[HN Gopher] How Silicon Valley Bank Avoided Oversight
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How Silicon Valley Bank Avoided Oversight
Author : marban
Score : 83 points
Date : 2023-03-15 14:28 UTC (8 hours ago)
(HTM) web link (www.wsj.com)
(TXT) w3m dump (www.wsj.com)
| toraway1234 wrote:
| [dead]
| neonate wrote:
| https://archive.ph/ert4b
| jmclnx wrote:
| I could not get into either articles, but..
|
| One can hope at the very least all the execs bonuses for the past
| 2 years need to be refunded to help pay for what the FDIC needs
| to pay out.
|
| Why ? Yes, they said the Taxpayer will not pay, but that is a
| kind of lie of omission. The Fees Banks Pay the FDIC will be
| raising, that was stated. But where do these fees come from ? You
| know who, we will pay higher fees on our Bank accounts and higher
| interest rates on Loans and probably Credit Cards.
|
| None of the journalist asked or brought up that point. So yes,
| the Taxpayer will pay for so they would not loose the amounts
| over 250,000. Again, no risk for the well-to-do but "main street"
| pays.
| lisasays wrote:
| In their big announcement, the Fed did say that ultimately all
| costs will be recovered from the bank's remaining assets (and
| will not fall on the taxpayer).
|
| The government is still providing liquidity and coercive muscle
| -- so it's still a bailout, plain and simple. Despite the
| attempts we are seeing to paint it otherwise.
| dasil003 wrote:
| What happened to the executives, board, and shareholders? I
| honestly don't know as I haven't followed that closely, but
| to me those are the most important three questions, and in
| that order, because that determines the level of moral
| hazard.
|
| I'm less concerned over semantic arguments of what
| technically constitutes a bailout. Personally a stable
| banking system is important to me, as is accountability for
| risky investment strategies. I have a hard time seeing the
| situation is black and white enough to jump to a conclusion
| on exactly what the delta is between what happened and what
| should have happened.
| FireBeyond wrote:
| I believe the entire executive is without a job. Likewise
| with board. Shareholders will be able to get what they can
| that is left over after depositors are made whole, but that
| seems like it will be effectively zero.
|
| As for consequences beyond that? Unsure.
|
| Hopefully the CEO (now on his second failed bank) doesn't
| "fail upwards". I mean it's one thing to have a poorly
| performing bank on your resume... it's another to have two
| banks forcibly closed by the FDIC.
| vkou wrote:
| The executives have been fired, the board has been fired,
| the shareholders have been zeroed out.
|
| The shareholders are currently suing the board and the
| executives for running the bank into the ground.
|
| Ten years from now, once all the long-term investments
| settle, if there's any money left over, the shareholders
| might be entitled to two turnips and cup of coffee from
| Uncle Sam.
|
| As far as 'The guilty getting their just deserts', this is
| a rare example of the world mostly working in a just way.
| gumby wrote:
| > it's still a bailout, plain and simple. Despite the
| attempts we are seeing to paint it otherwise.
|
| How do you define a bailout? The shareholders and bondholders
| of the bank lose everything. The customers (depositees) get
| their money back. You consider that a bailout?
| shadowgovt wrote:
| It's a bailout of the creditors. The bank itself is
| evaporating.
| boh wrote:
| The Fed is saying it will be funded by the banks remaining
| assets and the "banking system" which assumes higher FDIC
| premiums, which the banks will likely transfer to customer as
| additional fees. The taxpayer is definitely paying for it
| (just with extra steps).
| mulmen wrote:
| By that definition literally everything is taxpayer funded
| and thus taxpayer funded is a meaningless term.
| kmonsen wrote:
| It's not a bailout because the stockholders were wiped out.
|
| I guess you can say that customers were bailed out, but the
| bank was not.
| readthenotes1 wrote:
| and the govt made a profit from TARP.
