I’ve lived through quite a few financial crises, some local to Australia, and others global. Invariably, the first failures are those of obvious shonks (Australianism?) who would probably have failed anyway. Then there are seemingly reputable institutions that turn out to have been shonky. Then there are institutions that played by the rules, but it turns out the rules weren’t good enough. After that, no one is safe and the government steps in to bail the bankers out.Of course, ordinary people pay the bill.
So, I thought I’d get a headstart on listing the hierarchy of excuses, explaining why this isn’t just an inherently corrupt system, doing its inherently corrupt thing. Here we go:
*Silvergate: jumped up crypto bank, not really a bank at all
*Silicon Valley: mismatched assets and liabilities, classic mistake, also woke
- Signature: more crypto, more mismatch, also Trump
- First Republic: all these midsized banks misused the 2017 deregulation
- Credit Suisse: turns out all those capital adequacy requirements could be gamed. And just to prove this, we’ll wipe out the bondholders who helped make the books look good, while bailing out the equity holders
- TBC
John Quiggin 
I admit I’m not following the latest tired sequel in the Attack of the Zombie Bankers franchise with full attention, but was the implosion of Credit Suisse really a problem of capital adequacy? IIRC the bank had been losing depositors for a while, partly for good reasons as it used to welcome assorted crooks and kleptocrats and is trying, it says, to clean up. The actual crisis was a stock market run not a depositor one, triggered by an anodyne statement from a Saudi bank that it could not increase its equity stake to more than 10% for regulatory reasons. What am I missing?
Is it a problem at all that we let banks sell their stocks/be publicly owned? (I pay just about zero attention to finance, but, I was mildly surprised to hear bank stocks were part of the mess. I could have known that before and forgotten, though.)
It kind of seems possibly antithetical somehow. Still, this may be a really bonehead question I’m asking.
“Credit Suisse: turns out all those capital adequacy requirements could be gamed. And just to prove this, we’ll wipe out the bondholders who helped make the books look good, while bailing out the equity holders”
A bit of detail: The ‘bonds’ in question are labelled AT1 (Additional Tier one debt). The AT1 financial securities are “contingent convertible bonds’, which means under certain conditions the debt securities are converted into a form of equity capital (but not ownership shares). These bonds were introduced after the 2008 GFC. The idea was to prevent public funds (tax payers ‘money’) having to be used again to ‘bail out banks’ or rather ‘financial institutions’.
The first instance in the EU when AT1 were converted occurred in 2017 in Spain, involving the bank Banco Popular and Euro1.25 billion (English measure; Milliarden, milliard in German and French respectively) [1]
The Credit Suisse AT1 conversion involves Euro16.2 billion. This amount has been written down to zero debt, ie fully converted. In the meantime the share market value of Credit Suisse declined to around Euro3 billion (a decline of about 60% as at Mo 20.3.23). And Euro4 billion is the amount UBS is paying for the takeover. [1]
It was known in the financial markets that AT1s are high risk securities and this was also reflected in the rates of return, which varied between 3.4 and 7.5%, at a time when the rate of government bonds were close to zero. [1]
So why isn’t shareholders’ equity ‘written off’? Without owners there is no possibility of a sale or a takeover or a merger. Without a sale or a merger, there is a danger of contagion, ie serious instability in the international financial system – the Fed, the ECB and the Central Bank in the UK all expressed approval of the quick action by the Swiss authorities.
A Swiss pension fund is apparently very unhappy with the full conversion of the AT1s and is considering legal action. I doubt they will get very far because the AT1s worked as intended. I wonder if tax payer funds will be required to ‘bail out’ the pension fund.
It seems to me the financial system (the unconstraint creation of types of financial securities) has evolved to a degree of complexity that even the Swiss cannot handle it any more. The Credit Suisse event is also a reminder of the distinction between debt and equity being artificial in the sense of being due to the legal system (the human made laws in Ikonoclast’s terminology) and it illustrates how the legal system is linked to ‘property rights’.
[1] The numerical data is from an article in der Spiegel online, 21.3.23.
