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You are here: Home / Economics / C.R.E.A.M. / Silicon Valley Bank Open Thread: The (Negative) Larry Summers Indicator

Silicon Valley Bank Open Thread: The (Negative) Larry Summers Indicator

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Anything Larry Summers supports is almost certainly a terrible idea and bad for everyone who is not one of Larry Summer’s funders. You can argue around the margins, but the man has a track record of ignominy.

He’s gonna get at least a chunk of what he wants, if I correctly understand the latest Sunday-evening update:

But probably not all of it, if it’s up to the Treasury Secretary?


As far as I can understand — anything involving numbers is very much outside my skillset — SVB put most of its ‘lost’ money into Treasury bonds, which don’t mature for some years. Bad news for those who need their money back now, but a bigger firm that has the resources to sit on those bonds is guaranteed to make a profit…

Reader Interactions

85Comments

  1. 1.

    JPL

    Fk Larry Summers!

    A lot of people sell wares through ETSY and they depend on getting paid.  ETSY had a lot funds in the bank.   I’m okay with the bailout or whatever they call it.

    btw Fk Thiel, fk trump encouraging a run on banks, and fk those who gave trump what he wanted and further deregulated the banks.

  3. 3.

    Baud

    So did Larry Summers actually use the word “bailout?” Or is that all Ryan Cooper?

    The protection to prevent a bank run seems like a decent move, especially if there’s a buyer.

  4. 4.

    JPL

    @Sure Lurkalot:  In this case that’s not true for a lot of people.  If Etsy couldn’t payout the sellers, they would suffer.   What happened is trump wanted to repeal regulations for midsize banks and he got his way, with some democratic help.

  5. 5.

    Layer8Problem

    That clever boots Andrew Mellon had a line about “purging the rottenness from the system” during the Depression, although I think he meant letting everything fail hard because it’s good for you.  How about purging Thiel from the system, at least to the extent of keeping him far away from anybody’s money, off any boards, out of any business entirely?

  6. 6.

    prostratedragon

    I wrote this at the end of the other thread, in response to Sister Golden Bear:

    That part about the bank’s assets: I’m hardly a financial manager(!), just a kid on the internet who’s taken a couple of econ courses, but isn’t it at best questionable for a bank to have so much concentrated into long-term assets during a period of very low interest rates, as was the case until this recent Fed tightening? Especially if they have many large-deposit customers. I don’t mean ethically questionable, just dubious smarts.

    I’m going to look at that Reuters scoop in AL’s post, as I think that one in particular might have an answer.

  7. 7.

    different-church-lady

    Unemployment is at 3% and tech is melting into air.

    “WE’VE LITERALLY RUN OUT OF THINGS TO MAKE PEOPLE DO ON THEIR PHONES!!!”

  10. 10.

    West of the Cascades

    Is there any legal way to launch Larry Summers into the sun?

    One of the better (although unattributed and hence take-at-your-own-risk) analyses I’ve seen suggested that the SVB problem is just liquidity – that, at least on the books, it has more assets than liabilities, and thus once the assets are liquidated (most are not in cash) the proceeds will cover all or most of the deposits – so the government’s guarantee is sort of a bridge protection for depositors until they can be completely paid from SVB’s liquidated assets – and little to no FDIC insurance fund money will need to ultimately be paid to depositors. IF this is correct, this seems like a good outcome (when paired with the government’s refusal to bail out the shareholders and managers – and I hope to hell the FDIC tries to claw back the bonuses paid last week and proceeds from recently-sold-by-management SVB stock).

  11. 11.

    Jackie

    On a related note:

    ““U.S. regulators on Sunday shut down New York-based Signature Bank, a big lender in the crypto industry, in a bid to prevent the spreading banking crisis,” CNBC reports.

    “The banking regulators said depositors at Signature Bank will have full access to their deposits, a similar move to ensure depositors at the failed Silicon Valley Bank
    will get their money back.””

  19. 19.

    OverTwistWillie

    Bank management had a bedrock faith in Volker-nomics bringing their holdings portfolio back into round. No need in taking a hit restructuring for higher interest rates in the medium and long terms.

