I go back to the scene with my parents that always blows my mind. They went to a senior center during COVID and the lady working there offered them several $100 gift cards to major merchants. They said they didn't need them. The lady asked them repeatedly to say they did need them so she could give them away as part of the COVID stimulus they had been asked to give out.

I feel like that's our entire economy.

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1) It seems likely to me that anyone who borrowed short and lent long the last few years is insolvent, including depositors.

2) If the fed backstops these people, it has to print the money.

3) If it prints money to bailout anyone who can't handle high rates, high rates will fail to tame inflation.

4) If it doesn't tame inflation rates can't come down.

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Another angle here, which I don't understand: all of these VCs told their startups to bank at SVB, but neglected to tell these same startups to practice standard cash management. In other words, set up your bank accounts such that you do a daily sweep of all cash in excess of $250,000 into a money market fund. Had VCs told their companies to do this, there very likely would not have been a run at SVB. But it's not clear to me that VCs understand how banking works.

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Tangentially, it seems like a "regulation smell" (by analogy to "code smell", a pattern or practice well known for generating coding bugs) when you have an arbitrary threshold, like the $250B asset limit that used to be $50B, above which entities are very differently regulated. SVB apparently took pains to stay under the threshold, which is foreseeable system-gaming. Another example would be the rules that only apply to companies with 50 or more employees.

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For months I have been reading how with the increases in the Funds rate that banks are making unseemly amounts of money. Apparently not all banks! Apparently not banks who choose to invest in long duration bonds.

Why would a bank be investing in long durarion bonds? I thought banks borrowed short duration and lended long duration. SVB seems to have flipped the script and was taking cash deposits and investing long duration. Did they not consider interest rates could increase? I'm a nobody and I knew it was foolish to buy long term debt when it was selling at all-time high valuations.

There should be claw backs on salaries and bonuses paid to the executives of failed banks. The greatest moral hazard is executives can pursue riskier strategies, be terribly wrong, and still walk away very well compensates for being wrong.

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Agree with the analysis. My only comment is on the halting rhythm of the first line of the limerick. I believe this would improve it: "Regulators lay soft in their sleep"

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The only solution to permanently end bank runs is full-reserve banking. The US gov will never allow them to happen because they will destroy the credibility of the existing fractional reserve banks (and also remove the basis for their arbitrary audit/exam powers over banking)

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Delong is wrong (it rhymes it must be true)- full deposit insurance doesn't prevent bank runs, it just slows them down. SVB had assets yielding 1.85% on their books, which means they could not pay interest to their customers of more than 1.85% or end up bankrupt even with mark to maturity accounting. Meanwhile, prior to their failure, the 4 week bill was at 4.66% and the 1 year treasury was at 5.2%. I know its elementary school math but any bank in better shape could offer them a 1 year return with a yield up to 3.35% higher than SVBs maximum offer. How long do you really think it would take before some startups realized that they could pick up an extra 20-30 million next year per billion in the bank just by moving their accounts? Oh and the Fed was indicating rates in excess of 6% and then their desire to HOLD them higher for longer.

When you look at the actual environment with VC money drying up and startups still not profitable it is undeniable that these startups would move their money for a higher yield if it was offered for long enough. This bank run, which Delong (and so many others) like to imagine is psychological only was rational and baked in. Interest rate risk is, at its core, opportunity cost risk. The ability to get a higher rate over there makes your lower rate worth less, but most macro economists look at econ 101 as an introduction to be ignored when you get to higher stuff and not as root causes in a complicated system that lead to complex outcomes.

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Jason Furman this morning:

"P.S. I'm not particularly worried about moral hazard. The CEO, management & Board all losing their jobs. Equity going to zero. Bondholders won't be paid in full. These are all the entities that can effectively monitor, is unrealistic to expect depositors to do much monitoring."


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Mar 13·edited Mar 13

It seems like the answer is doing away with the FDIC and having private deposit insurance. Admittedly I haven't explored the idea in depth to find its flaws, but it seems like such insurers have incentive to risk weight their premiums and customers to decide then which bank with what insurers they trust. Either the bank would cover the premiums in their cost of doing business from however they earn money, or it could be an added fee the customer pays either to the bank or directly to an insurer. I guess the issue would be whether there is moral hazard that the government would be expected to bail out the private insurers.

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All expect to go to sleep and wake up knowing they can access all amounts of money they have on deposit at a bank at par, on demand; it really is that simple. There are alternatives to see this happens, but my bet is that going forward all deposits at a bank will be guaranteed as money good, on demand will be the outcome of SVB crisis. There are many alternatives to see this outcome ranging from higher equity requirements on part of banks, maybe adopting an insurance company model, much higher insurance payments by banks to FDIC, and others; all have trade-offs and will be analyzed, but fact remains almost all depositors have no idea with regard to the solvency and liquidity of a bank. Nor do rating agencies once again as in Q4 each of Moodys and S&P had A3 stable and BB stable at end of Q4.

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re: "So the tax will be paid by other banks, not “taxpayers.” Of course, shareholders of other banks, which will incur a loss of value, are taxpayers. And those shareholders did nothing to deserve any “special assessment.” Janet Yellen knows that, but she doesn’t care."

