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Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

cnbc.com

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Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#11

Post by anonuser123456 »

jimt222 wrote: post #7

A.k.a. “moral hazard”. When people take financial risks (such as holding more than $250K in FDIC insured bank account), why should taxpayers cover their losses?

There is a legitimate issue beyond “but Capitalism” here.

Banks that may be otherwise solvent may become insolvent because of a domino risk of bank runs.

Probably the right thing to do is forced equity dilution of a bank experiencing a run. That is, the Fed buys senior equity in the bank and the injection pays for short term losses.

The equity injection guarantee alone would likely be enough to stop the contagion and calm markets.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#12

Post by cma »

compumike wrote: post #2

Treasury Secretary Yellen was quite clear in an interview a few hours ago: "The problems of the tech sector aren't at the heart of the problems of this bank." https://youtu.be/vSZcPvp7NVU?t=292 Appears that leadership at the highest levels seems to be clearly aware that the problem at SVB had to do with bond prices/rates (rather than anything startup/tech/Silicon Valley specific), and that other banks may have the si…

>other banks may have the situation and be vulnerable to "contagion".

Are other banks that are in danger are now halting bonuses in anticipation to make sure to keep their books as sound as possible.

And are they issuing new equity, diluting shareholders and employee option holders, to make sure they make it through responsibly?

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#13

Post by chernevik »

tome wrote: post #9
hanklazard wrote: post #6

Earlier quoted context omitted.

This is referring specifically to deposits not equity or corporate bond holders, management, etc. The depositors are not making a sizable returns, they’re just wanting to keep their money in a bank account.

The problem is that continuing to bail out depositors means that they'll never do due diligence on their banks and therefore bank executives will keep trying risky strategies that increase their bonuses.

And then the regulators have to approve EVERY asset and of course anything looking slightly weird (hint: a startup) will be "risky" and unloanable.

The only way an SVB can exist is if banks are allowed to take risk.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#14

Post by blindriver »

Silicon Valley Bank was an outlier with respect to risk.

https://johnhcochrane.blogspot.com/2023/03/silicon-valley-ba...

The CEO pushed to ease regulations, and the lack of regulations led to this over-indexing in risk that was clear as daylight. But no one cared because they helped out startups, everyone knew the CEO personally, the VCs had relationships with the banks, etc.

Saying that "no one could see that coming" was wrong. Now the crybaby VCs THAT ACTUALLY CAUSED THIS PANIC IN THE FIRST PLACE get their way by preserving their investments, but hopefully the stark hypocrisy of Biden, first saying that millionaires "need to pay their fair share" and then immediately turning around and bailing his Silicon Valley VC buddies out, will be brought up time and time again during the election cycle.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#15

Post by thephyber »

jimt222 wrote: post #7

A.k.a. “moral hazard”. When people take financial risks (such as holding more than $250K in FDIC insured bank account), why should taxpayers cover their losses?

> why should taxpayers cover their losses

Most likely there are no losses so long as the assets don’t need to be sold in a fire sale. The bank just needs liquidity.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#16

Post by dragontamer »

anonuser123456 wrote: post #11
jimt222 wrote: post #7

A.k.a. “moral hazard”. When people take financial risks (such as holding more than $250K in FDIC insured bank account), why should taxpayers cover their losses?

There is a legitimate issue beyond “but Capitalism” here. Banks that may be otherwise solvent may become insolvent because of a domino risk of bank runs. Probably the right thing to do is forced equity dilution of a bank experiencing a run. That is, the Fed buys senior equity in the bank and the injection pays for short term losses. The equity injection guarantee alone would likely be enough to stop the contagion and…

So 15 years after 2008 and TARP, our solution is to reach for the most extreme tools available to us yet again?

I thought "TARP" / equity injections into banks was a "never again" kinda deal. With Dodd-Frank regulations being passed back then to try to stop these things from being regular. We can't just buyout every bank that collapses.

---------

At a minimum, I want to see major banks (similar to AIG) teetering on the brink before we reach for those tools again. This absolutely should not, and cannot, be our main way forward whenever a banking issue arises.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#17

Post by Nifty3929 »

anonuser123456 wrote: post #11
jimt222 wrote: post #7

A.k.a. “moral hazard”. When people take financial risks (such as holding more than $250K in FDIC insured bank account), why should taxpayers cover their losses?

There is a legitimate issue beyond “but Capitalism” here. Banks that may be otherwise solvent may become insolvent because of a domino risk of bank runs. Probably the right thing to do is forced equity dilution of a bank experiencing a run. That is, the Fed buys senior equity in the bank and the injection pays for short term losses. The equity injection guarantee alone would likely be enough to stop the contagion and…

I like this idea, but how would the correct share price be established? It must be conservatively low to avoid taxpayer burden.

I’d also insist that the govt/fdic must sell their shares on the open market with 30 days, even at a loss.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#19

Post by sidewndr46 »

Why does the government & media get away with using words like "contagion"?

If a single bank failure were to precipitate the collapse of the US banking system as a whole, this isn't a contagion. It is the reality of the insanely fragile nature of US banking.

Re: Fed and FDIC discussing backstop to make SVB depositors whole, stem contagion

#20

Post by paxys »

the-grump wrote: post #5
panarky wrote: post #3

I also lost money on the bonds in my portfolio, who will make me whole?

You took the risk buying those bonds. Depositing cash at a bank is a different matter. No bailout for SVB; no bailout for you.

Depositing >250K cash in a bank carries similar risk, so not a different matter at all.
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