But we shouldn’t be surprised by these occasional eruptions. First, banking is a confidence game. We’ve decided as a species that it’s safer to keep our money in a bank rather than say, at home, in our mattresses. Maybe it’s the confidence inspired by the marble bank façade, or the huge, 10-foot-thick steel door to the vault over in the corner. But here’s the fallacy in that logic: in our fractional banking system, one in which banks are only required to hold a fraction of their deposits as reserves, the money—our money—that we think is safe and secure is not even at the bank. And whether it is safe and secure is a matter of a myriad of factors that a depositor has nothing to do with, and no control over.
“In other words, in our fractional banking system, the mirage of safety and security is a clever and extremely persuasive narrative created to get us all to put our money in a bank thinking that a bank is the safest place to put our money. Even the banks that we perceived to be the most august—Lehman Brothers, Merrill Lynch, Bear Stearns—turned out to be elaborate and highly sophisticated houses of cards.
– William D Cohan, a writer at the “Puck” collection of columnists on various financial matters. (It is behind a registration wall, and free for seven days.)
It’s all a function of “willing suspension of disbelief”, and it’s exactly what happens when a movie or a book goes past the point where the audience is willing to disbelieve.
Any economy is built on a foundation of belief. Even gold-based ones; who says that gold is valuable, except other people? If it was available in the quantities that iron or silicon was, it’d be a nuisance, not much else. The anti-corrosive properties it has do possess some virtues, but… On the whole? I rather suspect there’d be another basis of exchange if it were more common.
So, the real problem, here? The same thing that’s going on with the media: People are losing their ability to deny reality, watching the whole thing play out in front of them. You can only lie for so long, and in so many ways, and once you’ve gone past that breaking point? Hello, preference cascade.
I suspect the banking system is at one of those inflection points, right now. A dollar is only worth what someone is willing to exchange for it, and if they lose confidence and belief in that dollar as a medium of exchange? LOL… Guess what?
Same with the US system. The Saudis are now falling into orbit with the Russians. Know why? They just saw the US elect a venal, corrupt cretin who is actively demonstrating senile dementia. Why the hell would they want to be an ally with that, especially after the US called them names over them killing that Khashoggi character that was likely a bagman between the factions in Saudi government that supported 9/11 and al Qaeda? I wouldn’t be a bit surprised if the general housecleaning that went on in Saudi Arabia after Trump got elected was them cleaning house on that entire crew, and that it was (possibly…?) something that the US demanded.
You know this much: Those 15 Saudi hijackers wouldn’t have gotten their clean passports and positive vetting by the Saudi government without someone in the Saudi government knowing about it and approving it. Just as it’s damn obvious that the Taliban wouldn’t have given the OK to bin Laden for 9/11 without Pakistan getting at least informed in advance, because the Taliban demanded that Ahmad Shah Massoud be killed before 9/11 could take place, which means that Pakistan’s ISI had to at least be aware of what was going to happen.
Still don’t understand why Bush didn’t go after Saudi Arabia and Pakistan directly, but maybe he didn’t want to chance killing a few billion people through starvation once the Saudis blew up their oil fields and the Pakistanis nuked the Indians. Maybe he thought taking away their toys and establishing a competitive democracy would serve, I dunno. I still think we should have just done a punitive expedition through both countries and called it good…
Used to be, a bank pushed the message of security, of overriding concern for depositors’ money. Humorless, pitiless old Scrooges guarding our money for us.
Now they want us all to know that they are serving great and important social values with our money. They are upfront about this.
Banking is now run by Kip’s Ma. Sorry, your cash rotted away on an abandoned railroad siding. But we meant well!
Well, time was that bankers had to project solid and stolid trustworthiness. Now, they need to project ‘woke’, and we all know the line… Get woke, go broke.
Ideology is a disease of the mind, no matter how it manifests. If you “believe” in something, anything? You’ve ceased thinking, and are now an irrational animal, reacting according to the delusions in your head.
The good news, so far as there is any, is that these failures don’t seem to be driven by wokeness. These were just failures of math, and attention. You need to be competent no matter your politics.
