According to the article, the pension fund's exposure is because it owns shares of stock in SVB. That's bad, but bank stocks can be tricky. They're not saying they lost money as a depositor.
I mean, that's worse. The depositors at SVB are being made whole, the shareholders are getting wiped out.
EDIT: I think a lot of people misunderstood me. Wiping out the shareholders was absolutely the correct thing to do; I just meant worse from the perspective of people whose value is in the equity.
Share holders are owners in the company. They are rewarded financially when the company does well, and risk losing money when the company does poorly. In what world are customers equally subject to the same risks? They obviously do not get the same rewards.
Or do you mean in general? In that case, it's not particularly interesting. There's risk in walking outside.
Let's not pretend to not understand what they are talking about.
It is more than fair to say that the FDIC insurance is common knowledge, and yet, depositors were bailed out despite understanding that risk. Furthermore, depositors have benefited from quite the entanglement with the bank that, in normal business, simply wouldn't fly.
The issue was the bank putting all of its deposits in illiquid long-term bonds that were worth substantially less if sold pre-term, and compounding that problem by becoming insolvent selling a large chunk of those bonds per-term at a huge loss to cover immediate liquidity needs.
Looks like it. Except I don't see that the bonds necessarily weren't liquid. They just kept going down as the Fed cranked rates up.
As some others have said in this thread: I'm just trying to talk about what happened, within my limited understanding. I'm not talking about who was right or wrong at all.
I am referring to the fact that startups that are being advised by VC firms had a requirement to keep their funds in the bank. If you think that SVB and the VC firms didn't have a special kind of relationship you're missing the facts.
I'm aware of the relationship betweeen SVB and the VCs, but it seems that you're confused about what you're arguing.
You're blaming depositors (specifically VC-funded startups) for "benefiting" from a relationship with SVB they were forced into by VCs, and want to deny making all of SVB's depositors whole on the basis of a bank relationship that, for many, was not their choice. Worse, you want the fact that VC-funded startups over-depositing their cash reserves in a single-bank to be used against non-VC funded depositors (i.e., other businesses in the SV area) to deny making them whole on the basis of a "special relationship" that was simply "geographically closest bank willing to provide a loan and banking services."
> In what world are customers equally subject to the same risks?
Perhaps not the same risk, but risk nonetheless. People forget what banks truly are. They are institutions you give money to and hope they leverage ( fractional lending ), invest, etc it well so that you can take out the money out eventually. And maybe even earn some interest along the way.
> There's risk in walking outside.
No. The very real and actual risk that the banks managing your money may not be competent and gamble your money on risky loans, investments, etc. In this scenario, the depositer would lose part or all of their money.
It's amazing how well the industry PR has worked that people lose the sight of what banks really do. They fundamentally take your money, "gamble it" and hope it pays off. And if it doesn't, oh well, the government ( taxpayers ) bail them out. There is a reason why historically, people shied away from handing over their hard earned cash to banks.
Of course there is risk in bank deposits, but it is a rather more thorny (and therefore more interesting) topic because the risk is not the purpose of the bank deposit; people generally don't deposit cash with a bank as a means of speculating on the creditworthiness of the bank. A pension fund losing money on stocks is BAU, but a pension fund (or any company) losing bank deposits is exceptional and arguably represents a failure of the market, regulators or both.
> Risk applies equally to depositors. Apparently we all forgot that banks have risk, just less than our mattresses.
Not since 1933, in the US. Our financial institutions have been oriented around protecting depositors since then, and everyone knows it.
There is a long list of people who get to make claims on the assets of a business when it fails -- depositors, bondholders, etc. Shareholders are always in last place or close to it. Everyone knows that too.
This isn't the wild west. There are longstanding rules and institutions here.
It’s dubious whether cash deposits should (in an ideal nation) be subject to risk. What would it look like if there was a federal deposit bank which offered lower savings interest rates than private banks but also guaranteed unlimited FDIC coverage?
