Two questions for my good friend @Klaus
Why would they buy $80B of bonds at 1.5% yield when rates were at all time historic lows rather than just buying t bills with a 1% yield?
On February 14, 2023 Forbes Magazine rated Silicon Valley Bank the #1 bank in America. How? And how can we trust Forbes ever again?
I asked my financial adviser these same two questions, my best friend and comandante, my wife and want to compare notes.
Klaus is the only one on here I would trust with MY Monies.
Kinda Funny how printing trillions of dollars out of thin air in a matter of months and just giving it away is coming back to bite everyone in the ass... Who would of thought?You are too kind. The explanation is kind of complicated. I will try to be as succinct as possible.
Taking a step back, what do banks do? Put simply, they take in deposits and lend these out to borrowers. Profit comes from the difference in rates between these.
The cash in does not always match the cash out. If they are lending out more than they are taking in they issue bonds or stock to finance the difference. If they are taking in more deposits than they are lending out they invest the difference.
There is also an accounting issue at work. If the bank invests in securities that they plan to sell in the near term they are "available-for-sale" (AFS). If the bank is a long term holder they are "hold-to-maturity" (HTM).
The accounting issue is that HTM are held at cost. AFS are held at market. But (and a very important but): If you sell any of your HTM portfolio the entire portfolio must be valued at market. All banks and insurance cos follow this convention BTW.
OK, so the stage is set. Now to answer your question.
SVB took in a shitload of deposits in a short order. They bank the VC industry which has been on a tear. They could not lend these deposits out fast enough so they had to do something with them.
What did they do? They bought US treasuries. They did not think that they needed the liquidity so they marked them HTM. Also, because they did not think they needed liquidity they went further out on the curve to pick up a little extra yield. 0.5% does not seem like much to you and me but on $100s of billion it adds up in dollar terms.
Because they were long duration their balance sheet was extremely vulnerable to interest rate moves. But: they were willing to take this risk because they were held HTM.
Because they do not have to mark this portfolio it looks like their balance sheet is in great shape.
Fast forward to now and the VC funds that keep their money at SVB needed it back. More deposits left than expected. SVB needed to come up with the money. Ultimately they had to dip into their HTM portfolio. But doing so would mark it at current valuations, which are -30% from where they put them on.
The result was a cascading effect. A huge hole appeared in their balance sheet, which freaked out depositors, which led to more deposit flight and kaboom they are gone.
Which sets the stage for others. Those that do not think this is systemic will say that the degree of deposit growth and amount of duration is unique to SVB.
But:
What has happened in the last 3 years? COVID stimulus, which is now rolling off. Individuals and corps put a lot of this into savings which banks could not lend out fast enough. Now these savings are being drawn down which forces banks to sell assets. What do they hold? USTs at stale valuations which will have to be marked to current valuations.
Two graphs:
Deposits across all banks. See how they have rolled over?
View attachment 1784414
UST Yield (price moves inversely to yield so flip this upside down to see the what the graph for the value of these banks balance sheets)
View attachment 1784415
So: every bank is facing some version of the issues that SVB faced, it is merely a question of degree.
Visions of Margin Call/ Sam Water's fire sale when all of the other firms realize what is happening come to mind.You are too kind. The explanation is kind of complicated. I will try to be as succinct as possible.
Taking a step back, what do banks do? Put simply, they take in deposits and lend these out to borrowers. Profit comes from the difference in rates between these.
The cash in does not always match the cash out. If they are lending out more than they are taking in they issue bonds or stock to finance the difference. If they are taking in more deposits than they are lending out they invest the difference.
There is also an accounting issue at work. If the bank invests in securities that they plan to sell in the near term they are "available-for-sale" (AFS). If the bank is a long term holder they are "hold-to-maturity" (HTM).
The accounting issue is that HTM are held at cost. AFS are held at market. But (and a very important but): If you sell any of your HTM portfolio the entire portfolio must be valued at market. All banks and insurance cos follow this convention BTW.
OK, so the stage is set. Now to answer your question.
SVB took in a shitload of deposits in a short order. They bank the VC industry which has been on a tear. They could not lend these deposits out fast enough so they had to do something with them.
