The great unwashed American public is being subjected to yet another round of “Cream for me, crumbs for thee” in the form of a bailout of Silicon Valley Bank, Signature Bank, and the creation of a facility to shore up uninsured deposits at other wobbly institutions.
This tender concern for spillover effects in the economy comes a mere five days after Fed Chairman Jerome Powell told the Senate Banking Committee that the central bank was likely to change course at its next policy meeting on March 21 and 22 and go back to larger rate hikes, after moderating at its last meeting.
Elizabeth Warren called out that the Fed’s own forecasts showed that it was setting out to destroy jobs. From Fortune:
Sen. Elizabeth Warren, Democrat of Massachusetts, noted that Fed officials have projected that the unemployment rate will reach 4.6% by the end of this year, from 3.4% now. Historically, when the jobless rate has risen by at least 1 percentage point, a recession has followed, she noted.
“If you could speak directly to the 2 million hardworking people who have decent jobs today, who you’re planning to get fired over the next year, what would you say to them?” Warren asked.
But the prospect of oh so special, connected, and innovative Silicon Valley companies possibly going bust as a result of uninsured depositors was too unfair to let stand. By contrast, ordinary Americans losing their jobs is merely a statistic.
Mind you, the justification for the emergency measures was contagion risk and that was real. Personal contacts, as well as chatter on the Internet, indicated that plenty of individuals and businesses with more than $250,000 in deposits were planning on Monday to move some funds into another bank or withdraw deposits and buy safe securities. Both would stress and potentially create runs at other banks. The likely winners would be the biggest banks, such as JP Morgan and Citigroup.
Anat Admati, a finance professor at Stanford University, said regulators over the past few years had allowed the banking system to become fragile again and had no choice but to bail out Silicon Valley Bank.
“When it gets to this point and you are in a hostage situation, there is nothing else you can do,” Admati said. “But there is no other word for this other than to call it a bailout.”
The officialdom is trying to pretend that these interventions do not amount to bailouts because they are wiping out shareholders and bondholders. Many experts and commentators do not find that argument convincing. For instance:
Shareholders and managers especially had a stellar run through privatized upsides all along the way. There’s a substantial amount of cold hard cash that these individuals have pocketed (which will stay in their pockets) because of this asymmetry. /3
— Peter Conti-Brown (@PeterContiBrown) March 13, 2023
Similarly, the new uninsured deposit program, banks get to pledge Treasuries and other high quality assets valued at par, meaning all mark to market losses in a rising interest rate environment go poof. This is effectively a “Get out of bad asset-liability management free” card.
Recall that we said when Silicon Valley Bank got wobbly that in the last bloody-minded Fed rate increases, under Paul Volcker, damage to the banking system force the Fed to drop its interest rate increases sooner than it had wanted to. Banks are structurally long bond/lending market risk. It is difficult for individual firms to create the yield curve version of a market-neutral profile, plus there is simply not enough hedging capacity for banks collectively to go net short (even if they had the intestinal fortitude to do so). Similarly, banks that normally can do a pretty good job of generating income on trading find it harder to do in a rising interest rate environment because its funding costs are going up. So unless a bank has a lot of fee-based businesses compared to its interest-income and trading operations, its income statement will have a sad when the Fed is tightening.
One of the effects of a program that gives banks a back door for getting out of losses resulting from interest rate increases. If the Fed and Treasury can manage to calm depositors’ rattled nerves, it will have created a mechanism that will spare banks from Fed induced damage, the better to crush ordinary workers.
Another effect is to incentivize banks to make stupid bets, or more charitably, Hail Mary passes. Some observers have argued that Silicon Valley Bank’s big purchase of long-dated bonds sure looks like a big wager on the Fed being about to end its tightening cycle. And remember bonds staged a big rally until economic data that the central bank deemed to be too good came out. Confirming that view, I have yet to hear a peep from anyone as to how banking regulators will tighten up supervision so as to prevent banks from getting the wrong ideas.
In other words, patching up the system without taking measures to curb risk-taking is a prescription for future crises. As the Bank of England’s Andrew Haldane warned in his 2010 speech, The $100 Billion Question:
One important dimension of the debate concerns the social costs of systemic risk….
Tail risk within some systems is determined by God – in economist-speak, it is exogenous.Natural disasters, like earthquakes and floods, are examples of such tail risk. Although exogenous, even these events have been shown to occur more frequently than a normal distribution would imply. God’s distribution has fat tails.
Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments.
To keep this post focused on the current freakout, we’ll skip over Haldane’s recommendations.
Some cynics are skeptical as to how this crisis unfolded. Silicon Valley Bank was not put into resolution mode Thursday evening, when regulators knew the situation was dire, but intraday Friday, breaking procedures established after the 1974 failure of Herstatt Bank and predictably engulfing foreign entities. They also question why Silicon Valley did not rescue its own.
And some commentators with a lot of reach have been coming awfully close to calling “Fire” in a crowded theater. For instance:
From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a… https://t.co/2BoqtCDKJt
— Bill Ackman (@BillAckman) March 11, 2023
I got reports of companies and depositors deciding to take action Monday based on this tweet. I am sure Ackman is being truthful when he says he had no Silicon Valley Bank exposures, but the lobbying from tech industry and finance figures for a rescue was awfully fast in coming, and we did’t even get a pretense of concessions to the peanut gallery like “Gee, it would be more surgical to just guarantee payrolls, but operationally the Fed can only work through banks and doing anything via the Treasury would take way too long” or “Gee, maybe it’s time to have a simple, boring Post Office Bank and have it help small businesses by letting them have guaranteed deposits of up to $2 million”.
There’s also been some insinuations that being critical of the Silicon Valley Bank rescue is attacking promising companies who just had the misfortune to have Silicon Valley Bank as their depositary. It’s not often enough discussed that the VC funders required that:
Normal banks see the risk is such insanity and didn't want to do this. They didn't have 80% market share in the valley because they were great. They had a model nobody else would do
Blame the greedy valley. And these founders in mansions with wealth that's completely illiquid.
— David. Seriously, Deflation? (@David32375134) March 11, 2023
It’s also not considered polite to point out that the activities of the Palo Alto ecosystem are in aggregate extractive. Start with the venture capital funds themselves. We’ve pointed out that private equity has not beaten the S&P 500 since 2006. The underperformance of VC is longer-standing, since the dot-com glory returns rolled off. And the positive side of that ledger came from a tiny number of companies delivering moonshot returns.
In a similar vein:
Larger tragedy of the SBV is that USA (and larger world) had a decade plus of low interest rates that could have financed a lot of necessary climate & health investment. Instead the policy allowed it to be fuel for tech bozos & their various dumb schemes (crypto, SBV)
— Jeet Heer (@HeerJeet) March 12, 2023
And Elair and her husband expressed a sentiment that more and more Americans are coming to share obout our tech overlords:
They literally make (and remake) the laws, whining about getting the government off their backs so free enterprise can, well, be free to innovate and break things. Then, scream for the government to come to their rescue when they have screwed things up.
A former California official told me on Sunday that the tech titans are sure to reward their Democratic party rescuers with lavish campaign contributions: “Follow the money.” Remember that Biden has proposed a wealth tax. It was never going to go anywhere. But it’s a no-brainer that the top wealthy will make a huge stink about it despite the salvage operation that benefits a lot of people in their circles.
Not to be too hopeful, but there may be some upside despite the apparent elite lock on the handling of this rescue: Regime change!
SVB bondholders aren’t being bailed out, while Anglo-Irish were. Apart from that, optics are roughly similar given the average SVB client (rich techie) & average Anglo-Irish client (rich property developer).
Relatedly here’s how the ruling party did in the subsequent elections. https://t.co/aPtVEcyZmP pic.twitter.com/0i5iFEgA0G— Philip Pilkington (@philippilk) March 13, 2023
I shudder to think what additional goodies will be supplied if Mr. Market does not get off his fainting couch.
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Good heavens. I shudder too since I foresee another try at cutting Social Security for “budgetary stability” reasons. If the Politicos argue with straight faces that the bailouts must be “paid for” with cuts elsewhere in the Federal Budget, expect all H— to break out.