    Oops.

  21. 21.

    mvr

    It is unfortunate that Obama’s modesty sometimes meant he listened to people like Larry Summers too much/often.  I think it slowed the recovery from 2008 in ways that hurt our politics as well as lots of not particularly well off people.
    But I appreciate Summers making it clear that he’s not the genius he thinks he is.

  22. 22.

    Amir Khalid

    I could use an explanation here: how does higher unemployment help reduce inflation, and isn’t there some cost to the economy from high unemployment itself?

  23. 23.

    Sister Golden Bear

    @prostratedragon: It was an extremely stupid move on SVB’s part.

    Anne, they were actually long-term bonds related to mortgages. Like the 3.125% re-fi I did last year. I could figure that it was a good idea to lock in rates when they were at the lowest there were likely to be in year, but apparently not the MOTU.

  24. 24.

    JPL

    @Amir Khalid: I’m not an economist, and I haven’t even slept with one, but the thinking goes if you can reduce spending then demand falls.  Prices would then lower to encourage spending.  There is a problem with that, there is a fking war in Europe that is upending the supply chain.  IMO

    Maybe a real economist will weigh in with a better explanation.

  26. 26.

    Eyeroller

    @Amir Khalid: I’m not a real economist, but as I understand it, at higher unemployment levels labor has less power to demand wage increases.  Economists associate wage increases with inflation in many circumstances.

  27. 27.

    Geminid

    @Amir Khalid: I can’t speak to the relation between unemployment and inflation other than to say there is some relationship.

    But there definitely is an economic and social cost to higher unemployment. It falls more heavily on working class and middle class people than it does on elites, though. That’s one reason Larry Summers was so cavalier about the prospect of extended 5% unemployment.

  28. 28.

    different-church-lady

    @Eyeroller: ​
     

    Economists associate wage increases with inflation in many circumstances.

    Because the system is designed to move money upwards.

    Until we fix that, there’s no way out.

    Easier said than done.

  30. 30.

    Anyway

    @Amir Khalid:

    Not an economist either but its all about value to the shareholders – employees and other stakeholders don’t count.

    I’d summarize Summers’ philosophy as Privatize gains, socialize losses.

  32. 32.

    OverTwistWillie

    IIRC the leadership team at Braniff International Airways thought re-regulation was inevitable, so the went on an expansionary blast right into the teeth of the early 80’s recession. Bye bye Braniff.

    Executive management types, are, by and large, chickens trained to peck at the right letters. Move the letters around and hilarity ensues.

  33. 33.

    Geminid

    @Baud: A 5% unemployment rate may be historically good, but I think we could have had a balanced and stable economy over the last few decades with lower unemployment, if Republicans hadn’t kept messing it up.

  35. 35.

    Sure Lurkalot

    @different-church-lady:

    Economists associate wage increases with inflation in many circumstances.

    Because the system is designed to move money upwards.

    Rum lady is very wise.

    I will add that idolizing wealth and coddling the rich is basically a spectator sport at this point.

  36. 36.

    Another Scott

    @Amir Khalid: Too many banksters and economists think the 2020s are just like the early 1970s when wages and prices were locked together – the “Wage-Price Spiral”.  So, if workers got automatic raises to counter inflation, then inflation would ratchet up, then wages, then …

    So, the way to counter inflation was to throw people out of work.  People who don’t get fired aren’t in a position to demand higher pay and won’t think about leaving their job for a better one because other companies aren’t hiring.  So wages fall.

    Trouble is, that model doesn’t work when few workers are unionized, few have automatic cost-of-living increases any more, and most of the changes in prices are short-period jumps caused by short-time things like container freighters stuck in a canal, or an ice storm, or a flood, or a pandemic rather than drones getting paid too much year after year.

    The FED and other central banks should have learned this lesson during and after the oil shocks in the 1970s.  Step-wise changes in prices don’t portend ever increasing prices.  The economy will hurt, but it will adjust and doesn’t require throwing millions out of work if they pay attention.

