UK also rules out bailout for SVB
I’m somewhat dubious - we shall see.
Asian markets open tonight, this could get very interesting, very quickly.
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There’s a big difference between bailing out the investors (share holders) and bailing out the depositors.
SVB Financial Group’s stock was 717 on October 1, 2021. It closed at 106 on March 9, 2023. These stock holders will have to eat their losses. They won’t be bailed out.
It’s possible that the FDIC will bail out the depositors. They did that in 1991 as I described in my Control Panel. I think this is possible, maybe likely.
Wendy
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Isn’'t the max deposit insurance limited to $250K per account? Some will have to eat many $mil…
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Yes, and I think that’s Wendy’s point (please correct me if wrong). The FDIC can raise the $250K per retail or corporate account (with possible timeline extensions to unwind everything) without doing anything to keep the bank or its shareholders from facing the consequences of their risk.
From a jaded perspective, most “bailouts” end up making executives and shareholders whole while customers and/or employees end up absorbing the costs. This is yet another opportunity to flip that equation by making innocent customers whole while the powers that be absorb the costs.
We’ll see though. There’s a reason the general consensus is “we’ll believe it when we see it.”
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The assets of SVB at current market values cover about 97% or 98% of the deposits and other liabilities. So depositors are likely to get a large percentage of their deposits back. The FDIC has already said that all depositors will have the $250k guaranteed amount available on Monday, and plan to make a further distribution to depositors later in the week.
My back of the envelope numbers say that depositors will lose up to about 3% of their deposits. The bigger issue will be cash flows - large depositors are going to have a lot of cash tied up for a while, even if their ultimate loss is as small as I have calculated.
As I’m learning more about this bank failure, I’m beginning to see that the FDIC insurance is basically irrelevant for SVB. The vast majority of their depositors had way more than the insured amount on deposit. The state regulators and the FDIC stepped in to keep depositors losses to a minimum.
There were some news stories that triggered and old-fashioned run on SVB. While that’s not entirely the fault of the bank management, they did err by selling off portions of their personal stakes in the bank. That’s terrible optics and may have pushed the regulators over the edge. Plus the bank had some clear problems. They got caught with the rising interest rates and had too much invested in long term bonds which dropped in value as interest rates rose.
As to the disposition of the bank, I hope they just dissolve it and don’t allow some other bank to get bigger off the failure of this one. Big banks are already big enough. And in line with the theme of the thread, stockholders need to be wiped out. They can’t be bailed out on this one. That was the biggest mistake made in the 2008-9 time frame - bailing out bank investors along with the depositors.
Personally, I’d be in favor of putting depositors first, and only paying the bank’s creditors if there is money left after making depositors whole. If that path were followed, I’m still not sure that depositors would actually be made whole - I don’t recall the exact numbers, but I think that the back of my envelope had the losses on the bond portfolio at pretty close to the same number as the bank’s non-deposit liabilities. That would wipe out shareholders, give little or nothing to creditors, and make depositors pretty close to whole.
–Peter
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SVB doesn’t have size. As we saw, 15 years ago, banks with size can hold national economies hostage to being bailed out of their bad decisions.
Steve
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We are witnessing “Operation Twist” which will be excellent for the US economy. Moreso in the years to come than this year.
The 1% get bailed out after all:
The solution found by authorities in the United States to avoid a financial panic following [the failure of Silicon Valley Bank (SVB)] over the weekend was like a wink to Belgian artist René Magritte and his famous “Treachery of Images” (This Is Not a Pipe) painting: There will be no bailout by the taxpayer, but all of the bank’s deposits will be guaranteed, even above a cap of $250,000.
Most importantly, the Federal Reserve is to set up a $25 billion credit line to help fund institutions that could be subject to a banking panic.
Can’t let your friends down can you:
https://edition.cnn.com/2021/01/04/investing/janet-yellen-wall-street-speeches/index.html
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I was hoping they would bail out depositors and not the banks back in 2009. Not that my opinion mattered or matters…
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Some economists claimed back in 2009 that bailing out the home owners would have cost $2 tr. That bailing out the banks cost $4 tr. We made an expensive mistake.
