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***OFFICIAL*** Bank Failure/Crisis Thread (2 Viewers)
- Thread starter whoknew
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LawFitz
Footballguy
Scary part about this is that this bank failed by investing in basic UST and MBS. It's not like these guys were getting over skis with CDS, CDO squareds or some new fangled crypto or NFT. Nope, all it took was some simple duration mismatching and at the first hint of trouble the bank run took shape and overran the capital.
How many other banks out there are susceptible to similar right now, I and everyone in the financial world wonder. The convexity of bond yield curves is a powerful force magnifier when yields are near zero, as they were when this mess started, as felt by anyone who bought and held fixed income securities last few years. That convexity dynamic is surely at play across the banking sector if rates maintain their upward arc through this situation.
That sais, there are at least a couple potential anomalies and hopefully one-offs for SIVB...
1. Rumored Peter Thiel spooked the entire Valley and charged up the bum rush in order to take down this bank, in the hopes that it would convince The Fed to reopen QE spigots, which are the lifeline of his business model. Jamie Dimon being accused of similar tactics for similar reasoning, with the added bonus for him of taking down a competitor.
2. This bank had a supposedly unique and unusually high amount of uninsured deposits (i.e. >$250k), from depositors with supposedly unique and unusually high short-term needs for that cash (start-up firms). That made this bank more susceptible than the average bear to asset/liability duration mismatching and without proper controls to mitigate, they got swept with the quickness.
Let's hope that SIVB is a blip and not a canary, but even if it's the latter, expect more QE and another backdoor bailout from The Fed.
How many other banks out there are susceptible to similar right now, I and everyone in the financial world wonder. The convexity of bond yield curves is a powerful force magnifier when yields are near zero, as they were when this mess started, as felt by anyone who bought and held fixed income securities last few years. That convexity dynamic is surely at play across the banking sector if rates maintain their upward arc through this situation.
That sais, there are at least a couple potential anomalies and hopefully one-offs for SIVB...
1. Rumored Peter Thiel spooked the entire Valley and charged up the bum rush in order to take down this bank, in the hopes that it would convince The Fed to reopen QE spigots, which are the lifeline of his business model. Jamie Dimon being accused of similar tactics for similar reasoning, with the added bonus for him of taking down a competitor.
2. This bank had a supposedly unique and unusually high amount of uninsured deposits (i.e. >$250k), from depositors with supposedly unique and unusually high short-term needs for that cash (start-up firms). That made this bank more susceptible than the average bear to asset/liability duration mismatching and without proper controls to mitigate, they got swept with the quickness.
Let's hope that SIVB is a blip and not a canary, but even if it's the latter, expect more QE and another backdoor bailout from The Fed.
Ted Lange as your Bartender
Footballguy
Reading a lot about this, I came to the same conclusions as you. I can’t imagine this is going to be totally isolated to SIVB but it also looks far different than what caused the 2008 dominoes to fall.
That said, from a VC/startup perspective, this is going to hurt all of us in ways we probably can’t perceive immediately in terms of innovation that could improve our lives. Even if these startups do get (most if not all of) their money back.
Captain Cranks
Footballguy
This is a key point for all those who pointed the finger at crypto when FTX failed. It wasn't the crypto. It was the organization who managed the funds, regardless of what form it's in.
HellToupee
Footballguy
The Z Machine
Footballguy
Eff that noise
Andrew74
Footballguy
I saw a graph from JPM that showed loan+securities/deposit ratios on x-axis to “low risk deposits” in the y-axis. SVB was all alone at the bottom right of the major banks. Huge asset base built on unstable deposits. I’ve heard of some other CA banks with niche business getting their stocks hammered. Even Schwab was taking it in the chin. But the big banks and even Schwab have a different deposit base. Unless John Q Public goes all “It’s a Wonderful Life”, I don’t see a systemic issue. Markets may be spooked badly though.
TripItUp
Footballguy
Credit rating agencies have looked like fools for a few decades now.
culdeus
Footballguy
Why? What ratings have they missed on?
