SVB Used Former McCarthy Staffers to Weaken Regulations, Lobby FDIC
theintercept.com
theintercept.com
One difference is that when things start breaking, Democrats are willing to reconsider de/regulation, while GOP blames the government (even if there had not been inspections for years) and doubles down.
Some Dems voted to repeal Glass-Steagall, but more voted to keep it. The GOP votes was far more lopsided in favor of repeal.
1) Hold interest rates near zero, inflating the fuck out of the economy
2) Use government to destroy market value of distant maturing bonds by holding real interest rates deeply negative and then rapidly inverting it. Force people to seek ever more risky investments and long term low interest MBS securities just to barely not even break even.
3) Suck all the liquidity out of the market by using fed to raise interest rates sharply
4) Banks fail
5) "There wasn't enough government intervention, we need more!"
Now we could move the goal posts to something else, but the question you ask is not hard to find examples of.
> doing unwise things
In retrospect anything that causes a failure is going to be characterized as "unwise." You could say the wisest thing would be to create a 100% reserve ratio by passing through deposits to the central bank, yet it's impossible to get a banking license to do that. We're left with various shades of unwise.
Instead, the only thing we see is a single bank that failed due to voluntarily tying up too much of their capital in instruments that cannot be easily liquidated.
At the end one person is dead.
Clearly since that one person followed the sector wide regulation and polices rather than anything that targeted that specific person, it is evidence strongly in favor of the problem being with that person, not the dice game. Were this a problem with the game or the dice or something like that, we would expect to see a lot more damage.
Instead, the only thing we see is one person who lost the dice game voluntarily rolling the dice at the improper starting position and velocity that cannot be easily rolled to the correct number.
Clearly this isn't the same, but the logic you've used doesn't parse and in any case the full fault is unlikely to be fully the fault of government nor the bank. And it remains to be seen if the dice game is over...
If a train spills chemicals, they should be liable for a satisfactory resolution, including buying a property that was polluted, or paying for the cleanup and any depreciation of the property.
At the end of the parable of Job, God gives Job all new sons and daughters to replace the sons and daughters that were crushed during the game with Satan. I never considered that as a thing that made Job whole. In case of devastating and prevetable disaster, the train companies will just declare bankruptcy and the owners will start new train companies, or they'll nationalize themselves and sell to the government at an inflated price.
edit: these companies were all formed by groups of insiders that were handed state property for free; they have typical post-Soviet oligarch origin stories.
Do you really think far away rich people are working to make things better for you?
As I remember it, the reason for weakening these regulations was that Dodd-Frank is/was extremely expensive to comply with, and that created a banking sector where only the biggest banks could survive and it made no sense to start any new banks.
The thing is, we were already employed by the bank to run risk management and the bank already had the subscription to the software. So from the bank’s perspective it was close to 0 marginal cost to conduct the stress tests because even if they weren’t required, we would be doing them anyway as good risk management practice.
If a bank says that stress tests are too expensive to run, that means that absent regulatory requirements they would perform no risk management.
This feels so damn true about almost every megacorp belly-aching about regulation.
Or “do nothing until someone(s) else gets stung/slapped, and hope that it is someone/someones else not you, so you are around to learn from the mistake”.
You're imagining a scenario where one set of clearly written and fairly interpreted rules applies to your core business. You're excluding scenarios where there are fifty states and two hundred countries wildly swinging back and forth from idiotic legislation drafted to apply to three companies (Google, Facebook, Amazon) that is impossible to apply to everyone else.
Imo the situation I describe is worthy of belly aching. I don't work in finance so I guess theoretically the US banking system could be easier to comply with than everything else - but I definitely disagree that everything else is easy to comply with.
The idea that we shouldn't regulated because it's too hard, is the same rationale for suppressing wages, costs money.
For a corporation, too hard === costs money.
No corporation is entitled to exist.
Hiring a team of 5, paying a $100k/year software license, etc are big barriers when you’re a small regional bank with $30 million in deposits.