People made fun of the Tea Party types carrying signs demanding that “The Federal Government Keep It’s Hands Off of My Social Security,” but that demonstrated that illogic can cut both ways.
Once the first small bank crisis is ‘resolved’ through a ‘bail-in,’ expect the GOP to make infinite hay out of it politically. With any luck, Trump and his cohort can restructure the Republican Party as “The Party of the Working Man.” It might well be all smoke and mirrors, but then, politics as usual.
Ditto and said so elsewhere under the guise of paying[tm] for it.
Yes, this is how fascism starts, you are watching it happen in real time.
I am so angry and I do not know what to do with all the anger.
I am so angry and I do not know what to do with all the anger.
I have become acutely familiar with that feeling, myself.
You guys wanna get angry? Go look at all the twits on twitter crowing about how Silicon Valley is Science and progress and all the wonderful things they’re doing for you.
I was trying to come up with some sarcastic rejoinder about bespoke organic pet food delivered to your door 24/7, but couldn’t quite come up with something funny.
Or maybe organic bespoke footwear with 7 different biometric web connected sensors…
Hmm, not quite.
It is truly mind bending.
They make products that create most of their value by getting rid of or disempowering labor; surveillance, data mining, owning debt and “intellectual property”, and sell it all between themselves… to some degree it seems they even required people to use the same bank. A real castle in the sky that was about to fall on san francisco. A possibly purposely (collusion is a thing) constructed bad bank (hey let’s put all our risk in one place so we have leverage if we don’t get what we want) is not out of the question.
And as usual DC falls all over itself to accomodate.
(hey let’s put all our risk in one place so we have leverage if we don’t get what we want)
The only bad thing about it all getting split up is that SillyCon culture then has the potential to spread.
>”…Silicon Valley is Science and progress and all the wonderful things they’re doing for you.” (Sarcasm noted)
Yeah, right. Give me a trillion dollars in low-interest loans and let me throw it around. I’m sure a bit of it will land on something good. Problem is, that’s not investing, that’s playing craps.
Juicero – overpriced juice in a box with a patented box squeezer.
I am very angry about the situation too. Plus I saw a lot of anger on Twitter last night. Coming from both left (where I land) and right! I think the horrible reactionary center is the group loving this crap sandwich of a bailout.
Things are definitely getting wacky and more unstable every time our “overlords” pull this stuff of saving the very rich while impoverishing the rest of us.
I don’t want to hear any more about the wealthy making money because “they take risks.”
Authorities didn’t have a problem going over $250,000 FDIC limit gor their protection.
“2022, the maximum amount of income subject to the Social Security tax is $147,000; in 2023, the maximum is $160,200.”
Raise it over $250,000 and dare these over-privilaged welfare-queens in libertarian masks to say something.
“privileged”
Yeah…it’s hard for me to see straight right now..
“The FDIC has raised the protection limit to $10B for certain individuals; it remains at $250K for everyone else.”
At least that would be more honest.
We need a law that will collect social security and medicare taxes on all earnings including capital gains. Let these pay it with their filthy money.
let these family bloggers pay it with their filthy money.
I am seeing a lot of distress around about this being a pathway to enslave us with CBDC. I confess I don’t understand the timeline for this. Does anyone here have insight into this fear?
CBDCs are coming, and yes they will be used to essentially enslave/control the population (as if the population isn’t already enslaved – but CBDCs will make it complete). They’re just waiting for the perfect time to enact them.
Any event like this raises fears that this could be the time. I personally believe it’s a few years away. They need to set up the infrastructure for it (digital IDs) first.
Thanks, I was also thinking the pot has to be brought to the boil gradually–they have gotten so good at that. They have Nigeria, etc. as test models to observe. When they condition *everyone* to accept lies because it would be rude not to, they are set. I am hopeless in that regard. Good thing I’m old.
Bailout = Trump Landslide
East Palestine Train Bomb + Bailout = Trump Landslide
But 12 months is a long time in politics.
But not a long time in Appalachian memories.
Appalachian* Alzheimers – forget everything but a grudge
*or Irish, or your favorite affinity group
Ukraine collapse + “Drill Baby Drill” in Arctic refuge + East Palestine Train Bomb + Bailout = Trump Landslide
Throw “Crony Capitalism “ into that as well.
Though that may just be another name for at least half of your list.
And throw no paid sick days for railroad workers in there too.
Am I the only one who thinks that while 20 months is a very long time in politics, this move to bail out the rich while the average person loses his/her job, the people of East Palestine are poisoned, food stamps are cut, etc. etc. means that the Republican candidate with win the 2024 Presidential election?
You are assuming that one man equals one vote, but what if with the rich you can get more bang for the buck, so to speak.
And it very well could be the same Republican candidate who won the last time. It’s going to be a gift from heaven to the orange clown.
If it isn’t Biden, the opposition can throw some mud on him as the inadequate controls of Dodd Frank were loosened up a lot during his administration. Biden is too tied to Banks to be credible but others could make it stick.
I should add that in a sane and logical world it would be a rare Democrat, or Republican, that could run with a logical chance of winning. There are no partisan heroes. Unfortunately we have a country where almost 25% of the voters will vote Democrat no matter what, and another almost 25% will do the same for the Republican.
Sadly this plus East Palestine and Ukraine and growing hunger and homelessness not to mention the eugenics of Covid and addiction response should fuel mass voter firing of current office holders, with very few exceptions, and a rejection of both parties’ candidates of choice, including for President, but won’t. The bases, which reject all reality regarding their “team”, provide too much of a cushion for real house cleaning.
The West has become a political desert. Policy never changes, both parties follow the same agenda, Europe enthusiastically embraces what is obviously contrary to its interests. Nothing makes sense. These things are real hope killers.
And pressure continuously builds up under the tectonic plates until eventually something cracks …
Yeah, but Putin is a dictator!
Putin, Xi, Assad, MBS and Ali Khameni are dictators! And they are getting together, doing stuff without clearing it with us first!
Thank goodness Israel is still a liberal beacon in the Middle East we can still do business with! /s
if it makes no sense to you and me, it does to someone. wonder who that is?
I read too quick and thought you said a “grift from heaven.” Maybe they mean one and the same for these folks?
One would think that the Democratic Party is not that concerned about keeping the Oval Office and at least keeping the seats they have in both houses of Congress. Does that party know anything that the plebeians don’t? Is there going to an October Surprise like child porn found on Donald Trump’s computer? “Leaked” emails between Trump and Putin? I do not like Trump, but it is like the Democratic Party wants me to vote for him.
It is depressing. All that money gone to waste. Used to make the wealthy even wealthier while the country is falling apart.
Biden Obama Pelosi Clinton AOC & Schumer LLC (should be N – as in No – LC) do not care about anything except maintaining their status on K Street and on Capitol Hill. This keeps them in both places, which are one and the same, and in the money. They are foaming the runway for Donald Trump v2, who will once again win in the Electoral College while losing the popular vote due to California, New York, and Illinois. The October Surprise regarding Trump is the pot of gold and the end of their rainbow. If I shake my head anymore, the marbles will fall out.
SMH. A common thread with both Norfolk Southern and SVB is that those pesky safety, labor and banking regulations were considered an impediment to the miracle of the free market. I’m really at a loss how the Republican party and its active dismantling of the regulatory backstop will improve the situation.
So, I’m pretty sure all those “free” marketeers like ackman are thankful that there’s a government to run to when that “free” market takes all that “freedom” and shits the bed with it.
The “free market” will come to mean free of these fools who make the same dumb moves over and over and over and expect to have mummy and daddy come to the rescue over and over and over. I do not know just what it will take to reach that point, but I am sure that the road does not include either branch of the uniparty. They are courtiers, hangers-on. Government of the people, by the people and for the people has perished from this earth.
It’s not a free market, and never will be, so long as the incentives all line up to encourage taking what rational thinkers would regard as dumb risks. In reality, they aren’t risky and, hence, aren’t dumb at all.
Stop living your life around the GOP, or you’ll just make them stronger.
Maybe even more pressure on Biden to dump Kamala. She reeks of California privilege without merit.