FreeBaGeL
Footballguy
Doubtful. The fed knows how badly they screwed up by caving to political pressure and easing off too quickly in 2018. If anything they'll overcorrect in the opposite direction this time. I bet they continue tightening way longer than people think.
FreeBaGeL
Footballguy
Uh, basically every MBS in existence around 2007, for starters.
Chadstroma
Footballguy
The first thing about SVB is that it is a very different bank from almost all other banks in what it did. It had very little consumer banking other than catering to some of the C suite types of the commercial accounts it held. The focus of SVB in the tech/start up/VC world was substantial.
It's failure though is actually very plain ole' banking. First, they hedged poorly against rising interest rates. Second, once they started to raise capital- it spooked the deposit holders. No bank- no matter how big, no matter how well run, no matter what stress tests are done etc can withstand a bank run. The whole purpose of the FDIC insurance is that people have enough faith that their money is ok in the bank that it doesn't start bank runs because of fear. The one huge problem for SVB is that it's deposits were large commercial deposits. You only have the $250K coverage there where as in personal accounts, you can get more creative to get much more insurance coverage as it is myth the coverage is for $250K. It is actually up to $250,000 per depositor, per institution and per ownership category. Which means you can structure accounts with a few family members to get literally millions in coverage. Commercial.... not so much. Once they got spooked, this bank was done for. Who did the spooking and why etc.... well, I have heard a few things but I don't know.
How will this impact things? I don't think it will do much to other banks. Some businesses may look to diversify their deposits among multiple institutions but I don't think any bank will end up with a run on deposits and fail. Banks that are heavily commercial focused would be the ones that I would be most concerned about. Though I don't think it will cascade into other bank failures, this absolutely can start it. 2008 with IndyMac failing and all the news reports of people lines outside of the branches unable to get money. Add in Chuck "I'm a self serving moron" Schumer with an open letter basically begging people to start a run on banks and then the media "who is next", which focused on any bank that also did Option ARMs like IndyMac did a lot of.... the attention went to WaMu mostly and when they were allowed to fail due to a bank run (which I am 100% convinced was initiated by Dimon and Chase execs and had them fanning the flames) it really kept the downhill momentum to go into overdrive with the RE market crash.
It's failure though is actually very plain ole' banking. First, they hedged poorly against rising interest rates. Second, once they started to raise capital- it spooked the deposit holders. No bank- no matter how big, no matter how well run, no matter what stress tests are done etc can withstand a bank run. The whole purpose of the FDIC insurance is that people have enough faith that their money is ok in the bank that it doesn't start bank runs because of fear. The one huge problem for SVB is that it's deposits were large commercial deposits. You only have the $250K coverage there where as in personal accounts, you can get more creative to get much more insurance coverage as it is myth the coverage is for $250K. It is actually up to $250,000 per depositor, per institution and per ownership category. Which means you can structure accounts with a few family members to get literally millions in coverage. Commercial.... not so much. Once they got spooked, this bank was done for. Who did the spooking and why etc.... well, I have heard a few things but I don't know.
How will this impact things? I don't think it will do much to other banks. Some businesses may look to diversify their deposits among multiple institutions but I don't think any bank will end up with a run on deposits and fail. Banks that are heavily commercial focused would be the ones that I would be most concerned about. Though I don't think it will cascade into other bank failures, this absolutely can start it. 2008 with IndyMac failing and all the news reports of people lines outside of the branches unable to get money. Add in Chuck "I'm a self serving moron" Schumer with an open letter basically begging people to start a run on banks and then the media "who is next", which focused on any bank that also did Option ARMs like IndyMac did a lot of.... the attention went to WaMu mostly and when they were allowed to fail due to a bank run (which I am 100% convinced was initiated by Dimon and Chase execs and had them fanning the flames) it really kept the downhill momentum to go into overdrive with the RE market crash.