I'd draw an analogy to having breakfast. If we legally required people to have breakfast every day, that would actually be quite expensive. It'd go from a reflex to something that has to be considered, we have to spend a little bit of time creating evidence that we had breakfast to satisfy the regulator, there'd have to be enforcement where parents check on their kids to make sure they have breakfast, situations where it doesn't make sense to have breakfast (eg, really excessive sleep-ins) now need big reworks to make sure that despite that someone rolls out of bed to have breakfast. The police would roll in and muck up people's life because they skipped breakfast one day due to illness.
It'd be a debacle. It is funny to even imagine what mandatory breakfast would look like if we tried to legally enforce it. It would be expensive, both in dollar figures and hours of lives wasted; no question of it. Just because the act itself is cheap and necessary doesn't make legal compliance cheap and easy. There is a huge gap between the everyday "should do" and the legal "must do".
This is part of why I like the analogy; something being important is different from whether it is a legal necessity. Making it a legal necessity is what brings in the complaints about costs, not the cost of doing the thing itself. The cost is in proving compliance under all possible conditions. The complying act, as the thread ancestor I first replied to noted, is often cheap and generally already done as good practice.
A government is formed by people, not corporations.
Corporations exist inside of a space governments specifically carve out for them.
The mantra that corporations are people is political ideology.
did SVB do any risk management either?
It would be a lot easier for banks to comply with a reinstated Glass Steagall law, but banks don't want that either. The problem is really just that the banks don't want any restrictions, but as this situation shows, restrictions exist for good reason.
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule."
Not seeing any partisan hacks there, unless you count the financial ones.
https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
Maybe the parent post missed that but I was responding to that post.
Surely the lowest gdp (maybe per capita) country in the world that has pension funds should be eligible to invest these funds outside of the country.
A priori, without knowing anything about world economies, we shouldn't expect every country with pensions to even have local possibilities of investment. There's possibly a country where every single tax payer works remotely, or in local administration.
https://www.nbcdfw.com/news/local/spanish-company-signs-50-y...
This is a very different problem from a pension fund investing money abroad. An investment can always go to 0, which would hurt Swedish pensions but has no ramification outside Sweden. On the other hand the 2006 Icelandic bank sector was flush with foreign deposits that not even the Iclendic government could credibly guarantee deposits at the legal level.
Quick side note, the Icelandic deposit guarantee at the time was only ~20k USD. Not a lot.
I’ll tell you what, it’s not regulators that caused this. IMO Banks need less regulation (and more smaller banks) and need to fail more (and have more jail time). It’s the banking executives and business analysis team at fault here.
Just like it’s the startups error for failing to have multiple bank accounts.
Some advice, be robust and self reliant. Assume everywhere you keep money could / will be stolen.
As an individual, I have 3 bank accounts - 1 large U.S. bank and 2 regional (in different regions). Each account has a minimum of 1 month living expenses, plus I keep 1 month expenses in cash on hand.
I do the same with investments, particularly after the whole “we won’t let you short sell GameStop” on with firms (but not others).
Be robust, that’s your job as an individual or founder.
100%
I learned the hard way not to "trust systems" when it comes to important aspects of your life.
In college, I found some transfer requirements confusing. I utilized the college's guidance center. They told me they were sure that I needed class X, Y and Z. Of course, as it turned out, I didn't need _any_ of them. So an entire year and thousands wasted. I know mistakes can happen... I know I probably should have done the work to check for myself but I figured they would know more anyways.
Maybe a priceless lesson in the long run though...
> and have more jail time
Regulations are how you get jail time.
Regulations are rules passed by administrative bodies, those rarely, if ever, result in jail time. There’s a lot of reason for that, but administrative agencies often don’t have the full authority to send people to prison (I personally don’t think they should). Instead injured parties should be able to bring a suit, and I’m sure they will here.
People who commit white collar crime are deeply scared of prison. And since the crimes usually are very premeditated, and not heat of the moment or out of necessity, calculations of risk do take place here.
Show examples.