It is antithetical to good social management and good mixed economy management to let private banks (privately owned or listed on the stock exchange) to create money. That is the central problem. They are creating money. Admittedly it is debt money, not fiat money. This still remains a problem and creates many of the problems of our mixed economy when financial regulations are lax and even when they are not considered lax. Permitting any private money creation at all is lax, pure and simple, and central to many of our ongoing problems.
Let me outline and please correct me if I am objectively wrong anywhere:
1. Debt money – Money created by issuing debt. I am here concerned with privately issued debt money not government issued debt money. Privately issued debt money creates a debt on their books to balance the credit. The debt is payed off in the future unless there is a default when the bank, if still solvent, writes the debt off against other assets. It has to do this by law and via double-entry accounting standards.
But here’s the rub. The debt money is put into circulation in the present. The paying off by repayment or write-off is put off into the future. Money supply is increased in the present. By acting as agents (government permitted agents) to increase the money supply, the banks create money now by “printing” debt money now. It’s a kind of seigniorage or “ordinary seigniorage” granted to the oligopoly of licensed banks and supported by government loans from the “cash window or money window” (correct term?) operated by the Reserve Bank and provided at the cash rate (a lower interest rate than the commercial lending rates). Again, I am open to correction if I have any of this wrong.
2. Fiat money – Fiat money is a type of currency that is not backed by a commodity, such as gold or silver. It is typically designated by the issuing government to be legal tender.” [1] The government can issue fiat money by “printing it”, creating it ex nihilo (out of nothing) as account entries, or by issuing money against Reserve Bank debt, which process again creates money out of nothing just for a period before it is (theoretically) destroyed ab nihilo, back to nothing, by “paying back” the Reserve Bank as an accounting entry. These are all operations and entries to control money supply and its positive or negative growth.
The key point here is that the creation of a very significant segment of the money supply, operating in the present, as debt money is in essence sub-contracted out to the banks who get a very juicy guaranteed oligopoly to “print” (debt) money. The big players (and the small depositors) further get free deposit insurance in effect as most governments guarantee deposits up to a limit. Then there is the “too big to fail” implicit clause which protects the big players anyway where they are rescued from insolvency or default by massive government money injections, easings or bailouts. Sometimes, there is the salutary punishment of the “naughtiest” bank in the class and they, their investors and their large creditors get sent to the wall or else take a haircut. Typically, no executives ever go to jail or even to court, even it clear cases of malfeasance look eminently prosecutable.
Summing up.
The whole thing is one giant, cozy scam run by the financial elites and their government enablers against the majority of the people via captured government and captured regulations. If the majority of the general public knew how this scam was operated by the players and the cognoscenti (those in the know) and how it kept most of the people inevitably poorer than they need be, stripped of their money and forever in debt, then they would rise up in (let us say) “vigorous” revolution.
The solution to this problem (NOT to every problem in the economy or in the real world) is to implement a sovereign money system. You can find links on the internet which explain sovereign money proposals in detail. I have not read any such proposals in detail. The devil would be in the detail of course. A sovereign money proposal would have to meet certain social and economic criteria to meet my approval (for example as a citizen). I cannot not know the problems and solutions in advance without detailed consideration and research but I consider it likely that a solution to our debt money, financial oligopoly and financial cartel problem lies somewhere in the sovereign money space returning all seigniorage, or “ordinary seigniorage”, to the democratically elected government for social use. It is not possible, IMHO, to have an economy in the democratic and socialist space without breaking up the financial economy cartel and socialising money creation in the hands of democratic government via a form (a correctly and equitably set up form) of sovereign money. QED as far as I am concerned at this point but I remain open as always to amending and correcting ideas if I can see, or be brought to see, that the amending ideas pass ethical, empirical and logical tests.
Notes:
1. Wikipedia
Ikonoclast, your paragraphs 1 and 2 describe the ‘balance sheet model of money’ quite well. The ‘balance sheet model of money’ is what we have. Except for one technical term that pertains to your point 2. I can’t assist. This term is ‘open market operations’.
The ‘scam’ element in this system is that the fiat currency units issued by the central bank cannot be distinguished from the debt currency units issued by the private banks when in circulation. That is, one would have to have a different ‘model of money’.
