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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

#71

Post by machina_ex_deus »

Linosaurus wrote: post #65
machina_ex_deus wrote: post #54

Earlier quoted context omitted.

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…

Of course, when you're forced to pick a bank, and you're forced to stay in that bank because it's a nightmare to move banks, and you're forced to pick the largest banks because only they are too big to fail, there is no point doing any due diligence.

If you banked directly at the Fed, or with crypto, then moving some of your money to a bank would actually be a choice. And the entire incentive structure would shift accordingly.

They have no incentive to change. They are given a government backed mandate to be your only choice. Given those privileges, it's their incentives to abuse them. They have been continuously abusing them for years. It's not only risk, it's the interest rates they give customers. They get to arbitrarily pick and choose their friends to get good interest rate while you get trash.

They get to do all of this because they are protected with innocent people as meat shields. Meat shields that have no other choice but to protect these people from consequences.

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

#72

Post by em500 »

kilotaras wrote: post #69
em500 wrote: post #67

Earlier quoted context omitted.

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 3…

I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company.

AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?

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

#73

Post by kilotaras »

em500 wrote: post #72
kilotaras wrote: post #69

Earlier quoted context omitted.

> 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 3…

I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parti…

> depositors get back 100% up to the FDIC limit

Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part.

I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.

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

#74

Post by [deleted] »

nytesky wrote: post #52
hiharryhere wrote: post #15

Earlier quoted context omitted.

250k is not a lot. A 15-20 person company could conceivably spend more than that month, especially with dev salaries, rent etc. How many of those have a treasury function?

They have to “make payroll” but couldn’t they cut all employees down to minimum wage? And then promise a performance bonus when money is restored and they haven’t quit. Tech workers are usually at will, no union, so I think salary is completely discretionary. This would be for hours going forward, not the payrolls due for hours already worked.

[deleted]

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

#75

Post by Symbiote »

jayparth wrote: post #35
ClumsyPilot wrote: post #20

Earlier quoted context omitted.

> Taxpayers should pay the bill, it might incentivize them to get off their ass for once like they did in 2008? I would rather pay off student loans

What happened in 2008? I was very young then so I don’t know.

https://en.wikipedia.org/wiki/2008

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

#76

Post by WastingMyTime89 »

machina_ex_deus wrote: post #66
WastingMyTime89 wrote: post #59

Earlier quoted context omitted.

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 directl…

You are confusing different things.

I also agree that banks shouldn’t be the sole intermediating agents for money creation but this has absolutely nothing to do with retail banking.

Who exactly is the captive audience in retail banking? Last time I checked there was plenty of choice there.

Anyway, SVB clearly is a failure of risk management which is a failure of the regulatory environment.

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

#77

Post by nmhancoc »

ithkuil wrote: post #25
swatcoder wrote: post #9

Earlier quoted context omitted.

If you had a payroll to make this month and only had that much in cash on hand, you were already a marginal business and a gust of wind could have knocked you out. Your bank failing was that gust of wind. You’ll definitely get up to $250k back soon and probably more, and hopefully you can sort out the disruption and find a way to carry on. If, on the other hand, you had a lot more cash on hand but parked it all as un…

I'm a complete ignoramus in this field, so this is a honest question. Please ELI5: Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 differ…

> Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 different banks?)

That is an option, yes. You can also automate it through a couple different ways. Some are third party brokers who then deposits it across multiple institutions keeping each balance below $250k, others are banks that have agreements between each other to share deposits such that the deposit at each institution is below the limit.

For an example of the latter, https://www.intrafinetworkdeposits.com/find-intrafi-network-...

> Or can you pay some extra insurance in order to get the required protection without the operational hassle of having to deal with multiple banks?

The above deals with the operational hassle but you can also directly insure deposits.

The most direct way is the Depositors Insurance Fund, which is run out of Massachusetts and has some participating banks.

Incidentally, really large companies like GM or Toyota, fund their payroll through the commercial paper market. As a result they don’t have the large balances you’re imagining sitting around in bank accounts for a monthly withdrawal.

These sorts of notes actually occupy a fun place in the history of the development of currency, but that’s off topic.

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

#78

Post by nmhancoc »

muzz wrote: post #41
jayparth wrote: post #36

Earlier quoted context omitted.

What is the difference between the two?

With TARP the government owned assets. For every dollar they invested, they could receive less, equal, or more than a dollar. Overall, they received more. Tan is proposing the backstop deposits. In this case, the govt can receive AT MOST a dollar for every one of its dollars. The absolute best case is a break-even on the investment (and the government eating the cost of administering the program)

How are you getting to an at best break-even?

Looking at the most recent 10-K (12/21), if you have more recent figures I’d be happy to use those:

  Total deposits: 173.109B
  Total assets: 211.793B
Of the assets, those that the government would actually care about in a takeover:

  13.8B cash
  26.1B available-for-sale (presumably marked to market, so that’s supposed to represent today’s sale price)
  91.3B held to maturity securities (these aren’t marked to market AFAIK, so this represents the value if they’re held to maturity not sold today)
  73.6B in loans net of loss allowances
  Total: 204.8B
There are also a few billion of non marketable securities and “other” which I left out.

Granted, some of this has already been liquidated, but if the government paid out depositors one-for-one, and held the rest of the book to maturity they’d make 31B. That’s basically the same argument employed when stating the government “made” money with TARP.

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

#79

Post by ithkuil »

nmhancoc wrote: post #77
ithkuil wrote: post #25

Earlier quoted context omitted.

I'm a complete ignoramus in this field, so this is a honest question. Please ELI5: Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 differ…

> Is $250k a fixed limit for insured deposits? If your company needs more than $250k to meet a month of payroll, is it advised that you have accounts in multiple banks so that you have the necessary liquidity guaranteed as insured deposits? (E.g. if you need a million you'd need 4 different banks, if you need 5 million you need 20 different banks?) That is an option, yes. You can also automate it through a couple dif…

Thanks! So where is the catch?

According to https://www.ycombinator.com/blog/urgent-sign-the-petition-no...

> In the Y Combinator community, one-third of startups with exposure to SVB used SVB as their sole bank account

Why did so many startups end up in that situation?

Is doing things properly too expensive? Or just requires hiring an expert? Hubris? (won't happen ever), calculated risk? (Among the many things that can go wrong in a early startup life, the bank going bust is the last worry)

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

#80

Post by muzz »

nmhancoc wrote: post #78
muzz wrote: post #41

Earlier quoted context omitted.

With TARP the government owned assets. For every dollar they invested, they could receive less, equal, or more than a dollar. Overall, they received more. Tan is proposing the backstop deposits. In this case, the govt can receive AT MOST a dollar for every one of its dollars. The absolute best case is a break-even on the investment (and the government eating the cost of administering the program)

How are you getting to an at best break-even? Looking at the most recent 10-K (12/21), if you have more recent figures I’d be happy to use those: Total deposits: 173.109B Total assets: 211.793B Of the assets, those that the government would actually care about in a takeover: 13.8B cash 26.1B available-for-sale (presumably marked to market, so that’s supposed to represent today’s sale price) 91.3B held to maturity sec…

Good points

> presumably marked to market

This is the key-- not sure if we really know what is marked to market at what isn't

> held the rest of the book to maturity

That's like 8 years? and a gain in nominal terms but to real terms ie inflation-adjusted since a 2031 dollar is worth less than a 2023 dollar

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