    The central banks only have chainsaws to try to meet their stable-prices mandate, so they jack up interest rates even when it’s a poor (or worse) tool for the problem.  (E.g. higher interest rates aren’t going to affect VVP’s actions in the Ukraine grain export program, and throwing millions out of work won’t either.)

    What should the FED do differently?  Dunno, but the mantra that we MUST panic if inflation is over 2% (no matter the world’s circumstances) is not helpful.

    I’m not an economist, but that’s my understanding.  FWIW.

    Cheers,
    Scott.

  37. 37.

    prostratedragon

    @Amir Khalid:
    @JPL:
    @Eyeroller: In all seriousness I’m enough of an economist to say those explanations sum it up. As to the cost in unemployment, a good economist will a) concede them, b) caution that they should be weighed against the damage from inflation, and c) use other policies to mitigate the effects on the short side of the decision.

  39. 39.

    different-church-lady

    @Sure Lurkalot: Which reminds me: I did an inventory…

    1) Bacardi Silver
    2) Bacardi Gold
    3) Bacardi Black
    4) Bacardi 151
    5) Cruzan Silver
    6) Cruzan Gold
    7) Brugal silver
    8) Mt. Gay
    9) Pusser’s
    10) Wray and Nephew overproof
    11) Appleton Signature
    12) Appleton 12 year
    13) Old Monk
    14) Flor de Cana 7
    15) Sailor Jerry
    16) Captain Morgan (don’t be judgy…)
    17) Malibu
    18) Lemon Hart 80
    19) Lemon Hart 151
    20) Meyer’s Dark (tastes terrible, but critical for a Jet Pilot…)
    21) 10 Cane
    22) Diplomatico
    23) Gosling’s
    24) Clement Canne Bleue
    25) Celemtn Select Barrel
    26) Barbancourt 4 star
    27) Liberty Tree
    28) Kirk and Sweeney
    29) Havana Club (Cuban)
    30) Havana Club 7 year (Cuban)

  40. 40.

    karen marie

    I’d like to start a GoFundMe to buy a rocket to shoot Larry Summers into the sun.  Who’s in?

  41. 41.

    TS

    @Sure Lurkalot:

    Moral hazard is only for the poors. Same.as.it.ever.was.

    I came to post something similar, so just stole your words – you have it to perfection.

  43. 43.

    karen marie

    @Another Scott:

    most of the changes in prices are short-period jumps caused by short-time things like container freighters stuck in a canal, or an ice storm, or a flood, or a pandemic

    Kansas City Fed says, “However, the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand.”

    Shorter:  Corporations raised their prices because they had a fig leaf in the form of temporary inflation.

    Funny how they always raise prices to anticipate the future but never bring them back down to previous levels when their claimed pants-wetting fails to materialize or the temporarily higher costs evaporate.

  44. 44.

    Bill Arnold

    @Eyeroller:

    Economists associate wage increases with inflation in many circumstances.

    Also, it is easier to raise prices in excess of increases in expenses, to increase profits without losing customers, if there is high inflation. People tend to believe tales about greedy low-paid employees rather than stories about greedy wealthier business people. (Yeah, over 1/2 the inflation in 1H2021 was due to profit taking after price increases. Month-over-month inflation has been relatively low since then.)

  46. 46.

    OverTwistWillie

    Those that lose their work die at higher rates.

    Larry is a psychopath and mass murderer.

  47. 47.

    Another Scott

    @Jay: +1

    I have a favorite source buried in the archive here (we really need to tell Google to crawl the site again!!) that is DeLong pointing to a story in one of the popular business papers about a study on what happened to wages in some midwest city as unemployment kept dropping.  It was a natural experiment on what the NAIRU – non-accelerating inflation rate of unemployment – actually is.

    The unemployment rate where wages started going up was …  Not 6%, Not 5%, Not 4%, Not 3%, but around 2.8%.

    The accelerationist Phillips Curve mantra has known to be bogus for decades (see DeLong’s simple calculations that illustrate it is stupid and doesn’t work).

