A lot of people are asking “how is this not a bailout?” right now. I would caution against dismissing them, it’s a legitimate question. Pointing to the “Taxpayers will not pick up the bill” line counts as dismissive: this is a press release, and it’s from the government, that’s two strong reasons for some skepticism.
So, in earnest, how is it not a bailout? Feel free to offer your answer! Mine is:
“Banks are required by law to pay for insurance on deposits they take. FDIC stands for Federal Deposit Insurance Corp, and they are the ones that manage the Deposit Insurance Fund, which is where that insurance money goes. The FDIC is going to take from that fund to pay out all the depositors in SVB in one go on Monday morning, and then over the next few weeks and months it is going to sell off SVB’s assets and put the proceeds back into the fund. SVB has plenty of assets, so the FDIC expects to recover 99% of the money. If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.”
Edit: if we take things like https://twitter.com/josephjacks_/status/1634569997266870272 at their word, the FDIC will likely see asset sales produce >100% of deposits, so absolutely no bailout of any kind. A good reminder that SBV didn’t die because they lied about their value or invested in financial instruments that exploded; they died because they didn’t have the cash on hand on the one day it mattered.
One reason why it's not (mostly) a bailout is that SVB's deposits are (as far as we know) still backed by bonds and mortgage backed securities, the problem is that those securities can't be easily sold right now (because people want higher valued investments) - a sudden forced sale means selling at a loss (or a cash flow crisis which is how SVB got into this state), holding on to them and letting them play out and they still have their value (worst case you sell them at a loss that is the difference between what they yield and what current investments yield)
They're worth alot - I haven't seen any indication that they're more than 10% underwater. Even 20% underwater is much more than 'not be[ing] worth very much'
One thing nobody seems to be talking about is whether SVB had more assets than liabilities- presumably they did since it was a money-making enterprise, right? So even if they sell at a loss there may be more than enough to cover the liabilities.
From [1]:
> The bank initially sold more than $20 billion of bonds, but did so at a $1.8 billion loss.
What we don't know is did they liquidate the positions that were more valuable in order to take a smaller loss, or positions that were most underwater? I'm guessing it's the former, which would mean they were in even worse shape with the unsold securities.
They absolutely did the former. Those are the securities which were marketable reasonably quickly, and they were planning to sell equity, too (another expensive but liquid asset).
Now that those assets are in the FDIC's hands, though, they can likely be unwound really slowly and without a ton of execution slippage, which would have otherwise happened if this were a firesale.
the problem is if I sell my own investments right now at loss nobody will come to pay my obligations. so why large institutions get to reap profit but get out of jail free when they screw up.. one set of rule for common man and another for investor..elite class.
Where do you see the 99%? My understanding is the bulk of their assets (long-term bonds) dropped 30% in value. If these bonds are sold on the market, they wont have 99% of the money.
Maybe the treasury is giving them the money back of the bond?
I'm guessing the FDIC can just hold them to maturity. The FDIC also has immediate access to a $100 billion loan from the treasury via statute if they needed cash.
Over the lifetime of the bonds/loans, they might even make money like what happened in the TARP program.
not to be pedantic, but my understanding is their value dropped because the treasury is selling higher interest bonds. Why would anyone buy a low interest bond at face value when for the same-price purchase a high interest bond?
It's not just that. A bond's price is simply the sum of its discounted future cash flows. i.e. the coupon value divided by (1+) the interest rate. When interest rates rise, the price goes down.
The Fed will accept treasuries as collateral for face value loans to banks for 1 year as part of the announcement. The losers here will be bank shareholders (of underwater banks) because they will need to dilute themselves to make up the difference when the loan gets called unless they can find other ways to make money in the meantime.
My answer: It is a bailout. And that's ok, if it was the best of bad options. Must we play the silly semantic game? By your explanation, all the bailouts during the '08 financial crisis also weren't bailouts. But they were.
I don’t like semantic games either. I always do my best to resolve a word to mean “the thing people care about when they use this word”. In the case of “bailout” it seems to me that what people care about is whether it will cost taxpayers.
In the case of SVB, it seems that their assets will cover their deposits, and FDIC has an insurance fund that gives them the liquid capital to cover deposits immediately while waiting for assets to sell. So no cost to taxpayers - not even in the form of “higher deposit insurance costs to banks being passed on to bank customers, who are taxpayers”.
