[HN Gopher] SVB Financial: Blow Up Risk (2022)
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SVB Financial: Blow Up Risk (2022)
Author : AlchemistCamp
Score : 179 points
Date : 2023-03-11 17:13 UTC (5 hours ago)
(HTM) web link (seekingalpha.com)
(TXT) w3m dump (seekingalpha.com)
| paulddraper wrote:
| > The company should be able to sell its AFS with minimal losses
| and about $2-3 billion of the portfolio pays down every quarter.
| The company also has some borrowing capacity. So, right now it
| looks unlikely the losses on the HTM portfolio will get
| triggered, it is a risk.
|
| In an alternate dimension, it played out exactly like this.
| hn_throwaway_99 wrote:
| Wow, how prescient. Articles like this are especially damning to
| the execs that sold stocks just a few weeks ago. This was not
| some huge surprise. They may not have anticipated the ferocity
| with which there would be a run on the bank, but they absolutely
| knew they were in deep shit and would need to do a capital raise.
| And I hope nobody tries to defend this with "those stock sales
| were from 10b5-1 plans!". Those can easily be gamed by execs
| waiting to release bad news until after their sales go through,
| or by cancelling sales if things look good for the future (courts
| have said you can't be charged with insider trading for _not_
| selling shares, which means you can basically just set up 10b5-1
| plans but cancel them as needed based on your insider knowledge).
| stefan_ wrote:
| We don't need to assume the execs knew their held to maturity
| MBS scheme would blow up when they are selling weeks before
| announcing a loss (which they would definitely be acutely aware
| of).
| darkerside wrote:
| If they're regularly selling securities, there is no good
| time to make the announcement
| paulddraper wrote:
| > Articles like this are especially damning to the execs that
| sold stocks just a few weeks ago.
|
| You mean the reverse, right?
|
| _You can 't insider trade if it's not insider information!_
|
| This article supports the execs, not damns them.
| hn_throwaway_99 wrote:
| No. Because a short seller speculates the bank is in trouble
| doesn't mean it gives execs carte blanche to sell their
| stock.
|
| The "inside information" piece is exactly _when_ SVB would
| need to do a highly risky capital raise, which SVB did (or
| tried to do) conveniently 2 weeks after the CEO sold
| millions.
| PaulHoule wrote:
| At least so far the story is that SVB got in trouble because it
| invested in bonds that went down in value, not because of its
| loan portfolio. We'll see if that is true or the whole story,
| but if it is true, the scenario is entirely different from what
| that article is suggesting.
| metalspot wrote:
| their AAA bond assets suffered big losses, but their loan
| assets are even worse. there is a big PR effort to focus on
| the bond losses, but the real shit is the 10's of billions in
| loans to companies that will never make a profit, and the
| systemic contagion risk that entails. they lost 15% on 100B
| of their book, but they are going to lose 100% on 10's of
| billions (unknown) from the other half of their book.
|
| if all of their assets were AAA and they were only down 15%
| they wouldnt be a failed bank right now. nobody knows how big
| the losses really are, but the people they were in business
| with knew best, and those people pulled their money as fast
| as they could, so everyone else can make assumptions based on
| that.
| panarky wrote:
| _> ... entirely different ..._
|
| The article nailed the "unrealized losses in its htm (hold to
| maturity) fixed income portfolio", and it nailed the risk of
| deposit bleeds forcing liquidation of the htm assets,
| realizing the unrealized losses, leading to insolvency.
| toomuchtodo wrote:
| Who got hurt by execs selling stock into the market? Hopefully
| sophisticated investors who should've known better. For over a
| year there were indicators SVB was not healthy.
|
| "We are selling to willing buyers at the current fair market
| price."
|
| Edit: if you don't like the 10b5-1 rules as they stand, feel
| free to submit a comment to Gensler and Co at the SEC. If you
| can't trade on positive material non public information, why
| would you expect them to trade on negative MNPI? Follow the
| rules and what is least likely to cause you to end up in
| handcuffs or in front of Congress. That is a logical and
| rational decision.
| jeremyjh wrote:
| "Even though we have insider knowledge that indicates it's
| worth less than market and quite possibly nothing at all."
