I do not understand what the hell is going on regarding Silicon Valley Bank. I read something in the New York Times that seems to suggest to the no doubt completely confused me that somehow money will change hands as if uninsured deposits were insured. I have some simple questions. What happened ? What is happening now ? Why ?
I guess the two key questions are
1) why are extraordinary measures being taken by the Federal Government to help people who chose to gamble and lost ?
2) why did they choose to gamble by holding liquid assets as uninsured deposits and not, say, as the balance of a brokerage account ?
A good source for detailed explanations which are not available in daily Newspapers is Vox.com
In this case, I am pretty sure that someone at VOX can explain what happened, because it turns out that most of VOX Media assets are the balance of an account at Silicon Valley Bank.
“Vox Media, the publisher of New York Magazine and The Verge, has a substantial concentration of cash at Silicon Valley Bank and used credit cards that were issued by the bank. Those credit cards ceased to work on Friday.”
OK so first question is why the hell do you have a substantial concentration of cash in a bank ? Do you know that the FDIC only insures the first $250,000 (or do you know that when you gamble and lose the FDIC will make you whole ?).
Second question is what are you getting from the US Federal Government and why isn’t it special treatment for the elite so that they don’t pay for their mistakes as ordinary people do ?
I guess third question is whether there is any risk of a general systemic financial crisis as occured in 2008 and, if not, is there any justification for the extraordinary measures.
Fourth question is what claim on the upside is the US Federal Government getting ? Are they loaning at a penalty interest rate ? Does it now have an equity stake in VOX Media ? One way to avoid bankruptcy is to issue new shares. How about creating some and selling them to the US Federal Government (clearly this is not allowed while we handle the losses but the profits are your private business is, somehow, sometimes, allowed.
Fifth question: does Robert Waldmann understand that the executives of VOX Media are not the very smart journalists who write VOX.com and that, while the executives were once smart enough to finance VOX.com, one should not assume they are generally smart based on a sample of one (1) decision.
Needless to say, I am ignorant. You will learn nothing here. I told you I need a VOX explainer.
More details from an earlier article
“no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
“Mr. Biden said in a statement. “The solution also ensures that taxpayer dollars are not put at risk.””
“The regulator will tap the Deposit Insurance Fund, which comes from fees paid by the banking industry, to make sure it can pay back depositors.
The agencies said that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.””
Ah now I understand, if money is taken from banks via a “special assessment” it is not a tax and the specially assessed banks are not taxpayers. It is the Federal Government taking money without taxing any tax payers. The English language is a strange and wonderful thing with enormous expressive resources, but I had not idea it could be *that* flexible.
I do not see any reference to loaning “at penalty rates” . It seems that firms that find themselves in a situation such that they might not be able to meet payroll (because they kept their liquid wealth as uninsured deposits) will get the money they need from the Federal Government without paying any interest let alone penalty interest, because they are depositors not gamblers who lost (one can be both).
Also, furthermore, oh hell I have to just quote at length, because I can’t understand (or maybe I can’t believe) what is going on, let alone explain it.
“And the Fed’s new lending program — backed by $25 billion in cash from the Treasury — could provide an even broader backstop to the banking industry.
The program will offer up to one-year loans to banks, savings associations, credit unions and other eligible depository institutions in exchange for collateral including U.S. Treasuries, agency debt and mortgage-backed securities. In doing so, it will create a workaround to financial institutions that have seen the market value of their long-term asset holdings fall as interest rates have risen.
Many banks are sitting on big “unrealized losses” because of the shift in rates over the past year: That is partly what brought Silicon Valley Bank down. Now, they will be able to borrow against the original value of their asset holdings at the Fed. That will give them bigger cash infusions, and prevent them from having to sell in desperation.”
As far as I can understand, banks which invested in long term treasuries, getting a higher expected return, because they chose to bear the maturity risk will be made whole from the losses they might have to bear because they chose to gamble and buy high return slightly risky securities not T-bills.
How the hell can something be collateral at the “original” value not the current market value ? What the hell is the “orignal” value. What does the word mean in this context ? What could the word mean in this context ? I fear it means “face value” that is money in the future is treated as identical to money present, that is, we will loan you money and you better repay because if you don’t we will seize the collateral which act will amount to giving you a zero interest loan.
Penalty interest I guess, but the Treasury will be paying the penalty not extracting it.
One last thing Biden “added: “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.””
Sure Joe, I’ll believe that when I see it. I am interested in finding out just you firmly committed you are.