IMHO, the strictly fiat currency supply model (ie only the central bank can issue currency units) has one drawback, The central bank would have to evaluate all loan applications and hence would have the task of deciding which investments are ‘good’ and which are ‘bad’. For a small society (say 5 million people who live on a relatively small geographical area – say Victoria), this seems to be manageable, including allowing economic objectives such as environmental or social goals to be taken into account – as you have indicated as being desirable. But this banking technology is not scalable to large societies. China is perhaps the best example how scaling up this banking technology doesn’t work well.
Then there is the Keynesian era model where the central bank has more than one policy variable, namely setting borrowing and lending rates not only the overnight interest rate. In some some countries socio-economic objectives were introduce by setting a range of borrowing and lending rates. Furthermore the foreign exchange rates were set by administrative means, including international coordination. During this period the types of financial securities were restricted to essentially plain vanilla debt, including mortgages and equity.
Then there is the Islamic financial system with the most prominent feature being it not recognising debt but recognising equity (ie all transfers of money among agents involves risk and this is to be shared between ‘borrower’ and ‘lender’ or better the risk is shared between the user and the supplier of money).
During boom-like periods of optimism people borrow with unrealistic expectations and with the expectation (Bond-Skase etc) that they will eventually never repay. Banks can get caught up in this. While the sensible view might be to maintain a sense of conservatism this involves, at the time, an apparent loss of business. I am not sure that corruption is the right word. There are crooks but usually outside the banks and the finance companies.
My view is that if there are bank runs then central banks may have an obligation to fund bank recoveries to protect innocent depositors. The reasonable expectation though is that shareholders of the banks should bear such bailout costs at least to the extent of their equity not only the taxpayer. It used to the case that banks traded on low PE ratios and on high yields presumably because shareholders understood this possibility. The expectation of bailouts ihas increased PE ratios and reduced bank stock yields because of the possibility of bailouts. Of course bailouts too decrease the risk awareness of banks for moral hazard reasons.
John, what do you mean by “also woke” wrt Silicon Valley?
Ernestine,
Firstly, let me say it is good to see you back and obviously feeling well enough to want to discuss economics and blog about it. I hope you are feeling absolutely as well as possible when considered under your personal “multi-objective optimization” goal. That concept will come up below.
Yes, in considering our money system I soon realize that a little knowledge (which is my case) is a dangerous thing. I can easily imagine myself adopting a hard line for sovereign money and then allowing aspects of the current model back into the system when valid objections are raised as to the real or possible inoperability or untenability of such proposals as a system.
You drop a hint (it seems to me) that electronically stamping money in circulation as fiat currency units issued by the central bank or debt currency units issued by banks might provide some new usable features, for control and compliance perhaps and/or new measurement measures for ascertaining what precisely is going on in the economy. However, you do not elaborate and I am not able to infer more without speculating.
It is probably (perhaps almost certainly) not a good idea to go back to money backed by a commodity like gold. I doubt Keynesians or neo-Keynesians would think like that today. I am not inferring that you think like that. Only some Austrians and assorted gold bugs living in the past seem to propose such things these days.
I know little about Islamic finance but the idea that risk should be shared is interesting. Of course, my rather hard-line stance might be to require the rich lenders or those with enough to lend to take all the financial risk.
It occurs to me (and KT2 might well have posted something about this) that AI neural learning networks could be used to learn how to best run an economy. Of course, the economy, economic units, agents, institutions, laws, regulations and markets would have to be formally modeled. At that point, we would bear in mind that a model is never as complete, obviously, as the original it models.
Nevertheless, modern AI is astonishing. As I understand it, the most modern is not programmed with any “playing” or goal-seeking algorithms and heuristics. It is programmed with a goal parameter or goals parameters plural. If I am correct, modern versions need not even be programmed with the rules of any game (and here considering the economy as a game). What the AI would do in that case is learn the rules by being thwarted by the rules base which it is separate from its calculations. Thus the AI would learn to be constrained only by the rules it encounters and which thwart its plays or moves. Thus if there are contradictions or holes in the rules (as there are in all complex legal (word-based) rules pretty much) it would learn to game or circumvent rules for good a bad, so to speak. It would also essentially develop (learn) its own best algorithms and heuristics and not be limited by what humans have developed in that area for the “game”.