Phil Elliott
Footballguy
bushdocda
Footballguy
Thanks for this. Trying to make sense of the possible coming steps that are much too close for comfort.
Alex P Keaton
Footballguy
Best of luck. Feel free to PM anytime. Dealing with this for 5 different business partners. The above is what I’ve heard now from about a dozen sources.
Thanks @Alex P Keaton
Beyond the $250k that is insured, where does the money come from to make all the other payments? Their assets aren't worth that are they?
For, "FDIC has already sold half of SBV’s assets as of today (they started selling at FDIC direction two weeks ago)", the FDIC took over two weeks ago and was forcing the sale of assets?
Alex P Keaton
Footballguy
SVB held assets worth more than its liabilities (at least on paper) and the majority of those assets were in boring government securities (eg Treasuries). So yeah, the simple answer is the FDIC is just selling the assets, and paying account holders. This isn’t a bailout — it’s an imperfect but decently organized ramp down of a bank at this point. Sell assets. Pay bills.
I don’t know that the FDIC actually officially took over two weeks ago. But from all I’ve heard, it sure sounds like in essence they saw this outcome as inevitable and started to “nudge” SVB toward the right actions. But it could have literally been a takeover two weeks ago. I haven’t been able to confirm that yet.
Desert_Power
Footballguy
Not sure I agree with the conclusion of this article. The annual stress test process is not the proper way measure this type of interest rate risk. These scenarios also involve a severe recession and often (including this year) a decline in interest rates instead of a steep increase.AFTER SUCCESSFULLY LOBBYING, for the rollback of new rules applied to Wall Street in the wake of the financial crisis, lobbyists for Silicon Valley Bank immediately began pressing their case further to the federal authority that insures bank deposits in the event of another crisis, according to lobbying disclosures reviewed by The Intercept. The lobbying effort managed to exempted banks the size of SVB from more stringent regulations, including stress tests aimed at uncovering the type of weaknesses that led to the bank’s implosion last week. Two of the bank’s top lobbyists previously served as senior staffers for House Speaker Kevin McCarthy, who himself pushed for the repeal of significant pieces of the landmark Wall Street reform legislation known as Dodd-Frank.
Silicon Valley Bank Used Former McCarthy Staffers to Weaken Regulations, Lobby FDIC
Two senior aides to House Speaker Kevin McCarthy were among the top lobbyists for Silicon Valley Bank, the bank at the center of a new financial crisis.theintercept.com
This type of stuff is usually looked at by the regional Fed oversight teams, so there may be something to their CEO being on that board.
Todem
Footballguy
He is the absolute worst.
FairWarning
Footballguy
If SVB got nudged, they made sure they got their bonuses.
It may be too early to play Monday Morning QB, but what could SVB have done to avoid this?
The Z Machine
Footballguy
Shorter term tresuries? Not locking up their assets in such low yield investments?
Chemical X
Footballguy
auction results could be out tonite. waiting to see if my bank is in on this.
Chemical X
Footballguy
to me, this seems and sounds like a confidence issue creating an unfounded bank run. let them fail, sell the assets before monday morning and temporarily increase the fdic guarantee.
Desert_Power
Footballguy
Put on more interest rate swaps to reduce duration. Funny enough, just went back and reread a conversation with a buddy from in September. He was interviewing for a role on that team at SVB and said that department head completely disagreed with more hedging. Oops.
Sand
Footballguy
It wasn't the rate, it was the duration. They had a unique set of clients who were very liquid (non-sticky to the extreme). Buying 10 year notes was a horrid idea as there is always the chance you're stuck until maturity, which essentially they were.
Sand
Footballguy
Increasing FDIC would not have mattered here as these deposits were huge and way over the limit. Not to mention the moral hazard. Silicon Valley are the last people who need a bailout.
At least right now this looks like it will turn out like it should. Depositors look to be made whole. Equity holders eat the loss.
Honestly this seems like it would be a good purchase for someone. This bank failed because of bonehead investments - the underlying business is a good one.
