There Are No Libertarians in a Bank Failure

The collapse of the Silicon Valley Bank may be a bigger deal than I first realized. As I live far from Silicon Valley I had never heard of this bank before. Here’s a basic explanation of what happened:

On Friday, regulators took over Silicon Valley Bank, a 40-year-old institution known for lending to tech startups, seizing all deposits. Earlier in the week the company had announced emergency measures in order to preserve its liquidity, leading to a customer bank run. On Friday, the Federal Deposit Insurance Corporation took control of the insolvent bank. CNBC called it “the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever.” Thousands of tech companies are now scrambling to figure out what this means for their future. The bank liked to brag that nearly half of all venture-capital funded startups had accounts there. $250,000 is insured by the F.D.I.C. But that’s not much of a comfort to a company like Roku, the creator of a popular digital media player, which had nearly $500 million in the bank, according to an SEC filing.

On the other hand, a company called CAMP that sells toys and play spaces used it for a sales promo:

l hope CAMP gets its money back. Here’s some more background:

The regulation that was put in place for the nation’s biggest banks after the financial crisis includes stringent capital requirements, which means they must have a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be.

But Silicon Valley Bank and others its size do not have the same regulatory oversight. In 2018, President Donald J. Trump signed a bill that lessened scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the move. Among other things, it changed requirements for the amount of cash that these banks had to keep on their balance sheets to protect against shocks.

The financial sector guys cannot learn. They always think they’re smarter than the last financial sector guys who screwed up and caused a meltdown. But they aren’t. Anyway, I understand the fallout of this on other financial institutions has been mixed.

Word is that Peter Thiel had many millions in Silicon Valley Bank but pulled it all out last week at the first sign of trouble, and that’s what precipitated the run on the bank.

Matt Levine writes at Bloomberg that part of SVB’s problem was that it had a lot of its assets in fixed-rate bonds rather than in loans, which means rising interest rates really messed it up. The bank was buying fixed-rate bonds with money on deposit because the tech startup companies it catered to had lots of cash from equity investors and didn’t need loans. I’m sure that’s an oversimplification of the situation, but that’s how I understand it. Banks usually profit from higher interest rates, because they raise the interest rates on loans. But SVB was stuck with long-term fixed-rate bonds, and the market rate of the bonds was going down. At the same time, the startup clients were withdrawing deposits to keep their companies afloat during a slow time for IPOs.

Anyway, on Wednesday the bank sold almost all of its securities, some $21 billion worth, at a $1.8 billion loss. Then the bank tried to sell $2.25 billion in new shares, but failed. Then Theil pulled his money out and told all his clients to pull their money out. SVB was done for.

There’s been much snickering about all the Silicon Valley libertarians who hate government regulation but now want the feds to bail out Silicon Valley Bank. Just as there are no atheists in a foxhole, perhaps there are no libertarians in a bank failure.

15 thoughts on “There Are No Libertarians in a Bank Failure

  1. Quick note on bonds, to make the rest make more sense if you don't know.

    Commercial bonds have what's called a "coupon rate" – if you had a really old bond, from back in the 70s, you sent in a coupon each quarter (I think it was quarterly) for a simple interest payment. If interest was 8% (not crazy in the 70s), then you got 2% of face value quarterly. This is simple interest – you get cash, not an increase in bond value, in interest. So a $1000 bond with a 4% coupon rate would get $10 quarterly in interest. (You can manually re-invest your interest payments in more bonds, of course.)

    That means your actual interest rate could vary, depending on what the face value of the bond is, and the price. If you have a 4% bond with a face value of $1000, but you only paid $800 for it, then you're getting $40 from an $800 investment, or 5%. Why would someone sell a $1000 bond for $800?

    There's a formula for pricing bonds. If you want to sell a 4% bond, when bonds are going for 5%, you have to sell it at a discount, so a $1000, 4%, bond doesn't go for $1000. After all, if someone had $1000 to invest, they'd buy a 5% bond, instead of a 4% bond… unless you sweeten the deal on the 4%.

    This means owning long term bonds is horrible, when the Fed is bumping up rates at an incredible rate. Bonds might have been 3% a year ago, and they might be 7% now. Well, you have to discount a bond a heck of a lot when it's paying 3%, when a "new" bond gets you 7%!

    Anyway: I don't know what's going on in the big bank – that's just the basics of bonds.

    One final bit: institutions need to "mark to market" – this is one of the reasons for the banking collapses in 2008. If you have $20 billion in 3% bonds, and bonds are going for 7%, your balance sheet will drop, when you have to file a report where you report the market value of your bonds – you can't sell them for even close to $20 billion when the interest rate is more than double.

    A big drop in assets means a run on the bank can occur, especially with a lot of accounts with millions that are only guaranteed to $250k. Get all $10 million out, or you might lose $9.75 million – even if you don't, you might not have access to your money for a long time.

  2. I feel no sympathy for investors with losses over $250K. Zero. 

    Suppose I had a million in cash assets. CASH! That's beyond what I own in real estate, stocks, car(s), boat(s), gyroplanes. I'm not Einstein but even I'm smart enough to split the million in four different banks so all the money is insured by the feds for free. 

    Roku could have minimized its exposure with $100 million in five different banks. 