The UK's National Savings & Investment Bank, which is owned by the government, offers almost exactly this, your money is guaranteed because it's the government (in taking your "savings" they are in effect borrowing your cash to run the country) so they can and will literally print money to pay you if necessary, however NS&I is intended to be used by individuals, not organisations, maximum balances even in their lower interest generic savings account top out at £2M.
That would still be subject to risk. It's impossible to completely eliminate risk.
The FDIC is not an absolute guarantee. The government could decide that it doesn't want to honour it, or could itself collapse. Both scenarios are very unlikely to happen in the near term, but the same is true for the largest and most stable banks.
Yeah I mean a dinosaur extinction meteor could hit the planet but for most people the determination of risk ends around “Complete collapse of USA/EU governments and their currency”.
It’s probably the most fundamental axiomatic assumption underlying any normal discussion of financial risk.
In other countries, it isn’t. “How can we manage a complete collapse of the Filipino government?” Is a reasonable question.
If the US government collapses, Coinbase won’t have a market to operate in so further discussion doesn’t matter.
It seems a bit facetious to compare the collapse of the US government with an extinction event. There will almost certainly be a world after the US government, and that world will probably still include ancient banks like Lloyds and Barclays, and large gold vaults under the Swiss Alps.
If you round the risk of the US government collapsing (or refusing to honour its obligations) down to zero, you should probably do the same for many private banks.
This is more philosophy than anything. The FDIC, an instituted paid for by taxes, was introduced because farmers lost everything in previous bank failures. Insuring deposits but not shares is entirely a choice made by society, not any inherent property of cash, despite some people wanting it to be so.
In my opinion it's really rather arbitrary at a point. If an individual or corporation has a lot of money that they need to store, they need to consider risk and return regardless. Deposits have FDIC reducing risk, but don't earn much interest. There are government bonds which a different risk and earning profile, and stocks with a different risk profile again.
I feel it's rather narrow to focus only on deposits when in a practical sense it's pretty unlikely that anyone with any meaningful amount of money will keep it all in deposits. Similarly I also have sympathy for small share holders who lost money as part of their pension funds or otherwise. Not sure why hacker news commenters appear so gleeful about these people losing. It's not like bank failures are a "normal" occurrence in any sense.
Being a durable store of value is generally part of the definition of cash along with liquidity and fungibility.
Governments put so much effort into making banking deposits function as cash because the modern banking system would break down if people thought they were better served by having a hidden shoebox full of cash.
I don't think anyone here is gleeful about a pension fund losing its money but there is a meaningful difference in terms of which parties should receive federal assistance.
To emphasize this point. Most of the deposits potentially lost at SVB were in checking accounts to cover day to day expenses. It is hard to imagine why we would discourage companies from using banks to hold cash over a relatively short term.
Should deposits have an associated risk, so that companies prefer to pay their employees in cash and require cash paper bills to settle accounts? If physical cash were required, our economy would be much less efficient.
It's wrong still though. Within our existing financial frameworks, the US government clearly wants putting your money in a major US bank to be essentially risk-free.
If anything, it's the people on the other side of the discussion who generally think depositing money into banks should be risky because they argue that the government ought to not bail out depositors.
Clearly based on this weekend, our existing financial framework is that depositors are entirely protected, provided the bank is important enough to some important demographic.
This should be spelled out in law rather than relying on the existing provision being used ad-hoc, though.
It's not about the demographic. It's about the consequences to the rest of the banking system. That logic of protecting the system from systemic risk has not changed since the FDIC was founded.
But also theory vs practice. In theory a depositor's money is at risk, but at least since the 1930s, no depositor has ever lost money at a US bank. The government always makes depositors whole, despite the supposed insurance limits.
Creditors get paid before shareholders. That is the general rule, and applies here as well. (With the addition of bailouts to pay said creditors). Shareholders don't get bailed out, ever.
NO, risk does NOT apply equally to depositors vs stockholders
There is a very well-legislated and well-litigated priority of claims agains a business that goes bankrupt.
It's roughly: first pay 100% of employee's payroll, then apply what's left to secured creditors (for a bank, I'd expect depositors to fall here), then what's left goes to unsecured creditors, then, preferred shareholders, then common shareholders.
