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SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

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Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#61

Post by JumpCrisscross »

WastingMyTime89 wrote: post #59
machina_ex_deus wrote: post #14

What's the point in having banks anyway. Why let the people in the bank earn anything if they are risking money that isn't theirs and that the government will pay back anyway if they fail. If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they…

You have the right sentiment but the wrong conclusion. It was clear after the large bailouts of 2008 that left to their own demise banks would do anything for a bit more money and were not trustworthy actors. That’s an old conclusion by the way. The same one was reached in the 1930s. The logical conclusion to these bailouts was that the regulatory environment surrounding banking was plain bad which was unsurprising b…

> conclusion to this one is that it still is and what was done in 2010 (Dodd-Frank) is a joke and clearly insuffisant

SVB was exempted from much of Dodd-Frank and Basel III.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#62

Post by [deleted] »

machina_ex_deus wrote: post #58
gruez wrote: post #24

Earlier quoted context omitted.

> What's the point in having banks anyway. Why let the people in the bank earn anything if they are risking money that isn't theirs and that the government will pay back anyway if they fail. They're not exactly risking nothing. Capital requirements mean that each dollar of deposits need to be backed by more than a dollar worth of assets. The extra assets serves as a cushion in case something goes wrong. That cushion…

I know how it works. They get 10 to one leverage while the government effectively insures their counterparty risk for free. That's absolutely ridiculous. Where do I sign up. I want to gamble other people money at 10 to one leverage and nobody suing me if I fall. My cushion if I make a margin account at the bank is what, 2 to 1? Do you know the interest rates you pay for these margins? Compare that to interest rates t…

[deleted]

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#63

Post by kilotaras »

em500 wrote: post #48
kevinventullo wrote: post #40

Earlier quoted context omitted.

But isn’t resetting the shareholders to zero exactly the problem? If we’re keeping score, the shareholders should owe the government exactly how much money was used to make the debt holders whole, right?

We're not keeping negative scores, that's the whole point of the invention of limited liability corporations. It's has large upsides (democratization of capitalism, ability to participate in larger and riskier ventures). Like most powerful tools, it can be abused, but it's such a powerful force multiplier that giving it up is just too costly.

> We're not keeping negative score

And that's problematic for banking.

Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely.

Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#64

Post by em500 »

machina_ex_deus wrote: post #54
em500 wrote: post #37

Earlier quoted context omitted.

> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose? How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/mos…

Where do I sign up to play with these levels of leverage of other people's money too? Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with? Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the…

Treating your question as non-rhetorical, you get to play with the money if you work at a bank (most bank have a standard career webpage where you can sign up). But most normal employees don't profit all that much unless they make it to upper management.

As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#65

Post by Linosaurus »

machina_ex_deus wrote: post #54
em500 wrote: post #37

Earlier quoted context omitted.

> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose? How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/mos…

Where do I sign up to play with these levels of leverage of other people's money too? Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with? Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the…

You seem to be saying, that bank owners can take big risks and make enough money that it’s worth it to occasionally lose all equity. But if we make sure depositors also lose money from this, you think depositors will be more careful - they’ll demand higher interest or choose banks with a lower risk profile?

I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later.

Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#66

Post by machina_ex_deus »

WastingMyTime89 wrote: post #59
machina_ex_deus wrote: post #14

What's the point in having banks anyway. Why let the people in the bank earn anything if they are risking money that isn't theirs and that the government will pay back anyway if they fail. If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they…

You have the right sentiment but the wrong conclusion. It was clear after the large bailouts of 2008 that left to their own demise banks would do anything for a bit more money and were not trustworthy actors. That’s an old conclusion by the way. The same one was reached in the 1930s. The logical conclusion to these bailouts was that the regulatory environment surrounding banking was plain bad which was unsurprising b…

You can't regulate away bad incentives which come from the privileges that other regulations grant.

We're only in this mess because banks have excessive privileges. These privileges lead to misaligned incentives. No amount of regulation can realign the incentives back. Only revoking their privileges.

Their privileges include being the only entities able to deal with the Fed and hold deposits .

Let people bank directly at the Fed. Or with crypto. But banks don't deserve a special privilege of being the only way people can hold money.

Furthermore, loans should not be transferable.

Now banks will actually have to price loans correctly. And putting your money in a bank would be a choice they will have to tempt you with, by actually giving real interest rates. And you won't have misaligned incentives, because there is no captive audience.

Giving your money to the bank would be a risk you're doing willingly. A risk they will pay you for taking instead of robbing from you by their regulatory privileges.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#67

Post by em500 »

kilotaras wrote: post #63
em500 wrote: post #48

Earlier quoted context omitted.

We're not keeping negative scores, that's the whole point of the invention of limited liability corporations. It's has large upsides (democratization of capitalism, ability to participate in larger and riskier ventures). Like most powerful tools, it can be abused, but it's such a powerful force multiplier that giving it up is just too costly.

> We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario -…

I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#68

Post by gizmondo »

machina_ex_deus wrote: post #54
em500 wrote: post #37

Earlier quoted context omitted.

> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose? How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/mos…

Where do I sign up to play with these levels of leverage of other people's money too? Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with? Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the…

> Where do I sign up to play with these levels of leverage of other people's money too?

Presumably you apply for a banking license, commit a lot of capital and subject yourself to countless onerous regulations (with more to come, as usual). I'm pretty sure it's significantly less fun than you imply.

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#69

Post by kilotaras »

em500 wrote: post #67
kilotaras wrote: post #63

Earlier quoted context omitted.

> We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario -…

I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.

> Shareholders could lose 100% of their investment, their EV is not +5%.

Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive.

> Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job.

Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job.

This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).

Re: SVB does not deserve a bailout. They DID NOT hedge interest rate risk at all

#70

Post by JumpCrisscross »

dehrmann wrote: post #45
muzz wrote: post #30

Earlier quoted context omitted.

Depositors knowingly took the risk of having such large deposits there. They made this decision and should face the consequences of it, not the taxpayers.

You're technically right, but people treat it as de-facto zero risk. You also need to look at second-order effects. If startups go out of business because of this, that's a drain on unemployment funds. Those are income taxes not getting paid. Then there are downstream job losses on top of it. It could set back the sector for years, giving other countries sudden advantage in tech. In addition, some LPs are pension fun…

> people treat it as de-facto zero risk

Silicon Valley was not an investment-grade bank. If you’re running a corporate treasury function, you should have sweep, have a back-up bank account and know how to pull deposits into Treasuries.

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