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Post by mnfish on Mar 15, 2023 10:48:23 GMT
From CNBC - Moody's cuts outlook on U.S. banking system to negative, citing 'rapidly deteriorating operating environment'
"Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital," the report said.
The firm noted that an extended period of low rates combined with Covid pandemic-related fiscal and monetary stimulus have complicated bank operations.
"US banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets."
So they pump $5-$6T into the system, raise rates to combat the inflation it caused and now banks can't afford to pay the new rate for all the savings people and businesses have. Brilliant!
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Post by johnsmith on Mar 15, 2023 10:51:14 GMT
My take -- underlying a lot of the public interest in the bank's demise is the impression management was more focused on liberal virtue-signaling, BLM, carbon footprints, DEI than on running a bank. For instance, we learn from The Daily Mail only ONE board member had actual experience in investment banking -- evidently the rest were high level Democrat supporters and woke cheerleader types. Without the political angle, I'd bet there wouldn't be half the interest. Heck, I never even heard of SVB until it failed. (I love the Daily Mail. You get perspectives (left and right) never covered in US newspapers.) www.dailymail.co.uk/news/article-11859379/Only-ONE-member-failed-SVBs-board-experience-investment-banking.htmlIMO - That "liberal virtue-signalling" is a canard, that the conservatives like to use.
The implication is - oh these people are too busy trying to save the planet, make sure that racist, homophobic and other various crap isn't happening to run a business.
I call BS on that!
Did the daily mail also tell us that SVB CEO worked hard to get the government regulators off his back, and trump signed the law, exempting his bank from oversight? Did the daily mail tell us that the CEO was previously at Lehman Brothers when it failed? Maybe the failure had nothing to do with the politics, maybe the CEO was just a grifter and bad at running a business.
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Post by johnsmith on Mar 15, 2023 11:11:10 GMT
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Post by steadyeddy on Mar 15, 2023 11:16:28 GMT
So easy to blame everything on one side or the other. Just be careful to not let this thread get out of our hands please and tread into politics.
To me, the reality is: what did the "risk division" in the bank do to protect its shareholders? what did the CEO do to run the business? all else is noise.
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Post by fishingrod on Mar 15, 2023 11:25:35 GMT
I have been following this thread. It is circling the toilet. Let's wrap it up.
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Post by newtecher on Mar 15, 2023 11:46:04 GMT
Nope. Private profits and losses. If you lost everything you invested to start a bank, the losses are not socialized. That is not an attractive proposition anymore. really?
So you run a private bank for 10 years with 15% in equity. (From what I have heard, banks, the really good ones run on around 10% equity, during the GFC, they were running on a thin 3% equity)
you invest in junk bonds and make 10% return every year. (I don't know what bank profitability is generally, I'm sure it's way less as they usually invest in treasuries.)
After 10 years of super profits. the owners, in the example, who are also depositors, get all their money back, except for their equity investment.
They deliberately took extra risk, to make extra profits, because they knew that their deposits would be 100% backed by the public.
how is that not :
private profits (the public did not share in all those years of super profits)
public losses (the public ponied up to make depositors 100%)
So you assume that the investors provide the equity and also are the sole depositors? That would definitely not get FDIC insurance since it is not an actual bank. Also, the amount of equity would depend on the risk profile of investments. If you want to invest all assets in PDI, I would not be surprised you would need 50% equity to get FDIC insurance because, as far as I remember, risky assets get a haircut when calculating capital ratios. With 50% equity requirement, it become similar to margin investment accounts, which you can easily do at a brokerage.
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Post by Norbert on Mar 15, 2023 11:46:52 GMT
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.
Neither Becker nor an SVB representative responded to requests for comment.
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Stronger regulation would probably have helped, but the cause of the SVB failure was management incompetence. They didn't know what they were doing.
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Post by Fearchar on Mar 15, 2023 12:42:25 GMT
[quote author=" Norbert" [/i]They didn't know what they were doing.
[/div][/quote] They thought they knew better. They probably did not pay much attention to others, which can be challenging for all of us. It is a balancing act and not very easy to recognize one's blind spot.
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Post by mnfish on Mar 15, 2023 13:05:56 GMT
Or one could say they knew exactly what they were doing. This is a stock that went up 440% from Apr 2020 to Nov 2021 and then down 62% in 2023 when the CEO and CFO made their last sales. A couple days later it fell another 86%.
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Post by bobfl on Mar 15, 2023 13:17:27 GMT
From CNBC - Moody's cuts outlook on U.S. banking system to negative, citing 'rapidly deteriorating operating environment' "Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital," the report said. The firm noted that an extended period of low rates combined with Covid pandemic-related fiscal and monetary stimulus have complicated bank operations. "US banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets." So they pump $5-$6T into the system, raise rates to combat the inflation it caused and now banks can't afford to pay the new rate for all the savings people and businesses have. Brilliant! Any yield (interest producing) investment bought when the Fed rate was near zero will drop in price as the Fed raises rates. Period. When they are marked to market, it shows a loss, even though, if held to maturity, there is no loss unless you bought over the issue price. That applies to all interest producing investments held by individuals or companies who had money to invest and invested for yield when the Fed rate was near zero. Sure the banks and individuals could have gotten out at the first sign that the Feds would raise rates. Individual investors could get out quick and buy back when it crashed, but big, big multi-billion dollar holders could not get out fast. The truly smart banks sold bonds, preferreds, etc. when rates were low. Example, USB issued paper at 4% and it actually sold. Ok, so the buyer took a bath, but if you bought when it crashed you could make a great 6% yield and excellent cap gains.
