This weekly roundup thread is intended for all culture war posts. 'Culture war' is vaguely defined, but it basically means controversial issues that fall along set tribal lines. Arguments over culture war issues generate a lot of heat and little light, and few deeply entrenched people ever change their minds. This thread is for voicing opinions and analyzing the state of the discussion while trying to optimize for light over heat.
Optimistically, we think that engaging with people you disagree with is worth your time, and so is being nice! Pessimistically, there are many dynamics that can lead discussions on Culture War topics to become unproductive. There's a human tendency to divide along tribal lines, praising your ingroup and vilifying your outgroup - and if you think you find it easy to criticize your ingroup, then it may be that your outgroup is not who you think it is. Extremists with opposing positions can feed off each other, highlighting each other's worst points to justify their own angry rhetoric, which becomes in turn a new example of bad behavior for the other side to highlight.
We would like to avoid these negative dynamics. Accordingly, we ask that you do not use this thread for waging the Culture War. Examples of waging the Culture War:
-
Shaming.
-
Attempting to 'build consensus' or enforce ideological conformity.
-
Making sweeping generalizations to vilify a group you dislike.
-
Recruiting for a cause.
-
Posting links that could be summarized as 'Boo outgroup!' Basically, if your content is 'Can you believe what Those People did this week?' then you should either refrain from posting, or do some very patient work to contextualize and/or steel-man the relevant viewpoint.
In general, you should argue to understand, not to win. This thread is not territory to be claimed by one group or another; indeed, the aim is to have many different viewpoints represented here. Thus, we also ask that you follow some guidelines:
-
Speak plainly. Avoid sarcasm and mockery. When disagreeing with someone, state your objections explicitly.
-
Be as precise and charitable as you can. Don't paraphrase unflatteringly.
-
Don't imply that someone said something they did not say, even if you think it follows from what they said.
-
Write like everyone is reading and you want them to be included in the discussion.
On an ad hoc basis, the mods will try to compile a list of the best posts/comments from the previous week, posted in Quality Contribution threads and archived at /r/TheThread. You may nominate a comment for this list by clicking on 'report' at the bottom of the post and typing 'Actually a quality contribution' as the report reason.
Jump in the discussion.
No email address required.
Notes -
I'm going to use this text, posted in last week's thread, as a jumping off point to make a little effortpost on a boring area that's actually kind of important, and where I know a little bit: treasury management!
This will only happen if your CFO is incompetent and doesn't do treasury management.
Treasury management - the most basic practice of any corporate finance department - is the practice of managing corporate cash in order to earn interest on what isn't being used , ensure that whatever cash is needed by the business is available, and also minimize tail risks like your bank going belly up.
Step 1 is observing that you can get 4.5% on 4 week treasuries. These are, regardless of amount, backed by full faith and credit of US Gov.
Now suppose you are a business with $500k of biweekly expenses ($500k due on Mar 15, $500k due on Mar 31). You have $20M in venture capital remaining which gives you about 1 year 8 months of runway.
All of that - minus $500k or so needed for short term investments - goes into 4-8 week treasuries which you reinvest whenever they mature. This earns 4.5% or about $900k/year in essentially free money. Money sitting in government bonds with duration < 90 days is called cash equivalent by corporate finance people.
Your not incompetent CFO just extended your runway to 1 year 9 months.
Step 2: ensure that the maturity dates of these cash equivalents line up to your payroll dates. $500k cash is due on Mar 15 for payroll/etc. Fortunately, $500k worth of your 4 week treasuries got turned into cash on Mar 9 (typically the maturity date is thurs).
Another $500k cash is due on Mar 31. You have another $500k worth of 4 week treasuries maturing into your bank account on Mar 30 (a thurs) or maybe Mar 23 (also a thurs) if you really want to be safe.
Step 3: line up a short term credit facility.
Some expenses are less predictable. Part of the job of CFO is to project these expenses, come up with upper bounds, and inform the CEO what it will cost if these bounds are exceeded. Then the CFO goes to a few banks and lines up credit facilities - a $2-3M line of short term credit backed by cash equivalents from step 2.
Step 4: have a few bank accounts including one at a "too big to fail".
That's treasury management, obviously oversimplified.
Now suppose your CFO actually did his job. It's Mar 13 and SVB just imploded. You had $500k sitting in SVB for Mar 15 payroll and that's locked up. Here's what you do:
Mar 11: Quickly call up your credit facility and tell them to wire $500k to your payroll provider on Mon. Call your payroll provider and tell them to confirm with the bank that this is happening to avoid any snafus.
