“Time for a VOX Explainer” all Time Winner
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.
Also
Could be that ‘extraordinary measures’ were taken because it was a pretty large bank, a lot of rich people stood to lose much money, and it was actions by the Fderal Reserve & the guv’mint (relaxing cash reserve requirements on regional banks) that caused the crisis to ouccur in the first place.
It’s basically a chapter 7 treated as a chapter 11 because they’ve accepted all the safe assets at par value (~98.5%, the face value of the bonds) instead of market value (~95.5% because you can just buy new bonds from the government at 4.5%).
It’s “not a bailout” because they’re resolving the bank, apparently this is mostly because the bank lobbied to be exempted from regulations that might have avoided this eventuality.
It’s on the skeezy side, but probably less so than what happened at the end of the W administration.
Ground Hog Day
Reliving 2008. Banks and Wall Street are saved and Main Street pays. The gov is afraid Main Street will pull their money.
Our home sold to us at higher price is not worth less. It is still more than the mortgage and we have little money into it. The interest rate is extremely low where our mortgage is split almost 50-50 with interest and principal.
They sell at a higher price till mgt rates go up and demand disappears. They hold their prices and buyers won’t buy. You have to wonder how much reserve the builder has before bankruptcy comes home to roost.
The oligarchs have insurance w/o paying premiums. I wish I could pull that off. This country is off the rails.
Dean Baker has a pertinent pot,
A 2018 law reduced “stress testing” for banks the size of SVB.
Trump’s Bailout in that he approved a bill that permitted looser regulation of regional banks, the tier below the handful of megabanks that dominate the industry, reducing regulation and margin requirments, making bankruptcy for them more likely.
Trump has initimate knowledge of just how beneficial bankruptcy can be to the wealthy & powerful.
Most of those congressional millionaires managed to have that bill delivered to his desk.
As a former FDIC bank examiner, it seems to me that J. Goodwin’s explanation above is very accurate. Over the past year or so, SVB received a lot of new deposits from very cash-rich clients. Much of that money was invested in Treasury securities, which were worth far more when they were bought than they are now. That drop in the value of those Treasuries was a primary cause of the bank’s problems when large depositors started making large withdrawals (apparently egged on by Peter Thiel, but also just a herd effect).
So, allowing the FDIC (as receiver) to “sell” those Treasuries back to the Treasury at par rather than the discounted current market price, provides much of the cash needed to make uninsured depositors whole, without using taxpayer money, and without “bailing out” senior management and shareholders.
As to why smart people deposited so much cash into uninsured accounts, I would simply ask: what would you do with millions/billions of windfall cash that is safer than putting it into a deposit account, keeping in mind that for years now we’ve all been aware that there is a lot of money sloshing around the world looking for somewhere safe and profitable to go?
My sense, as a ‘traditional’ left-leaning liberal and a former FDIC insider, is that this is a pretty good solution. As long as we don’t knee-jerk ourselves into “reliving 2008”.
This is definitely NOT the same as 2008.
Putting larger sums into FDIC-insured account than is covered by their insurance is risky, it would seem.
This is also known as Taking a Haircut in financial circles.
Taking a Financial ‘Haircut’
First it seems that allowing SVB in receivership to trade bonds at par not at their market price is giving it public money.
Second I had no idea that firms had balances over $250,000. It seems crazy to me given interest paid on deposits (I get zero). It would be safer to put the money over $250,000 in T-bills, commercial paper, and a portfolio of money market funds. There seem to be many ways to get higher interest without exposure to the risk of a (temporary with a bailout) loss of liquidity due to a bank run.
Now money in a brokerage account is not safe (ask Jon Corzine) but that risk involves fraud by some firm which is required to keep client funds separate from its own account. SVB balances over $250,000 were at least temporarily frozen without anyone breaking any law. I think that means the depositors were fools.
It has been known for centuries that money in the bank is not safe if it is not FDIC insured (known before there was an FDIC that money in the bank is not safe). Why did allegedly super smart people have to learn that again in 2023 ?
Robert:
You were in the trash. I approved your comments so they could be displayed. Sorry!The system did you in.
what would you do with millions/billions of windfall cash that is safer than putting it into a deposit account?
Roll over short term treasuries. Plenty of choices other than the one they made. Now we pay with moral hazard. Uninsured deposits made whole. What is right about that?
“We pay with moral hazard.”
The moral hazard created by making depositors whole is, IMHO, not at all the same as the moral hazard created by letting shareholders off the hook.
I agree that I would personally prefer that stupid depositors don’t get made whole. But given the potential scale of harm to the employees (of the stupid depositors) who would potentially be harmed, I’m pretty comfortable with this level of “moral hazard”.
Particularly since senior management has been fired (which didn’t happen in 2008) and shareholders are NOT being bailed out.
“Not at all the same” ??? not identical I guess, but it seems to me to be basically the same. It is giving something to someone who has no legal claim on it.
I agree it is better to bailout than to Lehman again. However, for over a century, the doctrine has been “lend freely at a penalty rate”. Lending to depositors whose holdings are, at least, frozen so they can meet payroll — sure. But why not lend at 10% a year ? There is no reason to give them money which does not, by right, belong to them.
