The hierarchy of excuses

by John Q on March 20, 2023

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



Aardvark Cheeselog 03.20.23 at 5:14 pm

Isn’t it classically the bondholders, rather than the equity holders, who are immune to getting wiped out (or who at least get the first bite at the carcass)? And isn’t it bonds where the real wealth is stashed, so that giving bondholders a haircut is a generally good idea, from a redistributionist standpoint?


John Q 03.20.23 at 7:33 pm

Normally, the equity holders are wiped out first. These are special “Additional Tier 1 (AT1) or Contingent Convertible (Co-Co)” bonds which can be (and have been) downgraded in the event of a bailout, thus supposedly providing additional capital adequacy. But the bondholders expected that their bonds would be converted to equity, not demoted below equity.

As regards your second point, I don’t think there is any significant difference between bondholders and equity holders in general.


Trader Joe 03.20.23 at 9:03 pm

@1 and @2
Yes, it is normally equity holders that get haircut first and only after they are wiped out that bondholders get impaired after that.

While there may not be any significant difference between bondholders and equity holders in general – there is a substantial difference in what sort of accounts will hold bonds vs. equity. Fixed income is the purview of savers and pensions while equity is largely the purview of speculators.

In this instance bond holders purchased bonds believing they had safety of principle and would get a fixed return for their capital. The conversion feature wasn’t a generalized “free upside” if the equity worked out better than bonds but was in fact marketed as actual contingent equity capital in the event the organization became distressed. In effect the purchasers of the bonds said they were willing to have their principal turned into equity if the entity needed it owing to distress. In essence they were prepared to subordinate their interests but weren’t required to – at least until this deal came along.

In general the losses will be borne by pension plans, savings accounts and in some cases insurance companies. Very little will be absorbed by hedge funds or institutional investors. Simply converting this to equity, as was intended, would have preserved capital for a lot more “little guys” – the same number of ‘big guys’ would have been harmed in either event.

The #3 owner is TIAA-CREF which basically invests US teacher pension plans. They expect to take at least a $400 million loss. Don’t tell me its all the same – it very much isn’t.


jsrtheta 03.20.23 at 9:45 pm

I don’t know about Australia, but the definitions I saw of “shonk” online add up to “derogatory term for a Jew”.

Not a good thing.


engels 03.20.23 at 10:24 pm

I think private pensions generally shift from equities to debt as investors approach retirement, so screwing over bondholders might be a way to épater les boomers.


diana 03.21.23 at 1:46 am

how about maybe the bank was lending to people who were doing illegal stuff:


J-D 03.21.23 at 8:30 am

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.

I don’t know about Australia, but the definitions I saw of “shonk” online add up to “derogatory term for a Jew”.

Not a good thing.

My Web research confirms what I already knew, that ‘shonky’ in Australian English means something like ‘of dubious integrity or soundness’, thus being similar in meaning to ‘dodgy’. It also tends to support the guess I would make that ‘shonk’ is a less widespread usage, which to my way of thinking suggests the probability that it is a back-formation from ‘shonky’: certainly what it means in Australian English is ‘a shonky operator’. Use of ‘shonky’ (if not ‘shonk’) in the same (generic) sense as the Australian one is reported from some other parts of the English-speaking world (at least New Zealand and the UK), but less frequently: that could mean is spread from Australia, but it could also mean it spread here from somewhere else but then became more common here than in its place of origin.

There are undoubtedly records of its use as an ethnic slur, and that is one hypothesis about the etymology of the generic meaning, but it is only one among many, and there doesn’t seem to be enough evidence to be sure; if it’s not a coincidence that the word is used in both ways (which wouldn’t be the first example of etymological coincidence), I still don’t observe enough evidence to rule out the possibility that the ethnic slur derives from an earlier generic usage. It’s also relevant to point out that the ethnic slur is not current usage, the way the generic slang undoutbtedly is in Australia (although at my age I have to be careful and acknowledge that what I imagine to be current usage may in fact be obsolescent, slang generally changing as fast at it does; if I remember, I’ll ask my daughter whether it sounds out-of-date to her).