    For people who claim to be objective and just follow the numbers, too many economists are just as ideological and set in their ways as any other political hack. But we’ll continue to have to fight their nonsense about it always being 1979…

    Cheers,
    Scott.

  48. 48.

    Bill Arnold

    @OverTwistWillie:

    Larry is a psychopath and mass murderer.

    And arrogant.
    And with an ego unwilling to comprehend that he has often been very very wrong in ways that caused a lot of harm.

  49. 49.

    Birdie

     

    @prostratedragon: I think the connection makes sense to an economist. More people out of work = more people with less discretionary cash and more people scared of being fired = less discretionary spending and less wage pressure = lower demand and supply pressures on prices = prices fall. 

    One problem is, with rising inequality, the people at the margin who are squeezed by unemployment and interest rates on debt are generally not the (richer, more financially secure) people who have been driving prices up with their willingness to spend. Talk about moral hazard! 

    Another problem (in my opinion) is that effectively governments and reserve banks are saying “oh no, everyone is too financially secure, we have to create more anxiety so that people go back to counting their pennies”. I don’t have a better answer, but it kinda sucks that capitalism apparently requires a distressed underclass to function.

  50. 50.

    azlib

    There is a valid economic argument that 2% inflation is too low. It is for the most part an arbitrary figure and it may in the current circumstance be too low to sustain full employment. I get the feeling the Federal Reserve has a bias towards reducing inflation even if it means higher unemployment. Short term rate increases also have a lag time before they take effect and there is a debate right now whether the Federal Reserve has overreacted and will lead us into a recession like they did in the early 80s.

    With the SVB debacle, it is always fun to watch the libertarian MOTU expose their rank hypocrisy. The bank apparently has enough assets to pay its depositers, but the assets are tied up in long term equities which will take time to unwind.  The bank may end up selling those assets at a loss given the rise in interest rates, but that is just the way it is when you make bad investment decisions. Hopefully, the management and the stockholders will be wiped out in the restructuring as they should be.

  51. 51.

    Jay

    @Another Scott:

    here, the number has always been people on UI/EI claims, (successful or not), Welfare, and “self reporting” through the Government run job sites.

    It never included the people who had given up, which here, in the early 80’s, was roughly 24% of the potential workforce.

    Did a cross Canada tour, at the time, trying to find a minimum wage jerb, only to come back to YVR. Managed to get 2 part time jerbs and one full time possible, lived hard and slept on buses, only to have it die less than 4 months later.

    Said f/it, joined the squats and street actions.

  52. 52.

    OverTwistWillie

    I thought it was pretty high…. I guess the problem solves itself. Fuck those ghouls.

    The relative risk of dying for unemployed Americans compared with employed Americans was 3.7 (95% CI = 2.6, 5.2) in the age and gender model and 2.4 (95% CI = 1.7, 3.4) in the full model reflecting a 140% increased chance of dying.

  54. 54.

    eversor

    We will bail out the bank and screw over everyone else.  It doesn’t matter what party is in power when it comes to these things.

  56. 56.

    different-church-lady

    @eversor: When this thread kicked off, I was kind of thinking, “It would be nice if we were smarter in kicking this around than the way it’s going over at LGM.”

    On the whole, I guess there’s still hope…

  57. 57.

    Kent

    @Amir Khalid:I could use an explanation here: how does higher unemployment help reduce inflation, and isn’t there some cost to the economy from high unemployment itself?

    If people are out of work they spend less.

    With less demand, there is less upward pressure on prices

    And yes, there is a cost to the economy.  It is called a recession.

  58. 58.

    Fair Economist

    @Baud:

    I don’t agree with Summers, but 5% is a historically good unemployment rate. Biden has spoiled us.

    Indeed. I remember back in the 80’s and 90’s when the Humphrey-Hawkins goal of 4% was considered impossible. And here we are at 3.5%.

  59. 59.

    Another Scott

    The MotUs are going to have a sad tomorrow, because Biden is going to say mean things about them.

