[HN Gopher] How deep is the rot in America's banking industry?
___________________________________________________________________
How deep is the rot in America's banking industry?
Author : throwaway12245
Score : 108 points
Date : 2023-03-16 16:44 UTC (6 hours ago)
(HTM) web link (finance.yahoo.com)
(TXT) w3m dump (finance.yahoo.com)
| macinjosh wrote:
| Why haven't FDIC rates paved with inflation? $250k is not much
| for a business these days.
| [deleted]
| [deleted]
| tenacious_tuna wrote:
| I'm seeing a lot of comments along the lines of "What should SVB
| have done? They bought the best bonds they could have for the
| time, and then the Fed screwed them over."
|
| Maybe I'm just naive when it comes to how these systems work, but
| couldn't SVB have just... done nothing? Nobody was compelling
| them to purchase any bonds at the time. Sure they have pressure
| from stockholders to make money, but if the deck was so stacked
| against them as everyone seems to think it was, it seems like a
| financially-literate management (which I would expect out of a
| bank) would have had the idea to merely wait a bit to see what
| the Fed was going to do.
|
| (Everyone and their mother was predicting a crash from 2020 to
| 2022, so it seems reasonable that a bank of all institutions
| could have made the call to be patient and see which way the wind
| blows...)
|
| Again, maybe this is me just being naive, but "They should have
| just been patient" seems like a mantra applicable to a lot of
| companies lately. Car companies cancelling all their chip orders
| at the start of the pandemic, only to scramble and re-place them
| as demand surged; tech companies hiring like crazy in the face of
| a supposed talent crunch, only to have massive layoffs a year
| later. It seems like companies keep making "impulsive" decisions
| to try and capitalize on short-term trends without any eye for
| the long term strategic view.
|
| Yes, "being patient" might mean they don't make as much money as
| they could have if they jumped at the first sign of a change,
| but... Do they have to? SVB could have continued making money
| hand over fist in the long run, but now they no longer exist.
| Google and Microsoft and all these corps could have saved a lot
| of corporate face and internal morale, had they just waited out
| the supposed hiring crisis that never quite seemed to
| materialize: now they have a pile of irritated employees and
| everyone I know at a major brand seems to be holding their breath
| for the next round of layoffs.
|
| There's a trend of hyper-efficiency in the name of maximum profit
| that I feel like I've been seeing kind of everywhere, and that
| seems fine until the moment the music stops. Maybe I'm just the
| kind of person who naturally hedges their bets, but I'm
| constantly blown away by how rickety entire companies appear to
| be sometimes. What am I missing? Are there just insufficient
| incentives to be conservative with resources and decision making?
| modeless wrote:
| Doing nothing wasn't the best strategy. They could and should
| have bought short duration bonds instead of long duration bonds
| and mortgage-backed securities.
|
| If you ask me, the real problem is the fact that 30 year fixed
| rate mortgages with super low rates were being handed out like
| candy. Who in their right mind would seriously hand out a 30
| year loan with a fixed 2.6% interest rate? It didn't cross
| their mind that just maybe sometime in those _30 years_
| interest rates would go higher?
|
| It was completely obvious to me that whoever owned those loans
| was going to be sorry sooner or later; turned out it was
| sooner. And in the meantime we got ridiculous house price
| inflation to boot. Why did those loans exist? Not because they
| make sense, but because of government policies intended to
| promote homeownership.
| cableshaft wrote:
| As the saying goes, 'Make hay while the sun shines'. If you
| don't take advantage of a good opportunity while it's there,
| it'll eventually go away and you won't have benefitted from it,
| while others have.
|
| Not saying that to justify SVB or anything, as they're in the
| business of securing people's money long-term, and they made
| bad decisions that they had plenty of time to course correct
| for (rates have been continuously rising for well over a year,
| with a clear goal of lowering inflation to around 2%, and you
| can see how slowly that was lowering and predict roughly how
| high that would get).
|
| Car companies also had a big faceplant moment with cancelling
| chip orders, but we were in the midst of a novel global
| pandemic that no one really knew how people were going to react
| to, or how big or how long it would last. Health officials were
| predicting around 100k total deaths in the US, and we blew way
| past that.
|
| But for tech hiring I can clearly see why they were like 'let's
| take all this zero interest cash, get a bunch of people, use
| them to get a competitive advantage, and then when everything
| starts to unwind we'll just lay people off'. It's a shitty
| thing to do to people, but I get the reasoning.
|
| I know they all claim they didn't see this coming and 'take
| full responsibility' or whatever in their layoff
| announcement/apology letters, but behind closed doors I bet
| they knew exactly what they were doing, at least the vast
| majority of them.
|
| I've had quite a few opportunities in my life that I didn't
| really leap on 100% like I should have, and as a result those
| opportunities slipped by, and I didn't end up making that hay
| at all as a result, the opportunities passed and I'll have to
| find some other way to make that hay.
| bwb wrote:
| lol, the media frenzy is hilarious to watch. This was a badly run
| bank facing some headwinds. I forget how much people like writing
| about things in a flurry instead of taking a step back and
| providing real analytics oversight.
| jgeada wrote:
| Bring back Glass Steagall and stop all this madness. Regular
| banking should be boring, not all that profitable and separated
| from speculation.
| SilasX wrote:
| Buying long-term Treasurys and booking them as high-grade
| capital (whatever they call it) was legal under GS too, and was
| the cause of SVB's failure.
|
| SVB was killed by the boring part, not the startup banking
| risk.
| GabeIsko wrote:
| Large venture capitalist depositors demanding to pull out
| billions of dollars because of relatively minor liquidity
| risk definitely contributed to the bank run though.
| SilasX wrote:
| That's irrelevant to the topic of this subthread, about
| Glass-Steagall and the regulations that would have
| prevented this.
| toomuchtodo wrote:
| My hot take is that demand deposits should be only invested in
| (EDIT: short dated, thx codexb) US treasuries (a la Narrow
| Bank), backed by the Federal Reserve and if a bank (or anyone)
| wants to lend, they can issue bonds to borrow versus the Rube
| Goldberg mechanism we currently have of deposits, FDIC, and
| then the Fed still providing an unlimited guarantee anyway.
|
| The bond market already is built to handle this, and we should
| stop treating demand deposits as this Schrodinger collateral.
| If you want to insure lending, insure the lending directly, not
| with consumer and business cash. I know there are no simple
| solutions to complex problems, but this all seems very
| unnecessary when you pull the system apart conceptually.
|
| > codexb
| [deleted]
| rolobio wrote:
| The Rube Goldberg machine is the point. It's all about
| obfuscation to prevent the commoners from understanding how
| the system really works.
| lostsoil wrote:
| If that happens start preparing to pay money(instead of
| receiving interest) for your demand deposits.
| toomuchtodo wrote:
| Most people do not receive interest in their deposit
| accounts (or its minimal) because banks keep the spread
| between paying depositors nothing and the interest the Fed
| pays on reserves held at the central bank. A Narrow Bank
| (which the Fed won't approve [1]) would cover their costs
| with that same spread. Failing that, one can invest in
| short dated government securities (US treasuries) directly.
| "All Roads Lead To Treasuries" if you will. If someone is
| going to gamble your money, might as well be the US
| government (treasuries are considered "risk free") vs your
| rando bank executive leadership team (the CEO of SVB
| collected ~$9.9 million in 2022 total comp for overseeing
| and approving suboptimal duration risk mgmt decisions).
|
| If banking is to be boring and minimally profitable, that
| leads us to the idea that it should be a utility, not a
| risk taking venture, no? And if the Fed interest is
| covering the costs of banking, aren't we already all paying
| that cost as taxes?
|
| [1] https://www.chicagobooth.edu/review/safest-bank-fed-
| wont-san...
| soperj wrote:
| that already happens for many.
| codexb wrote:
| By all accounts, most of their demand deposits _were_
| invested in US treasuries. Those treasuries are just worth
| less now because of interest rate hikes and so even if they
| didn 't have to do a fire sale on billions in treasuries, it
| still wouldn't be enough to cover deposits.
|
| There are no completely safe investments.
| opportune wrote:
| IMO the Fed should provide publicly available CBDC banking
| (implemented as a narrow bank with no ROI and no risk, just a
| balance in a fed table) and make it easy to move that money
| into treasuries or to integrate with eg visa/banks for
| payments.
|
| Then commercial banking becomes a competition of who can best
| manage risk/return on deposits, provide a good UX, integrate
| with other value add financial services, have the best risk
| models for lending, etc. I just don't see a point in a
| banking system where my deposits are going to be stored in
| something dead-simple like treasuries with the interest
| skimmed off, when I could easily do that myself.
|
| The current system where I as a normal (not off-grid or doing
| some fringe thing like going all cash) consumer _have_ to
| trust at least one bank with my money, only to get 0%
| interest in my checking and be exposed to risk, does not seem
| fair.
| toomuchtodo wrote:
| I think there is some nuance around CBDC vs simple
| "accounts" but I agree with your thesis, as do others, on
| issuing deposit accounts directly from the Fed.
|
| https://rooseveltinstitute.org/wp-
| content/uploads/2021/08/GD... (Central Banking for All: A
| Public Option for Bank Accounts By Morgan Ricks, John
| Crawford, and Lev Menand* | June 2018)
| globalreset wrote:
| Current global dollar-based financial system can only be
| sustained by an ever-increasing leverage, that allows rolling
| over the ever-increasing pile of dollar-denominated debt.
|
| Since 1971 _everything_ (all relevant policies) were geared
| towards increasing the amount of debt in the system. It 's no
| surprise that student debt, mortgage debt, credit card, auto
| loans and whatever else were ballooning.
|
| Regular banks not making risky bets would go against it, so it
| will not be done.
| andrewmutz wrote:
| Would Glass-Steagall have prevented the SVB failure?
| NovemberWhiskey wrote:
| No; Glass-Steagall allowed commercial banks to own
| investment-grade bonds.
| tptacek wrote:
| I don't think so. SVB wasn't an investment bank, was it?
| giantg2 wrote:
| Would that have made the difference? I thought that restricted
| banks to "safe" investments, which SVB's likely were. It's
| simply that they couldn't extract enough liquidity from that
| position to cover the run. Or were there other restrictions?
| rolobio wrote:
| SVB failed because they bought government bonds, typically
| the most secure thing. The problem is the Federal Reserve
| raised interest rates, which made the bonds pointless. They
| Fed will supposedly keep raising rates, which I expect will
| make more banks fail. After all, if the most-secure thing
| (bonds) is not secure, what is?
| giantg2 wrote:
| I assume most banks _should_ be going after shorter term
| bonds to adjust with those changes. Wasn 't the problem
| with SVB that they had too much money in long term bonds
| and MBS? So they were locked into really low rates (based
| on today's srandards), which is fine if they held to
| maturity, but they couldn't hold due to the withdrawals and
| then nobody wants to buy those low rate securities for them
| to exit without losing too much.
| lazide wrote:
| The problem is that no one has been allowed to price in
| (real) inflation risks into bonds for a very long time as
| the fed has artificially suppressed rates through QE.
|
| Bonds have only ever been considered 'safe' from a
| repayment perspective (it's the only thing they really get
| graded on risk wise), and even then junk bonds are a real
| thing. The value of the bond shrinking due to inflation is
| always a unquantifiable future risk that typically gets
| priced in price/interest wise by the buyer/underwriter -
| but with the fed suppressing rates? All bets are off.
|
| Those who got those 2% mortgages though have a lot to be
| thankful for. As long as the zombie hordes don't get them
| in the coming debt apocalypse anyway (/s).