Awaiting some public-interest/rights lawsuit claiming that Heels Up has to stay on the ticket due to her status of, well, choose one:
Intersectionality Representative/Avatar
Aphasiac
Beleaguered Minority subject to various -isms
Incumbent, and Second Gent already measured drapes
The other banks are going to run hog wild with customers money after this.
No surprising that the Feds bailed out Silicon Valley as that is a bastion for Democrats as was mentioned here. And if that bank went belly up with the Feds doing nothing, then this would be reflected on the rate of campaign contributions in the coming year. The Feds could have made it a contingent for saving the SVB, that the managers get the boot for wrecking it but that will never happen of course. Of course it is only a matter of time until Repubs and others will note that the Feds sent the cavalry to the rescue to help the wealthy enclave of Silicon Valley but let the people of East Palestine to rot. Morpheus’s comment above is the first time that I have seen this linkage. Good thing that old Joe doesn’t need any of the votes in fly-over America.
I thought the managers were all gone the minute the FDIC took over?
the upper management are gone at SVB, effective last Friday
Thanks for confirmation.
So I read somewhere that the lower level employees have 45 days until they get laid off. With yesterday’s news it seems that the FDIC has not been able to find a buyer for the bank?
Going by past experience, do not be surprised if the Feds hire those managers back again as they have the “experience” to know how that bank worked and how to “fix” it.
True in the case of AIG. Less true in the case of bank regulatory failures. The Fed and the FDIC have a deep bench they can make utilization of, and in addition there are interest rate and ALCO (Asset Liability Committee) consultant experts they can pull into these “triage scenarios.” This practice dates to the S&L Crisis and the period of failures that occurred. I know some people at a Dallas firm that would be up to this task. Fast forward to the crisis of 2008 – 2009 and the playbook gets updated, but regulatory processes in event of a failure are broadly set for most non-international finance companies (aka, just US institutional entities.).
It is an arduous thing to be hired by a national regulator, I once applied for a role with the NCUA to perform on-site exam work of regulated credit unions. Work I was qualified at the time to do, but man all the hoops are just ridiculous
It’s who you know, not what you know.
>”the upper management are gone at SVB, effective last Friday”
Yup, but not before they collected their bonuses and made some shrewd sales of personal stock holdings.
https://www.thestreet.com/technology/svb-ceo-sold-3-6-million-worth-of-shares-before-banks-collapse
“Faced with criticism that executives are abusing Rule 10b5-1, Gary Gensler, the current SEC Chairman, proposed new rules last year. These require executives using Rule 10b5-1 to sell shares, to wait 90 days between the plan filing and the actual sale. These rules will become effective on April 1.”
Gary, as a concerned citizen, I gotta ask you two questions: Why April 1? Why couldn’t these rules have become effective immediately? I see no reason otherwise, except to protect insiders. I’m guessing that you chose that date only because it makes you look like you put some actual thought into the decision. Which of course is unlikely. Always good, though, to try to fool the rubes.
Don’t go yet Gary. I’m not your average sycophantic MSM interviewer. Any significance to the date, April 1? April Fools’ Day? If so, that’s a good one. At least you have a sense of humor.
And a last question, Gary, before you go for lunch: Why do you still have a job?
”the upper management are gone at SVB, effective last Friday”
It’s like whack-a-mole. They just pop up somewhere else.
Liked the quote from “Elair and her husband.” Who are they?
I think she meant “Eclair” who posts here.
Eclair “blushes modestly”, a la Lambert.
And refers everyone to this morning’s comment by Jeff Stantz: I am so angry and I do not know what to do with all the anger.
well, I guess I should share my experience with anger.
I was quite angry after the 2008-09 bailouts. It was righteous anger, as I suspect many around here would empathize with.
But ultimately, it did me no good, in fact, it caused me harm. It probably contributed to a nervous breakdown I had last year, which I am still recovering from.
As hard as it is, you have to let it go. Remember, on a long enough timescale, entropy always wins. What these guys like Yellen, Fed doves, etc. are doing is really just fighting entropy. And we know how that turns out.
If you’re looking for justice with a capital J, you may be looking in the wrong place. Redirect all that energy to pursuing justice locally, get involved with a volunteer group in your community, or find some type of positive outlet. Don’t let the anger consume you. At the end of the day, we’re all just here for a short time and we have to make the best of the lives we’ve been given.
Does entropy apply in the localized human realm? Maybe it depends. Like gases, unfettered individualism does tend to chaos. Ethics and rules, like gravity, tends to counter chaos. In a democracy, leaders with the wisdom and courage to establish sound rules in the public interest can counter entropy. Does this require assuming pigs can fly?
I think I remember Confucius saying: in an autocracy, a firm benevolent hand at the top, and a cooperative spirit below, counters entropy quite well. Or something like that.
As a pure faith proposition, I do believe that on a long enough time scale, good Karma wins — i.e. brings dissolution into the great orgasmic singularity. Of course, that takes a billion lifetimes. The execs of SVB have a lot of bad Karma to make up.
Agreed. The Second Law is inescapable. And as far as we know, but only that far, the universe will eventually become a cold, dead place. But free energy will counteract the effects of “S” in an open system for as long as it can be applied. Although I could rearrange the equations with good enough facility when I took physical chemistry and thermodynamics, I did not truly understand the Second Law of Thermodynamics until we had children. They are effective, but little, chaos machines. Said chaos is prevented only by the constant input of free energy in the form of parents, teachers, and coaches…The libertarian dipsh*ts responsible for SVB and a whole host of other malefactions are the exact analog of children run riot. PMC, take a bow! Massive amounts of free energy will be required to keep them in check. I am not particularly optimistic that we have the wherewithal to rein them in during the Neolibertarian Dispensation. But hope, it springs eternal. The people just need to wake the “family blog” up!
That’s a lot of hard won wisdom speaking. I hope you’ve been able to move on and feel better about things. I agree this situation makes me upset too. But I have too much else going on, most of it good, to kill my happiness poisonous thoughts brewed in my own head.
I am also a big fan of acting locally. It’s the only way I think we’ll get through all this. As for those who both caused and profited from this latest debacle… I can only hope they get what they deserve.
Chris, don’t get mad, buy and practice with a deer rifle, buy lots of ammo.
It’s going to come in handy.
$3 billion of Circle cryptocurrency stuff all by itself.
And, “Silicon Valley Bank Depositor Bailout Makes Mockery of ‘Too Big to Fail’” https://www.nationalreview.com/corner/silicon-valley-bank-depositor-bailout-makes-mockery-of-too-big-to-fail/
I haven’t read that article yet and it’s the national review, but at least from the title they are on the right track.
It is short and to the point, which it makes nicely. Thanks.
They broke the buck, so there is a chance to really clean up on USDC :/, ;p
In the olden days, that would’ve been the kiss of death. Now I expect some pools forming to snap up discounted assets. Transitions can be fraught with danger and opportunity, so interesting times for some but just not the regular people.
Regarding the Irish politics:
Yes, the main party in power Fianna Fáil (tweedledee) was punished. Their junior coalition partner the Greens lost all their seats.
Then Fine Gael (tweedledum) took over in 2011, with the support of Labour. They implemented austerity as ordered and got punished in 2016, with Labour losing their position as perpetual third party to Sinn Fein.
Since then Fianna Fáil (tweedledee) and Fine Gael (tweedledum) has ruled together because Sinn Fein has so far been smart enough to not enter into coalition with either of those two, but is instead holding out for a coalition wiht the minor parties on the left.
To me, the graph shows importance of branding. One party has “fail” in the name, the other “fine”. Lo and behold, “fail” party keeps loosing votes and “fine” is gaining. One may wonder how such party brand names started to begin with?
Perhaps in Gaelic the names are both just fine, but the knowledge of Gaelic is waning?
BTW, in my homeland (not by residence), party names are often bad omens. Porozumienie (= Agreement) splits into fractions, Razem (= Together) goes separately (from other left parties) and so on.
Damn, that was fast. The fire sale of McLarens on Bring a Trailer have been cancelled.
ha!
So hold up, does this mean the FDIC program officially has no upper limit?? If so what even is a bank in that case???
