I find it curious that the word startups has been replaced with “small business” Didn’t Paul Graham write an essay explaining that they are not the same [0]
I would go a different path. Companies with 10mil of seed capital in their bank account are not a “small business”. The guy who owns 14 car dealerships in 3 states has less money in their bank account.
A “small business” has -100k/+100k in their bank account.
Typical rule of thumb is 3 months OpEx for a small business’ checking account balance.
A tiny $400k run-rate company should have $100k in the bank. Keep in mind we’re talking about expense run-rate not profit.
The guy who owns 14 car dealerships might not have $10 mil in their checking account, but they absolutely have payroll and rent obligations at a level where they’re holding at least a couple million. To say nothing of cash requirements for all that inventory…
I’m happy the financial system didn’t collapse, but I hate this spin by the Biden administration that this wasn’t a bailout. Yes, SIVB owners got wiped out, so it wasn’t a bailout for them, but, as far as I know, the owners of other banks that are insolvent based on the market value of their holdings had all of their equity saved by the new Fed lending program. So I fail to see how that’s not a bailout for all the other banks.
I guess this just adds to the outrage your must feel for; the Main Street New Loan Facility, Main Street Priority Loan Facility, Main Street Expanded Loan Facility, Nonprofit Organization New Loan Facility, Nonprofit Organization Expanded Loan Facility, Commercial Paper Funding Facility, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility, Term Asset-Backed Securities Loan Facility, Paycheck Protection Program Liquidity Facility, Municipal Liquidity Facility, Main Street Lending Program, Money Market Investor Funding Facility, ABCP MMMF Liquidity Facility, Term Securities Lending Facility, Term Auction Facility and the Maturity Extension Program and Reinvestment Policy.
I’m not outraged that banks are being saved. I’m not outraged about anything. But I do think it’s a bit stupid to get up on a soap box and yell “we’re definitely not bailing out banks” when that’s exactly what’s happening.
SVB takeover was mainly a bailout of startups and startup insiders IMO. Backstopping banks is the FDIC's job. Making sure Peter Thiel's companies can make payroll is not. Maybe it was still the right thing to do, and maybe enough Ivy-trained lawyers can make it seem legal eventually, but to every outside observer it's clear that the law was not part of the decisionmaking process. This was purely and only about bailing out well-connected Valley investors/founders/intelligence assets.
Backstopping banks is the Fed’s job, yes. But I’m not sure why the owners of insolvent banks that need backstopping get to keep their equity. That’s called a bailout.
If you pay for earthquake insurance, and then an earthquake destroys your house. Should you not get to keep your house after insurance pays out to fix it?
Did the banks buy insurance? No. The banks could have bought insurance against rising interest rates, but they didn't. Your analogy should actually be: if you don't have earthquake insurance and then an earthquake destroys your house, should you be entitled to the replacement cost of your house from the government?
"The banks could have bought insurance against rising interest rates, but they didn't. "
See, this always worried me. How do you buy insurance against rising interest rates? Or more precisely, WHERE to you buy insurance against rising rates? If the answer is "from other banks" (which it presumably is), then there is no hedge in any meaningful sense. My reasoning is that it's a closed-loop system. They can't all pay off each other without counterparty default somewhere along the line.
I guess what I'm trying to say that rising interest rates are bad in the sense that it creates losses (be they realised or unrealised) that are systemic to the whole banking system. There needs to be some outside party that can soak up the losses. That outside party is The Fed
> See, this always worried me. How do you buy insurance against rising interest rates? Or more precisely, WHERE to you buy insurance against rising rates?
You buy what’s called an interest rate swap. And yes, there is always counterparty risk. But that doesn’t mean you can throw your hands in the air and say “risk management isn’t important because you can never fully remove counterparty risk.”
And in the cases of the insolvent banks, it’s not like they did everything in their power to reduce risk. They didn’t. I’m not against having the government support the banks. But I think that, if a bank needs government support, then it should give up its equity to the government to get it.
You can also do things that are not really "insurance" but reduce your interest rate risk like buying shorter-term assets (T-bills for example), laddering them, and seeking out depositors that aren't all concentrated in one industry or region. Each of these things reduces your interest rate risk and means lower returns (and therefore "costs money") but is not an insurance product and doesn't really introduce novel counterparty risk.
The feds stepped in because the bank can't pay depositors. If you can't pay your depositors, your equity is worthless and you don't have a bank anymore.
Hm. That's pretty optimistic. It's like folks on the space station, "Let the oxygen filters fail! It'll teach Gary to clean them like he was supposed to."
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A “small business” has -100k/+100k in their bank account.
A tiny $400k run-rate company should have $100k in the bank. Keep in mind we’re talking about expense run-rate not profit.
The guy who owns 14 car dealerships might not have $10 mil in their checking account, but they absolutely have payroll and rent obligations at a level where they’re holding at least a couple million. To say nothing of cash requirements for all that inventory…
See, this always worried me. How do you buy insurance against rising interest rates? Or more precisely, WHERE to you buy insurance against rising rates? If the answer is "from other banks" (which it presumably is), then there is no hedge in any meaningful sense. My reasoning is that it's a closed-loop system. They can't all pay off each other without counterparty default somewhere along the line.
I guess what I'm trying to say that rising interest rates are bad in the sense that it creates losses (be they realised or unrealised) that are systemic to the whole banking system. There needs to be some outside party that can soak up the losses. That outside party is The Fed
You buy what’s called an interest rate swap. And yes, there is always counterparty risk. But that doesn’t mean you can throw your hands in the air and say “risk management isn’t important because you can never fully remove counterparty risk.”
And in the cases of the insolvent banks, it’s not like they did everything in their power to reduce risk. They didn’t. I’m not against having the government support the banks. But I think that, if a bank needs government support, then it should give up its equity to the government to get it.
Let natural consequences happen. Then adjust based on what is learned from the outcomes-- no pain, no gain.
The society & economy should recognize the pain resulting from irresponsible action,
if only do drive the society & economy to punish those who were so greedily irresponsible.
Stop sheltering the population.
And especially stop sheltering the bankers.
Experiencing consequences is an important part of improvement-- without consequences there is no real impetus to change.
Also see Mother Nature Is Trying to Kill You by Dan Riskin.