|
| I don't want the US government to be driven by a profit
| motive any more than it already is...
| qwerpy wrote:
| > govt made a profit from TARP
|
| That's like selling your used car for a "profit" during the
| recent supply chain issues caused by the pandemic. Sure,
| you might have gotten more dollars from the sale than you
| did when you purchased it. But those dollars are worth a
| lot less now, and you would not be able to repurchase an
| equivalent car with those dollars.
|
| The TARP profit line is how they deflect some of the
| outrage from yet another bank bailout. "See, it didn't cost
| you, the taxpayer, anything!".
| boh wrote:
| They are not profiting in the SVB bailout. The available
| SVB assets aren't increasing in value unless interest rates
| go back to zero.
| larkost wrote:
| The assets do not have to increase in value, the face
| value on them is enough (if what I am reading is right),
| but that is if you hold the bonds until maturity. SVB's
| problem was that suddenly they could not wait for
| maturity their depositors were asking for their money
| right now.
|
| Since most of the money is in treasury bonds, the
| government can either wait until then, or maybe nullify
| the bonds that are now in their hands, since it is now
| the government owing the government money (there is
| probably some complexity there, but I don't know my way
| though it). In the mean time the depositors' money needs
| to come out of the FDIC, and that is probably going to
| increase costs for banks (and thus their consumers),
| until things can be worked out.
| sfblah wrote:
| Just jumping in to point out that to make the profit from
| TARP, the government had to distort the economy in ways
| that won't be fully understood for maybe 30 more years.
| lisasays wrote:
| Yeah, I don't get this "It didn't cost the taxpayers a
| cent, so really it's all good, man, and not really a
| bailout" line that some people keep putting out, at all.
| TuringNYC wrote:
| >> and the govt made a profit from TARP.
|
| TARP had three players:
|
| TARP Fund: via The US Government (fiscal),
|
| POMO/QEx: via The Fed (monetary), and
|
| The Banks (those bailed out)
|
| TARP "made a profit" by the Fed printing money and buying
| assets at way above market value from the banks. It didnt
| cost anything because we just printed the money, but there
| was a cost...inflation. We just spread the cost secretly to
| everyone.
|
| Real impacts of printing money: Houses jumping in value by
| 40 or 50%, meanwhile:
|
| https://www.costar.com/article/266860380/most-us-
| households-... Most US Households Can't Afford a Median-
| Priced Home
|
| https://www.nahb.org/blog/2022/03/36-million-households-
| cant... "36 Million Households Can't Afford a $150,000
| Home"
| fswd wrote:
| What upsets me the most is that the execs gave themselves
| bonuses in to their personal FDIC insured accounts, essentially
| writing a bad check for free bailout money, after the bank went
| negative.
| rybosworld wrote:
| Source?
| mjmahone17 wrote:
| Do different banks pay different amounts into FDIC insurance
| based on how risky the FDIC considers them? If so then it's
| really the FDIC adjusting their risk model to treat most mid-
| size banks as likely to cause systemic failures if they fail,
| and requiring the riskiest banks to cover the cost for that
| updated model based on how likely the FDIC believes they are to
| fail.
|
| I don't know that pricing insurance based on the actual cost of
| the potential external harm can really be considered a tax
| increase.
| op00to wrote:
| Yes. Banks are evaluated for their risk and pay assessments
| based on their risk scores and total deposits (give or take).
| The riskiest banks pay the most.
| DrThunder wrote:
| "Oversight", is not the issue. The issue is our government has
| incentivized risky behavior by bailing these fools out. If you're
| bank management and you know big daddy government will save you
| no matter what... well then, why would you not continue to engage
| in this risky behavior?
|
| I love how the white house is trying to paint this as an issue
| with lack of oversight and the need for MORE regulation when
| that's not even the issue.
| HFguy wrote:
| How would this explain...that vast majority of banks were not
| doing what you say they were incentivized to do?