Depends on the size and importance of the bank. Since the C admin the govt has been trying to decrease the number of small, locally owned community banks. As seen in the later 2008 bank crisis, lots of little banks sold out to larger banks or went under, or were put under “memorandum of understanding” rules. Lots of middle sized banks were bought by larger banks. The FDIC was very strict on those banks. The big banks got off scott free, imo, thought they were the ones that caused the crisis. When the pain hit, the little banks took it on the chin.
I expect this fast rising interest rate squeeze on small banks is hurting their capitalization, too. (Although, I think most small banks are better managed than the bigs. They have to be to survive. The Fed won’t bail them out.) So it’s interesting to read in the post that 2 of the big banks are likely beneficiaries of the current Feds bailout of SVB. / My 2 cents (which I keep in a small, locally owned bank. My 2 cents is covered by the FDIC insurance limit.)
I have bad news, flora. Deposits LESS than $1,000 will NOT be covered by the FDIC.
Less than a thousand dollars? I have about as much faith in the Feds as I do a used car salesman. Less actually. And I think that much of the elites are disciples of Marquis de Sade, but could I have a link? Thanks.
Only during this emergency, which practically means until at least Nov 2024
They have this crisis on a timer?
That opens up a possibility that some could be getting a chance to get their money out first.
Every crisis in America is on a timer: the next major election cycle
‘A former California official told me on Sunday that the tech titans are sure to reward their Democratic party rescuers with lavish campaign contributions: “Follow the money.”’
It was also the reason for the bailout of banks ‘too big to fail’, whatever rationalizations were offered to the public for how their money was spent. I picked up a copy of ‘The Shadow Elite’ to gain a better understanding at just how insulated the rich are from anything like consequences, but especially from the taxpayers/voters themselves. It’s probably not the match, but it will add fuel to the pyre.
An interesting and unsaid aspect about the “won’t cost taxpayers any money” is that while true, it doesn’t mention that the banks, all banks large and small, may be, – and I’d bet will be – hit with larger FDIC insurance premium rates to cover the cost of these bailouts. Banks buy FDIC insurance at a cost-x per y-thousand$ in deposits. Just a guess.
Or do banks buy FDIC insurance at a costs-x per y-thousand dollars in FDIC-insured deposits? If SVB was paying insurance on less than 15% of their deposits while smaller banks typically paid insurance on 90+% of their deposits, this bailout becomes even more grotesquely unfair than before.
Good point. Two good points. Thanks.
… and like all ‘insurance’ bore equally among the banks regardless of their risk exposure? When did a bank fold because it couldn’t afford to pay the premiums?
Now I’m curious to know how the NCUSIF (National Credit Union Share Insurance Fund) is doing…
I’ve been a long term fan of Credit Unions, as a worthy option for depositors. Below is the latest release following the 4th quarter of 2022. Credit union failures don’t attract the same level of scrutiny, for apparent reasons. I need to tend to some TPS reports alas, but encourage digging on their site below for further detail.
https://ncua.gov/newsroom/press-release/2023/credit-union-assets-shares-and-deposits-grow-fourth-quarter
Plus, for the credit unions that NCUA regulates there has been a lingering legacy issue stemming from the financial crisis era. The result has become a small benefit, as bad legacy holdings and legacy investments have gradually dissipated and a small annual surplus becomes available. It’s a complicated situation, but the NCUA long term plan has actually worked in this regard.
“The U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. said the government would back Silicon Valley Bank deposits beyond the federally insured ceiling of $250,000.”
https://www.nbcnews.com/business/business-news/treasury-says-will-back-silicon-valley-bank-deposits-rcna74570
Let the lying begin. Biden was on CNN an hour ago. Second thing out of his mouth (after the standard boilerplate reassuring depositors): “No losses will be borne by taxpayers.” Well, if I’m not mistaken Joe, doesn’t the quote above mention the US Treasury? Isn’t the Treasury the taxpayers? I’m confused, Joe.
The FDIC currently has a balance of $128 billion. SVB had liabilities (insured and uninsured deposits) of $175 billion. If it starts covering all uninsured deposits that balance can’t last long, especially if other banks are infected as well.
And where was the FDIC early Friday morning when scheduled employee bonuses were doled out (and by the way SVB employees were the highest-paid of any public bank at an average of $250,000 per year)? It surely knew of the situation before Friday (that’s it job after all) and even the casual observer knew at least a few days ago that the bank was in trouble. Yet, it made no attempt to block those bonuses. First rule of a corporate takeover: Nail down the cash! But I should know better than expect prompt and appropriate action from a government agency.
Anyway, it quite predictable that most of this mess will be dumped onto the Federal Reserve’s already groaning balance sheet. Another form of QE.
Few are talking about the Fed’s balance sheet.
Of course the Fed cannot suffer a bank run as it can always supply cash.
The Fed’s QE purchased securities would suffer a huge markdown if they were “marked to market”.
The Fed, unlike SVB, truly has a balance sheet where all securities can be “held to maturity.”
Formally speaking, my understanding is that, through a somewhat circuitous route involving both FDIC and the Federal Reserve, SVB and Republic Bank depositors will be made whole, with funds coming first from the banks (liquidation of assets on hand) and the remainder (excess) ultimately coming from a special assessment on Federal Reserve member banks. However, it seems to me that this new “excess insurance” setup will just result in additional costs to banks and therefore to all depositors when the banks seek (as always) to pass on their costs.
Having said that, Wolf over at Wolf Street has argued that the relatively competitive market for depository banking will result in the banks being forced to eat the cost (reduce profit margins) instead of passing on the cost of this additional quasi-insurance coverage. I’m not convinced that’s the case but at least it makes sense as an argument.
My view is that there should be no change to the rules under threat. If the $250,000 FDIC coverage level is too low, change the relevant law and regulations going forward.
If the argument is that FDIC coverage is too low, I think deposits above a certain size (say the $250,000 level, since that protects virtually all individual accounts) should be explicitly assessed the cost of any additional insurance (at actuarially determined market rates–I’ve heard FDIC premiums might be low) that the government would provide. The purpose of this explicit accounting entry is to ensure that high deposit holders bear the cost of protection, since they are the primary beneficiaries of it. Moreover, as businesses or high net work individuals, it is their responsibility to engage in risk management and the cost of insurance is part of the risk management information needed for these (supposedly “sophisticated”) depositors to make appropriate business decisions.
I further think that SVB and Republic bank depositors above the FDIC limit should have amounts taken from their accounts representing the hypothetical cost of insuring their full bank deposit as of the day before each bank’s receivership that takes into account all financial information known to the company at that time, even if not clear to the wider public (such as SVB’s problem with investment timings due to extremely poor risk management). As it stands, the large depositors at these banks are getting a commercial benefit for which they did not pay.
As it stands, the large depositors at these banks are getting a commercial benefit for which they did not pay.
This seems to separate the wheat from the chaff
From the FED/Treasury’s statement,
Past time to forbid use of the term taxpayer by all entities of the Federal government. It’s always a dodge to mask the real outcomes, the real costs, of such actions. Those costs are always and inevitably borne by those citizens least equipped to bear them. Not necessarily in direct taxation, but in loss of income, employment, housing, security, health, up to and including life itself.
A 2024 challenger would be a fool not to drive this home: Fool me once (a decade and a half ago), shame on you; fool me twice, shame on me.
When will enough voters finally say, “Nope — you people — all of you — are done. Enough. The show’s over.”
Apparently the screws aren’t tight enough yet. But no worries, they are working on it.
The answer is clearly never. We’ll get angry enough to drive into restaurants that screw up our biscuit orders but we won’t do anything to actually change things to relieve the anger.
That’s all too true. And why? Because the mechanisms to instantiate the necessary change do not exist (or have been irremediably corrupted), so the anger builds until it explodes – either in senseless outbursts of violence (“drive into restaurants”) or in quite sensible forms of street protest and civil disobedience (as in George Floyd police murder protests, summer of 2020).
So it all gets wrapped into a bow before the open of Monday trading in the US, so that’s all well and good. Moral hazard, the can we can kick down the road just a little longer. Need healthcare and are borderline poor? Here are the bootstrap rules for you. Just one of many examples to add.
