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SVB shows that there are few libertarians in a financial foxhole

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Re: SVB shows that there are few libertarians in a financial foxhole

#61

Post by gregw2 »

From a Libertarian perspective why would we not:

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.

Re: SVB shows that there are few libertarians in a financial foxhole

#62

Post by miguelazo »

elzbardico wrote: post #11

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, alon…

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?

Re: SVB shows that there are few libertarians in a financial foxhole

#63

Post by cal5k »

mhb wrote: post #34
olivermarks wrote: post #21

Earlier quoted context omitted.

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 http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...

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?

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".

Re: SVB shows that there are few libertarians in a financial foxhole

#64

Post by yunwal »

_ktx2 wrote: post #31
balderdash wrote: post #20

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…

Other than Peter Thiel there's not a lot of Libertarians on this list: https://www.opensecrets.org/industries/contrib.php?cycle=202... This conjecture about Libertarians in tech is dated. Might've been true in the 90s, but the industry has been captured since then.

[flagged]

Re: SVB shows that there are few libertarians in a financial foxhole

#65

Post by nomay »

sdfghswe wrote: post #50
fnordpiglet wrote: post #36

Earlier quoted context omitted.

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 infla…

> 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?

You just explained the businness model of banking.

Re: SVB shows that there are few libertarians in a financial foxhole

#66

Post by psychlops »

ralph84 wrote: post #47
fnordpiglet wrote: post #23

Earlier quoted context omitted.

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…

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?

Don't forget they also paid bonuses the morning they failed.

Re: SVB shows that there are few libertarians in a financial foxhole

#67

Post by Swenrekcah »

Waterluvian wrote: post #46
elzbardico wrote: post #11

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, alon…

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.

Re: SVB shows that there are few libertarians in a financial foxhole

#68

Post by sdfghswe »

doodlesdev wrote: post #59
sdfghswe wrote: post #35

Earlier quoted context omitted.

Which is exactly what is happening here. A large business is failing and its investors are losing their investment.

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?

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?

Re: SVB shows that there are few libertarians in a financial foxhole

#69

Post by fach »

fnordpiglet wrote: post #36
sdfghswe wrote: post #24

Earlier quoted context omitted.

> 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 pos…

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 infla…

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?

Re: SVB shows that there are few libertarians in a financial foxhole

#70

Post by kodah »

yunwal wrote: post #64
_ktx2 wrote: post #31

Earlier quoted context omitted.

Other than Peter Thiel there's not a lot of Libertarians on this list: https://www.opensecrets.org/industries/contrib.php?cycle=202... This conjecture about Libertarians in tech is dated. Might've been true in the 90s, but the industry has been captured since then.

[flagged]

To conflate political alignment with investor opportunism is astonishing.
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