|
| Maybe they weren't?
| DrThunder wrote:
| You might want to hold off on that statement. This isn't over
| yet.
|
| Also, is your stance that if the majority don't do it then
| there's no incentive to be risky like these failed banks?
|
| What happens if the government continues the trend of bailing
| them out? Do you think maybe banks will start to see a
| pattern and start changing investments?
| [deleted]
| frankbreetz wrote:
| I mean you loose all your investors' money and your job. As the
| CEO of a bank you probably get paid a lot in equity and that
| would be gone. If they were really reckless they could go to
| jail.
|
| Hopefully they look into the exec stock sales over the past few
| months. If money in a checking account is not safe, and I can't
| spend cash over 10k without a ton of paperwork, where can I
| keep cash that is safe?
| DrThunder wrote:
| Oh how terrible. Must be awful losing your job while raking
| in millions off the stock you sold beforehand and then
| getting re-hired at the next massive bank that does the same
| thing.
|
| These people rarely go to jail, and if they do it's a minimum
| sentence in low security white-collar "jail". The politicians
| will do everything they can to keep their donors donating.
|
| The fact they ARE and continue engaging in this behavior
| right now proves you're just wrong about any possible "risk"
| they perceive.
| notch898a wrote:
| Revolving treasury bills
| realworldperson wrote:
| [dead]
| bombcar wrote:
| Shouldn't journalists be writing these types of stories _before_
| the bank collapses? What happened to investigative journalism?
| Maursault wrote:
| > What happened to investigative journalism?
|
| Infotainment consumers happened.
| [deleted]
| hudsonjr wrote:
| This guy had it in his newsletter in February:
| https://twitter.com/ByrneHobart/status/1628779894183272452
| FireBeyond wrote:
| A good comment on all this...
|
| If a bank is complaining about the overhead, effort, cost,
| complexity of adhering to risk management protocols...
|
| they're really actually saying "if it wasn't for pesky
| government, we'd be more than happy to take more risks with
| -your- money."
| strawhatguy wrote:
| Large banks do better with more rules, but that's not
| necessarily the outcome actually desired, or at least I'm tired
| of the Goldman Sachs running the sector with little to no risk
| of any challengers.
|
| The main problem is that the government is _too_ involved;
| namely that banks can get Congress /Federal Reserve to bail
| them out, as we see yet again. It really doesn't matter what
| rules gov sets, if it's always going to panic and dole out
| printed money at the slightest hint of hardship (and thus
| potential incumbent demise), you _will_ get bad behavior, and
| those involved _will_ do something like this again (plus
| inflation to boot).
|
| If the costs are instead borne by the bank, and depositors of
| that bank, yes it will suck for many, _but also_ risky
| investments like the kind SVB engaged in will be shown not to
| pay off. Depositors will ask many questions on the status of
| their deposits at other banks, forcing banks to be more
| transparent /less frivolous with client money.
|
| None of which will happen now; the Fed took care of it after
| all! Maybe we'll get more emotional banking rules implemented,
| maybe not. Can definitely kicked down the road though, I'll be
| expecting another such failure in ~15 years time, if that. It's
| really getting old, and seemingly happening with more frequency
| regardless of the number of rules implemented.
| yieldcrv wrote:
| there are plenty of pointless poorly thought out protocols that
| have nothing to do with speculation of customer deposits
|
| but do increase operating costs unnecessarily
| czzr wrote:
| Could you name one? (Just to help us understand a real
| example)
| dsomers wrote:
| Okay, name one?
| mostlysimilar wrote:
| In a perfect world regulation would be right-sized and not
| needlessly waste resources, but failing that I'll take "the
| billionaires make slightly less money but are less likely to
| crash the economy" over the inverse.
| Red_Leaves_Flyy wrote:
| When billionaires get too greedy it's typically average
| people who beat the brunt of their responsibility. This is
| a regressive state of affairs. Banks serving everyday
| people should not be allowed to make risky bets or engage
| in transactions that can cause contagion. If that pisses
| some billionaires off, well thats just the icing on the
| cake.