Rules are for suckers. Tell me I am wrong. Ignore the fine print on your depository institution statements or since it is 2023, the online statements. This is perverse. After yelling at clouds about Citigroup for the past 12 to 15 years, it comes to naught once again.
“We cannot save the world by playing by the rules. Because the rules have to be changed.” — Greta Thunberg
Bond market doesn’t seem to be all that calm. As of 8-ish AM ET, the 2-year treasury is down around 40 basis points (i.e., bond’s value as a safe asset is rising). That sort of move normally happens over a period of weeks or maybe 1 month, and it is typically associated with periods like 2001, 2007/8, and early 2020.
ThisIsFine.jpg.
Comments this morning on CNBC center around next and subsequent moves by the FED / FOMC. Seems most likely the pivot point for these projected (if perhaps unlikely) shifts to the future Funds rate to occur at the shorter points of the maturity terms. Or the rational response is flight to quality via buying UST’s and doing so in less duration than owning the 10 year.
Isn’t a motto of the VC investors and start up community, to move fast and break stuff? Seems pretty appropriate, all else considered.
Apparently “move fast and break things” is an incomplete sentence — it’s move fast and break things and then cry for Uncle Sugar to come clean up the mess …
“move fast and break things”
That’s a description used often with children.
It’s supposed to make perpetual adolescence seem endearing.
But it’s a cover for ignorance or greed.
At some point, the interior of the house is destroyed because of an inability to put a child in their place.
“… the house is destroyed because of an inability to put a child in their place.”
Especially when that child is clearly a Bad Seed.
The Fed did just tell everyone it will value and loan against treasuries at a higher then market rate. Of course there’s going to be a sudden jump in demand for them
Except that the run started Friday. Not sure I agree that today is a reaction to the “value at par” news. Maybe that’s an accelerant, but to me, this is pure flight to safety stuff.
Couple of thoughts here. First, SVB’s failure is a bank regulatory failure. Where was the FDIC, California Banking Dept and the like? Did they not do bank exams? What was SVB’s CAMEL score leading into this? I’m reading in various places that SVB had practically no hedges for interest rate risk. Didn’t SVB’s management and the regulators know SVB’s DV01? (Don’t know how true lack of interest rate risk management was, but still). If so, the “M” would have to be really low. Further, wouldn’t this also result in a really low “S”? Wouldn’t that warrant intervention of some sort or another? Good heavens, what an example of the failure of regulators. Golf claps all around!
Second, the actions of raiders out to poke and prod probe and potentially benefit from the decline of other regional banks is repugnant. It would probably not be economically viable, but it would be great if the big plaintiff side anti-trust/tort/shareholder derivative law firms could litigate against this behavior.
Third, and even though many of the depositors of SVB would have no problem with ripping the face off the middle class with extractive, non-value-adding schemes, I do feel bad that their deposits are at risk. That said, if they get 100 cents on the dollar (particularly right off the bat), their (systemically intended) oversight function is rendered a nothing burger.
Fourth, if Uncle Sam bails out the depositors to tune of !00%, then clearly the SVB’s (and by extension the banking industry’s as a whole) FDIC bank insurance fund contribution is way too low. If Uncle Sam truly is a 100 percent guarantor of all depositors, then the banking industry really should pay the full cost of the guarantee. The positive difference between the true cost of the guarantee and the cost of the BIF contribution looks like a big subsidy. Moreover, if the banking industry ever were to pay the proper amount of the guarantee fee, that might go a long way to addressing the banking industry’s rent extraction.
Finally, I fully agree with the comments here about East Palestine. Bravo Team Dem for yet again ignoring working people in East Palestine and favoring the rich coastal elites. Though to be fair, it does seem that there are some Dems who are working for the people of East Palestine (Brown, Fetterman, and others). Perhaps some Repubs (like JD Vance) and some Dems (like Brown and Fetterman) can work together and do some good (kinda like the mix we saw on the Syria war powers resolution, which is another example of this cross-over becoming more and more common and is a quite interesting development that I think we will see more an more of).
It all comes back to Mark to Market regulations. Had SVB and other banks been forced by regulators to value their assets at market value, their losses would have forced management to either hedge rate risk or sell and reposition. The ability to classify at HTM is simply a way to hide portfolio losses.
So now the government washes away all the sins of those who should have (family blogging) known better.
If the banking industry were to pay the full cost of a 100% guarantee, I imagine that they’d just take efforts to recoup the cost all around (either directly on fees and interest charges or by reducing interest payments on deposits). (With that said, Wolf over at Wolf Street based on his argument in connection with the current bail out might suggest that the depository market is competitive enough to prevent these costs from being passed on.)
It seems to me that the only ways to ensure banks do not pass on the cost to depositors are approaches like: (1) the high depository accounts explicitly pay for their additional insurance (it gets taken monthly out of the deposit accounts); or (2) the government implements a public bank (postal bank) where cash can be held risk free (100% guarantee) and all private depository institutions have no insurance coverage other than what they purchase for their customers on the private markets–compelling private banks to compete for depositor cash, with the insurers acting as a check on the risks that the banks take when accepting deposits.
Consider the possibility that the $250K guarantee is intended mainly as reassurance (i.e. PR) to the masses to keep them comfortable about leaving their money in the bank in good times and bad. As demonstrated by SVB, the problem here is that a run by the big wealth-holders, who often have inside knowledge of a bank’s true condition, can cause the risk event (bank collapse) precisely because they aren’t sure whether the FDIC will cover them or not. So FDIC policy actually raises bank collapse risk, not lowers it, given the wealth skew that has grown since the FDIC was created.
The FDIC only collects for the risk exposure within the $250K cap, but (with this precedent) the reality is that all deposits will be covered without limit. That amounts to free insurance for most of the wealth kept in U.S. banks, which is in the $250K+ class, i.e. most of this country’s net worth is held by the top 10%.
The obvious and equitable solution is to formalize the unlimited insurance coverage of the FDIC and charge an amount to fully re-imburse the FDIC. No more freebie for the top 10%. Potentially, the flat-rate charge can be reduced as a result and still bring in more insurance revenue, which savings can be passed on to everyone else.
To raise FDIC insurance rates without doing this would extend and increase the implicit subsidy to wealthy depositors. Note: it is they who started the runs at SVB. They precipitated the calamity. Surely they should start paying for the insurance coverage they are demanding for the risk event(s) they often cause.
This is very true. The basic problem is that the current neoliberal free-trade supra-states socialize the risk for bankers, corporations and the wealthy while they profit by increasing the risk of living for the little people, individually (e.g. NGOs took over the global response to the coronavirus pandemic). It will take a repeat of the 1789 or 1917 revolts by the surviving middle class to change the system to serve the governed not the aristocracy, once again.
Confounding this, the four superpowers involved with the proxy WWIII in Ukraine; USA/UK, EU/France, Russia and China are each armed with nuclear weapons. There may be no survivors from the Great Reset.
According to Wolf Richter both credit rating agencies, Moody’s and S&P Global Ratings, had given SVB investment grade ratings right up to the end.
https://wolfstreet.com/2023/03/11/svb-financial-had-investment-grade-credit-ratings-from-moodys-and-sp-up-to-collapse-then-ratings-got-slashed-in-one-fell-swoop-to-default/
Good info. Thanks
I agree with most of what you wrote, but I think starting with “the bank regulatory failure,” ignores that the responsibility for the failure begins with the bank’s senior management. They choose a business model that relied on unsecured deposits; they decided to buy long-term bonds; they chose to develop exclusive relationships with VCs; they were the ones who lobbied to change the regulations. Yes, regulations were weakened; yes, many regulators were likely sleeping on the issues, but the failure seems to start with the choices made SVB’s executives.
They were planning for the last war (2008) rather than the prior war (S&L and other 80’s debacles). Credit vs Asset Liability management. There is little economic rationale for banks to invest in massive bond portfolios with significant durations. They exist to make loans. I expect to see exotic asset based securities in 2040.
SVB was more interested in DIE than risk management.