Chemical X
Footballguy
decent grab for a regional looking to expand a CA presence.
GreenNGold
Footballguy
Everything I'm hearing is that they failed because they had a terrible risk management plan/team in place. The rest of the banking industry as a whole remains incredibly strong.
The Z Machine
Footballguy
This is the way
BlackCrowes
Footballguy
i have no idea what y'all are talking about, but i find it interesting.
BeTheMatch
Footballguy
Admittedly very ignorant on issues like this. But why should depositors be made whole? They knew it wasn't FDIC-insured, didn't they? I mean, isn't that why it's risky and you shouldn't do it? And now they're getting bailed out. I must be missing something.
McBokonon
Footballguy
There’s a bunch of systemic problems that could be caused if depositors were hung out to dry that I sort of understand but I’m not well versed enough to explain, but it’s tougher for businesses to be limited to the $250,000 considering the sheer number of expenses, payroll, etc. They’d have to have dozens of accounts in some cases just to handle something like direct deposit for their employees, let alone vendors, etc.
Chadstroma
Footballguy
I see the Fed is doing a closed door emergency session Monday. I would not be surprised if they don't swing to a rate cut and buying MBS again. The bank run killed SVB but what caused the bank run was the Fed's aggressive rate hikes which put them in a bad bind. The Fed is notorious for being unable to forward think and being reactionary. One of the consequences for having a bunch of academics run it.
Sand
Footballguy
On a micro level there is no reason depositors should be made whole. In this case the system worked and the bank had enough assets to cover liabilities. From a macro point of view this whole thing was caused by the most extreme set of interest rate raises in history - the Fed is causing all kinds of stress on the financial system. If there were huge losses to depositors here the system might be viewed as suspect and chain reactions start. That's bad for everyone.
The other item to note is that for these corporate depositors there is no way to guarantee all the money they have - there aren't enough banks.
that was scheduled prior to this. i would be shocked if there was a rate cut. this wasn't the Fed's fault, can't blame everything on them.
btw the CEO of SVB was a director at the SF Fed (until departure on Friday).
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Sand
Footballguy
Avatar fits.
Chadstroma
Footballguy
I disagree strongly as they created these conditions. They were slow to increase rates earlier calling inflation "transitory" when everyone not the Fed knew it wasn't and then they went into reactionary make up mode raising aggressively and doing so over and over without the time for the initial rate increases to make it's way through the markets.
Sure, SVB failed to properly hedge against and what killed the bank was no rates increasing or poor hedging but a run on deposits. EVERY bank will fail with that. But the faith was lost in SVB to start the run directly because of interest rates with the Fed.
Over and over and over and over again... the Fed does a horrible job of anticipating market conditions and reactions to what has already happened last Q which leads to their boom/bust cycles. I am not overly worried about this being a start of a domino effect BUT if the Fed wants to ensure that this does not happen and banks don't start failing and then the economy melts and they have another huge crisis on their hands.... a 25 bps drop on Monday would do the trick.
Chemical X
Footballguy
what in the world happened at signature? i have a pile friends there that used to be part of hsbc. gotta read more.
fruity pebbles
Footballguy
Fed cuts rates and commodities will skyrocket.
The Z Machine
Footballguy
There's no way the Fed cuts rates due to this. They have a mandate to quell inflation and that's what they will try to do through trate hikes until the economy relents.
Alex P Keaton
Footballguy
WASHINGTON, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:
Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.
Chadstroma
Footballguy
They very well could... and it will be a mistake. The rate hikes they have already done haven't gone through the system yet. It takes time. The Fed doesn't know how to act. It only reacts.
The Z Machine
Footballguy
In other words, the Fed is trying to be aggressive in preventing contagion through additional bank runs. Trying to inject calm and stability.
This is exactly what they should be doing here, not cutting rates.
This is exactly what they should be doing here, not cutting rates.
Chadstroma
Footballguy
Here is cough medicine to treat your pneumonia.