Used by an investor one assumes such an advanced learning AI would both find how to game the system in the best (worst) ways and find how to beat human investors. Used by a government with social goals, for example, one can imagine that such a system could find how to make the rules nigh on un-gameable and also find how to make rules to reach the goals set, like minimum wealth conditions, safety nets and Pareto efficiency in a multi-objective optimization manner.
I hope this is clear and not too speculative. I’ve tried to keep it as short as I can.
David: When SVB failed, various rightwing commentators found some fairly innocuous statements about the diversity of their board, and decided that the failure was because the institution was “woke” (the new term for “politically correct”)
The expectation was that the AT1 bonds would be converted to equity, which would have meant diluting the equity holders down to almost nothing. Instead, the AT1 holders were wiped out – permissible under the rules, but effectively killing this device for the future.
I understand the AT1 securities are linked to the capital adequacy ratios. That is, AT1 issues (the face value of these contingent convertible bonds) count as ‘capital’. If a bank can’t sell these securities in the future, as you postulate JQ, then the bank in question will face the capital adequacy ratio constraint without a buffer.
Whether or not AT1 issues will be ‘killed’ because AT1 holders were wiped out is ultimately an empirical question.
There are some reasons to believe that AT1 securities will be issued and bought in the future. For example, the AT1 buyers are not a distinct group of people. AT1s are more often than not merely an element of large and diversified portfolios, held by institutional ‘investors’ (eg wealth management, superannuation funds). Considering the relatively high rates of return these debt like securities offer, they offer a payoff structure akin to call options, written on equity shares. The main difference is the cost of the ‘investment’. Another reason is the observation that equity shares continue to be issued and bought even though every so often a company goes into liquidation and the share holders of this company lose the lot. Finally, during my relatively long life I observed that so-called tough decision makers in the financial system are not immune to advertising of ‘financial products’.
Of course any move to limit bailouts (however unfair these might be to the taxpayer) would be very risky in terms of reducing depositor confidence, the risk of bank runs etc. For this reason, in the US, Janet Yellen has assured the banks the Fed will rescue those in need. Confidence important in a system with fractional reserve banking.
Last anonymous = Harry Clarke.
JQ says – “why this isn’t just an inherently corrupt system, doing its inherently corrupt thing”.
See 3 & 4 – The hands on the interbank rate scales.
*
1.
“How Monetary Policy Affects Bank Lending and Financial Stability: A ‘Credit Creation Theory of Banking’ Explanation”
Posted on March 22, 2023 by Yves Smith
“Yves here. This is deceptively important post.
…
“Note that author Peter Bofinger is a very influential German economists and among other things has been a member of the German Council of Economic Experts.
“By Peter Bofinger, Professor for Monetary Policy and International Economics University of Wuerzburg; Lisa Geißendörfer, Research Associate, Chair for Monetary Policy and International Economics University of Wuerzburg; Thomas Haas, Research Associate, Chair for Monetary Policy and International Economics University of Wuerzburg; and Fabian Mayer, Research Assistant and PhD candidate, Chair for Monetary Policy and International Economics University of Wuerzburg. Originally published at VoxEU
https://www.nakedcapitalism.com/2023/03/how-monetary-policy-affects-bank-lending-and-financial-stability-a-credit-creation-theory-of-banking-explanation.html
“How monetary policy affects bank lending and financial stability: A ‘credit creation theory of banking’ explanation
Peter Bofinger Lisa Geißendörfer Thomas Haas Fabian Mayer / 20 Mar 2023
“Recent research has shown that the stance of monetary policy can influence financial stability. This column provides an explanation for the effects of monetary policy on credit growth based on a ‘credit creation theory of banking’. In this framework, ‘funds’ are liquid bank deposits created by the banking system independently of private saving(s). The central bank policy rate has a direct effect on credit supply by influencing the refinancing costs of banks. This provides a clear mechanism through which central banks can influence bank lending and financial stability.
https://cepr.org/voxeu/columns/how-monetary-policy-affects-bank-lending-and-financial-stability-credit-creation
*
2.