| throw0101c wrote:
| > _"We are selling to willing buyers at the current fair
| market price."_
|
| A line from the really good movie _Margin Call_ :
|
| * https://en.wikipedia.org/wiki/Margin_Call
|
| Worth checking out.
| johnyzee wrote:
| _" It's not a panic if you're the first one out the door."_
|
| Another great quote from _Margin Call_. Love every bit of
| that movie. Very underrated too, as it was (unfairly)
| overshadowed by _The Big Short_.
| pgwhalen wrote:
| In my opinion, it's the best movie ever about finance, and
| it's not even close.
| OneLeggedCat wrote:
| It really is. Above referenced scene:
| https://www.youtube.com/watch?v=ag14Ao_xO4c
| hef19898 wrote:
| Well, in case of those SVB execs we talk potential insider
| trading. Margin Call is fiction, and MBSs or MBS based CDOs
| are not shares in the company you run.
| hn_throwaway_99 wrote:
| > Edit: if you don't like the 10b5-1 rules as they stand,
| feel free to submit a comment to Gensler and Co at the SEC.
|
| The SEC already tried this. Courts have ruled that you can't
| be charged with insider trading for _not_ executing a trade,
| but the end result is the same: just set up plans that you
| cancel if you don 't want them to trade. Can't remember the
| name of the court case but shouldn't be too hard to find by
| Googling. SEC has tried to tighten the rules by requiring
| that cancellation of any trade cancels the whole plan, but
| their hands are also tied based on court rulings.
| pixl97 wrote:
| >Hopefully sophisticated investors who should've known
| better.
|
| You mean like your retirement fund manager?
| lotsofpulp wrote:
| If you are investing in actively managed funds, then you
| chose that agency risk.
| toomuchtodo wrote:
| "Sophisticated" doing a lot of lifting in this case. Very
| aspirational. If you're buying single named securities
| without any due diligence, you deserve the returns you
| encounter. That's your job!
|
| No one index investing is going to feel this in a material
| capacity. Depositors will be made "whole enough", and an
| irresponsible bank got blown out and dismantled. The system
| worked. If there was fraud, regardless of criminal and/or
| civil, prosecute those responsible.
| therealcamino wrote:
| When you say "the system worked" because depositors will
| get back some as-yet-undetermined percentage of their
| deposits, that's not relevant to an insider trading
| discussion -- that's shifting the topic from whether
| investors in SVB were harmed, to whether depositors were
| harmed.
|
| I don't quite understand your position on insider
| trading. The idea behind making it a crime is that no
| matter how "sophisticated" an outsider is, they don't
| have insiders' non-public information. Insiders can
| profit from the information gap between them and the
| people they sell their shares to. There's certainly
| disagreement about how to ban insider trading while
| making it possible for officers of the company to trade
| at all, but the basis of the law is that _no_ amount of
| due diligence can undo that imbalance in information.
|
| It sounds like you're saying that one might decide, as an
| individual, that the system is unfair or imperfect or
| corrupt, and decide to diversify. That's probably good
| advice. But that is a practical measure that doesn't
| really address the problem being discussed.
| toomuchtodo wrote:
| Please explain what action could've been taken.
| Cancelling the 10b5-1 scheduled sale of securities based
| on material non public "inside" information?
| oarabbus_ wrote:
| >No one index investing is going to feel this in a
| material capacity.
|
| Over what timeframe are you making this claim? A week? A
| year? 10?
|
| The entire index dropped, driven by a selloff in the
| Financial Services sector after FDIC placed them on the
| failed bank list, so in effect it has already affected
| the index.
| stametseater wrote:
| [dead]
| adhesive_wombat wrote:
| > They may not have anticipated the ferocity with which there
| would be a run on the bank
|
| Bank runs are pretty much always ferocious because 1) that's
| what a run is, rather some euphemism for the prelude like
| "temporary liquidity processing anomaly" and 2) they're
| positive feedback loops that end up ferocious as soon as
| someone responding to the "TLPA" gets noticed by someone else.
| eloff wrote:
| A more charitable interpretation of what the OP is saying:
| the execs may not have anticipated how fast the shit would
| hit the fan. I doubt they believed there would be a run on
| the bank this month, not even the short sellers were
| predicting that. They did know they were in trouble, but I
| think everyone, even those being against SVB, was surprised
| by the speed and ferocity with which this played out.