What did they do? They bought US treasuries. They did not think that they needed the liquidity so they marked them HTM. Also, because they did not think they needed liquidity they went further out on the curve to pick up a little extra yield. 0.5% does not seem like much to you and me but on $100s of billion it adds up in dollar terms.
Because they were long duration their balance sheet was extremely vulnerable to interest rate moves. But: they were willing to take this risk because they were held HTM.
Because they do not have to mark this portfolio it looks like their balance sheet is in great shape.
Fast forward to now and the VC funds that keep their money at SVB needed it back. More deposits left than expected. SVB needed to come up with the money. Ultimately they had to dip into their HTM portfolio. But doing so would mark it at current valuations, which are -30% from where they put them on.
The result was a cascading effect. A huge hole appeared in their balance sheet, which freaked out depositors, which led to more deposit flight and kaboom they are gone.
Which sets the stage for others. Those that do not think this is systemic will say that the degree of deposit growth and amount of duration is unique to SVB.
But:
What has happened in the last 3 years? COVID stimulus, which is now rolling off. Individuals and corps put a lot of this into savings which banks could not lend out fast enough. Now these savings are being drawn down which forces banks to sell assets. What do they hold? USTs at stale valuations which will have to be marked to current valuations.
Two graphs:
Deposits across all banks. See how they have rolled over?
View attachment 1784414
UST Yield (price moves inversely to yield so flip this upside down to see the what the graph for the value of these banks balance sheets)
View attachment 1784415
So: every bank is facing some version of the issues that SVB faced, it is merely a question of degree.
I wouldnt go quite that far myself, but I would definitely listen to what he had to say and consider it thoroughly before pulling the trigger, especially if it was counter to what I was thinking.Klaus is the only one on here I would trust with MY Monies.
Two questions for my good friend @Klaus
On February 14, 2023 Forbes Magazine rated Silicon Valley Bank the #1 bank in America. How? And how can we trust Forbes ever again?
That is the plan.Yeah….definitely an dud of a topic but with all the financial/tech stuff happening just seems like this stuff is going to be happening more and more.
The funny thing is, all these folks voted for all this. They should be happy their sh*t is failing and people are getting laid off.
The empty head in the White House didn't think so.Kinda Funny how printing trillions of dollars out of thin air in a matter of months and just giving it away is coming back to bite everyone in the ass... Who would of thought?
Weeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!!!I am now at the stage where I am having sunday strategy sessions on how things are going to play out.
Things are tricky. Yellen just came out and said that banks will not be bailed out.
There is no appetite to "rescue" venture capitalists. Even if this is the right thing to do.
The ripple effects are still poorly understood.
Policy makers will **** up, course correct then **** up again.
This week will be interesting.
I am now at the stage where I am having sunday strategy sessions on how things are going to play out.
Things are tricky. Yellen just came out and said that banks will not be bailed out.
There is no appetite to "rescue" venture capitalists. Even if this is the right thing to do.
The ripple effects are still poorly understood.
Policy makers will **** up, course correct then **** up again.
This week will be interesting.
I am now at the stage where I am having sunday strategy sessions on how things are going to play out.
Things are tricky. Yellen just came out and said that banks will not be bailed out.
There is no appetite to "rescue" venture capitalists. Even if this is the right thing to do.
The ripple effects are still poorly understood.
Policy makers will **** up, course correct then **** up again.
This week will be interesting.
I am still not quite understanding why you think this is a systemic/contagion type of event.I am now at the stage where I am having sunday strategy sessions on how things are going to play out.
Things are tricky. Yellen just came out and said that banks will not be bailed out.
There is no appetite to "rescue" venture capitalists. Even if this is the right thing to do.
The ripple effects are still poorly understood.
Policy makers will **** up, course correct then **** up again.
This week will be interesting.
I am still not quite understanding why you think this is a systemic/contagion type of event.
No disrespect, and you are more experienced in this arena than I am, but I am miffed at why this is being considered more than a niche type of problem. The way I am reading what you are saying is that you believe this is on par with what happened back in 2008.