| gamblor956 wrote:
| Every "pointless" banking protocol exists because of an
| actual bank failure.
| 1vuio0pswjnm7 wrote:
| "Some observers fear that the decision to disregard the $250,000
| cap on insured deposits could generate irresistible pressure to
| insure deposits fully regardless of the amount. This would
| undermine the purpose of the cap, which was to give large
| depositors an incentive to monitor the conduct of their banks and
| subject the system to market discipline. A total guarantee, many
| argue, is an invitation to irresponsibility. This may be right."
|
| Is there any track record of banks self-regulating. (SVB was
| happy to conceal their precarious position until they were
| _required_ to recognise and disclose losses when they sold some
| of their bonds.)
|
| Is there any reason we should promote personal responsibility on
| the part of depositors.
|
| The author's children are VC. What appear to be easy questions
| suddenly become challenging.
| pickovven wrote:
| SVB is actually an inverse example of that hypotheses.
|
| The biggest depositors added pressure on the bank to be more
| risky.
| Red_Leaves_Flyy wrote:
| Which proves the need for regulation.
| cmurf wrote:
| Or that the depositors should have lost money, with the
| ensuing ripple effects: unpaid workers, state fines for
| violating wage payment laws, bankruptcies, lawsuits, unpaid
| vendors and contractors and all their downstreams, etc.
|
| i.e. carnage, a big bloody nose, but not an extinction
| level event.
|
| Maybe the depositors deserved a bloody nose. But do their
| employees, vendors, and contractors?
| duped wrote:
| A family member noted to me yesterday (after being frustrated by
| the coverage and reading the regulatory requirements from the
| Fed) some stuff that is being poorly articulated by these
| articles.
|
| Even under Dodd-Frank and prior to the Trump deregulation, SVB
| was in trouble and acting badly - and regulators probably
| wouldn't have caught it, nor would SVB have broken the law.
|
| They had to do stress tests this year anyway. But that wouldn't
| have caught onto the fact that they parked deposits from (now
| forgiven) PPP loans into treasury bonds in a hold-to-maturity
| account (thus hiding the asset risk on paper, something that
| isn't illegal but is suspicious that they did to a degree beyond
| anyone else apparently), and it wouldn't get over the fact that
| the Fed's own guidelines for computing asset risk told them to
| only take into account a 1% rise in the Fed's interest rate (it
| actually rose 3%!).
|
| Point being, deregulation (real or advocated for) didn't cause
| SVB to fail. It would have failed anyway. The actual data they
| base things on is bad, _and_ the bank was nigh criminally
| mismanaged.
| DrThunder wrote:
| Frank was on the board of Signature Bank, that should tell you
| a lot about how useless Dodd-Frank was. The Biden admin had 2
| years of total congressional control to overturn Trump's
| rollback of these supposedly amazing regulatory requirements.
|
| Government encouragement of risky behavior due to bailouts is
| the problem, not deregulation.
| munk-a wrote:
| I think it's reasonable to say that both things are bad. We
| need more stringent regulation and we need to stop bailing
| out bad actors. I can't fathom why the government voluntarily
| dialed FDIC insurance up to infinity for this particular bank
| crash - the rules around how FDIC insurance should work are
| extreme clear.
| DrThunder wrote:
| Either the government wants more control over the market,
| and failing banks that require bailouts does that or
| they're just receiving so much money under the table from
| these people it behooves them to bail them out.
|
| I think stopping the bailout is in effect mostly enough
| "regulation" on its own. Anything else requires very good
| analysts watching this stuff and enforcing the regulation.
| From what I've seen, the government is very bad at
| enforcing most of their regulation. They're unable to do it
| with firearms, and they're unable to do it with the
| financial industry.