(It’s possible to play semantic games until we formulate a picture that does show taxpayers will pay, e.g. “the FDIC’s deposit insurance fund is made up of payments made by banks, and banks would have passed on the cost of those payments to customers in the form of not offering as much interest on deposits as they otherwise would have offered, so the funds used to make the bridge are a bailout the taxpayer has already paid for”. Money is infinitely fungible, you can always tell a story where taxpayers paid the bill. But we said we weren’t going to play semantic games.)
The anger I’m familiar with surrounding bailouts has to do with the government stepping in to rescue banks that, in the eyes of the angered, were engaging in corrupt and risky/greedy practices. Whether the money came from taxpayers, or was truly magically free, this anger would remain.
Your definition of ballot is the one that is strange to me —- in attempting to avoid confusion, you would have created much confusion with me.
I don't think the second part is a semantic game at all. This switch to insure all deposits rather than just deposits up to a fairly low limit will definitely impose additional costs to the banking sector which will definitely be passed on to some degree or other. I agree this is certainly not a transfer of tax money to private institutions, and I applaud that, but I still think it is socializing a big chunk of additional risks of an industry where the rewards are large and private.
But more broadly I just don't think "bailout" is as narrow as just "costs taxpayers". This may be wrong, but I think of "bailout" as having its root in what you do to save a sinking ship. The widespread belief here is that there was a significant risk of an important ship - the banking sector - sinking, and government action has been taken to keep it from sinking. To me, we've bailed out that sinking ship. (And I'm glad we did!)
I guess it remains to be seen whether I'm the weirdo with a strange definition, or whether everyone will agree that this was a bailout, once it stops being a question with such immediacy.
I do see where your definition of a bailout is coming from, I don’t think it’s that weird. Perhaps the disconnect is that I’m assuming people would not hate a bailout that they actually genuinely really don’t pay anything for; they would press a button to bail out a sinking ship if it was really free to do so, even if the ship was sinking solely by incompetence on the part of the ship’s captain.
So the opposition to bailouts is actually “opposition to bailouts that cost taxpayers” plus an enormous dose of “we know you sneaky fuckers always lie about bailouts not costing taxpayers so we will assume all bailouts cost taxpayers”.
The disconnect comes from the question of whether there is actually a magical thing where government can provide insurance to private entities without it costing society anything. Of course that magic doesn't actually exist. Public subsidies always cost something.
I liked this definition of what a bailout is, which meshes with mine but puts it in better words, via Dan Davies on today's Odd Lots podcast:
> "When the state steps in and provides insurance so that something economically destructive doesn't happen."
Yeah, like I said, this is the disconnect. Assume for a moment that magic does exist. Maybe aliens come to Earth and hands the government a stack of gold from outside the solar system worth exactly that much, which the government uses to pay for the bank’s issues and nothing else, and then the aliens leave promising to never return. If that happens, it didn’t cost taxpayers anything, so it can’t be called a bailout, since bailouts necessarily cost the taxpayers. Except in another sense it is obviously a bailout, the aliens literally flew in from outer space and bailed out the bank and the government.
So a bank bailout is when an outside party pays to solve the issue, and a bailout is also when taxpayers foot the bill. If taxpayers do not foot the bill for SVB in any appreciable way, is it a bailout?
> I liked this definition of what a bailout is, which meshes with mine but puts it in better words, via Dan Davies on today's Odd Lots podcast:
> "When the state steps in and provides insurance so that something economically destructive doesn't happen."
So the FDIC existing is a bailout to start with, so arguing over whether SVB should get a bailout isn’t about the systemic risk exception being invoked at all, but about the existence of public deposit insurance in any form?
This is a definition of bailout that seems to have been conveniently invented within the last 18 hours. Does it really not set your "I wonder if I'm rationalizing" alarm bells off when you find yourself writing out this weirdly very specifically narrow definition?
It's just simpler and more honest to recognize it was a bailout, and one that you support (as do I).
I think Matthew Klein put this pretty well on Twitter[0]:
> "We aren't using taxpayer money to do a bailout, we are just using the ESF and also having the Fed pretend that banks haven't lost money on their bond portfolios and we are going to charge depositors at banks that didn't fail to make depositors whole at banks that did"
I'm being perfectly simple and honest, here is the a legal definition of 'bailout', which is closest to the context we're all using:
"A bailout is when the government gives financial support to rescue a company that is in financial trouble and possibly at risk for bankruptcy. The bailout enables the survival of the company." [1]
The government is not giving financial support to rescue SVB. SVB's dead. The government is not giving money to depositors. The money comes from the bank's assets. Current estimates are showing that assets will cover over 100% of deposits. Let's say that SVB's assets don't cover 100%. In that case, the government is still not bailing out depositors. The banks themselves will pay through a special assessment. In 2009, that was about 5 basis points of deposits. 5 cents on $100 seems like a pretty good deal, all things considered.