Sort of OT, but the funniest line on Twitter today:
“YELLEN: IT’S NOT A BAILOUT UNLESS IT COMES FROM THE BAILE REGION IN FRANCE. IN THIS CASE IT’S A SPARKLING GOVERNMENT INTERVENTION.”
https://twitter.com/KlendathuCap/status/1635360261858267137
The puck article is interesting, but somewhat misleading since it says
Unless you read this really carefully you think the problem was buying US government bonds. This is something I made mistake with myself and this article isn’t the only misleading one because very few people seem to have actually looked at the balance sheet but just repeated what others wrote.
What has killed SVB is not the treasury portfolio but the mortgage backed securities and the fact that depositors were gradually withdrawing money at a rate of ~$1.5B/month instead of leaving it in there. A quick gander at the most recent 10Q – https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/dffa5746-7f80-4d88-9d3a-65b793df5d52.pdf – shows that SVB had about 3x as much MBS as treasuries. SVB, if I’m reading the 10Q right, had already put almost all the long dated treasuries in the AFS pile (just under $30B bought, valued then at $26B) and had already had their losses booked while what was in the HTM pile was almost all MBS (about $85B bought, valued at $71B in September and probably less now).
@bobby b
Well Ackshuallly… woke hiring for diversity means you may not be hiring the competent so wokeness probably is partly to blame.
No solutions on offer I note.
Putting it under your mattress is just to lose it by inflation. It’s far worse than risking fractional banking.
If you are a normal depositor you haven’t lost from Silicon Bank anyway. (If an individual has more than US$250,000 in cash in one bank you deserve to lose it.)
Would we all prefer Sharia banking perhaps?
And yet no bankers ever go hungry after their failures. The economy might crash, normal people lose everything and inflation eats what’s left, but bankers and the suits on Wall Street do just fine no matter what.
When the revolution comes, I hope the bankers and Wall Street types go to the head of the line to be lined up against the wall.
@FrancisT:
SVB’s collapse is a confluence of several factors:
1. For the most part, in traditional banking, you take deposits and make loans. Banks do hold bonds (both gov’t and MBS), but for example at Bank of America 28% of assets are bonds. At SVB, they were 56%. That’s because, with their focus on tech/crypto, in 2020/2021 they were getting a ton of deposits from companies flush with investors’ money who just wanted to keep it somewhere. These companies did not need a lot of loans. Loans to companies generally are floating rate. Thus, when interest rates go up, a normal bank’s bonds lose value, but its loans pay more, so this is generally good for the bank. Not so at SVB.
2. The venture capital (and especially crypto) boom in 2020/2021 was very much a product of the low interest rate environment. It only took one Fed rate hike to tank crypto. Funding dried, and all those startups started drawing the cash held at SVB to pay for current expenses. SVB now had to sell bonds at a loss. When you keep reporting that your capital is shrinking, usually not many people notice it in the footnotes to your financial statements, but occasionally some do.
3. At SVB 97+% of deposits were over $250,000, and thus not federally insured. Yellen has already said that the depositors will be made whole, but this is significant for the ensuing panic. If your deposits come from an industry (known for herd behavior, by the way) of people who know and talk to each other, and definitely talk to and listen to the same venture capitalists, when someone (cough-Peter Thiel-cough) starts warning that the situation at SVB is getting worse, and you should consider moving your cash pile – the life blood of your beloved business – somewhere else, people listened. Thiel and a few others caused a pretty garden-variety bank run. Well, I say that, but it was quite spectacular in magnitude – $40+ billion was withdrawn in three hours. The biggest withdrawals before that was at Washington Mutual in 2008, where $16+ billion was withdrawn over 10 days.
TLDR: SVB was downed by a confluence of unusually bond-heavy asset mix, a concentrated liability exposure to an extremely pro-cyclical industry, and a rumor-based (such rumors can turn self-fulfilling) bank run. It very well could have survived if not for the bank run, perhaps with some capital raising if high interest rates persist for a long time.
Banks are no more an artificial construct dependant on faith than fiat money.
My German parents lived through 2 currency and banking failures and always kept some gold and silver, and not in a bank deposit box either.
