Is the stock market going to tank?

[MultiVerse]

That's Matthew Yglesias' solution, "regional banks like Silicon Valley Bank are bad and we should encourage more consolidation among them to try to have eight or nine huge megabanks instead of just four." Meanwhile, megabank Credit Suisse is in trouble too...

[4matic]

CS been in trouble for many years. Plenty of time to exit for all stakeholders

[jono]

They aren’t the same thing, but you’re right that they can be both.

What stops it? Reasonable ALM that recognizes the instability of large and/or homogenous accounts and maintains ample liquidity to manage it. It’d be quite the long game, and a bunch of subterfuge, to deliver on that premise.

I think this cycle argues for a pretty short timeframe, assuming someone could identify an opportune target. Not unlike short squeezing on GME.

As a former buy-side short seller let me try to answer this question.

In theory - nothing. BUT that carries a lot of risk

1 - you'll need your funds to have enough size to trigger a bank run by asking for withdrawal
2 - if you have that much money in one bank then you have risk in being an uninsured deposit
3. - if you don't have that much money in one bank but are colluding with others to trigger a withdrawal then you'll almost certainly attract regulator scrutiny (SEC, banking etc) by the act of collusion. It's under a basket of anti "short and distort" laws.
4. If you're colluding there's too much risk that one of your gang of short and distort crew will backstab you and take a counterparty position to break your campaign.

TLDR - there's easier ways to make money. Either on the long or short side

Thanks, #3 was particularly helpful. It kind of seems like #2 is put in doubt by backstopping uninsured deposits, though, which is what prompted the question.

In the post-Elon Twitter Era it seems like there's a non-zero risk that not all capital is in hands that only use it to make more.

[Mustonen]

I think this cycle argues for a pretty short timeframe, assuming someone could identify an opportune target. Not unlike short squeezing on GME.

Thanks, #3 was particularly helpful. It kind of seems like #2 is put in doubt by backstopping uninsured deposits, though, which is what prompted the question.

Because a bank won’t notice you parking a few billion, invest it immediately in long term assets, and then be shocked when you yank the cash a few days/weeks/months later? Even SVB’s ALCO would have caught that.

Nobody guaranteed backstopping deposits. You can just hope. Big risk small reward.

[jono]

Because a bank won’t notice you parking a few billion, invest it immediately in long term assets, and then be shocked when you yank the cash a few days/weeks/months later? Even SVB’s ALCO would have caught that.

The same ALCO that saw Thiel coming?

[Brock Landers]

I’m going to put all my cash, tens or hundreds of billions of dollars, in a bank, just to take it all out at once in the hopes I make money shorting the bank? Back when there was no guarantee on all of those tens or hundreds of billions (aside from my first 250k)?

No.

EDIT: …and collude…with the federal reserve…to quickly raise interest rates so they are forced sellers at a loss to their balance sheet, so there’s questions into the ability of the bank to meet other depositors withdrawals. Need that point too.

No.

[4matic]

Green shoots

[jono]

To be clear, I'm not saying it already happened. I'm saying there may be a downside to normalizing the infinite backstop.

[J. Barron DeJong]

To be clear, I'm not saying it already happened. I'm saying there may be a downside to normalizing the infinite backstop.

Seems to me like regulators going forward need to acknowledge that implicit guarantee and make it explicit, which is going to require more strict regulations of smaller banks, and increased fees being paid into the FDIC bailout fund.

[JimmyCarter]

The reality is, banks should be regulated and run like utilities.

[MultiVerse]

The reality is, banks should be regulated and run like utilities.

Maybe so. Canada seems to have figured it out. One thing that is known with pretty good certainty, and please don't shoot the messenger on this (as he ducks and covers), deposit insurance gives bank executives an incentive to take socially excessive risks resulting in more, not fewer, bank failures. It's well established in the literature.

To be clear, I'm not saying it already happened.

The argument makes more sense if instead of suggesting a preconceived plan the planets aligned and somebody took their shot. I'm not arguing that's what happened either, only that it seems at least possible in some reality.

[dunfree]

I dare say this was almost 100% psychological, or at least due to some basic misunderstanding. No? There seems to be a false equivalency afoot between depositor and investor. They aren’t really the same thing….



