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Comment by cs702 | Hacker News Reader

> An industry built on risk-taking, which made mountains of money when those risks paid off, has just been reminded of what happens when they don’t. And the answer, once again, is: Someone else pays the price.

Ouch. That's a bit painful to read, because... it rings true, based on conversations I've had over the past few days. My understanding is that a majority of venture-backed startups in the US as well as a majority of venture capital firms all their had their cash balance deposited at SVB. In other words, the federal government just saved the entire US venture capital ecosystem from failure.

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At the expense of anyone holding dollars worldwide.

it's paid for by auctioning off SVB's assets and raising FDIC fees on other banks

I'm worried that "other banks" constitute a large enough body that they could just let SVB fail. Instead they're looking around nervously and acquiesce to a bailout because they might be just as vulnerable.

the fees are not voluntary and other banks have no reason to want their customers to see examples of people getting wiped out by bank failures

Your neighbor sets off fireworks in his living room and burns his house down. Everybody in your neighborhood with the same insurance policy immediately gets hit by a new fee that was not previously contracted, the neighbor walks away without a house, but also with his mortgage payed off.

In what world do we live in that a government agency can demand a new mandatory fee over the course of a weekend. This whole thing is bonkers.

“The ultimate result of shielding men from the effects of folly, is to fill the world with fools.”

people seeing a bank fail will worry that their own bank could fail, which could lead them to withdraw en masse which will cause their own banks to fail, and so forth. this scenario is bad for everyone.

We just lived through this 15 years ago, and that’s not what happened at the time in a situation where many, many more banks were exposed to significantly higher risk.

SVB had a short-term liquidity crisis, followed by botching a funding round to solve the crisis (along with some internal issues). They were a relatively small bank whose assets likely would have been gifted to another bank in exchange for covering the liabilities.

Which is likely to be passed on to consumers via increased costs; in an already unfavorable economic climate for lower end of the income gradient.

the fees are proportional to the size of the account and benefit banks and customers by eliminating the possibility of losses due to bank failures

IDK what banks you've used, but all the banks I've used the fee proportionality is regressive.

I also don't agree that the most prudent and responsible banks bailing out disproportionately depositors at failed banks is beneficial for them or their depositors. It also creates a moral hazard for customers to chase banks with the highest yield risk profile knowing they'll be bailed out by the other actors.

maybe other fees they tack on, but not the FDIC fee.

The bank doesn't have to pass fees down using the same algorithm with which they were assessed, and they usually don't. The small guy gets fucked with regressive fee structure.

>people seeing a bank fail will worry that their own bank could fai

I feel more confident in my bank as it is compared to my bank minus a "special assessment" to backstop depositors at irresponsible banks.

if they charge you a random fee and call it an FDIC fee then they are committing fraud

Where are those banks getting the additional cash to pay higher fees?

banks have access to a lot of cash

From the Fed. At the expense of anyone holding dollars worldwide.

the fed only loans money to banks with a term of like 12-72 hours

You and me

I've not seen any reporting or anything in the announcement that indicated an increase in fees for the FDIC insurance fund would be necessary, but I absolutely admit I may have missed that detail. Do you have a reference for this claim?

"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."

https://www.fdic.gov/news/press-releases/2023/pr23019.html

Thank you!

> Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

https://www.federalreserve.gov/newsevents/pressreleases/mone...

Ahh, yup, I absolutely missed that when I read the announcement. Thank you!

It's worth noting it's still unclear if that'll be necessary (it all depends on the level of recovery they can get out of SVB's assets), but the potential is there, and it's hard to deny that, if that is necessary, those costs will ultimately be born by everyone as the banks pass those costs along.

Uh... "fees on other banks" seems like a pretty good proxy for "anyone holding dollars worldwide", though. I don't think you disagree.

The idea that there won't be losses here is a little laughable. If their assets were so solid then some other bank would happily have written a loan with them as collateral. SVB transparently couldn't get financing, so they had to sell a bunch of stuff last week and booked a $1.8B loss (which is the proximate cause of the bank run).

No, this will end up being a bailout. It'll be obscured enough that people will be able to claim it wasn't. But it is.

the FDIC only has jurisdiction over US retail banks, not everywhere dollars are held worldwide, of course

the deficit left after auctioning off SVB's assets will be raised from other banks. the FDIC/treasury/Fed are not going to just pay for it out of pocket.

And who ultimately pays for raised costs at banks? I’m guessing it’s less like the C-class, and more like the individual depositor/personal-loan-class.