Gold and silver are useless, until they’re not.
@Kirk
Even gold-based ones; who says that gold is valuable, except other people?
This is a key point often missed by gold bugs. But gold has a few important properties — it is rare, it is fairly compact, it is easy to validate, it is easy to convert into different forms. It is in these respects that it is a good form of money. The concept of currency, a temporary store of value and an objective measure of value to facilitate transaction, does depend on a societal agreement as to what it should be. Of course we should not mistake “societal agreement” to mean “government mandate” or “government monopoly”, though that is what it tends to be. I suppose this is why governments hate, and so badly want to undermine cryptos (or non CBDCs.)
As an aside, I think CBDCs are an archetype of what has gone wrong on the internet — something so utterly liberating and libertarian as a crypto currency hijacked by government into something that looks on the surface the same, but is in fact one of the most dangerous tools of tyranny that has ever been thought of. This is true of so much of the internet: witness, for example, the massive censorship operation the government has been performing without worrying about that nasty first amendment. Worse than anything the Soviets could have imagined.
FWIW I’m not a fan of gold currencies, but I prefer them to the abomination of what we have now.
From the OP:
But here’s the fallacy in that logic: in our fractional banking system, one in which banks are only required to hold a fraction of their deposits as reserves, the money—our money—that we think is safe and secure is not even at the bank. And whether it is safe and secure is a matter of a myriad of factors that a depositor has nothing to do with, and no control over.
I think this is a bit misleading. Even in a non fractional reserve banking system this is true. If I deposit my money and then the bank lends it out at interest to you to, for example, provide a mortgage, then the money isn’t in the bank either. The nature of banking is exactly this. It is the fees earned by this that make banking possible, and makes me some return on my savings. And it is also this that allows accelerated growth of the economy based on credit. Of course that has some associated risk, and that risk needs to be managed. Apparently SVB hasn’t had a risk manager for over a year. However, the key to managing accountability for risk is fear of failure. If the bank has no fear of failure knowing that the FDIC or the government will bail out their mistakes then it is no wonder they are on the edges of the risk reward curve — it may well be their fiduciary duty to be there.
The success of the banking system depends deeply on the possibility of bank failure. And for customers to use market pressure to force banks to make sound risk judgements, then those customers must also be at risk for some pain in the even of failure. With guaranteed success and automatic bailing out on failure, any business gets distracted by pointless affectations.
But even the generous promise of $250,000 depositor insurance from the FDIC is apparently not enough. The company Roku for example, held half a billion dollars in SVC (FFS who the hell was managing their cash?) and we are bailing them out in full? Why? What is the punishment Roku suffers for such incredibly bad decision making on their part? Roku’s stock is UP since last Friday!
Are we REALLY bailing out lots of incredibly rich guys with money from middle class and poor people and nobody in the media is making a big fuss about it? How is that even possible?
And I guarantee you, all the guys at the top of these banks will have new, multi million dollar a year jobs before 2023 is out. Even if they aren’t pilloried in the stocks, you’d think they’d have the decency to slink off in shame, but no doubt their chutzpah will know no limits.
Fraser Orr, yeah, we really are bailing out banks and companies worth billions and rich folks with middle class tax dollars (and turning on the money printing machine which leads to rampant inflation and even more devaluation of what the middle class has left) and no one in the press or on Capitol Hill is saying anything.
Why? It’s really quite simple. If I might quote George Carlin,
bobby b said:
I have to ask… Are you reading the same news I am? Do you live in the same universe I do?
Did you not see the way they selected their board?
If you are focusing on the identities of the people you put on a board rather than their competencies, that is proof positive that they were more concerned about “optics” than they were anything else. They also went 8 months last year without a chief risk officer at the headquarters, while the one they had in Europe was more focused on la-la land identity politics and “woke” than her damn job.
This is exactly what Sam Bankman-Fried was doing, only not quite as bad. They were in with Gavin Newsome’s wife, and were investing in “fine wine”, underwriting a hell of a lot of really speculative crap out of the Napa Valley wine industry.
