Tuesday, March 14, 2023

Some ramblings on the state of banking this morning

The rapid collapse of Silicon Valley Bank and the reonset of a crisis mentality around the markets and the nation did little to enhance my day yesterday. To my credit, I had stayed true to an embargo of online news over the weekend -- with memories of the anxiety-plagued weekends of autumn 2008 amply fresh in memory and much better mental health practices in place. By now I have learned at a much more somatic level that there's nothing I can do about any of it so obsessing does me little good.

We will no doubt learn a bunch of lessons from this episode. The political blowback may be troubling. One question people and regulators might have asked themselves is: what happens when a start-up fails to make payroll? So the fuck what. They work for startups and should understand the risks of doing so and hedge them. Failure to make payroll is only really a concern for those that have national security implications where an employee not making payroll could open the door to temptation for espionage (Palantir, etc.). The VC ecosystem should probably have made some capital calls to stabilize many of the companies who banked at SVB -- especially as the VCs bear much of the blame for telling their portfolio companies to bank there.

Ultimately the fact that banks had so much cash in long treasuries is troubling. It should have been clear from the outset that there's a fundamental mismatch between the maturity of an asset that pays out 20-30 years in the future and near-term cash needs. Life insurance companies are the natural consumers of long treasuries. The problem is that people haven't been buying enough life insurance because their own concepts of the horizon of their responsibilities is excessively foreshortened. Also because too much wealth is concentrated in the top income quintile so the natural market for life insurance is too small. The constrained size of a natural market for long treasuries could make it harder for the US government to fund itself so cheaply over the long term.

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