TM 03.21.23 at 5:09 pm

One aspect of the CS story that isn’t obvious to many foreign observers: The Swiss government has amazing powers to circumvent the law whenever they think an emergency justifies it. To force the UBS/CS merger, the government made explicit use of “Notrecht”, emergency law. There is practically no judicial oversight in such cases. Here is a rant from a critical finance reporter calling the deal “clearly illegal”:

And he’s not alone:

A lot of the criticism focuses on the “expropriation” of the shareholders, the biggest of which is Saudi Arabia. They weren’t wiped out but UBS and the government effectively dictated the price and UBS got to take over a functioning bank at a bargain price, is the narrative. It is unclear how realistic this is. At market close on Friday, CS was valued multiple times the 3 billlion but that might have melted away on Monday without government intervention. So the share holders might have gotten way too much or way too little, by market standards. Maybe, I don’t feel competent to judge at this point, the government did the right thing and other courses of action might have led to worse outcomes. Most likely, there will be worse outcomes down the road. In any case, this blatant use of emergency law to stabilize the financial system is a sight to behold.


Hypocee 03.22.23 at 4:48 am

A “shonky shop” figures largely as a theme in (English) Terry Pratchett’s Night Watch FWIW. It’s run by a broadly Tibetan/Nepalese/SE Asian guy.


Jake Gibson 03.22.23 at 2:09 pm

There are some terms that started as ethnic slurs that have become so broadly used that the ethnic origins are lost on most people. I have heard and used the term “gyp” most of my life without associating with the Roma. Once it was pointed out I should have had a clue from the spelling.


Seekonk 03.22.23 at 8:50 pm

Although Russia and China are certainly “on the capitalist road”, it appears that the 2007–2008 Global Financial Crisis gave them pause about handing the keys to their economies to their finance sectors. The SVB debacle will further support their decision.


Ray Vinmad 03.23.23 at 6:09 pm

When you look at banks, you think ‘my this is a bit terrifying.’

They all look like they could go under. There’s nothing underneath the system, to quote the Lego Batman movie ‘but an infinite abyss that smells like dirty underwear.’

And I ask stupid questions like ‘wait, we can get a collapse not just from whacko quants making economy-collapsing social changes as investments like 2008, bank runs like now but ALSO investors pulling money out of banks?’ I have to say ‘why do we we let people invest in banks?’

It just feels like if too many people LOOK we will have collapse any old time. Maybe this is not a good thing.

After each tectonic shift, I try to learn about finance but then I forget what I learned but maybe it doesn’t matter because it seems like any number of things can bring this sucker down and it will be a different thing every time. And all the experts will be on TV saying ‘oh this time it’s the whatchamacallit.’

They were saying crypto can’t pull the banks down. It’s a different system. This isn’t true, right?


MisterMr 03.24.23 at 12:00 am

I don’t understand the problem: we know that the capitalist system (certainly the present version but probably all versions) works through debt expansion; so some times there will be banking collapses; there was some hike in the interest rate by the fed that is necessary to slow debt expansion but makes a crash more likely. What’s the big surprise?


John Q 03.28.23 at 9:47 am

MM ““What’s the big surprise”

I’ve reread the OP, and I don’t see any expression of surprise. We seem to be in furious agreement.


MisterMr 03.28.23 at 11:30 am

@John Q

What I mean is that I think that “capitalism” as an endemic problem of lack of demand (underconsumption from one point of view, overproduction from another, but in keynesian term a cronical excess of ex-ante savings VS ex-ante investiments).

This problem was somewhat assumed to be solved during the “great moderation” period, but I believe that the crisis of 2008 showed that it was just because there was a continuous increase in private debt that hid the problem under the rug, but then exploded in the crisis.

But if this is true, there is no “corruption” of the system, it is just the normal working of the system. I did read your sentence “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” as implying that there was more going on than normal capitalism.

Unless by “corrupt system” you mean that capitalism is in principle corrupt, which is not the way I would phrase it but “internal contradictions” is not completely different so perhaps we are indeed furiously agreeing.

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