Could not disagree more.
The Bailout Was 11 Years Ago. We’re Still Tracking Every Penny. — ProPublica.
Snip:
For instance, let’s take a look at the bank bailout stragglers. The biggest part of the TARP was the bank rescue, which invested $236 billion in over 700 banks. Almost all of those investments have been resolved, most resulting in a profit for the government, though over 100 did result in losses.
Turns out, TARP was not expensive at all. The government actually made money off of TARP.
How much money you ask? Over $15 billion.
U.S. ends TARP with $15.3 billion profit.
So ya, bailing out homeowners would have cost a lot more than what we did for the banks.
Hawkwin
Who thinks individual corporate critters should still have faced more (or at least some!!) civil and criminal penalties for their own culpability.
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No mistake!
Home owners don’t fund lobbyists, banks do. Follow the money. The money governments hand out is not governments’ money, it’s the people’s money.
The Captain
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The institutions would have been whole either way in 2009. Taking that motive away legislation was passed to avoid that confusion. If you were right it would not be handled the way it is now with only the depositors being made whole.
but homes were lost to the dwellers. That fallout of lost homes was higher in many regards leaving many Americans unready for retirement.
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While I hold banks responsible for their faulty lending practices, I also hold homebuyers responsible for their purchasing behavior.
No one made people buy an overvalued home. No one made them sell those homes when they were underwater.
Why should the government - the taxpayer - be any more responsible for making those individuals whole than they should when people lose money on stock?
If a person can cashflow a $2000 payment on a $500,000 home, why should we bail them out if they are making a $2000 payment on what is now a $400,000 home?
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There used to be a TV ad making the rounds, for those “innovative” mortgages. the husband says words to the effect “I don’t think we can afford that”. The salesman says something like “what if I showed you a way you could afford it?”. The wife lights up, says something like “Oh, sweetie, I would be so happy in that big house”…and I add the next line that she would have said, if the scene has run a moment longer “don’t you want me to be happy?” (fingernails digging into husband’s arm)
Those RE salesmen were probably reenacting the salesmen from Westworld “nothing can go wrong”.
Steve
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Hawk,
I realized I’d need to come back in here and do some explaining.
The proposal back in 2009 was to have a two year hiatus from all mortgage payments. Not just those underwater. Then people would reassess what they could afford better. Buying or selling as makes sense. Imposing FED rules possibly.
Remember the stock market tanked. This would have reduced that considerably. All for $2 tr not for $4 tr directly to the bankers.
You can say the little guys need to be responsible. Okay.
We might as well note that executives paid in the $10s of millions need to be far more responsible. Those are two different ideas on responsibility.
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It wasn’t $4 trillion. The original program was $700 billion, of which “only” about $635 billion was actually disbursed (of which about $150 billion went to bailing out AIG and auto companies, not just bankers). And the federal government received assets back for most of those funds, which (as has been pointed out) were later sold for a profit - $109 billion in profit, as of approximately now.
Whether or not it would have been a good idea for the federal government to pick up the mortgage payments of 90 million homes (most of whom didn’t have any problems making their payments during that time period) for two years, such a program is in no way comparable in either size or structure to what actually was implemented.
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One of the earlier calls
Buffett as usual puts some interesting numbers on it.
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I wasn’t disputing whether someone had suggested that policy - just pointing out that such a policy would be very different in size and structure from what we did end up doing, which was (mostly) TARP.
That said, Stiglitz didn’t call for paying the mortgage of every homeowner for two years - or at least, not in that clip. He stated generally that we should help homeowners, but the only concrete policy he suggested was that unemployment insurance might include among its benefits paying the recipients’ mortgage. Since the unemployed were only a fraction of U.S. homeowners (the rate peaked at 10% during the Great Recession, and we might expect unemployment to skew a bit towards renters than homeowners), that’s nowhere near paying everyone’s mortgage for two years.
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