Our financial system is built to fail. Is it about to fail again?
I mentioned that the FDIC had nothing to back up its claim to be able to cover nationwide deposits in my Jimmy Stewart Is Dead Book. So, I'm with you fully. When this becomes public, we'll have more chance of a bank run, but by the "insured" as well as the uninsured.
Yeah, I think we should agree with Larry here, not the Rampells. I would add one more point, though. Another scary thing is that Summers MIGHT be right. Maybe the Fed WILL make 100 percent of depositors good, that is, reveal that the true deposit insurance coverage is 100%, not $250,000. Why would that be bad? No, not because it would add to the deficit, silly. It would be bad because it would produce the mother of all moral hazard scenarios. The thing that is supposed to restrain excessive risk taking by banks is not really regulation -- that is a back-up mechanism. What is supposed to restrain risk taking is depositor pressure -- rational people won't put money in banks that take excessive risks. In SVB's case, the risk was an unreasonably long duration gap. In 2008, it was investment in derivatives that the banks themselves (let alone their depositors) didn't fully understand. Who knows what it will be next. But 100 percent deposit insurance coverage will make the next time just that much more likely. (Personal opinion of Ed Dolan, not an official position of Niskanen Center as an institution.)
Professor Kotlikoff -- You state that there are $10 trillion in FDIC insured deposits. The Deposit Insurance Fund has perhaps $120 billion and FDIC has a direct line of credit with the Treasury of $100 billion. My calculator tells me that FDIC's available capital is about 2% of the insured amount. What happens when this is expended?
"How should you react?" Since you rang the bell, I was hoping for more actionable ideas (not investment advice, of course :-) ) e.g. my Etrade acct is in 3,4, and 6 mo treasurys, Schwab is in their MM fund, SWVXX, and Fidelity sweeps to their MM, SPAXX. So...
Given that a group of 200+ of their large depositors got onto a slack channel and coordinated a bank run this statement might not be true.
"The fact that SVB had a concentration of a particular type of depositor, namely venture firms, did not cause its demise"
No, few banks are just like these two. My problem with Larry is the suggestion that these are typical and tips of the iceberg to come.
LOL: they must've been subprime US treasuries! THey gotta work the poor-man grifter-greed angle into the narrative of SVB, or those "lie flat" tech workers angle to denigrate and justify the failure of SVB! They deserved it.
He said super-safe Treasuries, which are only short-term. Longer-dated bond and mortgage-bonds are "safe" but of course lose value as interest rates rise. Listen, if FDIC was to sell off the assets of SVB and pay off insured depositors at 100% of deposits (that's their job) then the proceeds from liquidation might only give 90-95 cents on the dollar to the uninsured depositors, which is probably a lot better than in most bank failures but is still a bankruptcy. FDIC already indicated they will make a distribution to uninsured depositors very soon, something they did not indicate to Silvergate Bank customers, for example (Silvergate lent against "crypto" collateral). The problem with Lawrence's story is that it is one of those "this is like everything else" stories, beware! SVB and Silvergate Bank are far different from each other and far different from, say, 2008 bank problems. Making sweeping generalizations, particularly of the doomer kind, is not enlightening or educational. You must know that.
You have great posts and letters. I really wish I could have received my economics degree at Boston University studying and researching under your supervision. Thanks for all that you do. I'll be cross-posting this on my own Substack.
This is really a lot of half-truths. A) Lehman, AIG, Bear Stearns were not banks. 2) SVB had a wild mismatch of its assets and liabilities. Unlikely that FDIC could wind down the assets to pay insured deposits without driving the bank into bankruptcy. Also, SVB was not invested 100% in super-safe treasury bonds. Articles like this merely add to hysteria. A man like you should know better.