| delecti wrote:
| > total congressional control
|
| It most certainly did not have that.
| DrThunder wrote:
| Dems had the Senate and House. Stop with the gaslighting.
| If you want to let them pull the wool over your eyes over
| and over and blame the guy that's been out of office for 3
| years for their failures, I guess you kinda deserve what
| you get.
| chowells wrote:
| If you don't have 60 seats in the Senate, you don't
| control it under current rules. 41 Senators is all it
| takes to declare a bill filibustered and dead.
|
| These rules are a severe perversion of the intention of a
| filibuster. They absolutely should be undone, but both
| parties are too afraid of giving up power when they have
| less than the majority. It's obscene and a perfect
| illustration of American politics.
| macintux wrote:
| I'd be fine with the preservation of the filibuster if it
| was a _true_ filibuster. Make the people who want to stop
| the bill stand up in front of the Senate and the world
| and make their case, indefinitely, until something gives.
|
| Now it's just a cheap veto with no meaningful short-term
| cost.
| delecti wrote:
| The argument that I've heard is that a speaking
| filibuster results in inability to pass _other_ bills
| through the chamber. So we can at least get _other_ bills
| passed, but also some bills which can 't be voted on
| would be able to get through because it's so easy to
| block things. I'm not sure which option is better.
| ceejayoz wrote:
| That's a feature, not a bug. It requires you to decide
| the legislation is so bad it's worth tying up the Senate
| indefinitely.
|
| Right now, there are no consequences for filibustering,
| so there's little reason to use it judiciously.
| Maursault wrote:
| With the more than 20 years, and continuing, of
| Republican overrepresentation in the Senate, control by
| the Democratic majority is impossible. What needs to
| happen is making D.C. and Puerto Rico States of the Union
| and get rid of the Electoral College. Only then will the
| federally elected actually represent the voters.
| deltarholamda wrote:
| The original intent of the Senate was to represent the
| States, not the voters. That's what the House is for.
| myko wrote:
| True, and unfortunately neither body does that today, as
| the size of the House is artificially limited well below
| what it should be.
| hindsightbias wrote:
| President's Manchin and Sinema would like a word.
| DrThunder wrote:
| [flagged]
| thgirhet wrote:
| [flagged]
| [deleted]
| DrThunder wrote:
| Imagine being a manager of any business, and when
| something goes wrong on your watch you say "Hey!
| Remember, that guy that was the manager 3 years ago?
| Yeah, it was his/her fault." How do you think that would
| go for you?
|
| I do find it slightly entertaining you let these people
| spit in your face, place the blame on others, and then
| just accept them laughing at your blind faith in them.
|
| I think you're also mistaking my dislike for a certain
| group, and presenting a strawman argument trying to
| conflate that with support for another group.
| thgirhet wrote:
| [flagged]
| jmull wrote:
| The logical conclusion for the facts you present is that we
| should _increase_ regulation, not that deregulation didn 't
| matter.
|
| Also, to possibly strengthen the criminal code around handling
| bank deposits.
| twblalock wrote:
| Exactly. It's also unfair to say VCs and depositors should have
| noticed the problems when regulators didn't see them either.
|
| Banking has been a quasi-government-operated industry since
| 1933, and even more so since 2008, and we need to make sure
| that the government does not dodge blame for the failure of
| SVB. Government regulators are supposed to prevent this kind of
| thing from happening, and they didn't prevent it. You can't as
| deeply involved as the government is in banking and not be
| complicit in the outcomes of banking.
|
| People will try to blame "lobbying" for this but let's be
| honest, even if regulators were looking at every bank in the US
| with a microscope no matter how many deposits they held, those
| regulators probably would have missed this. Hey, government
| bonds are a great investment! Duration risk is sneaky.
|
| Who caused that duration risk to actually manifest as a real
| problem? The Fed! The same people who are supposed to run the
| banking system in a stable way have contributed to the
| instability of the banking system by trying to squash
| inflation. If the Fed hadn't raised rates so much everyone
| would be praising SVB for doing so well.
