🗞️ the news vol. 019
this is why i hate finance
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I’ve seen some people a bit confused about the Silicon Valley Bank situation, either asking questions or assuming things that are not correct so I figured I’d take my limited financial expertise and do a very quick, very basic explainer with my return to the news.
First thing to note, no tax payer money is going to the “bail out” in this situation. Think of the FDIC as your car insurance except they don’t turn a profit. All U.S. banks pay premiums into a pool of money that is used to guarantee depositors up to $250,000 the same way you pay your car insurance company on a regular basis to guarantee if something were to happen to your car you don’t have to deal with the full cost of that all at once. Typically uber-wealthy people will split their money between banks to avoid having too much over $250k in a single account, but In this case, most depositors kept much more money in SVG at the banks behest.
While I don’t know that it’s actually the correct decision, the FDIC has made the decision to guarantee all deposits, even accounts with over $250,000 in them and they are pulling from the same pool of money that is accumulated through bank premiums – not tax dollars. Now, banks will have to collectively deal with this and re-stuff the coffers through a “special assessment” like situation.
There are two main reasons they are doing this: first, a lot of companies bank with SVB and to meet payroll they need access to those funds, otherwise people will lose jobs and/or not get paid; second, there is a worry of this snowballing to other banks – you are seeing a bit of this as publicly traded bank stocks have been quite erratic over the last three days (there is also the idea of propping up smaller banks so we don’t end up with just four banks like we do cell phone carries, although SVB was the 16th largest bank at the time…). There are truths to both of those things, but that doesn’t necessarily mean painting with a broad brush and guaranteeing all money is the right decision.
If I had my say, I’d probably guarantee the companies accounts completely and let the rich deal with the consequences for their personal accounts – they’ll still get that first $250k anyways.
So why did this happen in the first place?
There are a few compounding reasons.
First, the way banks make money is using the money you deposit with them and investing or loaning it out. Banks will never have all their depositors money on hand, but in this case, because of the low interest rates (at the time), SVB invested in longer term treasury bonds to get a bigger bang for their buck, while also making them less liquid for depositors to withdraw their money.
At the same time, as everyone knows, the Fed started increasing their interest rates, making money more expensive, but also making those treasury bonds less valuable (see: Time Value of Money) all while still being illiquid.
To top it off, SVB’s main customers in the Silicon Valley, start-up, VC world, are doing less business overall now since money costs more and there has been a bit of a reset in the stock market after some tech firms boomed during COVID and have fallen back to Earth (during the same time, SVB went from ~$50 billion in assets to ~$200 billion in assets).
This resulted in them having far too much money locked up in long term bonds that they needed to get out of, culminating in the $2 billion loss during their fire sale. This caused customers to worry about the health of the bank, ipso facto they rushed to take their money out (~$45 billion in a 24-hour period).
Some have taken to blaming the 2018 rollback of the Dodd-Frank Act, which loosened oversight for banks with less than $250 billion in assets, SVB’s own CEO was very much a large proponent of the rollback. While I’d love to blame Republicans and the Trump administration, it’s hard to say for sure that things would be different for this given situation.
Smarter people than me are writing and talking about this situation and I’ve started collecting some of those pieces here: // 🏦 Silicon Valley Bank Failure
Alright… I went a bit longer on this than I plan to in the future, but thought it’d be a fun experiment to try. I’m no expert and probably got some of this wrong, but hopefully it’s not too poorly written that it helps at least a little bit for those who want to better grasp the situation.