I included the entire text of something someone wrote, along with a source of where it was written. Twitter has nothing to do with it, besides being the source of the text.
I didn't know about that legal definition, that's interesting! I would argue that it is not "the definition" of a word that is used a lot colloquially outside of legal cases, but I definitely appreciate being made aware that such a definition exists!
In any case, I think that definition clearly applies to all of the other banks that many believe may well have gone under today, were it not for the bailout.
Says who to which part? The part about where the money is coming from (other banks) is just factual; it's the structure of the rescue action.
If you mean the question of whether that will be passed on to the depositors at those other banks is not based on a factual thing you can point to, but it's just what happens, it's how businesses work; you can't charge them money without expecting some kind of pass-through to their customers.
We are talking about a single assessment of 5 basis points of deposits, which is what was assessed in 2009 after the 2008 crisis. This is unlikely to be a major cost for banks.
I dunno, it seems like a pretty sizable assessment as is. But this also isn't the end of this. There will be an expansion of banking regulations to cover smaller banks, which will incur costs, and they'll have to increase depository insurance premiums a lot to insure all deposits rather than just the first $250k.
> If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.
Regardless of size that sure sounds like “taxpayers will pick up the bill”
Bank customers will pick up the bill. There are actually a large number of US residents that aren't bank customers or are too small to meaningfully increase fees on. This will cost money but it will be smeared out across businesses and middle class/upper class individuals.
It's an in extra cost that the government is forcing people to pay against their will, in order to achieve social objectives decided by the government. It's a tax and making banks act as the collectors doesn't change that. I really hope the tech community doesn't try and pull this sort of stupid word game on the rest of society because everyone will see through it.
So you're saying they're just raising an existing tax by that logic (since FDIC is already using this mechanism and all banks already pay into it for the base FDIC insurance)
Agreed, not a bailout as this is the purpose of the insurance scheme.
If someone gave me 10-to-1 odds that actually there will be no shortfall associated with this action I would happily take that bet. Shareholders will be wiped out but SVB's assets will cover all of the deposits, the regulator is just being extra-conservative.
Because even a single dollar disappearing from someone's bank account will drastically decrease confidence in the US banking sector. Modern society requires people to trust banks, if everyone tries to pull their funds and hide it under their mattress we are fucked.
As opposed to decreasing trust in the government, which will now be seen as an institution that takes money from normal people and allocates it to those who confuse real money with Monopoly money.
I don’t think the accounting of losses to the fund is actually discretionary, if they lose money they have to report it, they can’t just re-define the fund as marginally smaller than it was before. I don’t think I understand what you mean.
This is merely an answer. Stock of SVB may ( may because at this point I am not discounting anything ) go to zero, however based on available information, vast majority of depositors ( 90% range ) were above FDIC insurance cap, which makes it a bailout of depositors AND, effectively and likely more importantly, all the smart ( and well-connected money ) that are invested in those startups.
It is a bailout. Its true beneficiaries are not as straightforward as in 2008 though.
<< bail outs keep the stock afloat. Here the stock goes to $0.
In such a case you are wrong about this statement then. This bailout is 100% intended to keep stock afloat; just not SVB's.
Interesting. So a bailout is when the rules are changed so that some people get to keep money that they otherwise would have lost (or would not have gotten). I'm onboard with that.
But then the PPP and pandemic payments were bailouts, too - a bailout isn't necessarily a "bad" thing, right?
Like, we judge the bailout by who benefits, right?
We should just bail out families, small businesses with payroll needs, etc., and VC firms should take a haircut? Or rich people shouldn't be bailed out - cap FDIC guaranteed deposits at 1m?
Or should Signature have gotten the full deposit bailout (not tained with VC funny-money), while SVB should not?
Serious question: what is the rule / policy / threshold that solves the problem better than "everyone affected by the problem gets the same full deposit insurance"? It's a decision full of tradeoffs, being made in a limited time and information situation. I don't think the Fed+FDIC+Yellen are making calls based on trying to "save" nor "punish" certain groups - they can't possibly have the time or resources to figure out an optimal solution.