|
| People have an impression that banking is a private industry
| and the government comes in to bail it out, when really the
| government was involved the entire time. If we don't understand
| that, we won't be able to actually fix the problems.
| lordfrito wrote:
| > _hey had to do stress tests this year anyway. But that wouldn
| 't have caught onto the fact_
|
| > _the bank was nigh criminally mismanaged_
|
| For sure this was a crime. It's being reported [1] that
| executives were aware of the risk and continued to purchase
| higher yielding assets.
|
| From the article: In late 2020, the firm's
| asset-liability committee received an internal recommendation
| to buy shorter-term bonds as more deposits flowed in, according
| to documents viewed by Bloomberg. That shift would reduce the
| risk of sizable losses if interest rates quickly rose. But it
| would have a cost: an estimated $18 million reduction in
| earnings, with a $36 million hit going forward from there.
| Executives balked. Instead, the company continued to plow cash
| into higher-yielding assets. That helped profit jump 52% to a
| record in 2021 and helped the firm's valuation soar past $40
| billion. But as rates soared in 2022, the firm racked up more
| than $16 billion of unrealized losses on its bond holdings.
| Throughout last year, some employees pleaded to reposition the
| company's balance sheet into shorter duration bonds. The asks
| were repeatedly rejected, according to a person familiar with
| the conversations. The firm did start to put on some hedges and
| sell assets late last year, but the moves proved too late.
|
| In order to avoid a $36M hit, they literally bet the bank.
|
| I wonder if any of this figured into their Chief Risk Officer's
| decision to leave the bank in early 2022.
|
| [1] https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
|
| edit: archive.is link to paywalled article [2]
|
| [2] https://archive.is/HqVWn
| hiddencost wrote:
| This particular type of response blows my mind... "They were
| hiding their behavior... Therefore we don't need regulation."
|
| When regulation fails, we update it to cover what we learned.
| When someone hides from regulation, we update the criminal
| codes. Regulation's goal is to steer behavior, not be a
| Minority Report for balance sheets.
| HFguy wrote:
| Did the person you are responding to actually say "They were
| hiding their behavior... Therefore we don't need regulation?"
|
| Does anyone say that?
| duped wrote:
| That's not what I said, or meant to imply. What I meant was
| firstly - depositors being made whole, investors losing
| everything, and management (hopefully) going to jail is the
| kind of response we want. Bad banks should fail, and the job
| of regulation should not be to protect _banks_ or people who
| own equity in the bank itself. It should protect customers
| and society.
|
| The second point that needs to be refuted, loudly, is that
| this is the Trump administration's fault for lowering the
| reporting frequency for smaller banks - what should _really_
| be scrutinized is what those requirements actually are and
| how they can be improved.
| driscoll42 wrote:
| So, I push back some on the depositors being made
| completely whole. Customers _are_ choosing to put their
| money in the bank, and their putting money in the bank is
| what is allowing the bank to take the risks. It 's not like
| depositors are completely faultless here. I'm all on board
| with the selling of the assets being used to make
| depositors as whole as possible, but anything the current
| sale price the assets couldn't cover, I don't see why
| depositors should be made whole.
| billiam wrote:
| What you say is true, but the point remains that the limits
| imposed by the government only work if some depositors
| (large ones) bear some risk of losing their deposits. The
| limits may simply be moved up to $2 million or $5 million
| for certain kinds of banks, but the rules imposed by VCs
| and related investors require companies to concentrate all
| their business with one bank; this increases risk and needs
| to be outlawed (this kind of sweetheart deal is one of the
| reasons the bad managers at SVB piled up so many deposits).
| The VCs share a good deal of the blame here. There needs to
| be some incentive for multimillion dollar depositors to
| both evaluate risk and to be able to reduce it.
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