Saving Private wealthy VC

 

Dedicated to my friend Richard Fields, a great proponent of transparency in finance.. we agree even when we disagree. The usual caveats apply, this is not in any means financial advice under current norms, change socks frequently AND take a Modrin.

The talk of the town today and yesterday is the largest bank default since 2008, Silicon Valley Bank, part of Silicon Valley Group.

That has started (again) the wailing of the “high(er) rates are killing the economy !!1!”, so a brief article is in order. First off the trouble is that the amount of deposits there is staggering,and most of them are uninsured by the FDIC. Yet, there are some... iffy representations even in the linked Reuters article.

First off, the graph of the stock reports only March 2023, with references to Powell's testimony. Sorry, what? The graph you want to see is this:

The bank fell over 60% in 2022, so, sorry for big depositors there, but there was plenty of time to diversify accounts... something any CFO with a couple of working neuron cells should have done anyway since day 1. Also: early 2023 is testament to why you will find unlikely proponents of “gonna bail them all!”. The relief rally on non accelerating inflation and pressures on the Fed to actually ease up on the tightening (pun intended) had worked its magic on that stock as well: +50% from year end is nothing anyone can sneeze at. But apart from this crowd... why are people, even well known in the business, advancing the idea of bailing out deposits OVER the 250k limit of the FDIC guarantee.

Deposit insurance is the most worthy and LESS costly of banking supervisory features, but it needs to have a maximum, and I will tell you why that's my opinion. Deposit insurance is there to avoid runs on banks, where depositors all want to cash in all at once. But the key word is "cash", i.e. the number each of us sees at the #ATM machine or on the bank website as his own cash balance. However that's not cash. I have seen grandiose public plans about financial education, and deposit insurance is an ex post measure...

No government or institution “vaccinated” citizens by telling them the truth: "when you deposit cash at a bank, you are LENDING them the money (which ceases to be yours). The bank invests it." That has advantages even when there is no interest income on bank balances: safety (better than under the mattress), convenience of payments, fast opportunity to transfer/invest the money, etc. Oh, you lose all privacy of course, and banking is a prime target for hacking, single point of failure. Yet, you don't NEED any more transparency than now to know what banks do with the money you lent it: invest it, of course. That doesn't mean you cannot. The trouble is explaining to Joe Soap that his bank is both his provider AND HIS COMPETITOR. Why?

Because if Joe Soap buys Treasuries, those get booked in HIS name on a deposit account separate from the bank balance sheet. If ALL those "poor" VC entrepreneurs instead of bank deposits had had the SAME long duration Treasuries that sunk SIVG, they'd be mildly annoyed that it will be a while before they transfer To another bank in their name and that bank won't be of their own choosing , as it happens here...a bit more slowly. You know why that public information campaign is not first priority, don't you?

Now, the vast majority of citizens don't HAVE cash balances exceeding 250k. So, for the avoidance of doubt, a full deposit bailout is not saving elderly grannies who need to pinch pennies to see the end of the week on a full belly. It saves people who didn't do their homework on cash management risk, and central banks who CHOSE this calculated risk:

"We won't tell people that over the insured threshold they would be better off buying a financial instrument, preferably not something risqué, like a T-bill, because that would reduce money available TO the banking system, and their profitability. But we will have to twist and change rules on the fly if we don't, because if we REMOVE the threshold limit now, a Pandora's box of bank malinvestment is unleashed on citizens as taxpayer, potentially leading to our heads on the block. So we will render law meaningless, with help from lawmakers. We'll build a system in which NO single bank crisis will be treated the same way as any previous one, and above all, NEVER as the book said we should or would."

Oh one last thing: Welcome to #Europe.