All this is way too high level and abstract for someone like me with no real knowledge of financial regulation to begin to understand more than superficially what is actually happening and whose ox is being gored. So my first thought was to search for an article explaining the legal basis for the new program that Yellen announced. (And I will never use an LLM/ChatGPT-style app since trying to answer questions for oneself is how you actually learn anyting). According to Forbes “The Federal Reserve also announced that they had created a new program to provide banks and other depository institutions with emergency loans, the Bank Term Funding Program (BTFP). The new facility aims to make absolutely sure that financial institutions can 'meet the needs of all their depositors.'" Pulling a new program out of a hat seems like a ploy worth examining in some detail especially since the FDIC has been appointed as the receiver and the money will come out of the Federal Deposit Insurance Fund.

One has to wonder if perhaps the BTFP ploy is a bit of misdirection intended to divert attention from some basic statutory limits on FDIC’s authority? If we read what appears to be the relevant legal authority in the Federal Deposit Insurance Act concerning the Federal Deposit Insurance Fund (see: https://www.fdic.gov/regulations/laws/rules/1000-1200.html#fdic1000sec.11a ) we see that sec. 11(a)(1)(E) offers the following definition “(E) STANDARD MAXIMUM DEPOSIT INSURANCE AMOUNT DEFINED.--For purposes of this Act, the term "standard maximum deposit insurance amount" means $250,000, adjusted as provided under subparagraph (F) after March 31, 2010. Notwithstanding any other provision of law, the increase in the standard maximum deposit insurance amount to $250,000 shall apply to depositors in any institution for which the Corporation was appointed as receiver or conservator on or after January 1, 2008, and before October 3, 2008. The Corporation shall take such actions as are necessary to carry out the requirements of this section with respect to such depositors, without regard to any time limitations under this Act. In implementing this and the preceding 2 sentences, any payment on a deposit claim made by the Corporation as receiver or conservator to a depositor above the standard maximum deposit insurance amount in effect at the time of the appointment of the Corporation as receiver or conservator shall be deemed to be part of the net amount due to the depositor under subparagraph (B).” And subparagraph (B) further specifies “NET AMOUNT OF INSURED DEPOSIT. The net amount due to any depositor at an insured depository institution shall not exceed the standard maximum deposit insurance amount as determined in accordance with subparagraphs (C), (D), (E) and (F) and paragraph (3).” So does this mean that there is no “maximum”? Pretty long and convoluted way of getting to have your “maximum” cake and eat it too if so. Or does the deeming simply specify how to handle timing issues. Ambiguous? Seems like another great moment in legislative drafting. It would be interesting to know if the BTFP relies on this provision.

But also further on in section 11, we find (4)(C) “LIMITATION ON USE.--Notwithstanding any provision of law other than section 13(c)(4)(G), the Deposit Insurance Fund shall not be used in any manner to benefit any shareholder or affiliate (other than an insured depository institution that receives assistance in accordance with the provisions of this Act) of--

(i) any insured depository institution for which the Corporation has been appointed conservator or receiver, in connection with any type of resolution by the Corporation;

(ii) any other insured depository institution in default or in danger of default, in connection with any type of resolution by the Corporation; or

(iii) any insured depository institution, in connection with the provision of assistance under this section or section 13 with respect to such institution, except that this clause shall not prohibit any assistance to any insured depository institution that is not in default, or that is not in danger of default, that is acquiring (as defined in section 13(f)(8)(B)) another insured depository institution.” One wonders how the professed intention to avoid “contagion” squares with these limitations?

One could go on of course. It will be interesting to see if banks getting hit with the assessment will challenge it. Of course in the US legal system with its anarchic concept of “judicial review” the courts are free to make words mean whatever they want them to mean in any given situation. The notion that banks are not taxpayers is of course a farce, but there are also limits on the amount of assessments that can be levied. One should not be surprised if it turns out that the Deposit Insurance Fund is simply being looted now for the benefit of a few and will not be made whole without direct infusions from the Treasury. One wonders in a year or two what kind of haircuts depositors who rely on the $250,000 insurance guarantee will be taking when their banks fail. At any rate looting seems to be the order of the day: retirement funds looted for ESG; the military looted for Ukraine; electricity users being looted to fund worthless non-renewable renewable energy projects enriching political campaign donors and cronies, etc. etc. Objectively, one, it would appear, must score this “1” for pessimists and “0” for the optimists.

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I'm puzzled by the belief that taxpayers are bailing out SVB. It looks to me like SVB is solvent as long as t-bonds don't drop again, and is being liquidated because it couldn't find a better way of handling its t-bond risk.

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Brad DeLong:

But, as Noah Smith correctly points out, there was more: SVB did not need its asset sales to raise cash to exert price pressure against it. SVB’s core problem was that its Treasury bonds had lost mark-to-market value. In SVB’s accounting for its hold-to-maturity portfolio, the loss created by the fact that the bonds it held had fallen in price was balanced by an expected capital-gain offset that was going to accrue on the bonds when they were held to maturity. But that only works if the game of musical chairs continues: if the music stops and the bank is liquidated right now, that offsetting expected capital gain vanishes.

Noah Smith:

With VC funding having dried up, many startups had to survive by using their “runway” — burning through cash to pay their employees and other expenses while they waited for the market to recover. But this meant a lot of startups were all withdrawing a bunch of cash from SVB, while new VC rounds were failing to give SVB new deposits.

To meet these simultaneous demands for cash from startups using up their runway, SVB had to sell assets.

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This why Progressives, Conservatives, and Libertarians ALL hate politicians.

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