SVB is Now In the Hands of the FDIC
- Thread starter 2003RedfireVert
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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?
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)
So: every bank is facing some version of the issues that SVB faced, it is merely a question of degree.
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?
Visions of Margin Call/ Sam Water's fire sale when all of the other firms realize what is happening come to mind.
Your summary of events starting from Thursday, and referencing the conference calls brought back memories of the 4 AM BoD meeting with John Tuld. Especially the reference to close relationships/understanding between engineering/physics and financial forecasts.
"Well, it's all just numbers really. Just changing what you're adding up. And, to speak freely, the money here is considerably more attractive."
I find it very troubling when I am attending meetings with MBA, business minded types, who cannot process the financial numbers or performance criteria resulting in identifying the tragedy that awaits
I'm an engineer, if my numbers are off, things break/fail or people die. The other side is that totals go to zero or negative. It is irrelevant if it is $, PSIG, RPM, etc, the numbers better exceed a base value, or there is trouble.
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So how bout they change the rule about changing their HTM assets to market if they sell any of it.
I mean it seems like there wouldn’t have been a bank rush, which is what ultimately screwed them, if they didn’t have to say they were -30% on these assets.
I was -15k on Mar3 on one leveraged ETF I day trade. Mar6 it swung to +18k and I sold that afternoon. I know this is extreme and moves faster than than their bond valuation/fed int rates but it seems some of their rules are like a self fulfilling prophecy.
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I mean it seems like there wouldn’t have been a bank rush, which is what ultimately screwed them, if they didn’t have to say they were -30% on these assets.
I was -15k on Mar3 on one leveraged ETF I day trade. Mar6 it swung to +18k and I sold that afternoon. I know this is extreme and moves faster than than their bond valuation/fed int rates but it seems some of their rules are like a self fulfilling prophecy.
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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.
Forbes has a great track record, yes?
Attachments
Menendez says no bail out. Call me skeptical.
That is the plan.
The empty head in the White House didn't think so.
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.
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.
This is what I expected and that attitude from then is part of what feeds my belief that they won’t cut rates due to this.
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Klaus,
Thoughts on the macro environment for the normal guys for the short/mid term?
For me in specific, I plow money into my 401K in a Target 2045 retirement fund with a portion of the portfolio holding dividend producing company stock from my employer. In addition, I have a separate IRA that is structured around emerging market funds and S&P Index funds and that are heavily DRiPed.
Any leftover gets smashed into legacy cryto (BTC and ADA). I hold very little cash.
Im at an age where I dont sweat financial down turns, I look at the as an opportunity.
Words of wisdom for my situation?
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.
Svb isn't the only bank that has invested in long term bonds. They are fine as long as people don't come knocking en mass for withdrawals.
They could also raise deposit interest rates to say 4-4.5% and they would probably gain a good bit of liquidity from deposits at the expense of their profitability and shareholder returns.
They could also raise deposit interest rates to say 4-4.5% and they would probably gain a good bit of liquidity from deposits at the expense of their profitability and shareholder returns.
Because it is a systemic issue. I am not sure how I can be clearer than that.
Read my response to Bruno. It should be clear. If it is not you are not following the plot.
Caught a blip that 150 UK firms can't make payroll.
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