I'm a founder of an Indiana based tech startup. What people in flyover states don't like is seeing stuff like Theranos. They also don't understand operating businesses for 10 years that lose billions. People here do not see the "tech sector" as evil: every flyover state has programs to attract and create tech sector companies. If anything there is a bit of envy combined with a simmering rage when we get bus-rolled for not having a great high-tech workforce, when Purdue, Notre Dame, IU, and other Midwest universities are cranking out fantastic engineering and business management talent that gets pulled to the coasts for big starting salaries.
> Perhaps the tech sector will have enough political capital to ensure they get to dump their losses on the public they loath,
I don't think that is what is being asked for at all. It's more of a "fix this before it hurts everyone". The Fed raising interest rates too quickly is the root cause of SVBs problems, and those rate changes may be doing the same thing with the small, community banks that flyover country agriculture and manufacturing relies on heavily. Hopefully SVB is the end of it... but this situation is not a "tech sector" issue. It's a banking problem caused by the Fed changing the rules to quickly.
> it's going to come at a great political cost for those who go along with it.
Not doing everything that can be done to fix this quickly will be politically un-affordable.
Good for you starting a tech company outside the tech meccas, it's a hard road. Remote work might help you. In an remote work world, you are on a level playing field.
As it relates to the SVB bailout. There's a strong libertarian streak in SV. While it might be entertaining to watch the hypocrisy unfold, I'm pretty certain these folks read hackernews and I'd like them to have a bit of self reflection about the role of government now that SVB has imploded.
Thanks. I think the hard road is getting easier every year. Access to capital is getting better, and as you said, remote work has been a game changer for talent.
> I'd like them to have a bit of self reflection about the role of government now that SVB has imploded.
What is remarkable is how much government intervention went into creating SV. You'd never know from listening to the scene. Regardless, I hope that the SVB situation ends well for everyone and we can get back to work building things that matter.
The Fed is raising rates and we are taking our medicine.
The Fed is owned by its member banks which are for-profit corporations. Imagine paying interest to a third party to access your own wealth! That's the USA. There is no technical need for the Fed. We were fine without it till 1913. It just makes a lot of insiders rich.
Taking our medicine would imply there are market consequences. It seems the typical gov reaction is some form of bailouts to the high end of the market combined with regulation to further limit the market to a few giant monopolies.
All the matters to people is not ruffling feathers, a sense of security, not about actually solving the root problems that SVB took a massive gamble on mortgages and no one seemed to care.
Gov focusing on helping the depositors is fine. But it sounds like the vast, vast majority of SVBs depositors will be made whole. So that's probably not even necessary. The Yallen stuff is most likely about calming the market, not direct intervention.
One I've seen is https://represent.us, who else?
The American socialist movement was mostly wiped out during the Red Scare.
"The government" (or state) is part of capitalism. In fact, it is a critical component. There could be no capitalism without a state to enforce it. Libertarianism is not a coherent ideology; it is a disease of the intellect.
The “principled” qualifier works for anything, e.g. we need a strong bank regulator led by principled felons.
Almost all monopolies are the result of government interference
Capitalism abhors competition.
Look at the Far East and Europe - successful movements _do not_ bundle Drag Story Time and Workers Rights. Stalin was closer to Nick Fuentes than Biden. Same with Mao.
As long as the first issue that the DSA cares about is trans rights, the DSA will continue to be a joke at best and potentially controlled opposition at worst.
[0] https://mises.org/power-market/central-banking-socialism
I am familiar with the delusional American libertarian fantasies, but that's just ideological denial. They haven't done any actual analysis of how a government or state works, or who influences it.
I take capitalism, thank you
"..second-largest bank collapse in American history and the first since the 2008 financial crisis."
You can't print money to pay off your household debt.
It's a different beast altogether subject to entirely different rules and incentives than household debt.
The debt can never be paid. It's by design.
No country other than New Zeeland bothers to properly account for the asset side of the national budget. Increasing liabilities is fine if there's a corresponding increase in assets. But most countries are basically guessing about the second half. (This is also why we see so many wasteful privatisations where national assets are sold off for way less than they're worth)
You can make a very solid argument at the risk here is actually risk that was forced into these companies by the government.
