near term.

Now, long term, all banks should be quality institutions and they should be carefully evaluated for the total amount of risk. Following the financial crisis a number of regulations regarding the amount of risk banks could take on and how regulators could evaluate their strength were implemented. Over the last 15 years those regulations have been gutted. Because the banks DEMANDED less oversight and the ability to take on more risk. The failure to implement and maintain regulations is a big part of the story here.

Basically there's no good option here - letting every business who banked with SVB lose all their deposits is going to have some pretty disastrous knock-down effects (at least in the short term). It's possible that some of that short-term pain would result in a healthier financial system but it could also result in a financial melt-down. I can at least see why regulators decided in the moment to choose to avoid the failure without having a good sense of the implications.

[Kaelik]

Thanks for being less informed than literally anyone else in the thread dead. We can always count on you to show up and say "I know literally nothing about the facts of the matter, but I can imagine a hypothetical reason why not giving a bunch of shitty tech bros huge sums of money might theoretically cause bad things, so I'm glad that we gave the shittiest people in the world billions of more dollars again just like every other time and it always has made the world a worse place, but I'm personally well off so I don't mind all the poor people getting constantly fucked by ever increasingly shitty world."

Tell us about how drilling for oil in Alaska is good too because your 401k went up.

[deaddmwalking]

I've read dozens of articles about it, and I work in the banking industry.

Here's one from PBS, which I'm hoping you would consider a pretty acceptable source - rather than Forbes or NY Times, etc.

The biggest question facing regulators and policymakers is whether the collapse of the two banks has been contained or if it presents broader risks to the economy. One worrying factor is the scale: SVB’s failure marks the largest bank collapse since the Great Recession. But, SVB was just the 16th largest bank by total assets, and it was fairly focused on the tech sector compared to the more broadly-invested banks that failed during the Great Recession.

What does the article mean by 'broader risks to the economy'? Basically it means a cascade of bank failures caused by large depositors pulling their money from their own banks forcing banks to increase liquidity (converting investments into cash - typically at a loss). What would have happened if the government hadn't guaranteed ALL deposits? I don't know and nobody else does, either. But it at least had the possibility of being catastrophically bad. Saving a bank isn't a good thing. Hell, saving the banking industry as it exists today may not be a good thing. But letting it collapse is probably worse.

[Kaelik]

Wow dead. Thanks for repeating "I know nothing about this bank but can imagine a hypothetical thing that could happen that would be bad so let's give billions of dollars to the worst people in the world." But this time linking to an article that says the same thing. 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.

Now apply this logic to literally any other policy. "Could refusing to forgive student loans cause everyone to have a sudden panic attack and withdraw all their funds from bank of america?" It's possible! Guess we need to forgive all student debt to prevent the hypothetical bank of America bankrun that destroys the economy.

The ONLY difference between these two hypotheticals is that one of them gives billions of dollars to the rich and you personally like every policy that gives billions of dollars to the rich.

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.

[deaddmwalking]

So Kaelik, sounds like you have a good handle on how much deposited at the 16 largest banks is covered by the $250k insurance and how much isn't?

Or the smaller banks, because the 5 that are next up for rating reviews based on similar risk profiles - how much is held by individuals like you and me and how much is held by institutional investors?

My understanding is that $7 Trillion is deposited in American banks beyond the insurance provided by the FDIC. That sounds like a potential catastrophic problem if multiple banks had that money pulled. Like I said - it's hard to say that guaranteeing ALL deposits was the right move, but it's easy to see why the government made that decision - especially since it had to be made quickly.

[Kaelik]

Dead, if you can't read the post you are replying to because your screen bugged out, why are you replying.

If you can, maybe read it, and stop making the same fucking post that doesn't address anything I said again.

[violence in the media]

It looks like those Moody's reviews you mentioned are in.

[Thaluikhain]

Assuming that the banks ending up with billions of government dollars is a good thing, why is it always a bail out, rather than a buy out? Why does it always seem that they get stuff with little or no strings attached?

(Ok, I can probably guess the real reason why, but what is the nominal reason?)

[PseudoStupidity]

It seems the reason is that if we didn't bail out everyone who banked with the risky SVB they would potentially not have been able to pay employees. Why we did not rely on the unemployment system to cover this cannot be known, instead the government needed to step in to give rich people money even though poor people who make bad investments get turbo fucked. SVB is actually going to be gone, the bail out was for the companies like Roku (who heavily invested in SVB) who made stupid-ass financial decisions by putting all their eggs into one basket. I am more fiscally responsible than Roku, because I don't stick all my money into one bank, but I would not get bailed out if something bad happened to my money (not that the sum of all my accounts even gets within spitting distance of 250k).

It's just the usual thing where we bail out rich people and they get no consequences. I had initially thought we were not doing that, but that's on me because I thought when the president said we aren't bailing people out that we would not bail people out. God bless Joe Biden, the greatest president of the greatest country in the world, where rich people absolutely cannot be allowed to fail even a little bit.

[deaddmwalking]

This is a good article that discusses SVB from the perspective of a Nobel prize winner who wrote about bank runs

[Kaelik]

It's extremely funny that deaddm decided to cite to a university of Chicago economist to argue that svb should be bailed out because the svb was a serious issue that could have spread and then the university of Chicago economist said "actually svb is a unique poorly situated bank that deliberately engaged in having the worst possible investments and depositors and making sure their depositors are also their investors. If the rich people didn't bribe regulators to look the other way then they would have never been in this position. (He obviously doesn't acknowledge bribing regulators because he's u of Chicago, but he is very mystified why the regulators didn't stop this.)

