Comment by tomhoward | Hacker News Reader

Comment by tomhoward | Hacker News Reader

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This just indicates that the $250K insured threshold makes no sense these days for corporate bank accounts.

It makes no sense for every business owner (and a business doesn't have to be very big to have more than $250K in the bank) to have to spread their funds across multiple banks and do ongoing due diligence across each bank's investment activities.

We're talking about farmers, used car dealerships, builders, and countless other kinds of businesses who would suddenly be expected to develop an aptitude for financial hedging and risk assessment. It would be incredibly inefficient and make it not worthwhile for many people to be in business at all.

The whole point of a regulated financial system is that regular depositors can expect that if the regulations are being met and the regulators are verifying that the banks are in good shape, you can trust that your funds will be safe.

The right response to this situation is to change the guaranteed limit for corporate bank accounts, and, sure, increase the fees that banks (and indirectly, corporate banking customers) pay for that. The wrong response would be to tank the entire banking system to stick it to the tech bros.

> This just indicates that the $250K insured threshold makes no sense these days for corporate bank accounts.

Maybe ... or it might indicate that US tech workers with their generous salaries, and tech startups with their decade of access to cheap money, have no actual idea what a small business in the rest of the world actually looks like.

"The median small business holds an average daily cash balance of $12,100, with wide variation across and within industries" (from 2016) [0]

[0] https://www.jpmorganchase.com/institute/research/small-busin...

> US tech workers with their generous salaries

Language like this suggests your primary concern is punishing tech bros for having too much money.

I’m happy to have a conversation about the excesses to tech industry funding rounds and salaries. I’d probably mostly agree with you.

The solution is not to evaporate their bank accounts for reasons that have nothing to do with the merits of their work and are almost entirely due to the economic instability continuing to play out since the pandemic started.

For a start, there’d be nothing moral about it whatsoever, and more importantly, it would affect countless low-income people, just as much or more than rich tech bros.

> Language like this suggests your primary concern is punishing tech bros for having too much money

It really isn't.

My hypothesis is that when things go bad, the poorer in society get thrown under the bus, yet the weathier get bailed out. What's happened in the last few days appears to be yet another data point in support of that hypothesis.

> The solution is not to evaporate their bank accounts for reasons that have nothing to do with the merits of their work and are almost entirely due to the economic instability continuing to play out since the pandemic started.

Millions lost their homes during the 2007/08 financial crisis[0][1], did that have anything to do with merit, or was it (to use your phrase) "almost entirely due to the economic instability" caused by excesses on Wall Street?

[0] https://www.marketplace.org/2018/12/17/what-we-learned-housi... [1] https://www.investopedia.com/articles/economics/09/financial...

> My hypothesis is that when things go bad, the poorer in society get thrown under the bus, yet the weathier get bailed out

I share the sense of injustice when that happens, and I know it has been the case plenty of times in the past and will be again in the future, but that doesn’t seem to be what’s happening here.

This action from the government is about shoring up the system to prevent a widespread collapse, which would hurt poor people and cost taxpayers much more than any direct costs relating to this action. It’s also worth considering that a huge driver of the economic turmoil that’s playing out now has been the government spending to support people - including/especially low-income people - through the pandemic, so it’s really not a case of poor people being thrown under a bus; it’s just a case of keeping the whole system functioning through very unstable and challenging times for everyone.

> Millions lost their homes during the 2007/08 financial crisis[0][1], did that have anything to do with merit, or was it (to use your phrase) "almost entirely due to the economic instability" caused by excesses on Wall Street?

There was plenty that was wrong about the way the 07/08 crisis was handled but it was a very different situation. I think it was terrible that people lost their homes, as well as jobs and businesses, through no fault of their own. It was mostly due to government regulations and bank lending practices that enabled people to buy houses they couldn’t afford. It was very wrong that the bank execs who oversaw it kept their jobs and wealth.

The SVB scenario is nothing like this. Depositors have not caused an economic crisis that will hurt poor people. SVB execs caused it and regulators contributed. And so SVB execs are losing everything and regulators are fixing it at little/no cost to taxpayers, but to the benefit of everyone who will keep their job, many of whom are low-income workers.

In the link you provide, you can see that most median small businesses hold an average of ~30 days of cash buffer. This would already put them over the $250k threshold.

> The right response to this situation is to change the guaranteed limit for corporate bank accounts, and, sure, increase the fees that banks (and indirectly, corporate banking customers) pay for that

"We demand more regulation", not something you'd typically hear from the US tech sector.

I can't help think about the moral hazard aspect of this mess.

Sam Altman literally called for more regulation on banking (and also AI) today, though I think may be misplaced and self-serving.

The regulation of SVB doesn’t seem to have been particularly lacking. The shortfall is not very large and should be covered by asset sales and some fairly small industry levies.

What exactly is the moral hazard here?

The executives and investors should lose everything. That will send the right signal to other bank execs and investors. And regulators should make some minor changes to balance sheet requirements and perhaps insurance thresholds/charges.

What do we expect corporate depositors to learn, aside from that their deposits are never safe, which would crash the whole banking system?

I share your concern about moral hazard. What I think you’re doing is letting your desire of an idealized outcome eclipse consideration of the least-worst workable outcome, which is realistically all we can hope for.

> The regulation of SVB doesn’t seem to have been particularly lacking. The shortfall is not very large and should be covered by asset sales and some fairly small industry levies. What exactly is the moral hazard here?

If regulation wasn't lacking, the shortfall isn't large, and (I paraphase) SVB and the sector can sort itself out, why would Yellen and POTUS need to hold press conferences?

If you hold cash in a bank and your balance exceeds the FDIC insurance limit, it's at some risk. This isn't new, yet seems to have come as a complete surprise to a whole bunch of people, many of whom really should have known better.

They've been loudly demanding a bailout for having been on the wrong end of their risky decision. Isn't that pretty much the definition of moral hazard?

> and (I paraphase) SVB and the sector can sort itself out

That’s an inaccurate paraphrase.

It makes all the difference for the government to clearly indicate that they will intervene quickly and decisively to keep the system functioning rather than stand back and let depositors lose big sums, potentially triggering much wider fallout. By doing that they can minimise further costs/failures for everyone.

> If you hold cash in a bank and your balance exceeds the FDIC insurance limit, it's at some risk. This isn't new, yet seems to have come as a complete surprise to a whole bunch of people, many of whom really should have known better.

It’s just not a norm - something that people in startups or small businesses generally think about or talk about, as it’s antithetical to focusing all your efforts on building a product and pleasing customers.

I understand you’re saying it should be.

Ok, sure, maybe it should be. That’s a valid topic of discussion. It just raises a whole lot of new trade offs and costs, if suddenly every early stage startup founder now has to also be an expert in bank risk.

Further to this: I’m reading this thread [1] from Mercury’s CEO, Immad Akhund (disclosure: a friend from my YC days many years ago though we’ve not had contact for years), that their neobank product automatically spreads funds across a sweep network and delivers $3M of insurance.

That seems like a simple and effective way for companies to manage their deposit risk.

If the government/president came out and said “we’re going to protect the system now but we may not/will not in the future and all companies should put their funds in sweep network accounts to be safe”, then it would be reasonable next time to say “should have known better”.

I understand your position that startup founders should already "have known better"; it's defensible on pure technical grounds, but just impractical/inefficient given contemporary realities.

[1] https://twitter.com/immad/status/1635302598831112192

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