Looking at your thought experiment, the difference is whether that customer gets $500K (all of the bank's assets are sold to make him whole[1]) or $1M - all the banks assets are sold, and also he gets another $500K from the FDIC.
[1] - the $250K insurance is normally only supposed to apply if there are insufficient assets to cover it. Unless I'm misunderstanding your wording and the bank in the thought experiment has $750K in assets.
> "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
Very curious to see who ends up paying this special assessment. Are we all going to pay in lower deposit/investment interest from banks? Are bank shareholders/profits gonna eat it?
My reading is that the "assessment" (tax) will be borne by all banks, not just the bank that fails.
My gut says that the incidence will fall primarily on deposit holders (likely in the form of marginally lower interest rates), and not significantly on bank equity holders, but I suspect it'd take an econ phd to fully parse that out.
> I hope the FDIC is able to get a substantial dividend quickly so that they can keep operating and that everyone works to keep disruption low
The FDIC has publicly said there will be an advance dividend and I don't see why it wouldn't be substantial, given that there's going to be a LOT of recovery unless SVB has big non-public problems.
FDIC has to make a decision about risk. There's no way they have done enough diligence to have a complete picture of liabilities (e.g. to find any non-public problems).
FDIC should pay early (Monday-Tuesday, not anytime "next week" as they've indicated so far) and should pay a big chunk, even though it's not completely safe.
Every day that goes by with uncertainty, the cost of the fear grows.
Why wouldn't there be a way? They're a government corporation with a $2bn budget, thousands of employees, whose only purpose is to oversee this kind of event. And it's not like they've been overwhelmed with work recently. The bankruptcy was only made public Friday, but they've been working on it for longer than that. Yes, they've certainly done their due diligence.
So, legally speaking what authority does the Treasury Department have to make depositors whole beyond the legally guaranteed $250,000 insured and an equal share up to the amount of their deposits of the auctioned and liquidated assets?
The question I have is do some of the proceeds of the liquidation get used for $250,000 insurance payout first? Or do the tax payers get to help?
> The question I have is do some of the proceeds of the liquidation get used for $250,000 insurance payout first?
Yup. FDIC gets the bank, and has to pay the insured amount. Then, the remainder must be managed for the benefit of depositors, other creditors, and shareholders. Any shortfall of the insured amount can be paid from the deposit insurance fund.
> Or do the tax payers get to help?
The FDIC deposit insurance fund is paid for by banks.
Interest rates are where they were in the mid/late 90s (https://fred.stlouisfed.org/series/FEDFUNDS). The idea that these interest rates are unsustainable/dangerous is just silly. If anything, the 2009-2016 and 2020-2021 periods at an interest rate of 0% are the anomalies.
The problem is is that the amount of debt is percentage of GDP, and therefore the interest rates that we need to pay are significantly higher now. This kind of analysis is hopelessly naïve without taking into account overall macro situation.
I always see people say the national debt doesn’t matter because it isn’t like household debt. However, I just fail to see how that is true. At some point the can won’t be able to be kicked down the road anymore. I guess everyone is hoping that it won’t be during their lifetime.
My point is just that national debt is more complicated than household debt. And every attempt to reduce it to household debt is flawed. They are fundamentally different.
> At some point the can won’t be able to be kicked down the road anymore.
No country other than New Zeeland bothers to properly account for the asset side of the national budget. Increasing liabilities is fine if there's a corresponding increase in assets. But most countries are basically guessing about the second half. (This is also why we see so many wasteful privatisations where national assets are sold off for way less than they're worth)
I mean, yeah, that's ultimately a potential problem for the federal budget. But that's not what tripped up SVB - long-term Treasury prices declined because higher interest rates made short-term Treasuries more attractive than long-term ones.
I mean, completely reducing this risk to 0 is probably expensive and annoying, yes. But you could halve the risk by splitting your money into just two bank accounts, and reduce it further by keeping medium/long-term savings in short-duration no-coupon T-Bills or something.
> "This isn't some sort of complex bid call option strategy"
Exactly. And "don't put all your eggs in one uninsured basket" is the exact sort of 101-level business advice I'd expect the experienced hands at YC or any Angel investor to provide pretty routinely.
They actually had like $12B split across 5 or 6 banks. But yeah, they definitely could've split it better. "No more than $1B per bank" seems like an easy rule, and even maxing at $500M could be doable.
Well and it's not just that they had money over the insured amount in a bank. It's that they had ALL of their money in ONE bank. If they had $500K in three different banks instead of $1.5M in one bank, there would still be a risk, but it would be that they'd lose $250K if any of those three banks failed, not that they'd lose $1.25M if one particular bank failed.
(And obviously actual losses are gonna be like 20% here, not 100%, but you get the picture).
Not just any initial capital, clean US dollars in a brokerage account under somebody's real name. You can't use BTC or rubles or drug money or whatever.
>When Musk posted a tweet 'joking' about taking Tesla private, which was utterly trivial to investigate, the SEC only managed to deliver a slap on the wrist.
Because prosecuting Elon Musk requires going up against top tier defense lawyers and proving things like "Musk tweeted this with the intention of impacting his stock's value" or something.
With hackers, you can use the financial stuff to target the hackers, and then either (a) prove the computer crimes or (b) use the computer crimes and the surrounding stock sales to prove intent. You also don't have to go up against a legal defense better funded than some militaries.
[1] - the $250K insurance is normally only supposed to apply if there are insufficient assets to cover it. Unless I'm misunderstanding your wording and the bank in the thought experiment has $750K in assets.