As I cannot evaluate this, I ask for responses to my question;
Q: Is the the Danish Mortgage System of value in Australia?
“In Praise of the Danish Mortgage System”
by Alex Tabarrok March 22, 2023
…
“Since the value of homes also falls as interest rates rise this is also a neat bit of insurance. Remarkable!
“The Danish mortgage market appears to be very successful and so may be a model for American reform:
https://marginalrevolution.com/marginalrevolution/2023/03/in-praise-of-the-danish-mortgage-system.html
*
3.
Q: Does any of this matter when the base rates are dominated by… guess who is now setting to system for interbank rates? (as LIBOR a zombie)
And JQ says: “… I don’t think there is any significant difference between bondholders and equity holders in general.”
https://crookedtimber.org/2023/03/20/the-hierarchy-of-excuses/#comment-823049
A: Squids, Vampires et al…
“LIBOR cessation and alternatives available
“Due to multiple factors, including the Libor scandal, concerns about the rates’ accuracy, and changes in how banks do business, the decision was made to phase out Libor.[81][82] Most LIBOR settings will stop being issued or become unrepresentative at the end of 2021, while certain U.S. dollar settings will continue to be provided until the end of June 2023.[
“Alternatives for the USD LIBOR
Alternative Reference Rates Committee
“In 2014 the U.S. Federal Reserve Board and the Federal Reserve Bank of New Yorkannounced the creation of the Alternative Rates Reference Committee (ARRC) to assess viable alternatives to the LIBOR.[88]
“In 2016 the ARRC released its first report on the possible indices that could serve as a replacement to the LIBOR.
“On March 7, 2018 the ARRC announced that the committee had been reconstituted and the following groups were participating.[89]
“The ARRC will comprise the following institutions:
AXA
Bank of America
● BlackRock
[usual suspects list continues]
https://en.m.wikipedia.org/wiki/Libor
*.
4.
The hands on the interbank rate scales.
Australian GDP (PPP)
2022 estimate
• Total $1.615 trillion
Blackrock – read Larry Fink – has 5.4 times Australia GDP.
Blackrock AUM US $8.58 TRILLION.
With Vanguard
AUM US$8.1 trillion (2022)
and State Street,
AUM US$3.48 trillion (2022)
8.58 + 8.1 + 3.48 = 20.16 Trillion
US$ 20,160,000,000,000
2,016,000,000,000 ÷ 66,192 = 30,456,853 HUMANS @ Australian’s Per capita income of $62,192.
We are 20th GDP.
So Blackrock+ Vanguard+StateStreet have more “voters” THAN AUSTRALIA.
*
At least JQ publishes some solutions – “John Quiggin’s Blogstack cross-posted a post from Slow Boring
John Quiggin
Mar 21 ·
“Standard Keynesianism, and in particular, functional finance. MMT has faded from view a bit, but its advocates should be cheering this.
“Tax increases are the best cure for inflation
It’s pretty weird that we use interest rate hikes to reduce aggregate demand”
Simon Bazelon and Milan Singh
Originally posted on
Slow Boring Matthew Yglesias
Passion and Perspective from Matthew Yglesias
https://www.slowboring.com/p/tax-increases-are-the-best-cure-for
*
Too swampy?
It occurs to me that we are all making a mistake, me included. We are assuming we will be listened to somewhere or influence someone on these policy matters. However, the public don’t understand and the policy makers don’t care. The path would be to attempt to get the public to understand. Enlightened economists have been attempting that for 40 years or more and that’s just counting the years of the neoliberal era.
Two generations of defeat, in the battle for social and democratic economics, indicates something. I don’t think it indicates a lack of brains or effort on the part of the enlightened economists. It indicates a lack of power. It indicates a lack of institutional power and also a very clear lack of capital as power. Academic institutions confer institutionally and by custom, academic power and public intellectual power respectively.