| GabeIsko wrote:
| It's really important to make this distinction: those bonds
| were, and still are safe investments, guaranteed by the
| full faith and credit of the United States Government. The
| issue is that you have to wait for them to mature. So SVB
| had too much of their depositor's money tied up in long
| term investments.
|
| I don't want to turn this into another tutorial about
| pricing works on the bond market, but the issue isn't that
| they invested in bonds, it's that they made a bet about the
| Federal reserve reversing course and not hiking interest
| rates. This is really stupid - the federal reserve has been
| saying over and over again that they will not be lowering
| rates any time soon.
| matwood wrote:
| And they also had a bank run. I think it was Stratechery
| that mentioned everyone _knew_ the issue SVB was in for
| months. Had there been no bank run, SVB would possibly
| have been fine.
|
| With that said, it's good they got punished for poor
| decisions given their depositor profile.
| lazide wrote:
| That's a pretty solid 'as long as no one says the emperor
| has no clothes, he is fully clothed' line though?
|
| If it was a short period of time (a week?) this was going
| on, then sure. The emperor darting to the bathroom
| without his clothes on is unlikely to be a scandal after
| all.
|
| But _even if fed rates dropped tomorrow_ those bonds will
| not recover to par, because inflation on their principal
| amounts has _already happened_ , and their interest rates
| are too low to ever recover back how much they have lost
| value barring truly exceptional deflation.
|
| So unless they somehow come up with even more cash on
| hand to be able to avoid ever realizing those losses
| (good luck when everyone starts drawing down savings and
| boomers start retiring more and more), they're boned
| inevitably.
|
| Deflation wise, the fed will fight _THAT_ even harder
| than the current inflation fight they are doing, and
| that's relatively easy to combat - print more money. It's
| why they've been printing money since '08.
|
| Since the expectation is that inflation will continue for
| some time of course makes the math and present value even
| worse, but there is no plausible situation right now
| where the expected future dollar value of those bonds
| will be high enough to recoup a large percentage of their
| purchase value in today's or a future dates currency.
|
| That value is gone.
| tptacek wrote:
| By all accounts, SVB's banking was boring. They borrowed short
| and lent long, and their long bets were very safe. The problem
| wasn't that they too exciting bets; its that they played the
| standard playbook incompetently.
| hnthrowaway0315 wrote:
| Risk management is much more than that. If that's easy then
| everyone can be a good fund manager: just take people's money
| and buy bonds. This doesn't work in real life.
| kurthr wrote:
| They actually let their interest rate hedges expire in '22
| (while they had no CRO). That was insane. Every banker knows
| about duration/rate risk so this is really next level
| incompetence.
|
| The best spin I can think of is that they assumed HTM was
| sufficient to prevent a bank run, but it wasn't.
| toomuchtodo wrote:
| If the comment below is accurate, HTM assets can not
| legally be hedged against interest rate risk.
|
| https://news.ycombinator.com/item?id=35130813
| kurthr wrote:
| Maybe remarking them that way let them get rid of the
| expensive hedges? That would be even more damning.
|
| Edit: I went looking and PWC has a nice overview...
|
| 6.4.3.4 Hedging held-to-maturity debt securities ASC
| 815-20-25-12(d) provides guidance on the eligibility of
| held-to-maturity debt securities for designation as a
| hedged item in a fair value hedge.
|
| ... The notion of hedging the interest rate risk in a
| security classified as held to maturity is inconsistent
| with the held-to-maturity classification under ASC 320,
| which requires the reporting entity to hold the security
| until maturity regardless of changes in market interest
| rates. For this reason, ASC 815-20-25-43(c)(2) indicates
| that interest rate risk may not be the hedged risk in a
| fair value hedge of held-to-maturity debt securities.
|
| https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/
| der...
| kragen wrote:
| i saw that, but then i also saw matt levine saying they
| should have hedged their htm assets against interest rate
| risk, which presumably he wouldn't have said if it were
| illegal
| tripletao wrote:
| They could have hedged and marked to market though. In
| that case, the accounting would have said they were fine,
| and they would actually have been fine.
|
| In reality, they didn't hedge, and they used the HTM
| accounting treatment. So the accounting still said they
| were fine, since that permitted them to ignore the loss
| when interest rates increased; but accounting doesn't
| change reality, so they actually weren't fine and they
| blew up.
| tptacek wrote:
| Yes, by all accounts, SVB was managed incompetently. But
| look at the thread we're on, which starts with the idea
| that Glass-Steagal might have prevented this, as if SVB had
| gone long on upper tranche subprime loans.
| kurthr wrote:
| I agree with you about G-S, all it did was separate the
| Investment banking from regular banking. That doesn't
| make it boring at all!
|
| But I just can't wrap my head around the decision making
| process at SVB. I wouldn't expect to be paid high 6
| figures to run risk at a $200B bank and I knew not to be
| in long bonds. hn_throwaway_99's comment about the
| legality of hedging their HTM book makes me wonder if
| they just reclassified it to reduce their costs in 2022.
| (Only credit and servicing risks can be hedged)
|
| And that gets to the real issue. Current regulations
| actually encourage rate risk at banks <$250B, because you
| can either pay for insurance or just mark it HTM. The
| majors don't have this choice and have to eat the extra
| cost.
|
| It is not that way in EU banking due to the Basel
| framework and IRRB. At least they have reporting
| standards and don't allow more than 15% to be at risk in
| the Supervisory Outlier Test (SOT).
|
| https://www.bis.org/fsi/fsisummaries/irrbb.htm
| ElevenLathe wrote:
| Also, if we expect government regulators to protect bank
| executives from their own incompetence and make sure no
| banks ever go under, this brings up the question of why
| we need bank executives at all. Just let the government
| run the banks or, since there would no longer be
| competition between banks, roll all deposits and assets
| into one big government-run bank. An alternate, roughly
| equivalent scheme is to shut down all private banks and
| give everyone a Fed account.
| ihaveajob wrote:
| You can argue that incompetence is not the same as
| recklessness. Incompetence was sufficiently penalized in
| this case, IMHO.
| [deleted]
| selimnairb wrote:
| Seems like if they had just laddered their mortgage backed or
| other securities more, they could have survived?
| phkahler wrote:
| >> By all accounts, SVB's banking was boring. They borrowed
| short and lent long, and their long bets were very safe.
|
| Clearly not safe. IMHO anyone buying 10 year treasuries in
| the last several years is an idiot. Those rates were
| guaranteed to rise, as they could not fall below zero.
|
| Next up: anyone who bought a house in the last few years is
| gonna get hurt. We knew rates would be rising, and hence
| prices falling. So far it's mostly sales volume dropping near
| zero, but soon...
|
| And then when people are broke, many will raid their
| retirement investments. The stock market has benefitted for
| decades from people blindly (via 401k funds) dumping money
| into the market. More buyers than sellers equals rising
| prices. Guess what a jump in sellers causes...
|
| And then after the market drops, people with money elsewhere
| will want to buy, resulting in one more shift of money from
| here to there.
| jandrese wrote:
| > Next up: anyone who bought a house in the last few years
| is gonna get hurt. We knew rates would be rising, and hence
| prices falling. So far it's mostly sales volume dropping
| near zero, but soon...
|
| People who bought a house as an investment might be in
| trouble, but people who bought a home to live in are making
| out like bandits with their 30 year fixed mortgages.
| debacle wrote:
| In a down economy, fewer people sell their houses, so
| housing prices haven't fallen as much as they would if
| interest rates were raised in a vacuum.
| opportune wrote:
| Agreed in general but I don't think there is anything
| structurally preventing <0% yields on treasuries. The ECB
| has already set a central bank rate as low as -0.50%
| before.
|
| It would of course be deeply unintuive to a regular person
| and likely very unpopular if rates went negative enough to
| require it to be reflected in consumer banking (eg negative
| rates on a checking/savings account). But I don't think
| it's impossible and we may see it in our lifetimes.
|
| That is just a nitpick though because I think the US public
| as-is would throw a fit if it happened, making it unlikely.
| Fully agreed that purchasing a 10y bond at 1% was
| boneheaded given plenty of people predicted interest rates
| to need to increase to fight inflation (come on, just
| because the fed said it was transitory for a while, doesn't
| give professionals an excuse to blindly take that at face
| value). The effective yields could have been so much higher
| just keeping the cash uninvested or in short term
| treasuries, then purchasing 10y bonds after the rate hikes
| started or stabilized.
|
| Yeah that is much more obvious in hindsight but it's not
| like it was a fringe position even in 2021
| ericd wrote:
| There were some proposals from the treasury for ways to
| make below zero rates work.
| tptacek wrote:
| Safe, as in they're going to be paid back dollar for
| dollar. People are talking about SVB's assets as if they
| were toxic, rather than just not as attractive as other
| available bonds.
| phkahler wrote:
| The problem with SVBs bonds is that they're long term, so
| if they need the money early they have to sell them at a
| loss.
| deweywsu wrote:
| [dead]
| jhallenworld wrote:
| So what should SVB have done instead? It's well known..
|
| https://www.proshares.com/browse-all-insights/insights/bond-...
|
| But even then: Some professor was on Bloomberg today wondering
| about the hedge strategy. The hedge providers may be at risk if
| all of the sudden there are a huge amount of sales there. But
| this only happens during heavy withdrawals...
| heisenbit wrote:
| SVB should have decided not to grow so much so fast. More
| companies have gone kaput for fast growth than for any other
| reason.
| 462436347 wrote:
| Today the big banks collectively agreed to inject $30bn of
| deposits into First Republic to sure it up:
| https://www.bloomberg.com/news/articles/2023-03-16/first-rep...
|
| Meanwhile, all the benevolent VC techbros had to do was
| collectively agree to just _not_ withdraw all of their deposits
| from SVB en masse, and they couldn 't even muster that. How deep
| is the rot in SV?
| jahewson wrote:
| That would be irrational. It's a Prisoner's Dilemma and no
| matter what any individual would prefer to do the only rational
| move is to assume others will betray you. I don't think it's
| fair to ask SV to behave irrationally.
| 462436347 wrote:
| These hand-wavy appeals to rationality and game theory to
| justify sociopathic foot-gunning by VCs is really getting
| tiring.
|
| First, it's not a Prisoner's Dilemma if the parties can
| communicate with each other:
|
| https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
|
| > Two members of a criminal gang, A and B, are arrested and
| imprisoned. Each prisoner is in solitary confinement with no
| means of communication with their partner.
|
| Second, the traditional framing of the Prisoner's Dilemma
| disregards the aftermath, and the lasting reputational and
| trust consequences of betrayal, which would be substantial
| for any VC that failed to cooperate, or outright backstabbed
| the others.
| alecco wrote:
| SVB executives knew exactly what they were doing.
|
| The Greg Becker of the article (SVB CEO & president) was in SF
| Fed board of directors until Friday [1] and successfully lobbied
| for lax rules for banks like SVB. The current risk officer worked
| at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7].
| Previous risk officer was director of Freddie Mac [3]. Yellen was
| the 11th President of the SF Fed [5] and the current president is
| her protege [6].
|
| They knew exactly what they were doing. The Fed looked the other
| way. They sold a lot of stock in the past month [8]. They are
| very well connected into the Fed and Treasury. I doubt anybody
| will get any kind of serious legal troubles.
|
| [1] https://www.reuters.com/markets/us/ceo-failed-silicon-
| valley...
|
| [2] https://www.svb.com/news/company-news/svb-hires-kim-olson-
| as...