Uncle of mine used to own a vineyard down there, on the very peripheral of it all. It’s a magnificently shady way to make money, because you can have actual crap in your cellars and be able to get loans on it all because “wine”, and nobody really knows what the hell it’s going to mature out as. I heard enough talking to him to start to wonder if Napa Valley wasn’t more a money-laundering scheme than anything else, because of the BS that goes on with all that speculative crap. You’re a bank, lending money on things where you have to rely on some oenologist to give you a value on the things you’re taking in collateral on millions of dollars in loans? LOL… Yeah, that’s not a situation rife with potential for fraud.
Just hanging around on the edges of things, you heard stories about wine cellars being filled with ‘the good stuff’, tested and pronounced upon by esteemed authorities, and then once the paperwork was filed, the actual good wine would mysteriously vanish, replaced with utter swill. The good wine, on the other hand, would vanish off into the twilight, possibly off to another scam.
Y’ever wonder why they went and invented all that complicated gas chromatograph BS for wine testing? This is why. It’s also why a lot of the wine industry refuses to ’embrace the science’, because that’d make it actually impossible for them to pull these frauds off.
I heard SVB was ‘involved’ in that industry, all I could do was shake my damn head. They ever investigate this thing the way they should, you’re going to find it’s all fraud, all the time, all the way down to the bedrock. Reputable banks don’t get involved in crap like that, period. Not if they’re trustworthy… It’s worse than investing in movies, with all the Hollywood accounting.
Another query for bobby b RE: Wokitude being a factor in SVB failure:
https://www.dailymail.co.uk/news/article-11859379/Only-ONE-member-failed-SVBs-board-experience-investment-banking.html
Yeah, Daily Mail. However, I can’t find anything that refutes the raw facts related.
One single, solitary member of the board had a background in investment banking. The rest? LOL… Identity politics top to bottom, side to side, all the way around.
I strongly suggest that your post about woke not being a factor might, just might, be in fundamental error.
Shades of Rumpole – ‘No, my Lord, of course this wine isn’t for Drinking – it’s for Buying and Selling!’
Bonus question of the day, who can name the truly-exceptionally-fine Easter Egg involving Sherlock Holmes, Horace Rumpole and wine? Answers on a postcard . . .
llater,
llamas
You have to read the whole comment, Kirk.
SVB didn’t go down because they made specific woke choices. No huge losing investments in solar/wind that tanked, no fur-lined sinks, no VCing of puberty-blocker drug firms, no huge donations to the Peoples’ Republics overseas . . .
They failed due to inattention and incompetence at the basic level of banking.
Sure, that’s because they were chosen for their wokeness and had no actual expertise, but that’s not what I was speaking of. Precipitating acts . . .
Were Lehman et al., fractional-reserve banks? Because I don’t think they were.
bobby b,
My friend, I have to point out the fuzziness of your thinking. If you hire based on what someone is, rather than their actual competency to do the damn job, that’s the very definition of “woke”.
And, I’ll point out that while you’re asserting that they weren’t making huge money-losing loans, I would also assert that we actually don’t know, at this point.
The fact that they had themselves leveraged 185:1 is pretty damn telling. I’m not even a banker or financial whiz, and I’d be questioning that one the minute I heard of it. Like “Uhmmm… Should that number there, on the left be that high…? I mean, shouldn’t we have some more assets, here?”
As is well known, the Credit Bubble banking system is fundamentally unsound – this financial and monetary system will collapse, the great question is “when?”
However, the Silicon Valley Bank did have some “interesting” features – which are, sadly, wildly shared in “Woke” Corporate America.
For example, for nine months it did not have a person in charge of dealing with risk – and when asked why, the reply was that the bank was too busy with the DEI (Diversity, Equity and Inclusion) agenda, which has been pushed in banks (and other corporations) since the Obama Administration – and which this bank regarded as its main priority. For example, “Pride Month” (a celebration of homosexual acts) was far more important to this bank than financial risk – we know that because they endlessly talked about their “Pride Month” preparations, and did not talk about dealing with financial risks (and did not do any work to manage their financial risks – they were all too busy all working on DEI and BLM).