That power is as nought or as very little compared to corporate and governmental institutional power, which power is nearly totally arrogated (claimed, assigned, held) by oligarch capitalists (via institutional capture and regulatory capture), neoliberal economists, administrators, assorted bureaucrats and of course politicians. Mike Pusey warned us about this power complex being assembled in his book “Economic Rationalism in Canberra”. It is well worth a read to understand a little about the vast powers arrayed against the people on the economic and ideological fronts. Canadian philosopher John Ralston Saul warned us too and there were many other warnings. The public for the most part never listened or never even heard.
In addition, there is capital as power. Those who hold the capital, the oligarchs, have the power. The rest of us as academics, workers, superannuants, pensioners, unemployed, disadvantaged etc. have, relatively speaking, little to nothing of this kind of power. The only power we have, or could have, is the power of collective action; a collective mustering of all of voting, financial, messaging, demonstration and physical power. Until, if and when this type of collective mobilization occurs, nothing will change except for an ever worsening trend to the collapse of our human condition and of the biosphere.
The contrasting styles of the SVB and Crédit Suisse bank failures show how backward American technology is in this promising, indeed disruptive, field. The USA managed to create the SVB crash using only the primitive tools available in 1830, principally long-dated government bonds (it works even better with perpetuals), and a rumour mill in a coffee shop or Zoom. The more advanced Swiss invented a shiny new type of convertible bond with concealed risks.
They really should have added a sticker saying DANGER: POORLY UNDERSTOOD ALIEN WEAPON. I’m thinking of course of Larry Niven’s short story “The Soft Weapon”, in the collection Neutron Star, 1968. In well-ordered SF universes, as in real life, such devices don’t come with helpful stickers. Those who come across them have to figure out the risks unaided. In Niven’s story, the hero, Beowulf Shaeffer, survives because he is more insightful and prudent than his kzin adversaries. He figures out that the shape-changing rifle from the long-dead tnuctipun civilisation is a special forces weapon – with a self-destruct mode. He lets the kzin try it out first. The scenario is outré but the moral perfectly sound.
James, on the watch list “The Soft Weapon”, in the collection Neutron Star, 1968.”.
kzin??? “The Kzinti (singular Kzin) are a fictional, warlike and bloodthirsty race of cat-like aliens in Larry Niven’s Known Space series. https://en.wikipedia.org/wiki/Kzin
TBC – put this in the No Excuse for Brazen Bailout category.
“The “small nonprofit school” saved in the SVB bailout charges more than Harvard: It’s got a private ski-hill!”
…
“What is this small, nonprofit school? Writing in The American Prospect, Luke Goldstein sleuths it out: the “small, nonprofit school” is North Country School, an upstate New York boarding school where tuition runs $62k/year – more than Harvard or Yale:
…
“North Country sounds like a great place to get an education. It’s got its own private ski-slope.
…
“The idea that they were worried about saving the janitors and receptionists of Silicon Valley strains credulity:
…
https://pluralistic.net/2023/03/23/small-nonprofit-school/#north-country-school
Ernestine (in reply to Iko): The ‘scam’ element in this system is that the fiat currency units issued by the central bank cannot be distinguished from the debt currency units issued by the private banks when in circulation. That is, one would have to have a different ‘model of money’.
“Money” is simply a system of transferable debts. This is so perfectly obvious both from its history and current instantiation (eg central banks defining money include commercial paper and credit card balances) that I can only see all the intellectual contortions on the matter as an obscure game, akin to the “Who really wrote Shakespeare? “debate”. As such, it’s created when some party – public or private – issues a debt, and destroyed when the debt is repaid/written off. The issue is always whose debt gets written off.
Peter T,
Whenever someone states something “is so perfectly obvious”, I am immediately on my guard.
You are not making a “money is neutral” argument explicitly but you are making an argument that “finance systems and financial regulations” are neutral. It seems to me consistent that if one argues that finance systems and financial regulations are neutral then one must also adopt the position that money is neutral. Do you hold that money is neutral?
The “money is neutral argument” fails, for the USA a least, according to this recent empirical research paper:
https://www.researchgate.net/publication/281734236_Money_Neutrality_Rethinking_the_Myth
The non-neutrality of money can be proven theoretically from basic information considerations in economics and in information science, in my humble non-expert opinion, so far as I understand such matters. Before saying much more I will wait for others to weigh in, if they do.