|
| [3] https://www.linkedin.com/in/laura-izurieta-1370144
|
| [4] https://fortune.com/2023/03/10/silicon-valley-bank-chief-
| ris...
|
| [5] https://en.wikipedia.org/wiki/Janet_Yellen
|
| [6] https://en.wikipedia.org/wiki/Mary_C._Daly
|
| [7] https://nypost.com/2023/03/13/silicon-valley-bank-execs-
| work...
|
| [8] https://twitter.com/unusual_whales/status/163455502148748083
|
| And this is just scratching the surface.
| rcme wrote:
| All banks are suffering, buy some are suffering more than others.
| It's also unclear how the Fed's actions are going to impact the
| situation going forward. Here are my unanswered questions:
|
| 1. What's going to happen to risk management at banks now that
| the government has shown themselves willing to backstop all
| deposits. Is there really any reason to spend money hedging risk?
|
| 2. What's going to happen to the bond market? Bonds are generally
| understood to change in price in a way that keeps yield equal to
| currently available fixed-income securities. However, with the
| Fed's new BTFP, the value of bonds is always par, apparently.
|
| 3. What are the banks going to do with their new liquidity? The
| Fed is essentially giving banks a fully collateralized $1 in
| exchange for $0.80. That's a lot of free money.
| qqqwerty wrote:
| If BTFP can only be used by banks with hold to market bonds
| purchased before March 12th, then wouldn't the impact on bond
| prices be negligible? I suppose we could hypothesize what the
| bond market would like in the absence of BTFP and the much
| higher likely hood of contagion. Feels like yields would drop
| on the expectation that the Fed would be forced to lower rates
| due the crashing economy. So I guess one could argue that BTFP
| might cause yields to go down a little bit, but probably a lot
| less than they would have otherwise.
|
| As to question 3, BTFP feels like a small dash of QE after
| pushing QT a little too hard and too fast. Banks will probably
| just put that extra cash into short term treasuries to shore up
| their balance sheet to protect against declining deposits. So I
| guess we should expect that extra cash to push short term
| yields down. Short term yields have already dropped a bit
| though, so maybe that is already priced in.
| omginternets wrote:
| >Is there really any reason to spend money hedging risk?
|
| Shareholder money is still on the line?
| stonemetal12 wrote:
| Is FDIC the only game in town? If you have ten million in the
| bank wouldn't you get private insurance for gap coverage?
| [deleted]
| NovemberWhiskey wrote:
| This is known as "Massachusetts".
| O__________O wrote:
| Specifically DIF:
|
| https://www.difxs.com/
|
| Though DIF has only $500 million in assets and only services
| member banks in US state of Massachusetts.
| jollyllama wrote:
| How deep is the ocean?
| upsidesinclude wrote:
| Steeped. Americas banks are still investment firms.
|
| Until we categorically prevent banks from attempting to "satisfy
| shareholders" with returns, these occurances will continue in one
| form or another.
|
| Banks dont need to be sexy or shake up the industry. We need
| boring people in banking making okay-ish money.
| landemva wrote:
| Boring banking for the people: member-owned credit unions.
| ajkjk wrote:
| I was pleased to read Nathan Tankus' take[1] on all this,
| although I wish I understood it better, which was that a lot of
| policy ideas that have been somewhat fringe are becoming
| mainstream in the last week:
|
| > The prospect of unlimited deposit insurance, whether de facto
| or de jure, is leading to a large-scale reconsideration of views
| among even "moderate" banking scholars.
|
| I imagine that's usually how real policy progress happens:
| interesting ideas are always getting thought up and proliferated,
| but it takes a big upheaval to move them over to being really
| possible.
|
| [1]: https://www.crisesnotes.com/every-complex-banking-issue-
| all-...
| rcme wrote:
| It depends on your view of "progress." Early in the pandemic,
| people thought you really could print money indefinitely and
| MMT was right. Now people see that classical notions of
| inflation are still valid.
| ajkjk wrote:
| Which people thought those things? I feel like at the time I
| was only hearing criticism.
| alecco wrote:
| Silicon Valley Bank was giving executives easy 50 y mortgages for
| mansions and commercial real estate. This is the garbage now in
| SVB's balance sheet. It's not just 10y treasuries. Read the
| actual reports.
|
| In turn, VCs/founders/executives promoted SVB. And now they don't
| want to be their own counterparties on a bet gone wrong.
|
| https://twitter.com/one4thecashbag/status/163533710637676953...
| vajrabum wrote:
| Let's not forget the nearly unprecedented interest rate hikes by
| the fed almost 5 points in a year, or the 2018 increase in
| interest the size of bank required to have a resolution plan
| thereby exempting SVB or Peter Thiel's call to withdraw $ I would
| have labeled the raising of the size required for a resolution
| plan as greed by SVB but the fed had no problems resolving SVB so
| it clearly wasn't too big to fail. If the fed continues to raise
| I'd guess we will see more bank failures
| d23 wrote:
| > Let's not forget the nearly unprecedented interest rate hikes
| by the fed almost 5 points in a year
|
| I'm not an expert in this area, but in what way is this true?
| Interest rates are still quite low by historical standards. The
| 80s saw massive increases to a much higher level (approaching
| 20%) in a shorter amount of time. There were large jumps in the
| late 60s and early 70s as well.
| tptacek wrote:
| People seem to have a really hard time with the idea that, in the
| SVB debacle, the system worked effectively and pretty much the
| way it was planned to. It's not even clear what people are upset
| about. There's an article on the front page of The Atlantic today
| about how angry we should be about SVB, and if you read it, it's
| hard to figure out who those angry people should be.
|
| Equity is getting zeroed out. Management was fired. Depositors
| were made whole almost immediately. SVB's assets are apparently
| not impaired; SVB would have held them to maturity had the bank
| run not happened, and now somebody else will instead. A bank made
| bad risk management decisions and got zeroed out; all the right
| incentives not to do that again are there. Meanwhile: the point
| of the FDIC system is for customers not to have to do this kind
| of risk assessment themselves.
|
| It is remarkable how badly SVB managed to fuck this whole
| situation up. But SVB is gone, so it's not much fun calling them
| out. I feel like people are flailing looking for someone else to
| blame.
| unixraider wrote:
| "People seem to have a really hard time with the idea that, in
| the SVB debacle, the system worked effectively and pretty much
| the way it was planned to. It's not even clear what people are
| upset about."
|
| Does that have anything to do with this article at all? First
| few lines of _this_ article: Banking is a confidence trick.
| Financial history is littered with runs, for the
| straightforward reason that no bank can survive if enough
| depositors want to be repaid at the same time. The trick,
| therefore, is to ensure that customers never have cause to
| whisk away their cash.
|
| This article is about the possibility of the total loss of
| confidence in the banking industry leading to a run on a system
| that can't handle it. I understand the context you meant when
| you said things like "the system works, why is everyone upset",
| but I find those a pretty poor choice of words regardless with
| this much fear circulating.
| ouid wrote:
| The problem here is that extremely liquid assets like treasury
| bonds are not being marked to market resulting in completely
| invisible insolvency. Banks don't have a right to have you keep
| your deposits when their assets do not cover those deposits,
| and, by extension, shouldn't have a right to lie about the
| _market value_ (aka value) of those assets in order to con you
| into doing so. Executives were still paying out their bonuses
| during the period of insolvency...
| tptacek wrote:
| The "insolvency" here was detailed in the SEC statements,
| which is, as I understand it, how the run happened --- there
| was chatter about it last year.
|
| Further: the "market value" thing here is complicated. The
| reason there is separate available-for-sale and held-to-
| maturity accounting for bank assets is that, in the ordinary
| course, the assets are held --- the only reason you sell them
| is because of extrinsic distress. There isn't anything
| _wrong_ with the agency MBS portfolio SVB had; they 're worth
| less because if you have to sell them in Q1'2023, they
| compete with even more attractive bonds and are discounted
| accordingly. But if you just hold them, they pay back dollar
| for dollar, and that's what the bank normally does anyways.
| ouid wrote:
| I really don't see the market value thing as all that
| complicated. A banks liabilities are (roughly)
| instantaneous. They must honor withdrawals when they are
| requested, so their assets must be measured accordingly.
| There is no other reasonable definition of instanteous
| value except for market value. This is an extraordinary
| advantage of having large markets for things.
|
| Granted, it's sometimes hard to establish market value. In
| the case of assets with genuinely low liquidity, the market
| value is somewhere above the bid and probably below the
| ask. Accounting in this case comes with error bars, but
| it's not really justifiable to approximate the value of an
| asset outside of this range.
|
| Here's an example. Suppose a hypothetical bank receives 100
| dollars in deposits at an interest rate of effectively 0.
| They use 85 dollars to buy a bond that matures in 1 year
| that pays 90 dollars, and keep 10 dollars in cash as
| reserve requirement. They pay themselves the extra 5
| dollars as bonuses. They have met their fractional reserve
| requirements, and according to your scheme, their holdings
| should be valued at 100 dollars. Are they solvent?
| tptacek wrote:
| I guess the core of my argument is that SVB's viability
| and the damage caused by their implosion are separable
| concerns, and FDIC has rather neatly separated them.
| Nobody has to take a bath on SVB's bond portfolio;
| deposits are guaranteed, so they can just be held to
| maturity; there's no pressure to sell. Meanwhile: SVB's
| equity is zeroed out, so they've paid the ultimate price
| for their incompetence.
| ouid wrote:
| Paying out from the FDIC insurance fund is inflationary,
| at the very least, which means everyone takes a bath.
| tripletao wrote:
| I think you're assuming here that the HTM accounting
| means the bonds don't actually lose value if they're held
| to maturity? That's not the case; it's just arbitrary
| accounting treatment, and the regulatory decision to
| permit such accounting is a big part of why the SVB blew
| up. Accounting rules are supposed to reflect economic
| reality to some extent, but they obviously don't do so
| exactly. For example, under FIFO inventory accounting,
| two identical boxes in the warehouse might be on the
| books at different values; but I assume you'd agree
| they're still actually worth the same amount, since
| they're identical.
|
| All bonds get held to maturity by someone (unless they
| default, but that's not the problem here). The FMV of the
| bond is determined by the value of the bond's remaining
| cash flows to that person; so if the FMV went down, then
| that should be a clue that value was fundamentally lost,
| regardless of who's holding the bond.
| rtkwe wrote:
| The weird thing is they were only insolvent under artificial
| pressure. A lot of banks would have similar trouble there's
| just not as concentrated of a depositor spread where a scant
| handful of people can create a run on the bank by themselves.
|
| A distinction between held to maturity assets and market
| priced assets makes sense though, there should be some
| consideration in the calculation about term though for sure.
| The question of that though seems very complex to answer.
| lackbeard wrote:
| > the point of the FDIC system is for customers not to have to
| do this kind of risk assessment themselves
|
| It seemed self-evident to me, based on the explicitly stated
| limit on FDIC insurance, that if you had an amount of money
| over that limit, you really need to have a plan to deal with
| that risk, and people who failed to do so should suffer the
| consequences of their poor decisions. As things stand, the
| people who did spend the time and/or money to provision for
| that risk have suffered for it.
|
| I think what many people are having a hard time with (myself as
| well, sort of...) is how the rules were changed out from under
| everyone in yet another example of how the rules don't apply to
| the politically connected.
