The CEO may have made out like a bandit, but the shareholders lost everything, and the next set of shareholders will think twice before retaining a CEO that engages in high-risk activities.
> 7) other banks want to hire executives from failed banks, go do it again somewhere else
As a shareholder of another bank, why the hell would you want to hire someone who took stupid risks, and lost everything owned by their previous set of shareholders?
> The CEO may have made out like a bandit, but the shareholders lost everything, and the next set of shareholders will think twice before retaining a CEO that engages in high-risk activities.
OK, so you can only rip everyone else off massively once.
Yeah, and once you do that, the shareholders at other banks will be asking their CEOs questions, like 'Prove to us that you're not doing the same shit that sunk SVB.'
True, we've invented new classes of "mistakes". It's fucking ridiculous. There's something very wrong with American banks and if the only solution we can come up with is further consolidation we're going to be in for a bumpy ride.
ING, before they bailed on US retail operations, only offered adjustable rate mortgages. They were also the only financial institution I ever dealt with that required the use of separate credentials for external banking integration (e.g. tax prep, quicken, whatever shiny new app).
SVB shareholders losing 100% of their investment seems like a consequence. They are probably kicking themselves for not doing more DD over the C-suite.
Sure. The point I was making that the mistakes which caused bank failures in 1930s and bank failures today, is fundamentally the same kind of mistakes. Ergo, we still make those mistakes; they still happen, we just don't let depositors bear the consequences of it anymore.
The 'shareholders' are all 401k fund managers. They make sure their CEO friends come in and get paid. It doesn't matter to the 'shareholders' if one or two companies go bust, they collect the fees anyway, and the losses are socialized across an entire country's retirement accounts.
$15.5B market cap Wednesday to S&P500's ~$32.3T. If you held the S&P500, you lost about 0.05% when SIVB got zeroed. In comparison, S&P500 was down 1.45% Friday. (Almost all of the impact to your retirement from SVB's failure will be from indirect effects, like downswings in other bank stocks, rather than direct losses from SIVB. Unless you held a highly concentrated position in SIVB.)
Why would #7 happen if shareholders get wiped out? Surely, people on the board and other C suite executives are big enough shareholders that they would care if their equity went to zero.
> Why would #7 happen if shareholders get wiped out? Surely, people on the board and other C suite executives are big enough shareholders that they would care if their equity went to zero.
I remember reading about something called principal agent problem here in HN… I think almost ten years ago. It changed my life. I spend a lot of time thinking about it. Once you look it up, it is difficult to not see everything in life with this lens.
Basically, the shareholders are not in control. Management is. And the management class has a special interest to protect “their own”.
> I remember reading about something called principal agent problem...
A summary of the problem:
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal"). The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".
Matt Levine frequently discusses the fact that losing billions of dollars means at some point, someone trusted you with billions of dollars. Which new employers (especially banks) look on favorably.
In particular, because the people are management who don’t lose anything when investors get wiped out. The solution is clawing back money that execs paid themselves with these embezzled (on a risk-adjusted perspective) funds.
You can apply the same thing to people management. Who cares if you're a shit manager, if you've managed 100 people that's still going to be looked upon more favourably than someone who's managed 20 people really well for a 100 person management position.
Applying it to execs is probably a simpler comparison. Shit exec means you were still an exec, so you can probably get hired somewhere else as an exec.
To be frank, letting depositors get wiped out will not stop those executives from doing the same thing. Most depositors won’t look too closely at what their banks do - heck most don’t understand how banks work. Simpler to just create laws and ban executives who break them from ever working for a bank again.
Even before this week I already knew I didn't understand how banks worked, or finance in general. Which is why I keep what little cash I have in an insured account.
Why do we keep speaking of SVB depositors with over 250k in deposits as if they are part of the hapless hoi polloi? These are founders who practice and preach capitalism with a capital C. They are part of a class of individuals with immense power and wealth in our society; or looking to soon enter that class. They deserve none of the type of sympathy you're extending towards them when it comes to matters of business and finance.
Just because they have a lot of money doesn’t mean they have the expertise to evaluate a bank’s inner workings. Although I guess they could have hired people at considerable expense to do that … and I think some of them did which was what exasperated the run when they mass redrew their deposits. That or I think they can buy insurance … that said I wonder how many people/corporations actually buy insurance for their deposits above $250k.
Still my point stands, having depositors drown won’t stop others from pulling another SVB.
I love these metaphors that equate losing money with death. The whole point of capitalism is that people who make good decisions get to become rich and people who make bad ones don't. SV founders believe this at their core; at least they pretend to. No wonder people think it's a total scam the way it's currently implemented.
You seem like you want to ‘stick it’ to these people because they are capitalists lol. You’re saying we should let everyone lost deposits over 250k because they are capitalists? A knowledgable capitalist knows that decreasing trust in banks hurts the economy and lead to less growth, just because you dislike them them and make wild assumptions about what they believe doesn’t mean the US ‘should’ do what you are prescribing.
You shouldn't know how an internal combustion engine works, right? So you bought a shitty truck for you business, it broke (let's say the warranty has expired), now you are broke. A knowledgeable capitalist knows that decreasing trust in vehicles hurts economy, so let's government intervene and compensate you for your broken truck. Right? Or maybe take over Ford/GM so they can build reliable trucks and they don't break, it will be good for economy, right? Banking and choice of banking tools is as important as choosing your truck and it's on you if you call yourself a capitalist, and if you failed, well, blame yourself.
It takes a lot of talent, hard work, and luck to be a successful bank CEO if you play by the rules. The invest imprudently while the sun is shining is a much easier strategy to pull off.
You become the CEO of a small regional bank. You can draw small regional bank pay for several years until they find someone else to be caretaker or you can invest imprudently, massively expand the size of the bank and be a growth CEO with growth CEO pay until the whole thing blows up.
Why? You can cash out along the way - your stock would perform well since your growth metrics will be great.
In fact, I'd say that CEOs would be heavily incentivized to follow this strategy. Their compensation is tied to stock. Stock price is tied to growth (not risk management). You have all the reason to pursue growth, show great performance, watch the stock go up and keep cashing out before the eventual collapse.
I don't think oversight comes from shareholders or the CEO, it comes from the customers, right? The desired outcome here is for the companies that banked with SVB to demand more caution from their next bank, meaning they'll pay higher fees; they have no incentive to do that if they don't lose any money in this mess.
Kinda. As someone who banked at SVB, I would not willing put myself, my CFO, and my director of operations through this Friday + weekend again if you handed me a million bucks. We didn't lose money but we're going to have a lot of inconvenience and we had a lot - a lot - of stress and uncertainty and spent a lot of time making contingency plans. A very high cost for a 15 person startup.