I might agree with that, except how? SVB was well capitalized and their balance sheet was extremely conservative. The FDIC put their seal of approval at every location and on every page of their website that discussed deposits. Risky loans? Hell no… we just put it in these nice safe treasuries to keep your money safe because so safe. Unrealized losses went through the roof….as it did for every FI with investments on the balance sheet. ROA was getting pinched by a weakening net interest margin…as it was for every FI, and earnings are still positive with a strong capital position so just wait a year or two and we’ll get back on track. Except that’s where they made a mistake; they wanted to tune up earnings by taking a loss now to reinvest at higher yields. And that put a slight damper on their capital position that they didn’t like a lot, so they tried to raise capital and ran into an illiquid market, and then they told everybody to not panic.

Very smart people in this thread don’t really understand ALM at a financial institution; shit, very smart people who are members of ALCO at financial institutions don’t really understand ALM at financial institutions. I fail to see how it makes sense or is reasonable for an unrelated business to have to worry about understanding it.

If this bank run started as a genuine worry that the back would be insolvent and impact business it’s clear that a) counterparty risk was a thing b) they had ways to know even if they outsourced reading of public? Information to other partys. If you don’t care about insolvency- why move your money?

infinite balance guarantee might have been a mostly practicality happening thing, but it’s clear they didn’t believe that, and that’s a change worth money (and regulation if it’s going to stay a thing)

[Mustonen]

The same ALCO that saw Thiel coming?

Yes, as I actually said. Even that one.

[J. Barron DeJong]

The reality is, banks should be regulated and run like utilities.

Postal Banking?

[mcphee]

The reality is, banks should be regulated and run like utilities.

Nationalize banks, utilities, health care, and while we’re at it defense!

[Mustonen]

If this bank run started as a genuine worry that the back would be insolvent and impact business it’s clear that a) counterparty risk was a thing b) they had ways to know even if they outsourced reading of public? Information to other partys. If you don’t care about insolvency- why move your money?

infinite balance guarantee might have been a mostly practicality happening thing, but it’s clear they didn’t believe that, and that’s a change worth money (and regulation if it’s going to stay a thing)

You raise a fair point, which is that the information needed to perform an independent ALM analysis isn’t publicly available. I’m not sure if model validation is something that is typically made available to anybody outside of regulators either….

[jono]

Yes, as I actually said. Even that one.

Why didn't that one protect the shareholders?

[Mustonen]

Why didn't that one protect the shareholders?

Because this wasn’t a short term play by a single depositor/investor? I’m not sure what we’re talking about at this point.

[jono]

The argument makes more sense if instead of suggesting a preconceived plan the planets aligned and somebody took their shot. I'm not arguing that's what happened either, only that it seems at least possible in some reality.

True. Although the risk still isn't that it already happened but that the possibility has been demonstrated and now we're talking about inventivizing a repeat. Possibly by simple capitalists/rope salesmen, possibly not.

[jono]

Because this wasn’t a short term play by a single depositor/investor? I’m not sure what we’re talking about at this point.

I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced vs. the Beverly Hillbillies' ability to disguise their intentions or whatever.

[Mustonen]

I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced.

Ah.

I’m not sure I truly believe in unlimited FDIC insurance, but I think the idea might have legs and make sense just because faith and trust in the banking system is so critical to the rest of the economy. If I put $100 in, I expect to take $100 out down the road sometime. The calculus doesn’t change much at $1M, except it does and perhaps it shouldn’t.

But I believe I also said that costs and regulation would also increase at least proportionally, and that’s something that would become very real and very onerous for me, personally. I don’t relish the thought.

[JimmyCarter]

I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced.

Gated withdrawals for amounts greater than FDIC insured balances?

[Mustonen]

Gated withdrawals for amounts greater than FDIC insured balances?

That feels like same crisis, different losers.

[jono]

Gated withdrawals for amounts greater than FDIC insured balances?

Or just don't accept massive deposits in checking without some in CD's, etc. It sure seems like there are plenty of ways.

[MultiVerse]

You raise a fair point, which is that the information needed to perform an independent ALM analysis isn’t publicly available. I’m not sure if model validation is something that is typically made available to anybody outside of regulators either….

Just spitballing here, let's all agree hardly anyone can independently determine the safety and soundness of a complex bank. I think that makes sense. You're right, Yglesias is right, everyone making this point is right. Does that even matter?

On average, most people can't independently asses most things. And yet people figured out Yale and and Stanford are better than Utah state. Most people can't wrench on their own cars but they know a Toyota is more reliable than a Fiat. Few people can evaluate individual doctors but they know the Mayo Clinic is better than a small community hospital.

Unlike schools, cars and medical care, nobody pays attention to bank safety because they don't have to. They used to. But now, as a result of people not worrying about it any more banks can be more reckless because the average person isn't paying attention.