Moreover, for all kinds of debt and equity, there are slices of the slices of different risks that can be setup to provide greater return (w/greater risk) or greater security (with lesser return).
Expecting the common shareholders to have anything resembling "equal" risk as the depositors is pure ignorance.
no it doesn't. there is no financial reward from having a deposit in a bank, and therefore there should be no risk. the measly interest that a savings account pays shouldn't even be considered.
we are _forced_ to use banks because of the need for cashless transactions. if government had a bank that 1) did not engage in lendigg or investment; 2) offered no interest payments on deposits; 3) only settled cashless transactions -- i would use that, and i bet most people would.
These shareholders were presumably diversified. They lost money on this but will make money elsewhere. They certainly would not be totally broke ... unless management was incompetent, which is a whole different kettle of fish.
I'm not sure there are any uninsured depositors in this case. The FDIC ensures the minimum they get back, but the remainder is first in line when the bank is sold. They will likely be made whole or mostly whole. It's the shareholders who are truly going to lose most or all of their investment.
It's sad that depositors could lose money that was supposed to be guaranteed. But not as tragic as the scenario that the OP seemed to suggest, where retirees lost a large portion of their fixed income.
Only those 250K and below depositors will get their money back pay by Fed. Amount greater than that subject to availability of asset fire sales AFTER more senior debts repaid. Depositors are considered "investors" by SCOTUS and hence has much lower pecking order than other secured debts. They are higher than unsecured debt and stockholders if that is the silver linings you looking for.
This is the biggest problem with retirement funds that no one talks about. There is so much money available that inevitably you end up with investments that are risky despite diversifying.
One of the things that most frustrates me about pension funds and even 401k funds is how my retirement is managed by someone who has no concern for my values and could in fact use my money to oppose my values and best interest(as a whole) in the pursuit of increasing gains.
If your 401k does not have an option for low cost broad market index funds like SP500, then that is a fault of your employer forcing employees to take on extra risk.
Retirement accounts are not intended as general purpose investment vehicles. If everyone could put their 401k/pension in anything, you would see a lot more people getting scammed and gambling on the latest GameStop internet mania. If folks want to invest like that, get a brokerage account. If you want tax-advantaged retirement planning, being limited to less risky things is the tradeoff you make.
There's nothing stopping you from having both at the same time, with the caveat that your contributions to the IRA may not be deductible if you earn over a certain threshold.[1]
Unfortunately this is a 'vote with your feet' situation. If you don't like who is managing your 401k, then work for another company (which is drastic, I know). The other option is to simply write to your plans administrator. Tell them your concerns and organize a letter writing campaign if you are really concerned.
Or with increasing of ESG investing ignore possible gains for political reasons. Thus making my future life worse as they don't extract maximum possible value from market.
Diversifying reduces risk, period. The question is whether the portfolio is diversified enough, relative to its size.
A lack of sufficient opportunity for diversification isn't a problem with the fund, it's a problem with the (investment) market. Offer more opportunities for diversification and the problem resolves. Too bad the economic trend is to consolidate businesses instead of keeping them separate; too bad entrepreneurship is declining; too bad more and more new companies decide to stay private instead of aiming for an IPO.
Why is it a problem with broad market index funds?
Some investments will underperform, and some will overperform. All you should care about is keeping up with inflation, which it should since it is invested in a representative set of the businesses that make up the market.
> you end up with investments that are risky despite diversifying.
Every 15 years some banks fail and we shake our heads. But by and large, investing in banks is probably one of the safest investments one can make, no?
Correct. It would be hard to find a stock where some combination of these players were not the largest shareholders based on the aggregation of all their managed funds.
Apparently they are limited to investing 5% of the fund's money in banks.
Turns out they used 2 of those 5% for investing in these banks.
It is not a disaster though, not even close to a disaster. And talking about banking and market economy, they most likely gained much more money from that than they lost. It just happened very quickly .