    WH.gov:

    MARCH 12, 2023

    Statement from President Joe Biden on Actions to Strengthen Confidence in the Banking System

    Over the weekend, and at my direction, the Treasury Secretary and my National Economic Council Director worked diligently with the banking regulators to address problems at Silicon Valley Bank and Signature Bank. I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk.

    The American people and American businesses can have confidence that their bank deposits will be there when they need them.

    I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.

    Tomorrow morning, I will deliver remarks on how we will maintain a resilient banking system to protect our historic economic recovery.

    ###

    Cheers,
    Scott.

  61. 61.

    different-church-lady

    @Central Planning: How do I put this kindly… the strawberry and ice is going to take over the whole thing, so don’t use the good stuff. The Cruzan Silver is a great value, and a step up from Bacardi. The Brugal would be even better.

    If, on the other hand, if you want to know how esquisite a silver rum can be, find the Clement Blue and sip it neat.

  62. 62.

    Central Planning

    @different-church-lady: I’m a tequila neat kinda guy.

    I want to recreate the first daiquiri I had with my dad when I was 17. It had some rum floated on top and was delicious. Best one I ever had, and probably because it was my first drink with him :)

  63. 63.

    different-church-lady

    @Central Planning: OK, trying to not be a snob… a daiquiri started off as a refined drink that over time became a fruit slushy. So it’s difficult to say where on that spectrum your father’s version fell.

    https://en.wikipedia.org/wiki/Daiquiri

    The classic version is just silver rum, lime juice, and sugar. No crushed ice, no fruit. So if you’re going to do that, then yes, one would want high-quality rum. I’m actually not good at knowing what to recommend for a straight silver rum because the emphasis is so completely on gold nowadays. But the Brugal is tasty enough.

  64. 64.

    a thousand flouncing lurkers (was fidelio)

    @Another Scott:

    The Fed’s statement.
    I understand any additional liquidity will be raised by levying an assessment on all banks in the FDIC system.

    I’ve been in and out (mostly out) these past few days; have we had a detailed explainer on what the FDIC people do when they take over a failing bank? Because I’ve seen some things on Twitter but I’d love to know if any of those were Actual Facts™️, or just Twitter twittering.

  65. 65.

    Another Scott

    DeLong’s Substack:

    If we lived in a good world—one in which Dodd-Frank had, as it should have, established the principle that all commercial banking deposits are insured (and that banks pay insurance premiums on all of their deposits) and if the 2018 EGRR&CPA had not been passed exempting SVB from NSFR, et cetera, then Peter Thiel’s chaos-monkey appearance would not have made a difference. No one would have an incentive to pull their money out of SVB. If anyone had felt the urge, SVB would have had a very different portfolio—one without this mark-to-market loss and the expected-future-capital-gain offset—because it would have had to maintain its NSFR ratio above 100% throughout.

    Now the right long-run thing to do is to have a system in which (a) commercial-bank deposits are insured—all of them—and (b) commercial banks are regulated so that they must meet their liquidity and stable-funding ratios.

    This, in part, seems to be a variation of the “everyone should have an account at the FED” idea discussed earlier. If all deposits are insured, then nobody has an incentive to grab their money early for fear of a bank run. That is a good benefit. I think one would have to structure the cost of the insurance properly, though. Someone with $500 in a savings account isn’t going to destroy a bank by closing their account, while someone with $500M is, so the insurance costs should go up, not down, on large accounts. The MotUs would hate that though, and would try to get around it (e.g. putting their millions in things outside the normal banking system, but still demanding to be rescued because they’re TBTF)…

    And, of course, giant (but not galactically-big) banks shouldn’t have found a way to get their capital requirements reduced in 2018. That needs to be fixed, again.

    The devil’s always in the details, and politicians who depend on large campaign contributions will always, always be trying to change those details to protect their donors…

    Grr…,
    Scott.

  67. 67.

    different-church-lady

    @different-church-lady: Hmmm… looks like my history is a bit faulty — the daiquiri wasn’t a blender drink, but it did involve shaved ice. So the blender thing isn’t that far off.​

  70. 70.