He does say that continued fed policy might possibly cause more bank runs, but he is not saying that depositors getting screwed might cause more bank runs, instead he says that increased fed rates will produce bank runs no matter who gets bailed out.

I think if your takeaway from thus article is "we need to bail out all the people who deliberately incited a bank run after bribing regulators to look the other way so they can have more money to..... bribe more regulators and deliberately incite a bank run at some other bank at the next rate hike." You might be entirely missing the point.

[deaddmwalking]

Kaelik, you are confused. I have not said 'I think SVB depositors should have been bailed out'. I have said 'there are a lot of potential negative consequences of NOT doing it and we can't know what would have happened since we did it - as a result I can at least see why the decision was made'.

It's very clear that shareholders are not receiving a bailout, which is bad for Sweden.

Major investors include:

State Street (STT) and BlackRock (BLK) funds each hold about 5% of SVB stocks, followed by Alecta Pension Insurance Mutual, JPMorgan Chase (JPM), and Artisan Partners .

It also looks likely that the government will pass legislation that claws back bonuses paid to bank executives who took these risks.

I also think that this is likely to create a consensus opinion that rolling back major provisions in Dodd-Frank were a mistake and that more oversight and regulation of the banking industry is important. I absolutely knew that this type of bank failure (but not SVB in particular) would happen when the regulations were pulled back. It's also clear that 'Stress Tests' that only consider a 2% increase in interest rates annually are flawed if the Fed is going to raise interest rates by 4.5% in 12 months.

But maybe we'll have a chance to see what happens if the Fed doesn't step in. People are thinking now about what will happen if more banks fail, so there won't be pressure to make a rash decision. Credit Suisse isn't supposed to have any FDIC/Federal Reserve obligations if it fails, but that's where I say the impacts could be hard to evaluate. If depositors lose their money there could be a 'flight to quality' like I mentioned (and as been documented in regard to JP Morgan/Chase) and that's going to strain weaker banks that haven't had to do Stress Tests.

It's interesting to me that a lot of the donor class/Team Trump is upset about guaranteeing the deposits calling it a Nationalization of the U.S. Banking System.

If Republicans are calling it government overreach, I'm inclined to believe it MUST be a good thing.

[Kaelik]

Lmaoooooo. "I'm not saying it is a good thing...

[Imagination about clawing back bonuses from bankers and consensus to reinstate Dodd-frank provisions]

Trump said something biden did is bad so I think it is good!"

Quite aside from how you now are in fact saying it is good everything you say is proof that you have the incredibly stupid view of the world of all the people who have consistently failed in every aspect for 45 years straight.

This is just dumbass cult of consultants neoliberalism with "I can't imagine republicans lying!" As a justification.

Try writing a post that doesn't contradict the first sentence with the last.

[deaddmwalking]

So U.S. banks (including U.S Bank but more importantly JP Morgan and Wells among others) deposited $30 Billion with Republic and the Swiss central bank infused a huge amount of cash into Credit Suisse in the form of deposits to help prevent a run/collapse.

In the case of the US, the banks basically took the money they had just received from depositors fleeing and put it back under their own name. That is, a dozen banks just assumed the risk to their own profits to reassure depositors to avoid 'contagion'. That's another mark in the column of 'letting SVB depositors lose everything over $250k would be bad according to people who are much more bank savvy than me or Kaelik.

[Kaelik]

So U.S. banks (including U.S Bank but more importantly JP Morgan and Wells among others) deposited $30 Billion with Republic and the Swiss central bank infused a huge amount of cash into Credit Suisse in the form of deposits to help prevent a run/collapse.

In the case of the US, the banks basically took the money they had just received from depositors fleeing and put it back under their own name. That is, a dozen banks just assumed the risk to their own profits to reassure depositors to avoid 'contagion'. That's another mark in the column of 'letting SVB depositors lose everything over $250k would be bad according to people who are much more bank savvy than me or Kaelik.

"Actually, bailing out the banks is a good idea according to BANKERS."

Cult of Consultant neoliberalism. We should definitely defer all banking decisions to the very SMART and SAAVY Bankers, like the ones that bribed regulators to let them..... run their bank like SVB.

But hey, I'm glad you've completely given up pretending your aren't defending bailouts while you defend bailouts, progress! Saying what you actually mean instead of pussy footing around pretending to mean something else is the first step to just being Larry Summers instead of being a dem politician who just does whatever Larry Summers says.

[MGuy]

9/10 bank executives agree that they should be allowed to do what they want.

[deaddmwalking]

The US Healthcare system is bad.

That doesn't mean that it's sudden unexpected collapse is better than its continued existence.

It looks like the worst case scenarios were pretty grim, and a domino effect was possible. It's not even certain that it has been contained. But it looks like it at the moment.

[Kaelik]

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.

[MGuy]

The US Healthcare system is bad.

That doesn't mean that it's sudden unexpected collapse is better than its continued existence.

Dead when arguing with PL: Why do you make such bad faith arguments?
Dead when arguing about things they don't understand: Have you considered this false dichotomy that I'm laying down here????

Can't just be that maybe we should stop doing unhelpful things and do more good things. It has to be that the choice is doing bad things or societal collapse. Do you really believe that letting these specific banks (banks that are not normal that explicitly service tech start ups that couldn't have otherwise gotten a loan because they are actually business shaped speculative assets) fall through would cause a banking collapse? Or do you think something more sane like perhaps it would cause people to consolidate within bigger banks that are more insured? Or just those people are out of luck and other people are just free to go about their lives? Oof any number of other more likely things?