Given that so high a percentage of tech startups and their investors were banking at Silicon Valley Bank, I can see why FDIC had to bail out the bank's depositors above the $250 thousand limit.
What I don't understand is why FDIC funds are making up 100% of the losses.
Why 100%?
Why not bail the bank's $250+ thousand customers to, say 90%, 85% or 80% of their deposits? That ought to not only have stemmed a national bank panic but also put foolhardy large depositors sufficiently on notice in the future to keep a wary eye on the governance of the banks in which they've placed their deposits. Silicon Valley Bank's managers screwed up six ways from Sunday in a highly visible way. Their depositors need to experience some pain.
This morning HSCB UK announced they were buying SVB/UK for a symbolic £1 ($1.20). And the Bank of England signaled that they may ease off on rate hikes for a period until the market settles down. They need to keep long term bonds from cratering further.
Undoubtably the Fed will follow the BofE and hold rates, or maybe limit increases to just ¼ point.
But no matter how careful you have been, avoiding any high flyers, SVB had relationships with 60,000+ businesses who need liquidity this morning. Saw a story of a well run business who used a payroll service who got locked out of SVB. This company scrambled all weekend to make good on 1,000+ paychecks that did not happen last Friday. The ripple effect will be everywhere for some time.
Amazingly the government in the 1990’s and in 2008 stated they were passing laws that this would never happen again. The government always lies and never anticipates what could happen differently.
When the economy collapsed in 2008, I remember screaming bloody murder at how Washington and the financial markets had manipulated mortgages for their own "self-interest" (a highly over-simplified description). But then I realized that anyone who sold a home in the previous two decades had benefitted from that manipulation, me included (on three separate occasions). When I look at current market conditions, I see what seems to be a similar situation; we've all benefitted from low interest rates over the past decade or more, even as the housing market heated back up in the late teens. Now, we're correcting. Not sure where this is headed, but the danger doesn't seem nearly as pervasive as it did in 2008.
I think you have been consulting with political folks and not economists. "The billionaire and multi-millionaire investors of SVB should be the ones to clean up this mess, not the American taxpayers. They are the ones clamoring for a federal bailout while also funding the leftwing groups that scream about income inequality in the country. They can give up some of their income to save their investment in SVB. The private sector created this mess and can clean it up." The investors in SVB are wiped out, as are the bondholders. They have no incentive to help out since the FDIC owns SVB now. The folks that were bailed out are folks with deposits. There may even be some conservative ones! Yes, they should have been more diligent with where they put their money, but many of these folks are focused on running their businesses than figuring out the quality of the bank they dealt with.
It's also an outsourcing partner problem. I knew where my cash was, but I could not track the practices of all my vendors. Payroll. Accounting. Staffing. Shipping. Customer services. Call centers. Most of these services were outsourced where partnering decisions were made on cost and perhaps quality.
True, but if you looked a week ago you would have thought SVB was fine (check the stock price out). Let's be honest, is an entrepreneur's valuable time spent looking at the quality of their bank or running their business? If it was my business, I would keep the funds in T-bills and not in the system. But I am probably only in the less than 1% that would do that.
Charles Chambers
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Balancing depositor safety and moral hazard:
Given that so high a percentage of tech startups and their investors were banking at Silicon Valley Bank, I can see why FDIC had to bail out the bank's depositors above the $250 thousand limit.
What I don't understand is why FDIC funds are making up 100% of the losses.
Why 100%?
Why not bail the bank's $250+ thousand customers to, say 90%, 85% or 80% of their deposits? That ought to not only have stemmed a national bank panic but also put foolhardy large depositors sufficiently on notice in the future to keep a wary eye on the governance of the banks in which they've placed their deposits. Silicon Valley Bank's managers screwed up six ways from Sunday in a highly visible way. Their depositors need to experience some pain.
You could beg most people to define “moral hazard” but you’re going to be disappointed.
The Silver Lining
This morning HSCB UK announced they were buying SVB/UK for a symbolic £1 ($1.20). And the Bank of England signaled that they may ease off on rate hikes for a period until the market settles down. They need to keep long term bonds from cratering further.
Undoubtably the Fed will follow the BofE and hold rates, or maybe limit increases to just ¼ point.
But no matter how careful you have been, avoiding any high flyers, SVB had relationships with 60,000+ businesses who need liquidity this morning. Saw a story of a well run business who used a payroll service who got locked out of SVB. This company scrambled all weekend to make good on 1,000+ paychecks that did not happen last Friday. The ripple effect will be everywhere for some time.
Cash is king.
Cheers
Amazingly the government in the 1990’s and in 2008 stated they were passing laws that this would never happen again. The government always lies and never anticipates what could happen differently.
FYI: https://www.zerohedge.com/markets/svb-latest-developments-live-blog-fdic-auction-failed-svb-assets-underway
When the economy collapsed in 2008, I remember screaming bloody murder at how Washington and the financial markets had manipulated mortgages for their own "self-interest" (a highly over-simplified description). But then I realized that anyone who sold a home in the previous two decades had benefitted from that manipulation, me included (on three separate occasions). When I look at current market conditions, I see what seems to be a similar situation; we've all benefitted from low interest rates over the past decade or more, even as the housing market heated back up in the late teens. Now, we're correcting. Not sure where this is headed, but the danger doesn't seem nearly as pervasive as it did in 2008.
Could this be Janet Yellen's first correct decision, to not bail out SVB?
Never mind. Expecting wisdom from this crew was too much to ask.
If this is DAY ONE of a cascading event, then I have zero confidence that Yellen or Brandon can handle what may come.
I think you have been consulting with political folks and not economists. "The billionaire and multi-millionaire investors of SVB should be the ones to clean up this mess, not the American taxpayers. They are the ones clamoring for a federal bailout while also funding the leftwing groups that scream about income inequality in the country. They can give up some of their income to save their investment in SVB. The private sector created this mess and can clean it up." The investors in SVB are wiped out, as are the bondholders. They have no incentive to help out since the FDIC owns SVB now. The folks that were bailed out are folks with deposits. There may even be some conservative ones! Yes, they should have been more diligent with where they put their money, but many of these folks are focused on running their businesses than figuring out the quality of the bank they dealt with.
You can’t focus on running a business without paying attention to where your cash assets are located. This is a vital part of managing a business.
It's also an outsourcing partner problem. I knew where my cash was, but I could not track the practices of all my vendors. Payroll. Accounting. Staffing. Shipping. Customer services. Call centers. Most of these services were outsourced where partnering decisions were made on cost and perhaps quality.
True, but if you looked a week ago you would have thought SVB was fine (check the stock price out). Let's be honest, is an entrepreneur's valuable time spent looking at the quality of their bank or running their business? If it was my business, I would keep the funds in T-bills and not in the system. But I am probably only in the less than 1% that would do that.
When I was CEO we simply used several banks to spread the risk. No lengthy analysis needed. Finished it all in a couple of hours. Easy peasy!
Which of the “usual suspects” made money from the SVB crash?