Not a disaster, but seems conspicuous. Looks like there is a connection between Signature and SVB and First Republic had a big exposure to SVB. So their risk exposure to a single entity such as SVB was pretty high for a pension fund.
I think what they did was invest too heavily in up&coming banks rather than traditional banks. With the rationale that their technology was more modern.
Not that I know of. However they sold their shares in the somewhat stable swedish banks Handelsbanken and Swedbank in the hunt for the more exotic, nieche bank stocks.
The CEO of Alecta even said in an interview that the 50%+ drop of "First Republic bank" isn't a loss because it hasn't been realized yet. It wouldn't surprise me if he had to leave before the week is over.
Last year they sold all their stocks in the Swedish banks Swedbank and Handelsbanken (they held them for 71 years) to buy SVB and similar banks because they wanted to have more profits. It'll take a while to recover.
Holy sh*t. That is just beyond horrible. But it also shows how difficult it is to evaluate a stock. If a pension fund can't - then how should the average amateur investor do it.
That question comes out often but... Apparently the $2bn realized loss that SIVB took was only about 1/10th of their total unrealized gains. Numbers are floating around now saying there's about $620 billion of unrealized losses among the various banks at the moment (due to the same issue of rates going up after trillions were printed).
Which institution can honestly offer any kind of product hedging against $620 billions of losses without, itself, going bankrupt should people try to exercise their hedge?
Basically the headlines, instead of being: "SVB goes down for it has $20 bn of unrealized losses" would be, instead, "SVB goes down for it has $20 bn of hedged unrealized losses, but the institution which is supposed to cover the hedge is bankrupt for it miscalculated and cannot cover $620 bn".
Which makes you wonder about their diversification strategy. 1% of their fund in a single, highly specialized banking entity seems pretty damn over-concentrated.
I agree, Tesla is massively overvalued and is over-represented in the S&P 500 as a consequence, resulting in excessive concentration in an asset that's already significantly declined.
JPM, by contrast, isn't a "highly specialized banking entity", and so doesn't earn the same level of criticism.
It seems like at some point in the past few decades money stopped becoming a useful abstraction for the values of goods and services and instead turned into a some numbers game played by by finances and tech bros looking to play the game rather than do anything good.
I mean ultimately the value of the money went like this
Some VC thought they could make money off a dog walking AI/ML self cleaning mapping proposotion. Not that they believed it would produce that much value but merely believed they could make a return.
The startup put money in SVB which held the funds that represented the supposed value of the startup.
The pension fund saw SVB had money (that represents the abstract value of a couple of dozen startups) and decided that would be a good place for them to put/invest more money.
All of this undergirded by the idea that the value was in the 100s of millions of dollars for an AI/ML Dog Walking Mapping Startup platform. Which everyone knew was never worth that much to begin with, but was just following the numbers game because the hope was it would be able to be pawned off on other suckers. With the suckers being either a) The general public through an IPO or b) The tech giants who would acquire it.
It just seems something broke somewhere and we need a correction.
Sure but the question to ask is whether our financial systems have gotten better or worse since the time of tulip panics, railroad stocks, etc. I would argue that they have gotten better but there's always possible improvements.
That doesn’t seem a problem, if the depositors go bankrupt, the banks shouldn’t be affected unless the bank lent them money. But the VCs gave the money, not the bank. I think the problem is really that the bank grew too quickly, so it only recently bought a bunch of low interest long term debt that was now worth much less.
Because if US Bank was collapsing it's one of those "end of the world as we know it" situations. Like, people would be looking to short BoA and JPM if that was the case.
If you're referring to Glass-Steagall, I don't think it would have helped with Silicon Valley Bank.
Commercial banks were allowed to "to buy, sell, underwrite, and distribute US government and general obligation state and local government securities."[^1]
And Silicon Valley Bank was underwater on US Treasury Bonds.[^2]
My impression is that Sweden doesn't care about the credentials of its pension managers. These people don't even conduct due diligence beyond asking their finance buddies for their advice.
I don't understand how this pension fund manager will lose any money if the FDIC will be making all depositors whole. The article doesn't seem to cover this (unless I missed it).