The American economy is controlled by unserious people – they are very rich (thanks to the funny money o the Federal Reserve), but they are not serious people.
It is not just Silicon Valley – it is Wall Street as well.
It needs to go.
“But the end will be terrible” – I know, but it still needs to go.
Possibly relevant http://www.alexanderboot.com/first-things-first/
Peter MacFarlane.
Yes indeed “Woke” doctrine (Diversity, Equity and Inclusion, Environmental and Social Governance, DEI and ESG, and all the rest of it) is insane – but this does miss the basic point.
The fundamental problem is Credit Bubble banking (money-created-from-nothing) itself.
Even the relatively conservative William Howard Taft reacted to the crash of 1907 by saying the system should be more “flexible” – which was exactly WRONG.
Even back then – the “flexibility” (limited though it was then) was the problem, not the solution.
Every step to make the monetary and financial system more flexible has made the fundamental problem worse.
Both Richard Cantillon and David Hume explained, some three centuries ago, why this whole line of policy distorts both the economy and society (the culture) itself – each step away from commodity money and lending from Real Savings (the actual sacrifice of consumption) is a step into evil and into madness.
By the way…..
I often say that the Economist magazine has fallen from its sound beliefs – but on banking it was NEVER sound, it was always pro Credit Bubble, which means (in practice) pro government bailouts.
The supposedly “laissez faire” Prime Minister Russell pushed bank bailouts in the late 1840s (making a mockery of Peel’s banking Act of 1884 – although that Act itself failed to identify and deal with the fundamental problem of banks lending out money that DOES NOT EXIST, legalised fraud).
Prime Minister Russell also supported the vast increase in the Irish Poor Law Tax (only created in 1838) in the late 1840s – under the slogan “Irish Property must pay for Irish Poverty”.
The Irish economy collapsed (no tax “just” hits a certain group in society – all taxation eventually hurts everyone) and one third of the Irish population either died or had to flee.
This discredited “laissez faire” – but crushing Poor Law Taxation is NOT laissez faire.
No more than endless bank bailouts is “laissez faire”.
And the banking of those times was light years closer to sanity than banking is now.
Banking, and the Corporations that depend upon it, today is totally Credit Bubble – there is no commodity money basis at all.
None.
Let us put this in terms of high philosophy – the film “Captain Kronos: Vampire Hunter”.
“But must I kill him?” says Captain Kronos when asked to destroy his friend (or rather the creature who looks like his friend) who has become a vampire.
“You must destroy him, not kill him, for he is already dead” comes the reply.
In the sense of lending out Real Savings (the actual sacrifice of consumption) of commodity money (of gold or silver or whatever commodity people choose, choose, to value) the monetary and financial system is already dead.
It is no longer about Real Savings (the actual sacrifice of consumption) it is a Credit Bubble – utterly dependent on the state.
It twists and corrupts everything, and everyone, it touches.
It is not a question of “killing” it – because it has become a vampire, it is already dead.
And now the Central Bank of Switzerland has offered up to 45 Billion Pounds to Credit Suisse bank.
Is there no limit to this evil?
This system must go.
It’s a long cherished and completely erroneous myth that the primary purpose of a bank is to store depositors money. The primary purpose of a bank is to collectively bring together lenders and borrowers; just as the primary purpose of a realtor is to bring together the sellers and buyers of real estate. If you want to store your cash and valuables, you would acquire a safe, or rent one. Some banks rent out safety deposit boxes, although most bank branches no longer do so. The secondary purpose of a bank is to facilitate payments and other transfers. Savings accounts and various time-defined deposits fulfil the primary purpose, and chequing accounts fulfil the secondary purpose. Lending your money will always carry some risk whether it’s done person to person directly; or through an intermediary institution.
Lending out depositors money is not creating money; unless the bank has lent out more funds than was entrusted to it by depositors. Of course, in earlier centuries, banks used to receive gold and/or silver and lent out a combination of said precious metals and bank notes. The bank notes, properly, should have only been equal to the bank’s reserve of precious metals. The advantage of bank notes, besides weight, was that they were redeemable at other banks that had exchange agreements with the issuing bank.