I quoted the noted raging red Walter Bagehot. What have you figured out about financial crises that he didn’t understand and explain ?
I think SivaDancer has it right. The administration didn’t want all those tech startups folding because they couldn’t meet payroll. There were a lot of jobs at stake.
The haircut that depositors would have taken after everything was resolved probably wasn’t gigantic as a %, but it takes time to wind it down. The list of other banks in similar positions (holding long term low interest debt now underwater at market values) that promptly made the rounds were probably of more concern.
Nothing causes a bank to fail quite like another bank failing.
on making payroll and not failing, the depositors needed cash now (yesterday actually). The Fed can lend to anyone in a crisis. They could have lent. They could have lent at a penalty rate and prevented bankruptcies (and made a profit to hand over to the Treasury). Why not.
Other banks need to be able to borrow from the Federal Government to pay out deposits. That is a separate provision of the rescue effort which has nothing to do with paying people for losses covered by imaginary insurance that they could have bought and chose not to buy.
SVB had a lot of corporate hitech clients. In the Boston area they also provided private banking services to wealthy folk who were not exactly ‘meeting payrolls’.
And some who were. From the Boston Globe…
The Wellesley branch of Silicon Valley Bank was a scene of crowding and confusion on Monday morning, as dozens of customers lined up to withdraw money and close accounts at the failed California-based bank.
Though most had heard about the Sunday night government plan to safeguard and make available all SVB deposits, even in accounts above the $250,000 insured maximum, those in line were not reassured.
“I don’t feel good about it,” said Dave Barry, an electrical contractor, who came to close his business accounts.
Barry’s company needed immediate access to its funds. “Access to capital is pivotal for us. We’re a union shop and we need to make payroll and benefits every Monday,” he said. Barry planned to get a cashier’s check and move the money to accounts he opened at other banks on Friday. …
(Previously a branch of) Boston Private Bank & Trust Co, which was acquired by SVB in 2021. …
Silicon Valley Bank Is Gone. We Know Who Is Responsible.
NY Times – Elizabeth Warren – March 13
No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules.
In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.
Greg Becker, the chief executive of Silicon Valley Bank, was one of the many high-powered executives who lobbied Congress to weaken the law. In 2018, the big banks won. With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank. Regulators, including the Federal Reserve chair Jerome Powell, then made a bad situation worse, letting financial institutions load up on risk.
Banks like S.V.B. — which had become the 16th largest bank in the country before regulators shut it down on Friday — got relief from stringent requirements, basing their claim on the laughable assertion that banks like them weren’t actually “big” and therefore didn’t need strong oversight.
… on Friday, S.V.B. executives were busy paying out congratulatory bonuses hours before the Federal Deposit Insurance Corporation rushed in to take over their failing institution — leaving countless businesses and nonprofits with accounts at the bank alarmed that they wouldn’t be able to pay their bills and employees.
S.V.B. suffered from a toxic mix of risky management and weak supervision. For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits. This meant that weakness in a single sector of the economy could threaten the bank’s stability.
Instead of managing that risk, S.V.B. funneled these deposits into long-term bonds, making it hard for the bank to respond to a drawdown. S.V.B. apparently failed to hedge against the obvious risk of rising interest rates. This business model was great for S.V.B.’s short-term profits, which shot up by nearly 40 percent over the last three years — but now we know its cost.
S.V.B.’s collapse set off looming contagion that regulators felt forced to stanch, leading to their decision to dissolve Signature Bank. Signature had touted its F.D.I.C. insurance as it whipped up a customer base tilted toward risky cryptocurrency firms. …
And I agree with Fred C Dobbs, completely. I think Brad DeLong at Berkeley does as well:
https://braddelong.substack.com/p/saturday-night-thoughts-on-the-need
Siva:
Would they give me the same consideration??
That is the crux of the matter. Get rich enough and the govt protects you? That is not a great country we are describing. That is not equality that we are describing.
Here are some crocodile tears for the masters of the universe. boo hoo.
My vote is I rather have the Fed that at least has to answer to Congress, is governed by laws and has oversight from Treasury running things than Thiel, paypal, Musk, Cryptobros and other Masters of the Universe. This is not 2008 but a concerted attack and the financial system for fun and profit. Jeeez anyone with a capital fund with the name Mithril pretty much gives a hint at the egos.
I’m usually all for sticking the bankers with pitchforks. But if it is really true that most of the problem with this bank is that they bought US treasuries that decreased in present market value because of Fed interest rate hikes, then I am almost feeling sorry for them. There really is no safer ‘investment’ than US federal debt, and I don’t have a problem with the Fed loaning against that collateral at the face value of the bond rather than the present market value.
But I imagine they screwed up some risky loans elsewhere as well and that we won’t find out about their non-performing loan portfolio until later.
If you owe the bank $1000 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem J. Paul Getty.
If a bank owes a bunch of powerful people a few billion$, then the guv’mint has a problem.