Instead, I'd look at the concentration of depositors within narrow geographic and professional areas and their connections to one another, which allows panic to spread faster and enables a bank run; other banks have a much broader and diverse set of depositors. I'd also look at the foolishness of some of those depositors who deposited far too much in one bank instead of distributing funds across many banks. Both are errors of over-concentration. Retail banking only made up 7% of deposits at SVIB; the rest was VC/tech money. That's not by any stretch of the imagination like other banks, and that's what caused this unique failure, not the same interest rate hikes that all banks are exposed to (and which they all account for regularly in internal exercises and stress tests like responsible banks do).
Even if they were going to go heavy with US debt, investment professionals normally use bond laddering for with fixed income funds to reduce that interest rate risk to the portfolio. They did not even do basic laddering!
The mitigation to interest rate risk is by buying them spaced out so principal returns are being re-invested at changing rates, and you are never tied to a specific rate. https://www.investopedia.com/terms/b/bondladder.asp
Here you see https://www.cnn.com/2023/03/11/business/svb-bank-collapse-ex... their average yield at 1.79%
Recently we've been in an inverted yield curve where short term yield was superior to longterm yield.
The way I see it they did a few things wrong:
1 - bought too much of the same instrument (diversity)
2 - did not bond ladder (put themselves into a high risk situation)
3 - Moved unrealized risks into realized losses by fireselling bonds (bad timing which provoked liquidity crisis)
If you think about it, #1 & #2 were easily manageable. It is the colossal screwup of #3 on top of #1 & #2 that proved to be the coup de grace.
Whether the interest rates were going to increase or decrease was completely up in the air. No one knows after a few rate increases.
This is equivalent to selling at a loss a stock because it has a 3 - 6 month downtrend when the stock is still fundamentally sound, nothing has changed in the thesis instead of riding it out longer with the recognition you may not receive primo returns or even decent returns, but you won't be taking a big hit either.
edit: HN is rate limiting me, but to see why the commenter below is wrong, just zoom out the chart he linked to 5 years view.
Fed was late, should have stomped on inflation early.
I don't think so, this is a failure of proper risk management, specifically interest rate risk.
Banks, with a proper risk management system, routinely do stress tests to assess their exposure to different scenarios and hedge accordingly.
Duration, duration, duration.
Their failure to recognize this as a risk even with “safe” assets is the problem. Hedging interest rate risk is not uncommon or difficult.
In other news: https://www.nbcnews.com/business/business-news/etsy-delays-p...
They clearly mismanaged their portfolio, since the Fixed Income approach towards interest rate risk is to hedge, and to use Bond Laddering, and utilize diversification.
They did the exact opposite at the same time they permitted deposits to flow into the bank unchecked. This is a crisis of their own making 100%
In this particular case, it's unclear exactly what oversight could have prevented the mistakes. We just won't know for a while. But... yeah, it seems very much not unreasonable that the 2018 Dodd-Frank rollback may be part of the problem.
I agree that we don't know if the weakened regulations caused this - it's possible the regulators already had the tools in their belt they needed to prevent this and were asleep at the wheel. We will find out eventually.
The fact that the 2018 bill was a bad bill with bad effects doesn't make it "corrupt". Congress debated it, congress passed it, the president signed it. All that happens in public; it's the opposite of "corrupt".
I've started to wonder if we have any other kind, frankly.
But it would have taken the govt getting into the whole risk & diversification & bond laddering & liquidity issues at a very granular level. You know, the whole shindig about huge risks to the banking sector and responses? That, all over again.
I'll say from my perspective they were under-regulated. We can't have dumb banks throwing all their deposits into Fixed-Income with similar maturities putting their deposits at extreme risk of devaluation and interest rate risk with no hedging or laddering, and no good response to liquidity demands.
I question the professionalism of the bank's investment crew given we knew about the interest rate rise several years ago. NIRP/ZIRP could never continue indefinitely and they knew it, and we knew it.
We knew it!
Serious question: Is there any chance of any repercussions for the lobbyists, the execs that hired them, or even the people that moved the balance sheet into the previously “Illegal! Danger! Dragons will eat you!” corner of the risk quadrant?