HN readers should be acutely aware of this as being entrepreneur-savvy. If your costs go up (unexpected FDIC assessment) you either are immediately less profitable, or you raise prices and past the cost to your customer. Banks are the Chris Paul of passing costs on to their customers.

tl:dr new fees for banks is increased fees for customers.

it's proportional to account size

> My understanding is that a majority of venture-backed startups in the US as well as a majority of venture capital firms all their had their cash balance deposited at SVB

Dataset needed.

It's worth noting that the concept of risk justifying disproportionate gains in most incarnations of capitalism isn't any sort of foundational principle. Instead, it was largely just a narrative people thought held true (and there's some truth still).

These days it's largely the mantra that if you can't find a way to pass risk and costs off, you're incompetent at your role. We've learned to optimize risk away from the reward system and made it socially and culturally acceptable. Before, it was less accepted, hence the narrative. Anymore, people don't even paint the facade.

It's the Silicon Valley corporate playbook:

Privatize the gains, Socialize the losses.

The corollary is: socialism for the rich, unabashed cutthroat capitalism for the rest of us.

I’m engraving this on a plaque and throwing it on the lawn of the super rich.

If you can turn that into a service where I can engrave things on a plaque and have someone throw it into a garden of my choosing, I'm sure you can build a successful startup out of it.

VaaS, Vandalism as a Service.

It should be noted, this isn't really unique to Silicon Valley. It's more like the "capitalist" playbook.

What is "capitalist" about requiring FDIC for a retail banking charter, then the same government creating the requirement (at gunpoint of licensing scheme) takes the money for that requirement, and creates a "insurance scheme."

Only it turns out that "insurance" is a fraud, as it is misrepresented. The premiums are advertised as being for backstopping up to 250k in the account, but it turns out this was a fraud and actually it's whatever arbitrary amount they choose all the way up to the biggest holder in the bank. And when they're finished, they'll assess a "special assessment" which totally isn't a tax, nevermind the licensees have no choice but to pay it.

the "gain" startups were getting was a deposit account that doesn't disappear over the weekend. these were not supposed to be high risk/reward investments.

The risk was not having insured themselves beyond what FDIC was providing. I can’t wait until my insurer covers hundreds of multiples above the coverage I have!

the FDIC limit was a minimum. for decades the FDIC has covered the full amount in practice. if the current level of fees aren't enough to cover that, they will raise them. and that is exactly what is happening now.

That is not what is happening now. They are assessing additional fees under systemic risk protection rules. FDIC rates are changed on a regular, periodic basis with forewarning time for markets to adjust, not over a weekend.

When has FDIC reimbursed more than the “up to” limit? Everything I’ve read regarding this suggests that this may be moral hazard, at least in the short term. The remaining amount should come from liquidation of the failed bank’s assets or by the acquiring bank, not the FDIC.

The federal government caused the problem first though.

The federal reserve denied inflation was real for so long, signaling to everyone that it was safe to buy US Treasuries, then suddenly and aggressively started raising rates.

And wasn't it the federal government regulators who are responsible for ensuring that banks are not taking on excessive risk? Are they not to be trusted, and must every depositor perform a deep-dive due diligence on their bank and continuously do so in order to make sure their money is safe while deposited in a bank of all places?

No, the Federal government is more like an arsonist who set fire to a building, then showed up to rescue the people inside, taking all the credit, and then shaming those who noticed the smoke and escaped on their own before they arrived.

moronic one-sided grudge content aside - isn't "market valuation" by private capital on assets they have an interest in, also a snake in the grass here?

It kind of feels like the argument here is "why didn't someone stop us from making mistakes"? If it's the case that the federal reserve sent deliberately misleading messages that no one could have doubted why isn't there a giant line of banks currently going under?

It doesn’t take every depositor doing a deep dive, but if you hold half a billion dollars in cash at a bank, you bloody well better understand their balance sheet. I assure you that mainline company and governmental treasurers do this due diligence as a matter of course along with all the other counterparty risk mitigations that are SOP for well run companies.

And if you are going to encourage (and sometimes insist) that your portfolio companies work with a bank, understanding concentration risk is the minimum professional standard you should be held to.

Every other industry understands what fdic insurance is and is not. Competent CFO and corporate treasurers manage their counterparty risk as part of their job. It’s either immaturity, incompetence or entitlement that makes SV think this isn’t their problem.

>The federal government caused the problem first though.

Nonsense.