It was incredible watching from afar as dyed in the wool libertarians handed in their badges for the weekend and demanding government intervention. So the contagion risk hole was filled by soil transferred from a freshly dugged one into which moral hazard was dumped, the message being that government will backstop reckless behaviour and right tail outcomes can be chased with reckless abandon, including ignoring left tail risk. Wow
honest queation, are there dyed in the wool libertarians in Silicon Valley beyond Thiel’s circle? if there are, they aren’t as vocal as they were 20 years ago
Silicon Valley has shifted left (culturally) since the 80’s…straight up Clinton-Obama economics. (culturally liberal, Reaganite economics)
Signature Bank (NY) is more for the crypto bros.
Crypto and real estate, seriously you cannot discount real estate.
Yes, and it just occurred to me, could Signature’s trouble be related to what must be awful commercial real estate exposure, caused by the pandemic and work-from -home?
That would help explain why the MOTU are so hot on return-to-office. We, by which I mean They, can’t have society changing the values of the landed.
To clarify, I have no idea if Signature had CRE exposure, but have been assuming minefields there, so if they did, it could be a harbinger…
Libertarians have always gone by I’ve got mine to hell with everyone else. Bailouts for them aren’t a problem.
They can call themselves Austrians and try to explain how Epstein isn’t a pedophile because of the ages of the children until the cows come home, but let’s not pretend anything is going special is going on.
At this point, we need a saying similar to Chirchhills “People get conservative when they get older” quote, but for libertarians.
“A libertarian’s steadfast belief in laissez-faire economics depends solely on how much they will benefit from it”
Bail out rich tech gamblers – yes please!
Reset a predatory student loan system that would bolster the middle class – WHOOOA NOW!! Don’t start talking all crazy.
Things will have to get worse before they can become a lot worse.
Doesn’t look like the Bank Term Funding Program (BTFP) is limited to SVB
At least SVBs equity and bond holders are paying the price. But this BTFP can be used as a cover so no equity holders are wiped out anywhere else. Kudos to the Fed and Treasury for slipping that through under the guise of protecting depositors and payrolls
Correct, we said that: “…. the creation of a facility to shore up uninsured deposits at other wobbly institutions.”
Biden gives a prepared cheerleading my leadership speech to stop the crisis and literally walks out a door as someone attempts to ask any questions.
Glad to hear depositors will have access to their deposits starting today. Unfortunately because we move slowly my small business place of employment will be slow getting out of the gate to move their insured even without special considerations account from Signature, but at least we will meet payroll and any previously issued checks won’t be held.
If the heart of the problem truly is due to mark to market losses on intermediate treasuries, how much money can that be? 10% or so of the asset value? That seems a manageable problem to me so long as the bank run can be halted.
Wipe out the bank’s equity holders and creditors and eliminate all management bonuses and voila, problem solved. Seems a small price to pay for preserving payrolls and risking wider contagion.
Unfortunately, the class of “managers” whose stock options and ‘production bonuses’ are in danger are making the decisions.
If the Feds are going to make the imperiled banks ‘whole,’ than the next obvious step is to fully nationalize the affected financial institutions. that, unfortunately, would require a public oriented policy at the Federal level.
I’m not holding my breath on it.
I’m all in favor of moral hazard. It would be satisfying if all manner of management bonuses, parachutes, options etc. were not only forfeit but also subject to clawback in the case of failure of the institution. And I would have preferred that something south of 100% of deposits pre-failure be backstopped until the workout process is complete.
I prefaced my remark with the proviso that the problem is said to be due to losses suffered from forced selling of assets at a discount, which seems like it should be a manageable problem. One that more good than harm would come from working through. The crypto banks, probably not so much.
“Some observers have argued that Silicon Valley Bank’s big purchase of long-dated bonds sure looks like a big wager on the Fed being about to end its tightening cycle.”
Another theory:
The people running these banks know they will fail upward. They have connections through family and where they grew up.
I could see them making the big purchases of long dated bonds at these banks to pressure the Fed into keeping rates low.
They acted stupid with the long dated bonds to get back to their cheap money because that is their ONLY innovation.
I don’t look at any of this as anything that wasn’t planned.
The. same. crap. keeps. happening. over. and. over. again.
Because the same people keep on benefitting, without real consequences – like prison time.
So the grift continues. TBTF my ass.
Yves, Thanks for most illuminating commentary, as usual.
One question: you said ‘Recall that we said when Silicon Valley Bank got wobbly that in the last bloody-minded Fed rate increases, under Paul Volcker, damage to the banking system force the Fed to drop its interest rate increases sooner than it had wanted to.’
I take this oddly-formulated sentence to mean that Volcker also had to cut short his rate rises becuase of damage to banking system. if yes, could you please provide more details? Most curious. What damage? Which banks? When exactly? Statements? Any and all details welcome.
I am no scholar or expert of any stretch, and not an economist. My recall is there were rumblings in the Latin American debt markets, and whatever the Citigroup predecessor was known as in the early ’80s was at particular risk among their peers. That is likely a too simplistic response, but I’ve read here and elsewhere.
Fun times with the US Prime Rate.
https://www.jpmorganchase.com/about/our-business/historical-prime-rate
Thanks, Griffen. I am aware of that. but Continental Illinois was bailed out (first time the expression ‘too big to fail’ was used. But I think Yves was referring to domestic US financial conditions, not those institutions impacted by the Third World Debt crisis. in addition to the bailout, that crisis was also dealt with my various IMF and World Bank orchestrated debt resecheulings etc whose main aim was to save the US financial system, no matter the cost to the Third World. And htat cost was great, paid throughout the 1980s and well into the 1990s…
Banks were paying 22% for funding when the most they could get on their credit card portfolios was 19%.
Yes, and that’s when they did away with the upper limit on credit card rates, which was arguably necessary to do, but then never put it back when interest rates fell again.
Heads I win, tails you lose.
Correct, Yves. and Thanks!
But what do we know about this spread making Volcker stop raising rates sooner than he wanted to?
Weren’t those Volcker-era rate increases part of the origins of the S & L crisis? It would seem to be a similar situation, with Savings and Loans holding a lot of low-interest debt amid rapidly rising interest rates. Given the times, things did not play out as rapidly, but some of the underlying dynamics seem similar.
How about enacting another version of Glass-Steagall only this one will have fangs, not teeth? I know, I know, that will be a cold day in a very hot place. Sigh….
https://www.reuters.com/article/us-usa-fed-yellen/feds-yellen-expects-no-new-financial-crisis-in-our-lifetimes-idUSKBN19I2I5
JUNE 27, 2017 U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
=======================================
Well, US life expectancies have been decreasing, so a 6 year or so life expectancy is to be …expected.
HMS Titanic, circa April 1912. Only God can sink this ship !
Peace in our Time. Was it Chamberlain, I want to say.
FTX commercial advertisements, circa February 2022. Fortune Favors the Bold !
Various historical statements that alas, did not age well at all.
It seems to me that this is about fixing a banking issue: stopping contagion. I hope it works. I think Yves is exactly on-point when she says some bankers will try to misuse the new mechanisms for their own profit. That’s something the authorities should be gaming out once things quieten down, in order to figure out ways to discourage such behavior.
The second issue was maintaining tech expertise in the West. I read that 40% of British startups were at risk, which corresponds to 100k tech people. I haven’t seen the US figures. Some British and US startups are working on mastering fusion which should reduce damage to the climate. Let’s be clear, it’s not about whether we like startup culture — I don’t. It’s about preserving tech know-how in this country which is currently organized as startups. I’d be quite happy if that culture changed for the better. I’d also be happy if VCs stopped funding stupid things. But I don’t want to see the baby thrown out with the bath water, because I expect that Asia will be out-competing the West very soon, possibly within a decade, and there’s no need to hasten this process.
None of this means the problems in East Palestine shouldn’t be addressed — I think they should be. If airplanes have increased their safety record so much over the last decades, under the supervision of the NTSB, then so should trains. And it seems to me that it should go without saying that the people living in East Palestine should be made whole again. It’s a question of priorities, and for some reason, for instance, the Federal government seems to think prolonging war in Ukraine on which over 100 billion has been spent is a higher priority.
