Nathan, in banking lingo, assets are debts, not capital. They are not a reserve from which to pay those debts all at once because they are lent out leveraged either in the form of loans, which may be very illiquid, or investments carrying some mix of credit, market, interest or basis risk. It was market risk that blew up MBS for the bonds that had mainly effective credit risk protection through subordination and other credit support structures.

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Oops. ... likewise that an institution like SVB offering higher rates on fixed term deposits only does so because rates in the capital markets are even higher.

Ah, but the yields. In the world of this century Before, the only assets with lower perceived returns were investment in plant and equipment and R&D. VC, like Big Pharma, are exceptional only because they have a strategy of high risk seeking the one big payoff.

Besides, the geniuses whose job it is to make the operating decisions on specific investments are creatures of moral hazard playing with other people’s money and taking compensation from the upside only or even from mere volume. It’s all a game, in the game theoretic sense.

I speak as the former lawyer who was, variously, the principal advisor to WMB’s mortgage backed securities and treasury operations.

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Well, not quite. Credit default swaps are still around, and when they get expensive those depositors who have bought protection have fair warning to bail. A deposit guarantor scheme simply pushes the underlying problem at one remove. Bank failures of this size--$100 billion plus--are rare only because banks that large are rare. As a group, not so rare. The FDIC guarantee has been sufficient to protect small deposits. It was tested severely in 2008 when regulators became anxious lest Washington Mutual Bank bust the fund (based on bank levies, not the Treasury). The anxiety was assuaged by precipitously lining it up against the wall and shooting it without so much as a final cigarette.

Big boy bank customers are different. They know, or should in the exercise of due diligence should know, that cash on deposit is a loan. L

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