>The federal reserve denied inflation was real for so long, signaling to everyone that it was safe to buy US Treasuries, then suddenly and aggressively started raising rates.

The Fed was issuing forward guidance in 2020 that it planned to aggressively raise rates. By 2021, my dog could have told you that this was going to happen.

>And wasn't it the federal government regulators who are responsible for ensuring that banks are not taking on excessive risk? Are they not to be trusted, and must every depositor perform a deep-dive due diligence on their bank and continuously do so in order to make sure their money is safe while deposited in a bank of all places?

SVB spent a lot of money on lobbying to keep themselves small enough (by raising the limits) to not have to get the full brunt of regulations. (https://theintercept.com/2023/03/11/silicon-valley-bank-used...)

>No, the Federal government is more like an arsonist who set fire to a building, then showed up to rescue the people inside, taking all the credit, and then shaming those who noticed the smoke and escaped on their own before they arrived.

Makes sense that you don't know the difference between the Federal Government, the Federal Reserve, and the FDIC though.

The Federal Reserve is basically part of the government, under the guise of independence. It's naive that you think otherwise.

FDIC is not part of the government and I never said it was, but it does work closely with them. I'm not sure what your point is.

As for your claim that the the "fed was issuing forward guidance in 2020", this says otherwise, from 2021 even:

Federal Reserve calls inflation "transitory" as it keeps interest rates near zero https://www.cbsnews.com/news/interest-rates-inflation-federa...

And any bank would have hedged their bonds against interest rate hikes.

Totally SVB's fault.

SVB ended up on the wrong side of a trade and somehow it’s the feds fault?

They knew that there were risks in their strategy and went ahead with it, rather than hedging and forgoing profits. It’s not the feds job to make policy on the basis of how one bank is trading.

Are you saying the deposit holders (customers of the bank) are to blame?

Blame for what? The bank failing?

SVB was financially mismanaged by its leadership. They then handled the communications around their poor financial position very poorly. This lead to the immediate cause of the banks collapse, a textbook bank run.

So, technically yes? The depositors who pulled their money were the immediate cause of the failure if we’re being simplistic. They pulled out a quarter of the deposits in a couple of days, no bank is going to be able to withstand that.

You're wrong, and it's easy to show why:

SVB executives did NOT have to load up on high-duration bonds! They were under no obligation to do that.

They CHOSE to do it because they wanted to increase interest income and earnings in the short run.

They could have easily purchased a lower-duration mix of bonds. Instead, they gambled the bank on a bet that long-term rates would stay at historic lows.

Once they made that bet, they could have easily hedged it every year, at a cost. Instead, they chose not to spend any money on hedging.

The federal government did not cause SVB's failure. SVB executives caused it.

I am not defending SVB executives.

Don't you understand the difference between deposit holders (customers) and the executives and investors in the bank?

> I am not defending SVB executives.

But you're blaming the federal government for something the executives did voluntarily!

Please don't change the argument. I didn't say anything about depositors in my response.

The federal government did not cause this. SVB executives did.

It's only fair, because I didn't say anything about executives in my original comment.

Please don't make strawman arguments.

Don't be silly, please. There's no strawman here. You accused the federal government as causing something that SVB executives did voluntarily. It makes sense to point that it was they who caused their problems, not the government.

Your arguments seem to be motivated by ideology, as opposed to facts and reasoning, so this will be my last comment on this sub-thread. Goodbye.

I am only calling out your strawman. If you want to pick up your toys and go home because of that, good.

Outside of the Federal Reserve issue, isn't a core component here the 2018 bank deregulation laws that weakened the rules so they wouldn't apply to banks the size of SVB (less than $250B in assets)? Dodd-Frank was put in in place for a reason after 2008 and crawling it back in form of the 2018 bank deregulation laws was a glaring mistake.

Real banks hedge interest rates as required by regulation (and sanity). SVB lobbied Republicans to have regulation removed. SVB had hedges and let them expire while it had no risk officer. Theil apparently recommended cash at SVB after the failure of his funded Glorifi bank, but it's unclear why large sums (in excess of monthly needs) would be left by any company in any bank (if only because there's no interest). Were there other loans being made against deposits?

https://www.wsj.com/livecoverage/stock-market-news-today-03-...

https://theintercept.com/2023/03/11/silicon-valley-bank-used...

https://www.businessinsider.com/anti-woke-bank-backed-peter-...

It was actually the raising of 10y long term rates (which are not controlled by the Fed) which caused the value of SVBs MBS to fall. That in turn is mostly affected by inflation expectations.

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