Estimates are that, in the end, depositors at SVB would have gotten something like 80-90% of their funds back, once the FDIC finished liquidation. For actually worthwhile ventures, this is not a set back that demands a bailout–Silicon Valley probably had the money to handle it. The fact that certain prominent VCs went screaming on Twitter all weekend tells me that they simply did not WANT to handle it.
RE East Palestine
Claims for –
Bodily Injury – physical injury/disease, death, medical monitoring, emotional distress, mental anguish.
Property damage – physical damage, loss of use, loss of value
Cleanup costs – testing, treating, remediation, disposal
Natural Resource Damages – flora and fauna, eco-system. Physical damage, diminution of value, loss of use, loss of enjoyment.
Some state’s insurance laws have something called “direct action”, where the third party claimants can make claims directly to the insured’s insurance companies. Pennsylvania?
The federal government / USEPA will not do a damn thing.
Legal costs will eat up a substantial amount of many damage awards and insurance payments, and the actual cost of bad health and stress are never fully compensated to begin with in any legal system. There is no being made whole on the individual citizen level.
Legal defense costs are covered outside of the limits of liability on commercial general liability and excess casualty insurance policies. This also applies to the exception (give-back) to the pollution exclusion (f) for BI/PD from a sudden pollution incident loss.
For more info, contact Uncle Buffy, insurance and choo-choo aficionado.
The townspeople need to get good legal representation. See ‘Sterigenics – Willowbrook, Illinois ethylene oxide case’ from a few months ago.
If the tech sector wanted an economic moat surrounding their castle of industry, they can do so via another method. They already are the biggest proponent of sponsoring H1B visas for employment, to my knowledge. I don’t see too many on CNBC today speaking to the cascading effect of all the tech sector going poof because said firms (temporarily) lost some deposit funds that became no longer on demand. I did see one CEO of start up company make the statement, our funds were on deposit in the bank and that means they were safe. Yes, they were safe to a point. Otherwise that CEO is wrong.
The second statement or issue is a falsehood. Textiles mills shut down in the eastern US, first moving south from the northeast and then further south until they were out of the country. Similarly, this happened with the furniture industry. Now these were employers who existed, and many still continue, that paid people decent wages to build STUFF. Yes, to build STUFF. And those jobs have vanished in large swathes from the US. The stuff we consume gets built or pre-built elsewhere (Latin America, Vietnam, etc…)
My point is to say, technology is like any other damn sector in the US economy. It’s a very big GDP pond, and no question the technology sector is a big portion. But I just do not agree with this statement.
Let’s protect the defense industry because Raytheon, Lockheed, et al, are national treasures and we must protect them with a magical economic moat (which essentially we do with a never ending war on this or that, or another). This ceases to resemble capitalism with the suggested approach above. Instead we just continue to transfer defense funds to defense companies, and intelligence funds to intelligence gathering firms hosting their sites in the cloud on AWS or on Azure. Hogwash says I. Nothing personal just a honest opinion.
I’m curious what you think the US will provide the rest of the world in exchange for the technology you’re happy to lose. Legal services? Woke Academia?
Losing the textile industry was not a good idea but a bad idea. It hasn’t hurt most people in the US yet, partially because the IMF and military is keeping the rest of the world out of equilibrium, by ensuring third world countries make monocultures, stay deindustrialized, and must trade for food. (My guess is that is the reason Dutch farmers are being dispossessed right now — Holland is too food independent for the globalists). But China (and Russia) are breaking that mold. The fact China got Iran and Saudi Arabia to cooperate is a big deal. Sunnis and Shias working together, who’d have thought? Once the rest of the world realigns, the West will need to trade real value (not just dollars that can be printed whenever the US feels like it). Technology being the highest value-add will be key to not becoming another third world country.
People in the West seem to forget that it was technology that gave them their current standards of living, a standard of living that kings could not even dream of a couple of centuries ago. It’s pretty obvious if you’ve lived anywhere else in the world that running water, fresh food, warm houses are a true luxury for which we can thank the people who invented tech. The computer you’re using to read this is also the result of tech, as is the internet which makes this communication possible. Taking it for granted is very short sighted.
>>>I’m curious what you think the US will provide the rest of the world in exchange for the technology you’re happy to lose. Legal services? Woke Academia?
This is the problem. It is not arguments about tech or defending the tools of the wealthy like the military. Sixty years ago, the United States made almost everything it needed. Those industries did not go away because they were not profitable, but when away because the owners could make more and bust the unions at the same time by moving the factories from state to state then country to country.
In order to survive, the United States with have to bring back almost the entire manufacturing sector it sent overseas and it will be the lower classes from the middle down to the poor who will be suffering the most while it is being done. It will have to be done, unless people think having an even more impoverished, war racked nation of over three hundred million people, or a revanchist nation seeking payment from someone, anyone, is a good idea? And arguments about running water, fresh food, or warm housing start to do poorly when a growing number of Americans lack water that wont poison them, or food, or a house.
So, no, I don’t care about woke academia, the national security state, or the Lords of Finance. I want the county of my childhood back. Well, not the social pathologies of the time, but everything else.
“People in the West seem to forget that it was technology that gave them their current standards of living, a standard of living that kings could not even dream of a couple of centuries ago…”
Alot of this new round of “tech” is more focused on marketing, surveillance, middle-man money management and distribution (inserting themselves in financial transactions), and rentierism. Not in the same league.
Part of the problem is that I think an amazing number of startups which call themselves tech startups really aren’t — they just happen to use software tools they may have developed. Are Zappos or Zillow tech firms? Not really. One sells shoes, the other has a database and does stats. Tech has been used as a buzzword like “AI” so that it no longer really means what it should. I guess this might sound a little like the “no true Scotsman” fallacy, but it’s how I see it.
This is a short form response. We will always have the FIRE sector to keep the lights on, the children clothed and fed and the homeless living in tidy little “Bidenvilles” or “Trumplandia” tent villages. \sarc
That’s mild sarcasm, but I would contend that losing industry has hurt the former middle class in flyover rust belt former industrial hollowed out cities and moderate sized towns throughout Appalachia. And as for technology being sponsored and funded in the US. I saw a feature on CNBC yesterday discussing how Silicon Valley Bank was incredibly beneficial to the Chinese start up technology sector. Yes in China. Not in the US. Capitalism seems to go with the flow where ever needed. Sort of like prostitutes chasing the action ( capitalism and the oldest profession have a lot in common ). Anything for a buck.
This contention, which I’ve seen elsewhere, makes it though we will revert to late 1800s standard of living without clean water or indoor plumbing if we don’t do all we can to save Technology. I do not see Microsoft, Alphabet, Amazon, Apple, etc…going the way of the dodo. Intel on the other hand, seems to be aiming for a desolate future all on their own. YMMV.
I agree about the Rust belt. I think that malaise will spread if tech fails. And yes, I read about the China thing after I wrote my response from another thread and then from the FT. If all the tech people move to China instead of the US, that will change the power balance significantly. There’s a reason why European tech doesn’t do very much, and many of the best European tech people come to the US — it’s because there are more opportunities to collaborate where there are other tech people. There are already a lot of foreigners moving to Shenzhen. If the dollar falls, that trickle may become a flood.
You mention Intel. I would say that Intel (& AMD) are systemically critical in a way that none of the other companies you mention, even Microsoft, are. One could do without the rest of them, since one could still run Linux. It would be painful, but if Intel & AMD were to fail, we’d live in a radically different world. Amazon and Apple’s dabbling in silicon would certainly not make up for their loss.
Heavy coins.
A pretty leaf on one side and Prince Harry’s sourpuss Nana on the other.
Its getting very interesting, the question as to why money has worth has to be coursing through oh so many minds?
FWIW @Twitter blocked me from tweeting about this post until I changed the URL. Make of that what you will…
Underwater treasury and agency securities might not be the only reason for bailing out SVB’s uninsured depositors. Banks take depositors money and use it to buy bonds (treasuries/agencies) and to make loans. This loan portfolio at SVB is at least as large as its securities portfolio. And it’s made up of billions in loans to venture capital and private equity firms who use them to finance Silicon Valley startups.
