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...
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.
Not sure why you want to denigrate Lawrences story. And you do so by "re-defining" his words. I think that your "beware!" comment is more applicable to your own comments. Treasuries, by the way, are "super-safe"... from default risk. All bonds, government or not, have "market risk" due to changes in interest rates. What really happened is that the bank took a supersafe investment vehicle and turned it into a risky investment by failing to match maturities properly. Are you trying to tell us that no other bank is doing the exact same thing?
Yes. There are no other banks taking 10s of billions of VC deposits (very short term money) most of which is uninsured and buying bonds with it. Of course we all understand market risk due to interest rates, I mentioned it in my post. Banks borrow short and lend long or they take credit risk. There are no other banks that do “the exact same thing” let alone on the same scale as SVB. In the news SVB and Silvergate Bank are described as typical banks and Kotlikof and you are out there in suggesting other banks are exactly the same.
Actually, any decent bank matches maturities in a manner that keeps appropriate amounts of capital available as needed, especially one that that has, as you put it, VC Deposits. It did not take a rocket scientist to see that long maturities in that environment were a very bad and very risky bet. Banks are well known for getting into trouble through poor investment management. Your only real defense of the banking system is that "no banks are just like these two". Truth is, many banks are just like these two in the respect that they prioritize profits over fiduciary responsibilities. Even Moodys ranked this bank well.... until now. But my real point is this; Larry provided a well reasoned opinion. Yours was an opinion as well. There is no need to be offensive toward the opinion writer merely because your opinion is different. You could have made your point without the sniping.
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.
Half truths? He never said they were 100% invested in treasuries... you changed his meaning. And the "truth" is, they were HIGHLY invested in long treasuries that were at the center of this debacle. I never could understand why any bank would hold extreme amounts of long treasuries in this environment. Would you Joseph? A man like you should know better.
Hi Michael,
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.
best, Larry
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.
Not sure why you want to denigrate Lawrences story. And you do so by "re-defining" his words. I think that your "beware!" comment is more applicable to your own comments. Treasuries, by the way, are "super-safe"... from default risk. All bonds, government or not, have "market risk" due to changes in interest rates. What really happened is that the bank took a supersafe investment vehicle and turned it into a risky investment by failing to match maturities properly. Are you trying to tell us that no other bank is doing the exact same thing?
Yes. There are no other banks taking 10s of billions of VC deposits (very short term money) most of which is uninsured and buying bonds with it. Of course we all understand market risk due to interest rates, I mentioned it in my post. Banks borrow short and lend long or they take credit risk. There are no other banks that do “the exact same thing” let alone on the same scale as SVB. In the news SVB and Silvergate Bank are described as typical banks and Kotlikof and you are out there in suggesting other banks are exactly the same.
Actually, any decent bank matches maturities in a manner that keeps appropriate amounts of capital available as needed, especially one that that has, as you put it, VC Deposits. It did not take a rocket scientist to see that long maturities in that environment were a very bad and very risky bet. Banks are well known for getting into trouble through poor investment management. Your only real defense of the banking system is that "no banks are just like these two". Truth is, many banks are just like these two in the respect that they prioritize profits over fiduciary responsibilities. Even Moodys ranked this bank well.... until now. But my real point is this; Larry provided a well reasoned opinion. Yours was an opinion as well. There is no need to be offensive toward the opinion writer merely because your opinion is different. You could have made your point without the sniping.
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.
Half truths? He never said they were 100% invested in treasuries... you changed his meaning. And the "truth" is, they were HIGHLY invested in long treasuries that were at the center of this debacle. I never could understand why any bank would hold extreme amounts of long treasuries in this environment. Would you Joseph? A man like you should know better.
["I never could understand why any bank would hold extreme amounts of long treasuries in this environment"]
UK pension funds?