March 14, 2023 5:53 pm at 5:53 pm #2173774
So now the senior House Republican on the Financial Services Committee says the government should insure every bank deposit in the country guarantee confidence in the U.S. financial system. Rep. Blaine Luetkemeyer of Missouri argued today that the Federal government should backstop all deposits for at least the next year(above the $250K FDIC limit) to provide confidence in the economy.
After the 2008 Wall Street bailout, both parties promised “never again” yet time after time, we continue to capitalize gains and socialize losses. Even the smaller banks now pose “systemic risk” (the excuse used by the Fed to bail out SVB and Signature Bank customers. Going forward depositors can chase high yield deposits w/o any concern over risk since taxpayers will bail them out if their banks fail.March 14, 2023 8:04 pm at 8:04 pm #2173800ujmParticipant
The 2008 bailout was smart and vital, even though it was politically toxic, since the bailout prevented a much worse economic disaster.March 15, 2023 12:17 am at 12:17 am #2173839
SVB seems to be involved in support of partisan projects to the degree that other banks are not interested in picking up the loans. That means, the bailout might include a hidden subsidy to the partisan favorite causes.March 15, 2023 4:15 am at 4:15 am #2173871
AAQ: That would make sense given that there may be a higher Democratic representation in the VC sector. So far, however, there seems to be fairly bipartisan support for the bailout with little concern for the “moral hazard” fallout which is the real long-term downside Market participants take greater risks with the expectation there will be a government backstop in case things go bad. In contrast to black swan events, SVB seems to have been entirely preventable and the outcome of poor risk management.March 15, 2023 8:27 am at 8:27 am #2173915mentsch1Participant
The answer is always follow the money.
Our elected officials, are less interested in ethics and much more in getting reelected and paid
Every bail out now means an indebted rich person that can contribute to a current reelection campaign or a post governmental service cushy board position (or a significant donation to a presidential library)
When bitcoin first came on the scene, I was wondering why it was not instantly outlawed. The only purpose to bitcoin initially was people using it for illegal payments, either on the dark web, or to be paid for ransom ware attacks. Somebody got paid.March 15, 2023 8:31 am at 8:31 am #2173928
From the reporting, it seems that the failure was very simple – putting 75% of their money in long-term bonds. Who said bonds are boring…apparently, regulations (Basel 3?) do not require accounting for sovereign bonds until they are sold. So, this is like you got a $1 mln house in downtown Detroit and continue listing it as an asset even as squatters moved in. Curiously, their reporting showed 75% of holdings were “held to maturity”, so it seems any reasonable professional would have been able to flag the problem. At the end, a private entity – Moody – was first to report the problem, not the government. Please correct my description, I am not a money professional.
some thoughts on this:
Who was responsible for this maturity regulations?
Is it normal for congressmen who created regulations to then become lobbyists to try to weaken the same regulations, or advise how to go around them? This is a huge maris ayn and perverse incentive
Risk management was apparently “not a priority”.
Main lesson is that any romantic long-horizon goal is danger to current responsibilities. Communists & Nazis could kill millions i the name of happy future; Moschichists do not need to daven on time as they hasten the geula, etc. We need to be ehrliche yidden first before saving the world/learning Torah kuloh, etc.March 15, 2023 8:31 am at 8:31 am #2173930akupermaParticipant
Those with gigantic bank accounts are the major source of funding for the political system, so why shouldn’t the politicians help them. That’s what corruption and bribery are all about.March 15, 2023 11:21 am at 11:21 am #2173935
Is there a metric that tracks how many board members re solid professionals v. politicians and social warriors? is it predictive of anything?March 15, 2023 11:30 am at 11:30 am #2173958
AAQ is right on point. Its not complicated. SVB bank deposits were short term funds held in the bank by a wide range of commercial startups, payroll service companies, real estate etc and could be withdrawn in the blink of an eye. Their smaller retail depositors were moving funds from bank to bank chasing higher yields. The bank’s investment portfolio was held primarily in long-term T bills and higher quality corporate bond. It doesn’t take a Nobel economics prize winner to realize that in a rising interest rate environment, that portfolio would lose value as the Fed increasing interest rates. While the assets were high quality and if held to maturity they would have been whole. However, once they started a bank run by mindlessly announcing they were raising capital and then failed to do so, they did not have the portfolio liquidity to meet the demands by depositors to take out their money. The FDIC receiver now has the time to slowly unwind that portfolio and most likely will recover most if not all of the asset value.March 17, 2023 11:22 am at 11:22 am #2174529akupermaParticipant
They could require banks to have a very high (perhaps 50%) reserve requirement on uninsured deposits, and perhaps restrict banks having interest-paying uninsured demand (not a CD, “checking” accounts) deposits. This “crisis” resulted from rising interest rates (due to the growing Federal deficit, due to Congress spending more money than it has, and borrowing the rest) causing banks to offer higher interest rates on saving accounts, but that caused banks to start losing money since they generally have short term deposits and long term loans whose interest doesn’t go up fast enough to cover the raising rates on savings accounts. The people (usually corporations) saw the bank become unprofitable, and justifiably “freaked out”.March 19, 2023 8:27 pm at 8:27 pm #2174891
Further reporting seems to make it more complicated: apparently, CA Feds were warning SVB for 2 years already, but nothing was changed, and Feds followed up at glacial speed.
This looks like a systemic problem in everything related to risk management: people who are responsible receive their salaries and hope that nothing bad will really happen. If something bad happens – rarely – they just lose their jobs. Otherwise, they’ll get paid extra for many years… Same as people in charge of institutions who invested with Madoff. And probably many others who were lucky not to be exposed.
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