    Hoppie

    I used to ask dudes in first class on airplanes  (I was a frequent flyer on my own money who always upgraded back in the day) “would you prefer the Eisenhower tax rates,  the Bush tax rates, or the Reagan tax rates?’
    Almost all of the very well off, highly paid ignoramusses said they preferred Eisenhower tax rates.

    I have no idea how we battle that level of ignorance.  It is scary.

  71. 71.

    Goku (aka Amerikan Baka)

    Y’know, I’m seeing quite a few replies on Twitter about how the special assessments charged to all FDIC-insured banks to cover the depositors at SVB is just a taxpayer-funded bailout with extra steps. Basically, banks will simply pass this cost onto depositors (the rest of us) through higher bank fees. Is this take correct?

    I’m aware that SVB assets will also be sold off to help cover deposits, so maybe not? It’s probably a bunch of dumb uninformed opinions

  72. 72.

    mrmoshpotato

    @West of the Cascades:

    Is there any legal way to launch Larry Summers into the sun?

    Let’s research this!  Also, can all of these fuckers go suck Kenneth Lay’s cremated asshole also too?

  73. 73.

    Fair Economist

    @Goku (aka Amerikan Baka):

    Basically, banks will simply pass this cost onto depositors (the rest of us) through higher bank fees. Is this take correct?

    No.

    First, banks are generally quite profitable. Some of the fees will come out of their profits.

    Second, to some extent it will be paid by depositors. BUT that will be based on amounts deposited, and will overwhelmingly fall on the extremely wealthy, and not the “rest of us”. Insofar as it does, it will be an (extremely small) wealth tax.

  75. 75.

    Goku (aka Amerikan Baka)

    @Fair Economist:

    Thanks for the explanation. I am curious though; why would it overwhelmingly fall on the extremely wealthy? Because they have more deposited?

  76. 76.

    Fair Economist

    @Goku (aka Amerikan Baka)

    : I am curious though; why would it overwhelmingly fall on the extremely wealthy? Because they have more deposited?

    Yes.

    Fees are based on amount deposited. Some have pointed out the fees should be progressive (larger deposits pay a higher percentage) because a larger account creates more risk. You can’t crash a bank by pulling out a thousand bucks. But Peter Thiel can (and just did), by pulling out a hundred million. So he should pay more. But he doesn’t, and I doubt that will change.

  77. 77.

    Hoppie

    @Hoppie: (As  everybody knows, marginal income taxes on high income people were 80% plus under Eisenhower.)

    Please advocate that while advocating a wealth tax.  Thanx.

  78. 78.

    Carlo Graziani

    I mean, in principle the Feds stepping in should have nothing to do with “bailing out” anyone. The principle behind runaway contagion is that banks accept deposits short-term, but lend the money long-term, and a bank stressed by a depositor run that has illiquid assets enough to cover its obligations might be forced to call in its loans to avoid bankruptcy. This can cause  copycat runs resulting in liquidity crises for other banks, and, eventually, value decline in assets that actually threaten the solvency of other banks. Acting as a circuit-breaker, the FDIC (and in major crises, the Fed) can interrupt panics, reestablishing the credibility of illiquid assets to back liquid deposits, so that panic subsides and the deposit holders feel secure again.

    As I understand matters, SVB was somewhat incestuously invested, so that the tech decline caused a decline in its asset values, which triggered a run. But in real terms, that decline does not represent a wealth-destruction event on, say, a 2009-scale. Shareholders will get hurt, a bit, but the somewhat diminished assets still cover deposits. If history is any guide, the Feds will make a small profit from being the only level-headed agent in this rodent-riot, just as in the accounts settlement post-2009.

  81. 81.

    Dmbeaster

    Bank regulation and FDIC auctions of failed banks are something that I know about.

    The usual process of bank failure results in depositors being 100% protected despite the insurance limitation, and without any bailout.  The FDIC auctions the failed bank’s assets, regular liabilities and deposit liabilities to interested banks, which bid on the amount of cash that the FDIC must kick in for the acquiring bank to take over the whole mess.  The winner bids the lowest amount.  The huge majority of failed banks have enough going concern value that the FDIC cash necessary to close the deal is less than the deposit liability after a fire sale of hard assets.  The FDIC saves money even though all depositors end up being 100% protected.  It makes sense.

