SVB management cashed out millions in stock sales in the preceding months and days before the implosion, which is the closest thing you can get to a soft landing in this circumstance.
It's difficult to believe they top executives didn't know something was severely wrong in 2022 when they setup the sales.
It’s actually not difficult to believe at all in my opinion.
They had 105b plans prepared, filed and approved by outside entities. You can see in the SEC documents and company filings all of the sales were pursuant to those plans, which are also commonly done to cover tax obligations throughout the year due to the vesting of stock.
KPMG passed SVB’s audit and several top financial firms had SVB’s default risk at around 2.5%.
The executives didn’t expect a “run on the bank” and those longer-term assets had been underwater for awhile & the financial market knew but expected they would be fine when they came to maturity.
They booked a loss to shift funds into shorter-term securities with higher yields to hedge and hindsight is 20/20 but they should’ve hedged sooner.
Overall, I don’t believe there was anything nefarious here & if we dislike the 105b rules, as many do, that should be the outcome of this review - that they need to change.
Any rescue beyond the $250K insured limit is basically tempting other banks to take similar risks in the future. It is a bad omen for the American financial machinery.
And I sincerely hope I am wrong on this count, and this is just an outlier...
With govt intervention.
- Shareholders suffer the exact same amount.
- Execs suffer the exact same amount.
- Depositors don’t suffer
So what exactly has changed in the personal fortunes of either execs or shareholders after the govt intervention to change their incentives even a little bit?
The only “moral hazard” being created here is that depositors are being told that it’s ok to deposit your money in a single bank account in smaller non systemically important banks.
If you think encouraging depositing money in banks outside the big banks is a moral hazard, then yes, this action has furthered that.
Otherwise I’m struggling to see what other moral hazard has been created relative to the govt not intervening.
Rescuing depositors by ignoring FDIC limits is violating the law. From the FDIC page: "Depositors should note that federal law expressly limits the amount of insurance the FDIC can pay to depositors when an insured bank fails, and no representation made by any person or organization can either increase or modify that amount." [1]
Thanks for the pointer, and I confess I overlooked that part.
That said, I hope my faith in the people making this call is not misplaced, though at some level I feel tormented because this does not seem fair. Only time will tell.
The depositors in SVB were not only not normal depositors, but should have know about the insurance cap and behaved accordingly. Instead, we've emptied the FDIC insurance fund on a bunch of people who should have known better, so if shit goes south, normal depositors are unlikely to get the same consideration.
So once again, different treatment for different people, stratified by social class.
Why would giving the depositors their money back tempt banks to take risks? SVB has totally folded. Its stock, and probably its bonds, are equally as worthless as they were before the government stepped in. I guess it could tempt other businesses to take risks like keeping all their money at one bank, but I’m not sure how big a deal that is.
Nobody pays out money for uninsured goods. Making the depositors whole is sending a signal that (a) FDIC insurance limits are worthless and can be ignored, (b) Depositors can continue to be callous in their financial behavior, and (c) Banks can take known-stupid risks, worst case the bank will collapse, but depositor money is rock solid safe.
While a company parking millions of dollars will require several accounts to meet that FDIC limit, having two to five accounts at separate banks is certainly not out of reach for almost all institutional depositors. Spreading risk, that simple.
(Again, all this is hindsight, and I am not exactly privy to what forced startups to park their funds in a single bank, so take my commentary with that grain/rock of salt).
These aren't behaviors that add any value to society:
> Depositors can continue to be callous in their financial behavior
Depositors should be able to select a normal bank and put their money in without having to do a huge deep dive on the books of the bank. In this case the problem was with having too many treasuries or something? Why do we want a small business with $400k in the bank to have to figure out the bank's treasury holdings before they are able to start their ice cream store?
Do we want them to have to open multiple bank accounts each time they hit $250k? How is that not just 'busy work' for a business owner (and thus raises the bar to entry for new businesses in the market)?
That said, the vast majority of people don’t need to worry about the $250k limit. But companies do.
Should there be a separate limit for business accounts? Or is every business just supposed to juggle dozens+ of accounts if they’re big enough to stay safe?
Roku had $500 million in SVB. That would need 2000 accounts. But even small local business may have to deal with $1-2 million just in savings and payroll and such right?
> Or is every business just supposed to juggle dozens+ of accounts if they’re big enough to stay safe?
You don’t need dozens of accounts to diversify against short-term risk, and the long-term risk is pretty low since, while uninsured, even in failures a large fraction of uninsured deposits tend to be returned, and bank failure is still pretty rare (in terms of probability of hitting any given depositor per year.)
And, if you do, there are, in fact, businesses you can go to whose entire business is facilitating this.
We have, after a lifetime of careful savings, several times the FDIC limit and we don't exceed the limit in any one bank. This is a minor annoyance, but we do it. It's especially important for CDs, etc.
I can't imagine anyone taking that risk, but it's typical of the Government to reward people who are less careful than I am.
Sorry, but shit happens and so yes, we all need to learn and exercise some financial prudence. "Don't put all your eggs in one basket," is not a "weird financial hedging game," it's common sense.
Investors may lose almost everything. The management is sacked. The bank is dead, not bailed out.