Selling these billions in VC and PE loans would require an evaluation of what backs them (startup companies) in order to assign a fair market value (marking them to market). The IPO and SPAC market are dead, which has closed a primary exit for VC and PE firms to pay back these loans. SVB probably has these loans on their balance sheet at book or some amortized value which has nothing to do with their true market value. Selling these loans, however, will initiate a price discovery for thousands of ‘private’ Silicon Valley firms. And price discovery for startups might cause much larger losses than underwater treasuries and agencies (which would not realize any losses if they can wait for maturity to get their principal back). The consequences of this ‘startup’ price discovery would go way beyond just SVB.
So yesterday a bailout fund was created (the Bank Term Funding Program – BTFP) to help troubled banks borrow against their underwater treasury and agency securities (by pledging them as collateral at par and not fair market value). At the same time Silicon Valley Bank received a full bailout of both its underwater bonds as well as its ‘startup’ loan portfolio.
Makes me wonder just how many kinds of insurance are possible. Insurancism? Because sovereign money is the foundation for all of this shakedown. We have the US Dollar, once smugly referred to as “king dollar”, but that was when we still had economic momentum from manufacturing. Those days are gone. We’ll be lucky to re-shore stuff to Mexico. High tech startups are better than no startups at all but without import tariffs they will probably have a difficult future. So the point is, we are between a rock and a hard place. One form of insurance that needs to be invented is interest insurance. Insurance that protects securities from becoming worthless overnight. Kinda like insurance insurance. Really. And therein lies the problem. Because money is sovereign, it isn’t something removed from the wealth of the nation; it is not a store of private value. We should redefine money clearly to reflect this and in the redefinition create a mutual interest insurance thusly: Sovereign money is constitutionally created by the people to serve them and serves three functions – it is a medium of exchange, a unit of account, and a fund of insurance. And there it is. Because we are going to need it.
>>>High tech startups are better than no startups at all but without import tariffs they will probably have a difficult future. So the point is, we are between a rock and a hard place.
True, but the United States began as a country less industrialized and in someways poorer than it is now. It took two centuries under the American System to create the country that the elites have spent fifty years to use up, but it could be done again. Unfortunately, it will probably take at least another fifty years to build the country back up, but as a nation, we do have the choice to do it.
50+ banks in double-digit fall and trading stopped, including Schwab (500B$ in assets) now. Same in Europe. I don’t get the contagion. The non-bailout bailout only positive side was it would avoid contagion, or am I wrong? Bank run?
Wow. What’s up with that?
This has gone beyond my pay grade, can some of the traders tell us what’s up?
The treasury is requiring them to pay 5 percent interest, which is higher than they had access to via checking and savings accounts. If the checking/savings deposit rates were too high to pay to stay in business, so is 5 percent.
This bailout does ensure the money is there for depositors.. but if you’ve run your bank so poorly you cant survive a 5 percent short term funding rate, you’re SOL
>”…if you’ve run your bank so poorly you cant survive a 5 percent short term funding rate, you’re SOL.”
This is good. I’ve said in the past that if an economy can’t live with a 5% fed funds rate, then it’s a sick economy, one suffering from an unhealthy addiction to low interest rates. Why do I say that? Because 5% has been the average FFR for over sixty years or longer and the economy did just fine for most of them.
I can just imagine Peter Thiel portraying Sheriff Bart in the Rock Ridge reception scene in “Blazing Saddles II”.
(With gun held to own head): “Hold it! The next man makes a move, the capitalist gets it.”
And boy, are we dumb.
If I understand things correctly, is the idea some are expressing here, that this bailout could/will encourage more bad behavior because others will be assured if they break things they too will be bailed out, more or less the same as some concerns about that massive housing development company (or whatever it is) in China (hopefully people know what I’m referring to, I can’t remember it’s name)?
I didn’t keep following what the Chinese govt decided to do about that. Is the situation at all similar enough to draw comparisons and ponder alternatives?
Evergrande. Latest news (via Reuters): https://www.reuters.com/world/china/china-evergrande-races-court-deadline-debt-restructuring-terms-sources-2023-03-09/
no chance of contagion, ROTFLOL!!!!!
looks like 20 more heading for the trash heap of free trade, free market capitalism, and those 20 will spread it to another 20 and so on and on.
the dim wits that barked and brayed how inter-connected the world will become under free trade in the 1990’s, are the same dim wit types that said free trade will mitigate contagion, keep prices low, and no one will want to upset the apple cart, are the same dim wits that said inflation was temporary, and that markets are not inter-connected.
https://finance.yahoo.com/m/39746a2b-9c9d-3c3a-8282-78f00d209287/20-banks-that-are-sitting-on.html
20 banks that are sitting on huge potential securities losses — as was SVB
Not just American banks.
The HSBC purchase of the SVB English bank for one £ was done quickly due to the fallout among tech firms there. The firms were facing a wipeout, which the current regime wouldn’t want (mentioned quietly in understated terms) given the rest of their post-Brexit activities.
Currency, Ukraine, food, shelter, heat, migrants, royals on occasion, ahh Dear Old Blighty.
Can there be a clearer signal that the Powell Put is back?
The last six months of QT, and the withdrawal symptoms we are seeing, means the addict needs more QE heroin now!
BTFD!
When combining that Powell Put with ZIRP, does one write Putz?
Asking for a DC friend.
The Dems are going to dump Biden, blame it all on him, i.e., SVB bailout, East Palestine, lousy economy, failed war in Ukraine, weakened NATO. They’ll find a fresh patsy to do their bidding (enrich the rich).
I don’t understand this statement from the article. Sure managers will be out on the street next week, on street corners in threadbare suits playing their fiddles over their begging bowls and they deserve it, but while shareholders will have pocketed their dividends they would have had to have held their stock for a long time for this to even cover the capital loss let alone compensate for what a more sensible investment, such as into Vegas slot-machines, would have returned over that period.
I’m not pleading for them, yer pays yer money and takes yer risk in investing, but to suggest shareholders, especially mums and dads trusting in the managers of their pension funds not to invest in risky ventures like banks, will still be whistling all the way to the bank (as it were) as a result of this seems to me unjustified.
Do not Make Shit Up. You are earning troll points.
The last time Silicon Valley Bank paid dividends was 1992:
https://www.nasdaq.com/market-activity/stocks/sivb/dividend-history
In general, companies have become less inclined to pay dividends because that is seen as an admission that they don’t have much in the way of growth prospects. Instead they use excess cash and often borrow to goose the share price artificially, which typically results in higher executive pay due to equity-linked incentive schemes.
Here is a video of a Democratic Party Representative from North Carolina speaking about why the total guarantee of all deposits of people and entities in SVB and in that other bank in New York are necessary to prevent a chain-of-dominoes financial crash crisis from happening within days or weeks. It is a TikTok video
which I found under TikTok Cringe. I don’t know just yet what to think of the substance of the argument he presents. But I know the making and sending of this video is some kind of real-events-tracking data point.
So here is the link.
https://www.reddit.com/r/TikTokCringe/comments/11qa0wy/information_about_the_bank_closures_from_rep_jeff/
Meanwhile, here is a TikTok talk delivered by a fairly young person whose wife and himself did all the right things in all the right ways and after 7 years find themselves in a homebuyership-not-possible situation. The talk is titled “It really is all for nothing” and is on the antiwork subreddit.
Here is the link.
https://www.reddit.com/r/antiwork/comments/11qm3na/it_really_is_all_for_nothing/
( I must confess that as I looked at the picture of the awful-looking house, I wondered if it was even habitable at all. Was that garage looking thing to its right and further back a part of the property? How much of the land visible around the house was part of the lot this is on? Since that is literally all there is for this young family, is it potentially-makeable fit to live in? Would the land around it be transformable into a food-expenses-displacing series of intensive garden beds? Would these young family-starters even have the energy and time to be able to do that given all the work they have to do at their jobs already? Is this what the Revolution of Falling Expectations will look like going forward?)
Man. It’s hard to see how that property, a weather-beaten shack, even with unattached garage, is worth much — it’s probably in such poor condition you would have to rebuild much of it anyway, and at some point you would wish you had just torn it down.
No, absolutely not.
America is failing. For many, it has failed.