| tptacek wrote:
| As I understand it, the ordinary way FDIC resolves a
| situation like this is that they simply have the failing bank
| acquired by a peer bank (a bank of generally the same size
| and structure), which then takes over the depositor
| obligations. So it's not as if the ordinary course is that
| uninsured deposits get zeroed out; it's just that the
| mechanism FDIC is using is novel and abrupt.
| rufus_foreman wrote:
| >> they simply have the failing bank acquired by a peer
| bank
|
| "Simply".
|
| WaMu - acquired, depositors got 100 cents on the dollar
|
| IndyMac - 50 cents on the dollar
|
| Silver State - 11 cents on the dollar
|
| Depositors have not always been made whole in the past.
| Calvinball has certainly been played in the past, for
| IndyMac the FDIC limit was retroactively raised from 100K
| to 250K.
|
| That's what people are pissed about. The Calvinball rules.
|
| And we know how that works out, if you're in the in group,
| you get paid, and if you're not in the in group, you get
| fucked.
|
| As Black Flag once sang, "We're tired of being screwed.
| Revenge!"
| lackbeard wrote:
| I wonder why that didn't happen in this case? Perhaps fear
| that would just trigger a run on the acquiring bank?
| temp-dude-87844 wrote:
| The situation unfolded over a weekend, after SVB shut
| down Friday afternoon. The FDIC attempted to find a buyer
| on Saturday, and got at least one interested party, but
| couldn't close a deal. The Administration was getting
| anxious over the possible fallout: tech companies not
| meeting payroll, possible banking contagion, who knows
| what else? Then Powell/Fed proposed some novel mechanisms
| for temporary rescue. [1]
|
| They worked together to put out a joint press release,
| and Biden gave a down-to-earth, rough-and-tumble speech
| about protecting depositors and kicking the failed
| executives and bad-luck shareholders to the curb, because
| this is "how capitalism works". It was an unusually blunt
| attempt to preemptively push back at the perception that
| this guarantee of FDIC-uninsured deposits will be branded
| a 'bailout'. (I predict that this attempt will fail and
| this will widely be perceived as a 'bailout' in casual
| and political discourse, which is the exact forum at
| which they've aimed this message.)
|
| After 2008, the public gained awareness of the
| consolidation -- both forced and emergent -- that occurs
| in response to these sorts of crises. Public opinion
| views these outcomes unfavorably, because they seem
| unfair and irreversible, albeit no palatable alternatives
| have emerged that are acceptable to both to the public
| and government and industry incumbents.
|
| [1] https://apnews.com/article/silicon-valley-bank-
| failure-depos...
| tptacek wrote:
| I don't know either. I've been wondering if it's largely
| because SVB is a weird bank. They were huge --- larger
| than American Express --- but with an unusually small and
| extraordinarily correlated based of depositors. I think
| it's hard to understate just how strange SVB's customer
| base was; the closest analogy I can come up with is the
| Last of Us zombies, all perfectly connected with fungus
| hyphae.
| Nick87633 wrote:
| I think the outrage would be for/at all the -other- bankers who
| made the same poor decisions but now still get to keep their
| bonuses and jobs due to the new Fed Backstop lending. SVB lost
| their pound of flesh but the rest (or most) are getting a free
| pass. We still have to see how the first republic bank run
| plays out... but according to some other comments which I can't
| find right now, there are more than just these two banks which
| have heavily exposed themselves to rate risk.
| steve76 wrote:
| [dead]
| geodel wrote:
| Well, people are specially angry about _Depositors were made
| whole almost immediately_ among other things.
|
| And depositors to their dismay are learning they are about as
| much loved as Wall street bankers, corporate execs and
| billionaires. More than any particular moral deficiency I think
| people are finding a general lack of self-awareness common
| among SV startup founders infuriating.
| stametseater wrote:
| > _I think people are finding a general lack of self-
| awareness common among SV startup founders infuriating._
|
| Exactly this. I even read a comment from such a founder
| saying essentially: _" Why are people so angry, don't they
| know I oppose brogrammer culture?"_ As if brogrammer culture
| were the meat of of the reason why people are sick of the
| hypocrisy of the capital class, or even American startup
| culture specifically. Totally out of touch, completely
| clueless. Utterly tone deaf.
|
| Particularly, the decision to change the rules in the middle
| of the game and make depositors over the FDIC limit
| completely whole again is clearly an unfair favor to the
| rich. Normal people don't get to have the rules changed mid-
| game in their favor. If all the depositors were merely semi-
| wealthy commoners with only $300k in their accounts, they
| would have only gotten $250k back. Nobody would expect the
| rules to be changed in that scenario. But if you're much
| richer than that, then the rules are apparently just
| guidelines. It isn't fair and that's why people are mad.
| Anybody confused by people being mad is completely out of
| touch, and voicing that confusion is only going to make
| people even madder.
| creato wrote:
| > If all the depositors were merely semi-wealthy commoners
| with only $300k in their accounts, they would have only
| gotten $250k back.
|
| No, they would have gotten $250k + ~90% of the balance.
| Maybe even 100%. Annoying but I wouldn't care enough to
| take to twitter about it.
|
| To explain why: it's an overall loss of a few percent. The
| same as the daily fluctuation if I had kept the money in
| the stock market or whatever.
| jksmith wrote:
| The system is designed to be a private scheme supported by a
| government which supports that scheme. That's the issue.
| Profits are privatized and losses are socialized. If deposit
| insurance becomes limitless as Yellen announced, then the issue
| is our kids will pay for this.
|
| Re effective system: Maybe dinosaurs had to swallow rocks to
| digest their food, but we don't have to maintain this practice
| just so dinosaurs can keep existing. The system needs to be
| deprecated in favor of better tech that takes it out of the
| hands of dinosaurs. Legacy banking and gov/political class need
| to be replaced by a better solution.
| catskul2 wrote:
| > need to be replaced by a better solution.
|
| Which is...?
| colpabar wrote:
| Every few months the mainstream media jumps on some new thing
| about how big tech is finally collapsing because of X or we
| should be mad at big tech for doing Y and it's usually blown
| way out of proportion. Traditional media doesn't seem to like
| big tech, and this is a great opportunity to stir up some
| outrage.
|
| What I am confused about is - if everything went "according to
| plan", then what _did_ happen? Is it really all peter thiel 's
| fault? Surely someone as smart as him saw _something_ that made
| him do what he did, given that it was a pretty massive thing to
| do.
| chongli wrote:
| _Traditional media doesn 't seem to like big tech, and this
| is a great opportunity to stir up some outrage_
|
| Of course they don't! Look at some charts of newspaper
| advertising revenue over the past few decades. There's one
| word that best describes it: apocalyptic.
|
| Where did all that advertising revenue go? Google and
| Facebook!
| corbulo wrote:
| There isn't clear messaging on where the money is coming from
| to cover depositors. Thats whats leading to no one even
| factually knowing whats happening.
| tptacek wrote:
| In SVB's case, can't you cover depositors simply by holding
| their assets to maturity and waiting for them to be repaid?
| SVB couldn't do that because there was a run that was forcing
| them to sell early, in unfavorable conditions.
| jandrese wrote:
| This doesn't make sense though. Sure they would have to
| take a haircut on those securities thanks to the fed
| jacking up the interest rate so much, but if you offer the
| right price they should still sell.
|
| Investing involves risk. Sometimes that means losing money,
| even if you are the bank.
| tptacek wrote:
| No, they don't, right? They simply hold them to maturity.
|
| The reason a $100 par bond paying 2% sells for (I don't
| know, say) $87 when interest rates are (I don't know,
| say) 5% isn't that the original bond is impaired. It's
| that the same $100 buys you a bond that pays 3% better,
| so nobody will buy the bond without a discount.
|
| But the bank doesn't normally sell the bond to begin
| with. That's why people say banks "borrow short and lend
| long". What the bank is supposed to do is hold the bond
| until it matures and is paid back in full. The only
| reason SVB can't do that is that all its depositors
| simultaneously demanded their money bank, so it couldn't
| wait the bonds out. But other institutions can do that
| waiting.
| jandrese wrote:
| But it's not like there is no market for bonds. You can
| calculate what they will be worth at maturity and sell
| them to people looking for shorter term bonds. Yes
| they're getting a bad deal thanks to the Fed, but that's
| life.
|
| It will be a loss for the bank, but that seems better
| than total collapse. Banks are ultimately companies that
| take calculated risk to make money, if you can't afford
| to take an occasional loss then you shouldn't be in a
| risk based business.
| tptacek wrote:
| Right: SVB was incompetent. Their stock got zeroed out.
| Meanwhile, institutions that have adequate cushion can
| step in and hold SVBs assets to maturity.
|
| The thread here asks: "who's paying to cover SVB's
| uninsured depositors?". Isn't that the answer?
| tripletao wrote:
| The SVB was mark-to-market insolvent, not just
| undercapitalized. There's no indication that those marks
| were unrealistic; the market was orderly, and they were
| consistent with a naive NPV calculation, with a loss due
| to the increase in that discount rate. So it wasn't
| obvious that sufficient money to repay the depositors
| would exist even after zeroing the shareholders and
| creditors; if it were, then the SVB would probably have
| found a buyer.
|
| Maybe enough depositors will leave money in the SVB at
| below-market interest rates that it will earn its way out
| of the hole. The FDIC has given depositors a special
| incentive to, since by guaranteeing all funds they've
| made the SVB the safest bank in the USA. If the
| depositors don't, then the FDIC will take the loss, and
| socialize it over all participating banks.
|
| Per my other comment, the HTM accounting is a
| distraction. That accounting was compliant, but
| accounting doesn't define reality. The holders of long-
| term bonds take a real economic loss when interest rates
| increase, regardless of whether they sell. This may seem
| unintuitive since the cash flows don't change, but it
| couldn't be otherwise--if the bond is worth par, then why
| aren't any buyers willing to pay that?
| trifurcate wrote:
| The bond _is impaired_ in that sense. The concept of
| present value isn 't made up just for fun, it's because
| the value of money depends upon the time at which it is
| available. $10 in 10 years is obviously worth less than
| $10 right now, which is not only captured by present
| value calculations but it's also plainly and intuitively
| visible if you make the chain of associations of high
| interest rates -> higher price levels -> lower monetary
| value. So yes, if your bond sells for $87, you can be
| reasonably sure that $87 is the value of all of its
| payments back to you. It doesn't matter that the nominal
| payouts sum to $100, because they are denominated in
| future dollars which are worth less than present dollars!
| You need to cover the shortfall when you move those
| payments from the future to now!
| NovemberWhiskey wrote:
| The bond is impaired (fair value less than amortized cost
| basis) but from the accountancy perspective, the question
| is whether it's Other Than Temporarily Impaired (OTTI).
|
| As long as the holder does not intend to sell the bond,
| believes that is more likely than not going to be a
| position where it isn't forced to sell (to generate
| working capital etc), and there is no likelihood of a
| credit loss, then the bond is not OTTI.
|
| The subjective assessment of whether you're "more likely
| than not" going to be forced to sell the bond is the
| pivot on which this whole thing tilts. It's probably a
| good question whether a simple balance of probabilities
| is really where that standard ought to be.
| TuringNYC wrote:
| >> SVB would have held them to maturity had the bank run not
| happened, and now somebody else will instead.
|
| If that were the case, they wouldn't have had to raise
| emergency funding last week. The assets were indeed impaired.
| Hiding the true values via AFS accounting treatment doesn't
| magically make the dire circumstances sustainable.
| dh2022 wrote:
| The assets are impaired at today's interest rates. The yield
| curve is very inverted (is that gramatically correct??) this
| signals interest rates will be quite a lot lower in a few
| years. At that time the assets will not be impaired - they
| may even be at above-par value.