    What is humorous was the insane freak out of the privileged that they must be insulated from risk immediately, even though they probably faced no real risk.  All that they faced was the uncertainty from Friday to Monday while the FDIC does what it always does.  These deals are usually resolved in a weekend.

    Also, the crisis was almost certainly the result of bank regulators telling SVB to remedy their capital short fall promptly, or face seizure.  That is why they started selling assets, but apparently bank regulators saw no hope and acted anyway.  The sudden early flight of some major depositors (Thiel for example) probably doomed a rescue plan since it would greatly increase the capital shortfall.  Bank seizures do not result from bank runs, though a bank about to fail is often hit with that problem.  Seizure is a result of the bank going in the red.  Regulators seize banks well before an ordinary business would fail from similar problems.  Banks in a death spiral tend to do very unsafe things out of desperation, which makes failures much more costly to the FDIC.

  82. 82.

    Bruce K in ATH-GR

    I have a candidate for stupidest comment on SVB, courtesy of the website Techspot: apparently SVB serves as evidence of why we need Bitcoin, because banks can’t be trusted.

    Not even going to try to parse the stupid in that this early in the morning.

  83. 83.

    Matt

    My cynical read on the whole “we’ll buy Treasuries at par for 1 year” bailout is that it’s the bankers going “OH SHIT when we said ‘the economy demands interest rate hikes, so sad that some people lose their jobs’ we didn’t mean PEOPLE LIKE US”.

    Every VC who forced their companies to keep money in SVB should be banned from investing in startups FOR LIFE. Enough of these ghouls.

  85. 85.

    SomeRandomGuy

    As far as I can understand — anything involving numbers is very much outside my skillset — SVB put most of its ‘lost’ money into Treasury bonds, which don’t mature for some years. Bad news for those who need their money back now, but a bigger firm that has the resources to sit on those bonds is guaranteed to make a profit…

    Not true – you’re forgetting mark to market, and bond yields.

    (Note: I’m not saying that a large firm *will* lose money or break even. I’m saying “guaranteed to make a profit” is false – there is no guarantee.)

    Mark to market means, if you have $20 billion in bonds, but you can only sell them for $18 billion right now, you only have $18 billion on your balance sheet. You can’t pretend that you have $20 billion, if you can’t *sell* for $20 billion.

    Bonds – bonds are a funny thing. They have a face value, right? Isn’t a thousand dollar bond always worth a thousand bucks? NO!!!

    If you have a thousand dollars, and you can buy a bond that pays you $30 a year, would you buy that, when you can buy a bond that pays you $50 a year? Of course not – $50 a year is better than $30 a year. If you had a grand to invest in a bond, you’d rather get more money, than less.

    So: why will someone buy a 3% bond today? Well… if it’s discounted. For example, if someone told you they’d sell you a $1000 face value bond, at 3%, for $600 – so you’ll get $30 a year, which is 5% of $600 – that’s *definitely* a good deal. You get 5% return on your invested money, and, if you hold the bond to maturity, you’ll get an extra $400.

    So bonds are complicated, more complicated than you might think. If you have a billion dollars in 3% bonds, and everyone can buy bonds at 5%, your billion dollars can only be *guaranteed* to sell at $600 million – the only discount that puts your 5% bonds on a better-than-even footing with the 5% bonds.

    The rules are probably a bit more complicated than this – but you can see the idea.

    A bank needs liquid assets – if they have too few assets that can be liquidated quickly, they need more liquid assets. If they have a bunch of bonds that can only be sold on the spot market for a portion of their current value, those bonds are discounted heavily, and they might need to hold other investments back, in order to prop up these heavily-discounted bonds.

    Every billionaire in the world might agree that there’s a place for buying a big chunk of those bonds, and they might all hope that “someone, who isn’t me, will do something.”

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