    At any time, when SVB lobbied for more lax restrictions so they could make more money with the deposits of companies like Roku, did the bank consult with the depositors to explain that the bank is spending money for relaxed government requirements? (Annual lobbying for banks runs just under 70 Million according to Open Secrets.) Oh, did the bank mention that if the bank gets what the bank wants (bought thru lobbying), they earn more with your deposit and everything you trusted them with over 250K is at risk? Hell, no! The company or individual with deposits in seven, eight, or nine figures wants security and stability. If that means regulation and oversight, for the depositor, the reaction is, "Bring it on!"

    I'm not a banker but it seems to me that any bank is more stable with a very large number of depositors, with smaller deposits – rather than have a huge chunk of deposits in the hands of a relatively few "Thiel-size" speculators. If any one depositor is big enough to cause a run on the bank by pulling out, they own you if they're trying to borrow or do other business with the bank.

    I'm right in there statistically as "middle-class" and I have not had a savings account in decades. Like everyone in my strata or below, there's no money for savings or investment. So every bank is dependent of a relatively small number of depositors with large sums of cash. That's inherently unstable and that's the inevitable result of squeezing income from the middle to the top. 

    It's a boring subject until it's your business or life's savings that gets wiped out.

    •  Like everyone in my strata or below, there's no money for savings or investment. 

       I can strongly indentify with that sentiment! It's like I hear you loud and clear about living the hand to mouth experience.

  3. When lil donnie signed that bill (a few democrats in congress voted for it) it was hailed as him getting things done and cutting unnecessary liberal regulations. Now FAUX business is reporting that Trump simply signed a "bipartisan banking bill". It's always someone else's fault!

  4. Once again, the can must be kicked down the road, or let's put it a better way, real and deserved consequences of faulty behavior are being circumvented.  The bail out bucket will be broken out, for not to do a bail out could trigger all those dominos.  Better to put a patch on it here before all those other dominos follow.  

    We all should know by now that financial institutions behave like a row of tightly spaced dominos.  If gaps are not left in the row, one risks a slight mishap to trigger the loss of the whole system.  On Friday the message was one of a lone isolated domino falling.  By today the bail out bucket was in play.  More welfare to the rich, who really benefit from our government when they have it in the wringer.  

    I am not saying this is the wrong action.

    I am saying this is why the rich need to pay more taxes and understand why they need to.  That is because when they screw up, they cause way bigger damage and harm to the commonwealth.  They do screw up, and when they do the poverty gushes down on many.  Many who get no bail out.  

    Some of what seem to be more solid financial gurus, see cracks in the commercial real estate market due to inflation fighting measures.  It might be this fear that is motivating the bailout.  A bit more caution could be in order. as the financial world has been running on the reckless side for some time now.  Let's hope for a soft landing.  


  5. Looks like another bank has failed. Signature Bank based in NYC. Apparently Barney Frank (who co-wrote the banking bill after the 2008 collapse) sits on the board of this bank.

    A google headline reads: "Former Rep. Barney Frank (D-MA) endorsed changes to his own Dodd-Frank law in 2018 that freed mid-sized banks from undergoing stress tests. He sits on Signature Bank's board, which just collapsed. "

    This could get ugly quick?

      • Why anyone would get involved with "crypto" escapes me? The name itself indicates a sketchy computer code association. No thanks!

  6. I've been advised that bailout is not what we are to call this bailout.  So, let's call it a modified bailout because everyone assumes bailout means taxpayer bailout.  This is a very important distinction because fees are not taxes, but just look and act a lot like taxes.  Here the bank pays the fees but those that use the banks will ultimately foot the bill.  You will just do so indirectly.

    This may sound a bit Milo Minderbinderish, because it is.  To those who have not read Catch 22 Milo was quite the war entrepreneur.  You have to read the book because the movie was unable to capture his character. 

    Another correction is that the bank executives and investors are getting consequences.  The modified bailout goes to those with over 250K in their accounts.  The Silicon Valley Bank did require those with business loans to use the bank.  This included small businesses that needed a larger cushion for maintenance of payroll and expenses.  The modified bailout is aimed at those businesses effected by this bank rule.  They were not allowed to bank elsewhere and manage their risk and risk to their employees.  It seems they were rightly bailed out, as the bank limited their options.  Executives and bank investors are getting appropriate consequences according to reports. 

    • Yes, it's important to understand the BANK ITSELF is not getting "bailed out" at all. The bank is gone. “The banks’ equity and bond holders are being wiped out,” said the official at Treasury. “They took a risk as owners of the securities, they will take the losses.” It says here. The depositors will get their money back, including deposits in excess of the $250,000 FDIC insurance cap. This money is coming out of the Deposit Insurance Fund, which is funded with quarterly fees assessed on financial institutions and interest on government bonds.

  7. "So, let's call it a modified bailout" … or for those of us who remember the Watergate days, "a modified limited bailout"!

    Bankruptcy allows a clawback for "preferential transfers", where unsecured creditors who received payments in the 30(?) days prior to the bankruptcy filing have to give back those funds to the bankruptcy estate so that all unsecured creditors get treated equally.  Why not apply a similar clawback for depositors who withdrew funds within the week/fortnight before the bank shutdown?  Potential participants in the bank run might be discouraged by the potential clawback.


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