| TuringNYC wrote:
| >> At that time
|
| It doesn't matter that prices _might_ recover in the
| future. I 'd argue they _might not_ -- and if anyone
| believed otherwise they would buy up the assets at inflated
| prices (why arent they?!) SVN rolled the dice, made bets,
| the value is way down and... _they didnt have enough money
| to allow customers to withdraw money._ That is a fail. They
| needed to raise a lot of cash, they didnt /couldnt raise
| enough. That is a fail.
|
| Further, they underwrote tons of LoCs for startups which
| are underwater due to down-rounds. That isnt a temporary
| impairment, that is a permanent impairment.
|
| Their customers are burning funds (as most VC-funded
| companies do) and VC funding is down, so declining balances
| via continued withdrawal is the natural state they need to
| support (even in the absence of a bank run.)
| [deleted]
| fumeux_fume wrote:
| > the system worked effectively and pretty much the way it was
| planned to
|
| Had a good chuckle at that part in particular. I think it's the
| plan that a lot of people are having a hard time with.
| rayiner wrote:
| It's also not clear to me what the material impact of this was
| on "Main Street" that would cause people to be worked up
| looking for someone to blame.
| dboreham wrote:
| Well you begin with "California bad woke liberals" and take
| it from there...
| jjoonathan wrote:
| Yeah, people are flailing.
|
| The only party that made out like bandits is the SVB management
| that piled on the risk in the first place -- but investors are
| ultimately responsible for letting them do that and investors
| have been punished.
| basseq wrote:
| I'm unclear how SVB management "made out like bandits". I
| assume they had a couple good years of nice salaries and
| bonuses, but now their equity is zero'd and they're out of a
| job. I presume they would have preferred to continue managing
| the bank as a going concern.
| SkyMarshal wrote:
| It's probably a reference to reports of some SVB execs
| selling their stocks in the weeks before the failure.
| basseq wrote:
| Ah, likely. Though it doesn't seem like there's any
| evidence yet on insider trading or execs fully cashing
| out. They got lucky liquidating some single-digit % of
| their holdings, but still likely lost most. A 95% loss is
| better than a 100% loss, but still not "making out like a
| bandit".
| jjoonathan wrote:
| They chose to invest in those 10 year securities,
| proverbial pennies in front of the steamroller. I'm sure
| this was framed as a smart move at the time and they gave
| themselves big bonuses while investors were out to lunch.
| Ultimate responsibility does lie with investors, but
| management definitely hustled them and got away with it.
| basseq wrote:
| I guess my point is that _they still got hit by the
| steamroller_ : they lost their jobs and future earnings,
| they lost any equity (which certainly was part of
| aforementioned bonus), etc.
|
| Earning a nice bonus last year is a reasonable
| consolation prize, but I'd wager most execs would rather
| have had a lower bonus and the ability to continue to
| manage an operational bank through 2023.
| jjoonathan wrote:
| No, the investors got hit by the steamroller. Management,
| who knew exactly what they were doing, did not lose their
| earnings. Future earnings? Some of these were Lehman
| execs -- their ability to land a position in SVB is proof
| that they probably did not sacrifice future earnings.
|
| > Earning a nice bonus last year
|
| Why do you think this was limited to last year? I suspect
| they made risky moves again and again and again and got
| paid out again and again and again.
| digitaltrees wrote:
| This is so out of touch with the reality of people. No
| one is knowingly taking risk that will bankrupt their
| company for a few million dollars in bonus when they can
| instead have a 10 or 20 year career where even 25% of
| that bonus with accrue to much more value. Further, their
| bonus were stock, and every single executive at SVB lost
| most of their equity which was paid over years and locked
| up as options.
|
| Edit: after reading this article posted by lordfrito
| below I stand corrected. SVB executives knew the risk and
| took it anyway. But not for personal gain but to maximize
| firm value as it allowed higher profit which increased
| the valuation (so yes they benefited personally, but to a
| greater extent than just a few million in bonuses).
|
| https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
| cronix wrote:
| They cashed in millions in stock just before they
| announced they needed to raise $2B in capital to offset
| losses on their bond sales, which led to a crash, on top
| of their bonuses. If that's getting hit with a
| steamroller, sign me up.
| digitaltrees wrote:
| So far as I have seen, every equity sale was part of
| standard, pre-cleared and disclosed plans. And all those
| executives had significantly more equity they probably
| would have loved to sell but couldn't.
| kristjansson wrote:
| Interestingly, that second part appears to be true only
| for the CEO, who's lost ~$30m. Other executives (at least
| the ones on NASDAQ's insider transactions list) were
| holding only a few thousand shares at most.
| SkyMarshal wrote:
| They didn't even pile on the risk, at least not in the
| 2007/2008 sense. They bought long-dated 10yr US Treasuries
| (or was it MBS's? I've heard both), since that was one of the
| lowest risk assets they could invest in and still get enough
| spread vs their deposits to remain a viable business. It's
| strange days when that is considered piling on risk.
|
| While there wasn't counterparty risk with those assets, there
| was duration risk. And their mistake seems to have been not
| selling those the instant the Fed publicly committed to
| killing inflation with higher interest rates. It should have
| been clear to them that their exposure to duration risk was
| rising, and they needed to restructure back in 2021 or early
| 2022 to mitigate that.
| jandrese wrote:
| The rumor I read is that SVB booked those treasuries in
| some weird way that prevented them from being sold but also
| prevented them from having to pay taxes on the treasures.
|
| Otherwise you are totally right that it should have been no
| problem to cover the shortfall by selling off some of the
| treasuries, even though they would have had to take a
| haircut on them thanks to the Fed jacking the rates so
| fast.
| kasey_junk wrote:
| Their a&l committee told them to change their asset mix in
| 2020 and they didn't to preserve their profits[0].
|
| All bank risk assessment regimes measure both credit and
| interest rate risk. Measuring 1 in isolation is idiotic for
| now obvious reasons.
|
| [0] https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
| lordfrito wrote:
| It's been reported [1] (no paywall [2]) that executives
| were aware of the risk and continued to purchase higher
| yielding assets in spite of internal protests.
|
| The actions are borderline criminal. To avoid a $36M hit
| they literally bet the bank. This was a step beyond regular
| incompetent mismanagement.
|
| From the article: In late 2020, the
| firm's asset-liability committee received an internal
| recommendation to buy shorter-term bonds as more deposits
| flowed in, according to documents viewed by Bloomberg. That
| shift would reduce the risk of sizable losses if interest
| rates quickly rose. But it would have a cost: an estimated
| $18 million reduction in earnings, with a $36 million hit
| going forward from there. Executives balked.
| Instead, the company continued to plow cash into higher-
| yielding assets. That helped profit jump 52% to a record in
| 2021 and helped the firm's valuation soar past $40 billion.
| But as rates soared in 2022, the firm racked up more than
| $16 billion of unrealized losses on its bond holdings.
| Throughout last year, some employees pleaded to reposition
| the company's balance sheet into shorter duration bonds.
| The asks were repeatedly rejected, according to a person
| familiar with the conversations. The firm did start to put
| on some hedges and sell assets late last year, but the
| moves proved too late.
|
| [1] https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
|
| [2] https://archive.is/HqVWn
| digitaltrees wrote:
| Thank you for posting. This actually changes my view
| entirely and makes many of my other posts invalid.
| lordfrito wrote:
| Yeah I feel this point isn't well known, but likely will
| be soon.
|
| I love HN because many of us actually listen to each
| other and debate in good faith, helping each other
| sharpen our views.
|
| Glad you found it helpful.
| lackbeard wrote:
| It's well known that long-dated treasuries are highly
| volatile. I think the lesson we've all learned here is that
| they didn't have a viable business. It seems like they were
| offering a product that was not profitable given their
| competition and reasonable risk management.
| tptacek wrote:
| They're volatile if you trade them, right? But they're
| not volatile in the sense that there's uncertainty that
| they'll pay back. Do banks normally actively trade their
| long-dated bonds?
| lackbeard wrote:
| I guess that's what you normally do when you're
| overweighted that asset class and you must cover
| withdrawals!
| basseq wrote:
| No, and that's the point. I understand that banks mark
| long-term bonds as hold-to-maturity (and only then can
| list them at par on their balance sheet). But they
| _actually have to hold them_. Otherwise, they have to
| mark them to market, and _any sales_ of HTM bonds flip
| the entire tranche over to MTM.
|
| So part of the problem is that SVB had a reasonable-
| looking balance sheet of HTM bonds, then had to sell some
| at market, which flipped their entire portfolio to MTM
| and destroyed their balance sheet.
|
| E.g., a simple balance sheet: Assets
| Qty. Par Market Total ----- Mark To
| Market Bonds 10k $1k $0.8k $8Mn Hold To
| Maturity Bonds 1M $1k $0.8k $1Bn Total
| $1.08Bn
|
| But then let's say I have $16M of withdrawals. I sell all
| of my short-term bonds for $8M, but have to cover another
| $8M, so I sell another 10k bonds at market price.
|
| But, oh shit, now all my long-term bonds have to be
| marked to market, so now my balance sheet looks like
| this: Assets Qty. Par
| Market Total ----- Mark To Market Bonds
| 990k $1k $0.8k $792Mn Total
| $792Mn
|
| $16M of outflows have reduced the assets on my balance
| sheet by _two hundred and sixteen million_.
| UncleEntity wrote:
| And people saw this is what they were doing and were
| tweeting about it in advance of all their "problems".
| landemva wrote:
| To allow the bond sale before they had a cash infusion
| basically flushed the business. I wonder if board of
| directors had an understanding of how it would detonate
| the balance sheet. After that, the regulators took the
| obvious necessary action.
| [deleted]
| jjoonathan wrote:
| 2008 is an extremely low bar. They still piled on risk.
|
| > that was one of the lowest risk assets they could invest
| in and still get enough
|
| Was it? They had enormous deposit inflows and were
| struggling to scale, so their costs should have been
| undersized by default. They really ought to have been able
| to survive off the pennies that weren't in front of the
| steamroller.
| SilasX wrote:
| There are also the people who were able to buy USDC or DAI at
| a discount when there was worry that SVB's collapse would
| cascade to those stablecoins.
|
| Disclaimer: was one of them, though not nearly as aggressive
| as I should have been.
| AmVess wrote:
| Banks failing is how it is planned to work? Zero oversight from
| agencies charged with keeping their eyes on them is how it is
| supposed to work?
| tptacek wrote:
| Yes. That is literally the reason we have the FDIC.
| aeyes wrote:
| > SVB would have held them to maturity had the bank run not
| happened, and now somebody else will instead
|
| This "somebody" is the government aka the central bank putting
| these bonds on their balance sheet. This is a new form of
| quantitative easing.
| jjtheblunt wrote:
| > It's not even clear what people are upset about.
|
| The upset seems centered around the perception that rules were
| changed ex post facto to protect political donors.
|
| I get that impression from HN, from newspapers of all ilks and
| biases as well.
| TMWNN wrote:
| > The upset seems centered around the perception that rules
| were changed ex post facto to protect political donors.
|
| 69% of SVB employees' donations were to Democrats over the
| past three years. <https://unusualwhales.com/news/svb-
| donations>
|
| The bank donated $74 million to Black Lives Matter.
| <https://nypost.com/2023/03/15/svb-donated-73m-to-black-
| lives...>
| taeric wrote:
| I confess I feel like I've taken crazy pills with all of the
| takes I've seen. This post sums up my understanding perfectly.