Arguments in political economy from the position of “it’s perfectly obvious”, and with “it’s perfectly acceptable as it is” being implied, usually come from a position of apologia for the status quo.
Iko
I don’t know how you read my post to say that money is neutral. Again very obviously 🙂 a debt is not neutral. Creditor/debtor is a relationship of power, as the old saying about whose problem is owing a million vs a thousand illustrates. Much of the finance game is about swapping less worthy debt for more worthy – often involving smoke and mirrors. A lot of the confusion is due to conflation of ‘standard of value’ with actual value – which is to confuse the numbering system with the objects numbered. The latter are in no way neutral.
KT2. I’ll concede on adjectival kzin vs kzinti. Actually I’m not sure but can’t be bothered to check. You win this year’s Trekkie Award for Most Recondite SF Grammar Peeve. The prize, along with a handsome certificate in five of the most common galactic languages, is one mint condition Swiss franc. They come in a tnuctip stasis box timed to open in one billion Earth years (3.154e+16 seconds). You will have to take my word for it on the contents of the box. I also offer no guarantee as to the behaviour of the box should anyone attempt to open it early, but you should be aware that the tnuctipun were pretty hard guys. You will be free to sell the box. I daresay it has a market price. After all, there is one for bitcoin.
James, re: “The more advanced Swiss invented a shiny new type of convertible bond with concealed risks.”
Which risks were concealed? I understand the Swiss AT1 bond documents did not conceal the regulatory authorities’ power.
I noticed the concerns raised in the guardian article on this issue starts with the situation of liquidation and then argues the usual hierarchy of distribution and notes the Swiss have not respected this hierarchy.
But Credit Suisse was not liquidated, it was acquired (taken over) by UBS. That is, the loan book of Credit Suisse (the asset side of the bank’s balance sheet) and the deposit book (liability) was not given to a liquidator but was bought by UBS for the equivalent of around Euro4 billion (there is a smaller figure listed in some reports; I haven’t seen the documents). To whom should UBS have paid this amount? Surely, payment has to be made to the owners, i.e. the ordinary shareholders . I understand UBS paid with its own shares.
SVB Financial Group has four operating segments:
– Silicon Valley Bank,
– SVB Private,
– SVB Capital and
– SVB Securities.
Commenters above, would you please clarify your remarks in view of the corporate structure of the “SVB Financial Group has four operating segments”, and “FDIC Guaranteed the Deposits of SVB Financial Group”
“Oops. How the FDIC Guaranteed the Deposits of SVB Financial Group
…”This is basic structural priority/limited liability: creditors of a subsidiary have no claim on the assets of a parent.
“What’s worse is that the holdco, which filed for bankruptcy today, has substantial assetsincluding around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.
“There isn’t any provision in the Federal Deposit Insurance Act that subordinates the claims of insiders—like corporate affiliates or executives—that exceed the insured deposit limit to other creditors. So once FDIC guaranteed all deposits, it necessarily guaranteed the deposits of the holdco and other insiders.
…
https://www.creditslips.org/creditslips/2023/03/oops-how-the-fdic-guaranteed-the-deposits-of-svb-financial-group.html
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-39154
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
Business Overview
For reporting purposes,
– SVB Financial Group has four operating segments for which we report financial information in this report:
– Silicon Valley Bank,
– SVB Private,
– SVB Capital and
– SVB Securities.
https://www.sec.gov/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_343
“… capital adequacy requirements could be gamed.”
These capital adequacy requirements (eg Basel III) are auto-gamed in the sense that “equity capital” (shares) itself is leveraged due to banks providing loans (margin lending) for ‘investments’ in equity shares. Add to this short selling, derivatives of various types and off we go for a boom and bust ride. The balance sheet model of money is overextended in its ability to represent the risk associated with the various types of ‘money’ (loans) and it cannot represent systemic risk. Margin lending alone provides a rather obvious mechanism for contagion. And the public is acquiring more and more liabilities for no other apparent reason than to keep this unstable system going – according to some (eg Peter T above) the belief that it has always been like this seems to be the justification.