| adhesive_wombat wrote:
| You might be validly surprised by the short time between
| "uh.." and a full-on run, but the run itself is no more
| ferocious than people responsible for avoiding one should
| have been thinking of.
|
| It's like a airline blaming the ground for being
| unexpectedly hard and the crash happening so soon and it's
| not their fault why there were no survivors and not because
| of the deferred maintenance of the aircraft under a
| loophole in the FAA regulations.
| paulddraper wrote:
| That's true, though most bank failures aren't bank runs. IDK
| if there's been a bona fide bank run in the U.S. since the
| 1930s.
|
| The reason this was a bank run is that FDIC insurance meant
| approximately nothing, as opposed the the usual situation
| where a huge amount of depositors are fully insured.
| anonymousiam wrote:
| The executive stock sales were only for a few million dollars,
| and a relatively minor percentage of their holdings. I doubt
| there will be any criminal charges.
| xiaolingxiao wrote:
| Note this was published dec 2022.
| kurthr wrote:
| So, classic bank run... except there were 6 people on the same
| chat channel controlling 10% of the bank's reserves. Once they
| notice, poof!
| steveBK123 wrote:
| This is also why small, concentrated merchant banks like this
| are risky. Deposit base is too homogenous.
| mikeyouse wrote:
| It was one of the 15 largest banks in the country.. if
| depositors lose money here, every bank in US better be
| ready Monday morning as every company moves all of their
| funds to one of the top 3.
| steveBK123 wrote:
| Most banks the vast majority 60-70% of depositors are
| insured.
|
| SVB was under 10% They were super concentrated in one
| industry, their depositors themselves were super
| concentrated with their deposits and they were poorly
| run.
|
| They'll be open in some capacity Monday but the idea that
| big rich uninsured depositors should be made whole
| because of vibes is silly. They have a $10Bish hole. TBD
| how this plays out.
| IrnBru wrote:
| That is irrational behaviour. Depositors should spread
| their cash across multiple banks. This is very basic risk
| management.
| mikeyouse wrote:
| I'm just telling you what I'm seeing.. The "multiple
| banks" will be the few biggest ones, even if it's 1/10th
| of their funds, nobody will accept the risk of a smaller
| bank.
| bcrosby95 wrote:
| Yet still small enough to not need to undergo stress
| tests after changes to Dodd frank in 2018.
| notlukesky wrote:
| They mentioned this report in the All In Podcast this week.
| stcredzero wrote:
| From the podcast: "The herd mentality caused us to all run for
| the door..." -- There was an N-way Prisoner's Dilemma that just
| played out in the Silicon Valley startup networks.
|
| And the startup networks in aggregate -- Failed! There was a
| reference made to the movie, "It's a Wonderful Life." The
| Silicon Valley startup scene failed like a mob, where the
| Building and Loan crowd succeeded as a community.
|
| Maybe that kind of thing only exists in the movies? Well, not
| quite. But it is rare.
| dboreham wrote:
| After reading this article my take on the situation substantially
| changed from the typical (here) "idiot bankers put all their
| assets in HTM instruments".
|
| ianab but I get the impression that when you're operating a bank
| you think of depositors and loans like a SaaS service would view
| subscribers. You want more deposits same as we want more
| subscribers. Having got more deposits you set about lending the
| money in order to make a profit.
|
| Most businesses that don't go broke take on "steady state"
| characteristics -- month to month the money coming in and going
| out is much the same. Hopefully rising a bit each month, but
| mostly tomorrow is the same thing as yesterday.
|
| That would be the case with a typical big bank. e.g. my
| businesses bank with WF. We have some amount of cash on deposit
| there that varies through the month and the year but long term
| averages to some near constant. Once the bank has thousands of
| businesses as clients all those deposits' noise will smooth out
| and as someone running that bank it looks like you can rely on
| having some $$$ of deposits, always. In this situation you don't
| actually care whether you put the money in liquid or HTM
| instruments because net nobody is going to withdraw it anyway.