|
| Many of the takes further complicate by implying that they had
| no assets. Which just feels like lying at this point.
| UncleEntity wrote:
| It's not that they had no assets it's that they couldn't
| liquidate them to pay out their depositors.
|
| Sure, if everyone had just waited for the 10 year bonds to
| mature to access their funds their bank was in perfect shape.
|
| --edit--
|
| Assuming they could come up with enough money to pay the over
| market interest rates on deposits while also seeing their
| money flows reversing because of VC capital drying up.
| taeric wrote:
| Right, I'm not arguing that they made no mistakes. That is,
| as the post above me said, things seem to have worked out
| about how they should have.
| Ilverin wrote:
| Stylized example of how the game works:
|
| Bet on every number but 0 on a roulette wheel
|
| Not 0: you and your investors make 3 billion this year
|
| 0: you and your investors lose your 20 billion you have
| invested, and the government bails out your depositors who kept
| 200 billion with you
|
| This stylized bet is a good deal for the investors and
| management and bad for the government. Sometimes investors lose
| everything but it's still a very good bet in expectation. This
| stylized example is a case of "privatized gains, socialized
| losses".
|
| Then the question is: was SVB reckless? They could have been
| less reckless by covering their interest rate exposure, but the
| fed has an equity to deposits ratio requirement, and getting
| any equity to invest requires a return. IMO they should have
| either diversified their business or stopped opening new
| accounts for tech companies because when depositors are
| uninsured and concentrated in the same industry, that is risky.
| TuringNYC wrote:
| >> They could have been less reckless by covering their
| interest rate exposure, but the fed has an equity to deposits
| ratio requirement, and getting any equity to invest requires
| a return.
|
| Great point. To rephrase a bit, they lost money...and then
| kept doubling down by not cutting their losses (?hoping
| things would turn?) They finally tried to do something about
| it, but it was too late to matter.
| digitaltrees wrote:
| What bet should management have made instead of buying US
| treasuries and Grade A MBS? Should they have held all
| deposits in cash? How should they have funded operations
| because eventually, holding $180 billion in cash with no
| interest and thus no profit while running a large operation
| will start to eat into shareholder equity and eventually
| depositor capital. I think a thought experiment about what
| should have been done is important if we are going to assign
| blame for anyone. When I do that, its not clear that SVB
| management made some profound mistake as there were
| structural challenges they faced that were unique to them
| (large capital inflows that were a majority of deposits
| during a very low rate interest rate environment, client mix
| that kept balances that were much higher than FDIC limits,
| client mix that was highly concentrated in one industry with
| much greater sensitivity to interest rates than most
| companies since fundraising is now clearly seen as tightly
| coupled to rates) and forces outside of their control in that
| the Fed raised rates very quickly without providing any
| mechanism for member banks to exchange long term low rate
| securities.
|
| So Management has to invest in something and it has to have
| some interest. I would love to hear an investment thesis that
| would have been able to deploy over $100 billion in new
| capital during the low interest rate 2018-2021 time period
| that wouldnt have been ill prepared when rates drastically
| increased in 2022-2023.
|
| Edit: after reading this article posted by lordfrito below I
| stand corrected. SVB executives knew the risk and took it
| anyway. But not for personal gain but to maximize firm value
| as it allowed higher profit which increased the valuation (so
| yes they benefited personally, but to a greater extent than
| just a few million in bonuses).
|
| https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
| landemva wrote:
| When interest rates began rising about 13 months ago, SVB
| should have taken a small haircut on the long term bonds
| and moved to shorter terms and T-bills. They held their
| losers until last week when they finally sold for a larger
| loss.
| tangjurine wrote:
| No.
|
| First SVB was bailed out by FDIC funds which all banks pay
| into.
|
| Second, to say 'privatized gains, socialized losses', you are
| assuming that banking is like gambling, with no value being
| created through the banking process.
|
| Even if banks were being very very safe, they would still
| make money by lending out deposits. (Whether that is good or
| bad for society, is another question, which I would argue the
| answer to would be bad).
| digitaltrees wrote:
| These are great points and show that the system worked as
| designed. There will always be bank failures. We want
| depositors to have confidence that their deposits are safe,
| not altruistically, but to prevent bank runs since those
| serve no one and re totally avoidable. Management and
| Shareholders were wiped out.
|
| Honestly, it looks like in a year or two, the Government
| will make money off of this because as soon as interest
| rates come down the securities will go back to book value.
|
| The real winner here is Goldman, since they bought the bond
| portfolio from SVB that triggered all of this at a discount
| and can hold to maturity and interest rates may need to
| come down or a broader asset exchange program implemented
| to stop any contagion, so those bonds will return to book
| value sooner than expected.
| watwut wrote:
| That is what insurance was supposed to be for and it was
| up to 250000. Anything above that was supposed to be
| returned from sold assets. When assets are not enough,
| those money would be lost.
|
| There are literal products to insure money in excess of
| 250000. But people who are getting bailout now were not
| using those products. They were not paying for insurance
| in excess of that.
|
| The system did not worked purely as designed. The system
| socialized loses of well connected rich people.
| strangattractor wrote:
| Maybe somebody here can explain something I just doin't seem to
| be able to understand. Why is it so hard for banks to do a
| stress test?
|
| They have all the data. If I was CEO of a bank I'd want to be
| able to get up in the morning and have some idea how much risk
| and what types of risk my bank was assuming. Especially in a
| dynamic environment of Fed interest rate changes. I would think
| they would be doing it all the time. Isn't that what computers
| do? Simulate scenarios like - What does our bank look like if
| the Fed raises rates to %2 etc. It makes me feel like they
| truly just don't want to know so they can do whatever they
| want.
| patientplatypus wrote:
| The CFO of Lehman Brothers was an executive and everyone's FDIC
| rates will go up in perpetuity and a lot of people are going to
| be fired that have nothing to do with the financial world. Go
| fuck yourself.
| selimthegrim wrote:
| He was in a different arm.
| noslenwerdna wrote:
| Shouldn't the executives have to pay back their bonuses they
| got just before the FDIC intervened? Aren't they effectively
| subsidized by the govt?
| sschueller wrote:
| Yes, every cent. If they don't it is effectively a ponzy
| scheme where the last bag holding investors are the ones
| getting zeroed out. All the previous holders made money on
| them.
| 0xcde4c3db wrote:
| The main source of upset I've seen (disregarding the silly
| "woke bank" hot air) is less about banking industry regulations
| _per se_ and more about viewing government priorities writ
| large through a blurry sense of class warfare. For example,
| there 's a particular feeling of a double standard between SVB
| depositors and people with student loan debt. When the
| government decided to bend the rules for the former, it was
| done swiftly with a minimum of serious political conflict. When
| the government decided to bend the rules for the latter, the
| swift action was to arrange for the program to be challenged at
| the Supreme Court.
|
| There are all kinds of legal and practical reasons that this
| isn't really a fair comparison, but again, it's not really
| about the specific policies, it's about a sense of where the
| government's priorities are and its flexibility seeming to only
| bend in one direction.
| digitaltrees wrote:
| Valid point. It seems that both challenges would have come
| from the same group, and that group has no mechanism to stop
| the FDIC or Fed action.
| sidewndr46 wrote:
| > Depositors were made whole almost immediately
|
| This is what I'm mad about. FDIC insures to $250k in normal
| cases. It should not have been used to insure depositors for
| their full deposit amounts here.
| wootland wrote:
| Why does that make you mad? If my money is at risk, I expect
| to be compensated with an interest rate. If I'm not earning
| interest, my money should have zero risk. We should remove
| the FDIC $250k limit and if bank's business models don't work
| with that, we should nationalize the banks. It's in society's
| best interest to not have our money wiped out overnight for
| things beyond our control.
| zefalt wrote:
| No, your money should not have zero risk. There is always
| risk in the system. The FDIC was created as an insurance
| for this specific risk hence the name (Federal DEPOSIT
| INSURANCE Corporation). This was mainly to help the common
| person when bank failures were more prevalent...not the
| wealthy who were the predominant beneficiaries of this
| bailout.
|
| You should learn that you the moment you put a deposit in
| the bank, the funds become the property of the depository
| bank. As a depositor, you are a creditor of the bank.
|
| People are mad because the rules were changed in the middle
| of the game to serve the interests of a select few (mainly
| VCs and the startup crowd).
|
| Those supporting this bailout seem to have some of the
| least knowledge on how banks work.
| wootland wrote:
| If there's risk, I should be compensated for it with
| interest on the account.
|
| I'm fine with banks being not for profit institutions run
| by the government. Allowing people to safely store their
| money is baseline civilization. If banks are private, the
| government is going to have to back them up because you
| can't have the operational accounts of nearly every
| business in the country getting wiped out randomly.
| rybosworld wrote:
| It makes very little sense to treat depositors as risk
| takers. These aren't people investing in stocks or bonds.
| These accounts are places to park your cash. It would be
| very bad to discourage deposits.
|
| Putting a ceiling on FDIC insurance is effectively an
| outdated idea that doesn't work.
|
| Take the example of a company that keeps payroll in a
| cash account. Let's say that company has 100 employees.
| Should the FDIC treat the account as belonging to 1
| person or 100? If you say 1, I say you are irrational.
| zefalt wrote:
| They are choosing to place money in the bank. This is a
| risk in and of itself.
|
| Companies with treasury departments already know this.
| They can put money in money market funds, CDARs, cash
| sweeps, or any other vehicle to protect their cash. There
| are multiple ways to hold cash with very low duration
| risk that does not involve putting it in a bank.
|
| FDIC is not an outdated idea. It is just the reality of
| the current financial system because it would require an
| excess of $20 trillion dollars to insure every deposit in
| the banks.
| dboreham wrote:
| Although I knew about the FDIC coverage limit, it seems
| many did not. I've never had enough cash to test this,
| but I suppose I assumed if you put $251K in a bank
| account the web page turns red or something, or a dude
| calls you up to warn you that the last $1K is at risk.
| I'm guessing now that doesn't happen.
| watwut wrote:
| Uninsured accounts are effectively insured and the difference
| is paid by other banks and their customers. Also, if system
| actually worked, the bank whose crash means systemic risk would
| be subject to more serious regulations.
| mcherm wrote:
| I am one of those who has been harmed.
|
| I work at a different bank. The rates charged to banks for FDIC
| insurance have been based on the assumption that the FDIC would
| cover depositor losses up to the insured limit. By choosing to
| cover all losses even above the insured limit, we have chosen
| to put the burden for paying for those losses on all of the
| other banks (and indirectly on those banks depositors). I
| suspect this means that you will not see the interest rate on
| savings accounts go up as much as it might have otherwise.
|
| I'm not saying this outcome is terrible, perhaps it was the
| best solution for the system as a whole. But using an insurance
| fund to cover a kind of loss, the insurance was not sized to
| address is not a choice that has no impact.
|
| If I were in charge of everything (perish the thought!) I would
| probably have insisted that the uninsured portion of the
| deposits take some haircut. If depositors had gotten back 90%
| or 98% of their deposits instead of 100%, it might have
| increased the chance in the future that institutions with 100
| million+ bank accounts would pay more attention to the risk
| profile of the banks they choose to invest with. Banks are
| rewarded mostly in proportion to the risks that they take;
| having a force other than government regulation that pushes in
| the opposite direction can be very useful.