Mar 13-14: As soon as SVB allows it, wire the $250k FDIC insured money to your credit facility. Also redirect treasury maturity payments to said account, and take another $250-270k of cash equivalent and don't reinvest them.
Mar 16 or Mar 23 (a thursday when your maturity payment gets deposited): get $270k worth of 4 week treasury maturity payments from the US govt. Wire this money back to your credit facility.
Net result is that you make payroll with no interruption. You just lost $250k to SVB's errors and paid your credit facility $20k in interest. The end.
There are services that help automate treasury management for smaller companies now, like Vesto.
Until last year T-Bills were paying ~nothing, and it had been that way since 2008, an eternity in the startup world. There was no direct financial incentive to do anything more complicated than park your money in a checking account. Sure, ideally everyone should have been actively managing things to hedge against bank failure, but startups have a zillion things to worry about. SVB's pitch was basically that they were experts on startup finance and would relieve you of having to worry about this yourself. The social proof of these claims was impeccable.
So, yes, many startups screwed up. It turns out that safeguarding $20M isn't entirely trivial. But it's a very predictable sort of screwup. There wasn't really anyone within their world telling them this, it wasn't part of the culture, nobody knew anyone who had been burned by it.
And, well, maybe it should be trivial to safeguard $20M? "You have to actively manage your money or there's a small chance it might disappear" is actually a pretty undesirable property for a banking system to have. The fact that it's true in the first place is a consequence of an interlocking set of government policies — the Fed doesn't allow "narrow banks" (banks that just hold your money in their Fed master accounts rather than doing anything complicated with it) and offers no central bank digital currency (so the only way to hold cash that's a direct liability of the government is to hold actual physical bills). Meanwhile the FDIC only guarantees coverage of up to $250K, a trivial amount by the standards of a business.
The net result of these policies is that the government is effectively saying "If you want to hold dollars in a practical liquid form you have to hold them in a commercial bank. We require that bank to engage in activities that carry some level of risk. We'll try to regulate that bank to make sure it doesn't blow up, but if we fail, that's your problem."
"WTF?" is a reasonable response to this state of affairs. If these companies had had the option to put their money into a narrow bank or hold it as a direct liability of the government, but had nonetheless chosen to trust it to a private bank because they were chasing higher returns, I'd have zero sympathy for them. But our system declines to make those safer options available.
Since when have banks been banned from owning Tbills? They can 100% hold safe cash like instruments that can be liquidated quickly.
The phrase "Narrow Bank" is the name of an actual bank that the Fed shut down because it did not lend out money and just held 100% safe reserves.
https://archive.is/TqCJX
The issue there is more that the Fed pays interest on excess reserves and that bank was just trying to abuse that system. The fact they could abuse it shows how much of an abomination the whole reserves system has become; but, I don't think an actual 100% reserves bank that just held required reserves at the Fed and kept the rest in T-bills or money in its own vaults would get in trouble.
No, the explicit reasoning of the fed in blocking TNB is that it would discourage people from putting money into institutions that lend.
That is not at all my interpretation of the Fed's statement. I read it as more in line with my interpretation. They explicitly state many times in their statement that the issue is over what institutions should receive interest on reserves. If The Narrow Bank did not receive interest on reserves the Fed wouldn't care IMO. The article in the archive link above also explicitly makes note that The Narrow Bank was trying to do arbitrage on the Fed's policy of paying interest on reserves. I think you are just mistaken.
Nah it really must be more ideological, or something else like that. To the extent any journalist or economist was speculating that the Fed wants to avoid paying interest on excess reserves, they would be flatly incorrect. Central bank reserves are a closed system, so to the extent that a narrow bank is attracting them, that's just a flow from other banks where they were beforehand. The central bank is paying the same interest out either way. Other non-depository institutions (who aren't eligible for IOR) using reverse-repos to get (nearly) the base interest rate is just a workaround to help smooth out the system (ineligible because of congressional rules; the central bank would almost certainly prefer to pay it out in as simple a fashion as possible).
And the central bank is not trying to avoid paying out interest -- it's a policy choice in the first place to pay IOR (that's the whole rate maintenance regime now: instead of using open-market-operations to maintain a positive interest rate, they simply flood the system with excess reserves and pay interest on them directly, which is way simpler). It sounds like the Fed had been narrowing the gap between ceiling and floor rates anyway, because they never were using that lower rate to try to really save money or whatever.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link