<< So a bailout is when the rules are changed so that some people get to keep money that they otherwise would have lost (or would not have gotten). I'm onboard with that.
I would say that bailout is a bailout is a bailout. No need for conditionals here. Most people instinctively know the bank would not survive without government intervention.
<< But then the PPP and pandemic payments were bailouts, too - a bailout isn't necessarily a "bad" thing, right?
You may be assuming something about me that I did not say. I am not sure what PPPs were exactly, but at its core, they were bailouts too ( or at least that was their intended purpose ).
<< what is the rule / policy / threshold that solves the problem better than "everyone affected by the problem gets the same full deposit insurance"?
The rule is really simple: follow the policy you claim to follow. Otherwise some may think you are lying all the time.
> But then the PPP and pandemic payments were bailouts, too
Yes, PPP loans were 100% bailouts. I do think, however, that there’s a significant difference, which is that we didn’t have widely available insurance for pandemics. Even if businesses wanted to protect themselves against the risk of pandemic, they probably could not have done so before COVID.
Businesses that fail to hedge risks when the option is readily available to them should fail.
A bailout is a bailout is a bailout. I am not sure why people get so offended by this. Here it is a bailout with extra steps to allow for claims that it is not a bailout. I have no real horse here. My market exposure is maybe 10k usd now.
The point made is rather simple: whatever the rules are, enforce them. Otherwise they are not rules and no one will take you seriously.
Its a (potential, whether any funds will be necessary is unknown) bailout of depositors (not the bank or its shareholders) at the (potential) expense of other banks (not taxpayers).
> If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.
Sounds like a bailout at the taxpayers' expense, just with extra steps. A bailout of a few billion dollars that banks are allowed to pass on to their customers is still a bailout.
This is quite different than a bailout. They can’t just go to their customers and say, hey, we got this bill now you have to pay for it. They can raise fees, but then customers can go to another bank. They can lower what they pay in interest rates, but again, customers can go to other banks. Or customers can buy treasuries instead of keeping money in bank accounts. Banks are not the only place to keep money, nor the only way to raise money. Sure, chances are that some of the money will come from raising rates on customers, but some of this will just come out of bank profits.
So by your own words, it’s still a bailout being paid by taxpayers.
It’s just that taxpayers may decide to pay in either money (fees, less interest) or time (switching banks and updating payment methods, or taking money out to buy bonds).
In a painfully literal sense, yeah it's being paid by tax payers because everyone pays taxes. The better distinction is that it is not paid via tax revenue. Even if the FDIC has to levy fees on banks to help cover the cost and the banks raise fees on their customers to cover this, this is not the same as the tax payers funding the bailout because they're not funding it in their capacity as tax payers (where they have no option but to pay the government and would probably prefer their money go towards building a school or something). Additionally, the banks wouldn't just be scooping the extra money out of people's accounts, it would be in the form of higher fees or something which the customer could decide to leave the bank over if they desired. Most wouldn't do this, but again the point is that there is at least an option where as a tax payer funded bailout there isn't. At a certain point, everything in the economy is connected and you could drill deep enough to say the tax payer pays for literally everything, but at that point the label becomes meaningless.
So, in earnest, how is it not a bailout? Feel free to offer your answer! Mine is:
“Banks are required by law to pay for insurance on deposits they take. FDIC stands for Federal Deposit Insurance Corp, and they are the ones that manage the Deposit Insurance Fund, which is where that insurance money goes. The FDIC is going to take from that fund to pay out all the depositors in SVB in one go on Monday morning, and then over the next few weeks and months it is going to sell off SVB’s assets and put the proceeds back into the fund. SVB has plenty of assets, so the FDIC expects to recover 99% of the money. If there’s a shortfall they will charge the banks a little extra in their next insurance payment, but keep in mind we’re talking about at most a few billion dollars spread over every bank; they are unlikely to pass on a small cost like that, but even if they do pass on the cost to the taxpayer it will be something like $10 per person maximum.”
Edit: if we take things like https://twitter.com/josephjacks_/status/1634569997266870272 at their word, the FDIC will likely see asset sales produce >100% of deposits, so absolutely no bailout of any kind. A good reminder that SBV didn’t die because they lied about their value or invested in financial instruments that exploded; they died because they didn’t have the cash on hand on the one day it mattered.