| tptacek wrote:
| Here is my question about that: whatever the increased costs
| to insure other banks by making uninsured depositors whole,
| aren't they ultimately based on the resolution costs for SVB
| itself? That is to say: in the limit, if it costs almost
| nothing to wrap up SVB, because their assets are fine (just
| inconveniently structured), what drives insurance costs up at
| other banks?
|
| I'd also add that covering uninsured depositors isn't new
| behavior for FDIC, at least as I understand it. The mechanics
| of how it was done here are different than in previous
| instances.
| KingMachiavelli wrote:
| > because their assets are fine (just inconveniently
| structured) If assets are so inconveniently structured that
| the bank fails, then the assets are not fine. A bond that
| pays 0.01% that never matures has an infinite value over
| infinite time. So while the FDIC/gov can solve the
| liquidity issue by replacing a $100 face value bond with
| $100 cash but that's still a net transfer of actual value
| from the FDIC i.e other banks.
|
| As far as I know, regulatory requirements require/encourage
| holding good bonds but if the FDIC is going to start
| treating gov/muni bonds of any maturity length as good as
| cash, then there's less reason to hedge against interest
| rate risk.
| kasey_junk wrote:
| Covering uninsured deposits is common as they retain their
| senior debt status. Guaranteeing them on the other hand is
| very new.
|
| And if we are going to expect them to be guaranteed in the
| future insurance rates must go up, not just to cover more
| things but to cover the riskier behavior it creates.
|
| If we aren't going to cover them 100% in the future then
| apparently it's true that there are not just different
| classes of banker but different classes of depositors.
| tptacek wrote:
| Or just different circumstances? IndyMac famously paid
| uninsured depositors back 85 cents on the dollar, right?
| But IndyMac was also plowing depositor dollars into a
| portfolio of Alt-A MBS's.
| kasey_junk wrote:
| A regulatory regime that makes depositors whole when a
| bank fails due to not managing their interest rate risk
| appropriately but not when they mismanage their credit
| risk feels even stranger than just admitting that the
| fdic cares more about some depositors than others.
| btilly wrote:
| That's not an accurate summary.
|
| The regulatory regime is one that makes depositors whole
| when doing otherwise seems likely to cause a major crisis
| in the banking system. Which we've had for a long time.
| It merely seems inconsistent because evidence of "likely
| to cause a major crisis" differs by current possible
| crisis.
|
| As https://www.bitsaboutmoney.com/archive/banking-in-
| very-uncer... explains in painful detail, the reasons why
| they likely concluded that there is systemic risk. But
| long story short, rising interest rates caused the
| banking sector to have $620 billion in unrealized losses.
| Unsurprising since the interest rate rise was *INTENDED*
| to make people lose money, making money more valuable
| relative to goods and services, which reduces inflations.
|
| But $620 billion is substantially more than the $130
| billion in the FDIC insurance fund. It is substantially
| less than the $2 trillion in equity in the banking
| sector, but both losses and equity are unevenly spread.
| Therefore there are banks under water, and others that
| are fine. But nobody is sure which are which. And given
| cash outflows from worried people, we were about to find
| out the hard way. And once there is a bank panic, even
| fine banks become not fine.
|
| Like Wile E. Coyote, running off this cliff works fine
| until you look down. But we've looked down. And now the
| whole sector needs saving. Thus these actions.
|
| They will go back to normal behavior once the crisis is
| over.
| FreakLegion wrote:
| First Republic now has a sweep account that spreads up to
| $100m across 400 banks in increments of up to
| $FDIC_INSURANCE_LIMIT.
|
| What's the difference between the FDIC insuring all
| deposits at US banks directly and US banks doing it
| themselves by forming a complete graph? (Other than there
| being a clear upper limit in the latter case, which is
| currently greater than $1b per account.)
| mercyandgrace wrote:
| Insurance only pays out to $FDIC_INSURANCE_LIMIT if a
| bank fails. I can't say what the scenario looks like
| where 400 banks fail simultaneously, but I can image it
| would not be good. I'm not sure the current FDIC payout
| models account for that, either.
| Gunax wrote:
| I agree about 400 banks failing would likely be due to
| some greater catastrophe.
|
| But financially I think it's the same. If 400 customers
| each use 1 bank each, then a single bank failure means
| the FDIC needs to make whole one customer.
|
| But if every customer put 1/400th of their wealth into
| each of the 400 banks, then FDIC has to cover all
| customers for 1/400th each.
|
| The cost to us as depositors/taxpayers is equal.
| mercyandgrace wrote:
| I'm not sure I'm following. If the FDIC only needs to
| insure 1/400 of all deposits, then they only need to have
| on balance 1/400 of the total funds. So the cost to all
| accounts is in effect 1/400, no?
|
| If customers are only utilizing a single bank, and the
| FDIC will insure all deposits regardless of amount, they
| would need 400 times as much than would be necessary if
| the balances were swept.
| FreakLegion wrote:
| The FDIC insures the entirety of the deposits either way.
|
| _> Insurance only pays out . . . if a bank fails_
|
| That's a good point. So one difference is that while the
| money is equally insured in both cases, the payout
| dynamics would change. Very roughly, the amount of a
| payout might be expected to go down in the cross-bank
| case (smaller account values, but then also more accounts
| per bank, so it isn't quite so simple), and the
| likelihood of a payout might be expected to go up (higher
| chance of failure with more and smaller banks). But this
| all depends on how interlocked the banks become; in the
| extreme they could end up functionally a single bank.
|
| The first thing that came to mind for me is somewhat
| related: Spreading deposits across banks is relatively
| better for small banks and worse for big ones, since the
| small banks gain deposits and the big banks lose them. So
| you can definitely argue there's some advantage to
| keeping a lower insurance limit, although it gets murkier
| when we bring behavioral considerations and "too big to
| fail" into the picture.
| TMWNN wrote:
| > Or just different circumstances? IndyMac famously paid
| uninsured depositors back 85 cents on the dollar, right?
|
| About 50 cents on the dollar.
|
| The typical depositor in post-2008 bank failures (all
| tiny, until SVB and Signature) got about 75 cents on the
| dollar.
| HPMOR wrote:
| As somebody employed by a company which kept all their assets
| in SVB, I strongly support the FDIC bailout. Even a couple
| percent haircut would've resulted in many many second order
| economic implications. I think even for member banks, strong
| economic activity not realized through a systemic contagion
| is much better than slightly lower premiums.
| whatshisface wrote:
| If we're not going to let economic signals tell companies
| to check who they're banking with before putting all their
| assets in one place, how can that happen? Regulations
| saying every small business needs to have a risk officer,
| and more regulations specifying how that officer has to
| make decisions?
| RC_ITR wrote:
| >If we're not going to let economic signals tell
| companies to check who they're banking with before
| putting all their assets in one place, how can that
| happen
|
| The assumption that an operating company should
| understand fixed income pricing dynamics, have a POV on
| future FED interest rate moves, _and_ dive into each
| potential banking partners ' asset duration is an
| interesting one, especially when most of SVB's deposits
| were made during a period of _perpetually falling_
| interest rates, where duration mismatch _helped_ banks.
| AlexandrB wrote:
| Maybe not each company, but the VCs who encouraged their
| portfolio companies to put everything in SVB should have
| _some_ inkling of the risks involved in doing that.
| greenhatman wrote:
| > we have chosen to put the burden for paying for those
| losses on all of the other banks
|
| But isn't it likely to cause more bank runs if depositors
| lost money? So in a real sense, many other banks were saved
| from going under, by assuring depositors that their money is
| safe, whichever bank they're at.
|
| My understanding is that other banks have massive unrealized
| losses as well, due to the steep interest rate increases. So
| they're all kind of vulnerable.
| photochemsyn wrote:
| What's the rationale behind not breaking up the accounts of
| large depositors into FDIC-insurable accounts? Apparently
| this is called a 'cash sweep'. Typical ad blurb:
|
| > "Insured cash sweep is a safe and convenient service that
| provides FDIC insurance on large balances while giving you
| access to your money, as well as the ability to earn
| interest. Choose between demand accounts, which offer
| unlimited withdrawals, and money market accounts that permit
| up to six withdrawals per month."
|
| I've heard some claims that SVB was offering incentives to
| depositors who kept their funds in one lump account, is this
| true and if so what's the benefit to SVB from doing that?
| balderdash wrote:
| It's called brokered deposits, there is not reason to not
| do it if it's just sitting in bank acccount, but if the $
| size gets large (>$25m it can be cumbersome), and if there
| is a lot of operational activity it doesn't make much
| sense.
|
| What's unforgivable is why these large depositors that
| didn't tend this cash for short term operational needs
| didn't have the funds in govt securities in an insured
| brokerage account at a trust company...
|
| Where many venture backed companies got hung up though is
| that the terms of venture debt provided by SVB required the
| borrowers to keep use SVB as their bank...
| maximinus_thrax wrote:
| > I am one of those who has been harmed.
|
| How were you harmed specifically?
|
| > you will not see the interest rate on savings accounts go
| up as much as it might have otherwise.
|
| Bullshit. Interest rates for savings accounts are and have
| been an absolute joke. Are they going to become a more
| hilarious joke? Probably but seriously, who cares?
|
| > I'm not saying this outcome is terrible, perhaps it was the
| best solution for the system as a whole.
|
| Yes, it is the best solution, otherwise you'd have written a
| completely different statement if the bank run went viral and
| you would have been really harmed.
| HN_is_for_gemes wrote:
| [dead]
| el_nahual wrote:
| Have the FDIC rates _actually_ changed or is this a
| hypothetical. It 's relevant because the FDIC limit has not
| actually increased--it's still de jure $250K. The fact that
| the FDIC said they would cover 100% of deposits at SBV could
| be related to the fact they weren't actually insolvent and
| could have covered the run if given enough time to liquidate
| assets.
| deanCommie wrote:
| 100% hypothetical.
|
| Of course the banks are only happy to have ANY
| justification to complain and not raise saving rates, and
| blame the Federal Government.
|
| But there have been no indication yet that the FDIC will be
| drawing on the insurance fund to cover the depositors.
| RC_ITR wrote:
| >Have the FDIC rates actually changed or is this a
| hypothetical.
|
| It's hypothetical. The FDIC is likely to recover a _vast_
| majority of the uninsured deposits through asset sales,
| people just want to be outraged.
|
| At smaller banks, 60-75% of uninsured deposits are usually
| recovered by FDIC _and those banks went out of business for
| bad balance sheets, not bank runs due to duration
| mismatch._
|
| We've gotten so used to assuming every statement is spin on
| 'you're getting screwed' that people assume it's always the
| case.
| upsidesinclude wrote:
| >interest rate on savings accounts go up as much as it
| might...
|
| No sensical person is concerned with the interest rate on
| savings, it is nearly zero and effectively negative.
|
| I dont believe anyone should have a single account with 100
| million dollars nor should banks allow that, but they do.
| Perhaps part of the problem is that the $250k coverage is a
| value that should adjust annually and coverage should be
| relative to each account as opposed to each account holder
| idontpost wrote:
| [dead]
| sophacles wrote:
| I keep reading comments like this, but I've seen no well
| sourced material saying that the FDIC is raising rates.
|
| Do you have some reliable source about it?
|
| (NOT a "look at it logically" or "here's how my health
| insurance works, why would the FDIC be different", or "do
| your own research" or anything else that's some random
| internet comment - I'm looking for real meat about this
| claim).
| rippercushions wrote:
| From the Treasury announcement:
|
| _Any losses to the Deposit Insurance Fund to support
| uninsured depositors will be recovered by a special
| assessment on banks, as required by law._
|
| In other words, if the FDIC's current funds can't cover the
| bill, an extra fee will be levied on banks to make up for
| it.