|
| Here's where I think SVB went off the rails : their customers
| were not normal businesses. This meant that the assumption that
| deposits would remain roughly static was not valid. That's
| because a large proportion of the deposits represented startup
| burn fuel.
|
| Deposited funds that starts ups are burning through will only
| remain static if there is a constant flow of _new_ start ups.
| That wasn 't the case in the last couple of years as the free
| money environment dried up.
|
| So now you have big net outflows from SVB because no new start
| ups are being funded, but the existing ones are still burning
| their money.
|
| And then it gets worse because all the depositors are part of the
| same close social network and therefore can organize a run
| quickly and easily.
| IrnBru wrote:
| Borrowing short term and lending long is what all banks do. The
| problem here is a lack of diversification.
| darkerside wrote:
| Surprising similarity to the 2008 crash in that there was
| systemic risk that wasn't detected or fully understood based on
| there being events that were entirely predictable (housing
| prices drop, or Fed rate increases) but happening at
| unpredictable rates of speed.
| eastbound wrote:
| No bank can bet the deposits will stay the same: Through the
| short-term economic cycles, people will accumulate for 6
| months, 2 years, 10 years, then deplete. Covid hits? Everyone
| needs 3 grand at the same time. Government gibs money? Everyone
| has 3 grand extra for a few weeks. Everyone gets paid on the
| 1st of the month. You can average, but everyone will hit the
| low at the same time.
| IrnBru wrote:
| Not true. Imagine there was only ONE bank.
| spacebanana7 wrote:
| I see what you're getting at but people could still
| withdraw paper money or do international transfers.
|
| A single global bank in a world without paper
| money/gold/etc might be different.
| 0003 wrote:
| Really great marks. Almost perfect. Except the key piece "The
| company should be able to sell its AFS with minimal losses and
| about $2-3 billion of the portfolio pays down every quarter. The
| company also has some borrowing capacity. So, right now it looks
| unlikely the losses on the HTM portfolio will get triggered, it
| is a risk."
|
| File this under... "thought it was bad, didn't know it was THIS
| bad." And enjoy the millions of dollars you made :P
| toinewx wrote:
| The author had a short position. You can find it at the end of
| the article: Disclosure: I/we have a beneficial
| short position in the shares of SIVB either through stock
| ownership, options, or other derivatives.
| tedivm wrote:
| You say that like it's some gotchya, but someone who felt the
| bank wasn't in a good financial position would naturally short
| it. This just means the guy put his money where his mouth is.
| dtech wrote:
| It's beneficial for someone who is shorting a stock to put
| out negative press about the company. It's basically the
| modus operandi of some hedge funds.
|
| I also don't get the gotcha though. As long as it's disclosed
| and the facts are true I don't see the problem.
| bmitc wrote:
| I assume it's going to be much, much riskier to rely on
| sentiment affects of an article rather than valid research
| when shorting.
| mlyle wrote:
| > It's beneficial for ...
|
| It's beneficial for anyone has a thesis that a stock is
| mispriced to:
|
| * Take a position (short or long) that will take advantage
| of the mispricing
|
| * Broadly communicate this thesis after taking the position
| devmunchies wrote:
| So... he put his money where his mouth was? Sounds better than
| putting it in SVB.
| kortilla wrote:
| You would be stupid not to after stumbling on a gem like this.
| steveBK123 wrote:
| If they thought the stock was going to $0, they sure wouldn't
| have a Long position would they?
|
| What do you think all these guys on CNBC all day talking up
| stocks do.. not own it already themselves?
| therealcamino wrote:
| Yes, but the author was also completely correct about their
| financial situation. The disclaimer doesn't mean "I'm making
| this up."
| rufus_foreman wrote:
| I believe this is called "talking your book" and it should be
| your default assumption of investor behavior.
| latchkey wrote:
| Two more followup articles from the same author that are good
| reads as well (along with a bit of well deserved gloating)...
|
| https://seekingalpha.com/article/4586033-svb-financial-blew-...
|
| https://seekingalpha.com/article/4586342-svb-financial-today...
| therealcamino wrote:
| I have to say, the articles in Seeking Alpha are so uneven that
| I never read the when they pop up in a news feed. The original
| article is pretty startling in how accurate it was (even if it
| was more concerned about the loans than the mortgage-backed
| securities.)
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