|
| https://home.treasury.gov/news/press-releases/jy1337
| sophacles wrote:
| So they _might_ raise rates. If they can 't recovered
| from SVB assets via selloff, the government loans on
| bonds, etc.
| jt2190 wrote:
| Just so I'm clear, you're saying that you've been harmed
| because your savings account will pay a lower interest rate?
|
| (Note that I'm _not_ trying to suggest that you were not
| harmed, I just want to make sure that I understand the source
| of the harm.)
| qotgalaxy wrote:
| [dead]
| miohtama wrote:
| As you have insight,
|
| 1) Is this outcome better than (expected) panic on the banks
| and bank runs? There still seem to be runs going on e.g.
| First Republic. Are the markets "calm" now?
|
| 2) Because insurance fund is not designed for the task it is
| currently experiencing, how the gap will be plugged?
|
| 3) Could this cause depositors move money from smaller banks
| to larger ones, and then larger banks just lend this money
| back to small banks w/some nice profit?
| tensor wrote:
| It's really pretty easy to understand. Imagine if some tech
| company went from fine to bankrupt overnight in a surprise to
| everyone. All the shareholders zeroed, not just management but
| public shareholders, employees, etc. Would you seriously be
| surprised that all those people who lost their shares would be
| upset?
|
| Hell, even with just layoffs the outrage on this site has been
| deafening. I can see shareholders and employees of SVB rightly
| being pissed off. It's not your place to tell them they should
| not be.
| Analemma_ wrote:
| > I can see shareholders and employees of SVB rightly being
| pissed off. It's not your place to tell them they should not
| be.
|
| I mean... yes it is. I'm against zeroing depositors of failed
| banks, because (for better or worse) we've decided that banks
| should work like restaraunts and you shouldn't have to do a
| complicated risk assessment about how safe one is before
| deciding to do business there. But _shareholders_ are a
| different story. If you invest in a company and they do dumb
| things and lose your money, that 's at least somewhat on you
| - you're supposed to know what the company is doing before
| you invest, and potentially push for management changes if
| they're doing stupid things. Insulating shareholders from the
| bad decisions of their companies is an utterly unacceptable
| degree of moral hazard.
| tensor wrote:
| Where did I say they should be insulated? I said they are
| pissed off since you seem confused as to why. Imagine
| telling a laid off employee: you work for a tech company
| you're supposed to know what the company is doing before
| you join. If you get laid off that's how it's supposed to
| work! I don't understand why you are so upset?
|
| Does that resonate with you? Or do you still have no
| sympathy for all those people?
| checkcircuits wrote:
| I dont know if I agree with your assessment.
|
| > Equity is getting zeroed out. Management was fired.
| Depositors were made whole almost immediately. SVB's assets are
| apparently not impaired; SVB would have held them to maturity
| had the bank run not happened, and now somebody else will
| instead.
|
| Part of the problem is that the system that enabled them to end
| up in this situation is the erosion of Dodd-Frank. The systemic
| risk to depositors isn't going away. If pissant SVB (relative
| to it's contemporaries) can lobby congress effectively imagine
| what other banks are up to. Speculation? Sure you can say I'm
| speculating. But the apple doesn't fall far from the tree.
|
| > Meanwhile: the point of the FDIC system is for customers not
| to have to do this kind of risk assessment themselves.
|
| The issue of course is that the total balances required the
| FDIC to dip into special capital reserves in order to make the
| bold faced lie the taxpayer won't front this.
|
| Anyone who knows the surface level details of a bank know that
| these FDIC "loans" are effectively collateralized by the
| taxpayer. Banks pay an assessment. With what money? The
| depositor's money. A perfect example of a hidden tax.
|
| > But SVB is gone, so it's not much fun calling them out. I
| feel like people are flailing looking for someone else to
| blame.
|
| Credit Suisse is in big trouble and getting a bailout. Several
| other banks have collapsed in the wake of SVB. The only people
| not worried have their heads buried so deep in the sand only
| their feet are showing. Calling Chicken Little because you
| believe it was only SVB and not a massive market level problem
| suddenly beginning to show it's head is not a very effective
| argument.
|
| I'd ask you to consider the economy that allowed these levels
| of capital to even exist. Years of ZIRP and near-ZIRP allowing
| effectively free money. As it stands, the mainstream media
| currently blames the fed for this and implores it to once again
| lower rates. The problem of course is that there has been no
| sign of stoppage in market speculation and we are only now
| starting to see VCs really tighten their belts. History doesn't
| repeat itself but it often rhymes and terrible, borderline
| predatory, VC funding practices begin to approximate NINJA
| loans in the limit. There's no reason to believe it's just SVB
| and there are _plenty_ of reasons to believe we have very
| serious economic concerns ahead of us. Only difference this
| time is the criminals responsible will be wearing Patagonia.
| digitaltrees wrote:
| This wouldn't have been solved by any thing in Dodd-Frank.
| SVB invested in highly liquid securities that are considered
| the safest asset class, interest rate risk wasn't expected to
| materialize as quickly as it did as the Fed would have been
| expected to raise rates more gradually over a longer time
| horizon or provide an asset exchange mechanism for member
| banks. SVB is not an example of a bank that had engaged in
| Investment Banking activity with depositor capital or had
| unacceptable capital reserve ratios.
|
| That being said, I could be wrong and not aware of the
| specific Dodd-Frank policy that, if followed, would have made
| SVB safer.
|
| The fed doesn't need to lower rates necessarily, it could
| simply allow all member banks to exchange low interest rate
| long term bonds for new higher yield bonds and pay the Fed
| for the spread with a loan. That would reduce the liquidity
| risk if the member bank needs to sell some or all of its bond
| portfolio on short notice to fund depositor withdrawals, it
| would allow the Fed to hold the low rate securities to
| maturity while being fairly compensated by member banks.
|
| Edit: after reading this article posted by lordfrito below I
| stand corrected. SVB executives knew the risk and took it
| anyway. But not for personal gain but to maximize firm value
| as it allowed higher profit which increased the valuation (so
| yes they benefited personally, but to a greater extent than
| just a few million in bonuses).
|
| https://www.bloomberg.com/news/articles/2023-03-13/svb-
| failu...
| landemva wrote:
| > The fed ... could simply allow all member banks to
| exchange low interest rate long term bonds for new higher
| yield bonds and pay the Fed for the spread with a loan.
|
| Maybe we should admit Congress will never repay the
| national debt and simply have the Fed purchase new federal
| debt issuance. The current complicated charade just pays
| banker bonuses.
| TMWNN wrote:
| > Part of the problem is that the system that enabled them to
| end up in this situation is the erosion of Dodd-Frank.
|
| My understanding is that SVB would have met the Tier 1
| capital requirements even without the 2018 revisions to Dodd-
| Frank, for the reason digitaltrees said: The bonds it
| purchased are considered highly liquid and safe.
| UncleEntity wrote:
| > The only people not worried have their heads buried so deep
| in the sand only their feet are showing.
|
| If you haven't lived through a couple of these things then
| it's perfectly understandable.
|
| Back in '98 there was a huge monetary problem going on in SE
| Asia but pets.com could take a loss on every sale and make it
| up in volume. Everything was fine until it suddenly wasn't.
|
| In '08 cracks were starting to become obvious but housing
| prices never go down, keep selling $500k houses to someone
| making minimum wage. Everything was fine until it suddenly
| wasn't.
|
| Today you have massive layoffs in the tech sector but the
| CEOs are just trying to appease activists investors, nothing
| to worry about because tech companies never fail. That Dot
| Com Bust? Well, that was Web 1.0 and we have it all figured
| out this time, nothing to worry about. Everything is fine...
| michael1999 wrote:
| Agree on SVB.
|
| But the bailout that people are complaining about is for all
| the other banks that aren't SVB. There are many insolvent banks
| out there that would otherwise have had to raise capital at
| punishment prices this year. Those banks are unambiguously
| better off with the Fed taking their underwater collateral at
| par, and this is a clear subsidy to (non-SVB) bank
| shareholders.
| mindslight wrote:
| It's hitting the cultural memories of both 2008 (where banks
| themselves were bailed out) and multiple cryptocurrency
| exchanges (where "failed" means all deposits vanish).
|
| Then add in some vocal VCs' hypocritical stance on bailouts
| coupled with Surveillance Valley's overarching hypocritical
| stance on freedom, and here we are.
|
| It seems that in this day and age of instant communication and
| social media mobs, even three days is too long for the precise
| fate of deposits to remain unknown. IMO the right way to
| proceed is to calmly raise bank capital requirements, create a
| few new tiers of FDIC coverage (eg coverage on accounts between
| $250k and $10M is funded from assessment on accounts between
| $250k and $10M), and institute criminal penalties for
| executives of banks that go bust beyond their capital buffer
| (otherwise nothing reigns in TBTF accounts that have too much
| variance to be absorbed by higher FDIC tiers).
| DubiousPusher wrote:
| > A bank made bad risk management decisions and got zeroed out;
| all the right incentives not to do that again are there.
|
| This kind of assumes that the risk matrix of an executive is
| singularly indexed on the long term viability of their
| institution. But the short term gain of bad behavior is still
| in full effect. Bonuses for the years up to this crisis have
| already been paid and were probably inflated based on the banks
| over performance due to its riskier posture.
|
| And the consequences have been softened. There's a very good
| chance that the people responsible here have had their guilt
| assuaged by the reduction in impact. They are probably less
| likely to become the kinds of pariah that they probably should
| because while we should always consider decisions in the
| context they are made, humans seem to always adjust their
| assessments to final consequences.
|
| I'm in agreement that the decisions here on the part of the
| government are probably the wisest in this context. But this
| crisis does hint that perhaps we need to reconsider the
| structure of this system a bit.
| afarrell wrote:
| Alternately, it assumes that the risk matrix of an executive
| also includes:
|
| 1. Their reputation. How much less likely is it that a board
| of directors would think twice before hiring them to be a
| steward of shareholders' assets?
|
| 2. Their egos. How much less likely is it that people will be
| willing to invest time delivering projects whose value can be
| wiped out by poor risk management in the same way that SVBs
| has?
| DubiousPusher wrote:
| I probably shouldn't have used the word singularly. I think
| reputation and shame matter to these people to some extent.
| But as I indicated in my comment, I think this outcome
| dampens the consequences for those incentives as well.
| alistairSH wrote:
| _1. Their reputation. How much less likely is it that a
| board of directors would think twice before hiring them to
| be a steward of shareholders ' assets?_
|
| One member of the SVB c-suite was the CFO fr Lehman in the
| run up to that catastrophe. So, BOD don't appear to care.
| They keep on hiring each other, making massive mistakes,
| but walking away with $$$$ in bonus money.
| joekar wrote:
| The unintended consequences here are having a guarantee on
| uninsured deposits.
|
| Most people are unaware they are loaning money to a bank when
| they open a bank account.
|
| You've effectively said that bank deposits are now risk-free,
| meaning that the government is back-stopping 9.2 Trillion of
| deposits (40% of all deposits).
|
| Can banks still provide a yield for these guaranteed
| deposits? Are they still able to loan out these deposits?
| What are the new capital requirements for these deposits, are
| depositors allow to take their money out when a bank run is
| happening?
|
| We don't know
| DubiousPusher wrote:
| Yeah, I agree. I think this a situation where the
| individual decisions mostly make sense. But when you add
| them up, you get a system that creates some questionable
| implications.
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