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Post by Norbert on Mar 15, 2023 13:41:42 GMT
[/i]They didn't know what they were doing.
[/div][/quote] They thought they knew better. They probably did not pay much attention to others, which can be challenging for all of us. It is a balancing act and not very easy to recognize one's blind spot. [/quote][/div][/div]
If a bank doesn't understand the risk of loading up on long-term government debt when rates are at all-time lows and inflation is looming, that's a bit more problematic than having a "blind spot".
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Post by johntaylor on Mar 15, 2023 13:53:34 GMT
This crisis has enabled us to add "Cry at a Shinto Shrine" to the list of actions for tough times
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Post by johnsmith on Mar 15, 2023 14:20:07 GMT
This crisis has enabled us to add "Cry at a Shinto Shrine" to the list of actions for tough times
I have no idea what - "cry at a shinto shrine" means, so I googled it and ran into the article below, fun!
"The Naki Sumo Crying Baby Festival (Japanese: 泣き相撲, Hepburn: Nakizumō) is an annual Japanese festival in which babies are held in the arms of sumo wrestlers in an open-air sumo ring. Two babies compete in a short match in which the first child to cry is proclaimed the winner. According to Japanese folklore, a crying baby has the power to ward off evil spirits, while a strong, loud cry indicates the child will grow up strong and healthy."
Thanks JohnTaylor.
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Post by chang on Mar 15, 2023 14:52:17 GMT
Please keep it on topic, and avoid off-topic politics and unnecessary heat. (Edit: as noted here on-topic politics are fine ... I think everyone knows where to draw the line.)
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Post by Norbert on Mar 15, 2023 15:53:46 GMT
Thinking about this some more, I'm wondering if the decision to chase yield wasn't intentional ... to pump up the stock price. The SEC will probably want to look at insider sales prior to the collapse.
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Post by retiredat48 on Mar 15, 2023 16:04:01 GMT
Sidebar: I declare victory. Let the party begin; FD1000 also invited!
Victory as in my expectations that my ownership of VGSH (2 yr treasury bond fund) and VGIT (5 yr bond treasury fund) was to earn BOTH a capital gain, and earned interest. Today I have a capital gain and earning interest, in VGSG. Today, I have a relatively large capital gain in VGIT, and earning interest as we go. Beats FD's holding 100% in money market funds. My brother very happy he followed this guidance and bot VGIT!
R48
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Post by archer on Mar 15, 2023 16:07:05 GMT
retiredat48, Did you mean to post the above in the "Now is the time for 2 yr" thread?
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Post by bobfl on Mar 15, 2023 16:13:44 GMT
If a bank doesn't understand the risk of loading up on long-term government debt when rates are at all-time lows and inflation is looming, that's a bit more problematic than having a "blind spot".
[/quote] Yet, all these treasury bond sales sold out. What about all the sovereigns that bought these ultra safe investments and are now burned?
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Post by retiredat48 on Mar 15, 2023 16:14:20 GMT
retiredat48 , Did you mean to post the above in the "Now is the time for 2 yr" thread? I posted there also. Sorry, but this is my "Paul Revere ride" alerting everyone R48 (conservative investor; not a trader).
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Post by bobfl on Mar 15, 2023 16:27:21 GMT
Thinking about this some more, I'm wondering if the decision to chase yield wasn't intentional ... to pump up the stock price. The SEC will probably want to look at insider sales prior to the collapse. IMHO When companies or sovereigns bought treasuries they were chasing safety. The yield is not that compelling. Remember, the treasury yields were OK for the last 8 years, to many safety seeking entities. It is the pension funds who need 7% that hire money managers to chase yield, they are the yield chasers. As well as individual investors, who buy black box funds or high yield debt.
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Post by habsui on Mar 15, 2023 18:48:53 GMT
Thinking about this some more, I'm wondering if the decision to chase yield wasn't intentional ... to pump up the stock price. The SEC will probably want to look at insider sales prior to the collapse. IMHO When companies or sovereigns bought treasuries they were chasing safety. The yield is not that compelling. Remember, the treasury yields were OK for the last 8 years, to many safety seeking entities. It is the pension funds who need 7% that hire money managers to chase yield, they are the yield chasers. As well as individual investors, who buy black box funds or high yield debt. I disagree respectfully. If one wants safety, stay on the short end and roll over. My understanding is that SVB had longer dated treasuries.
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Post by bobfl on Mar 15, 2023 19:53:30 GMT
IMHO When companies or sovereigns bought treasuries they were chasing safety. The yield is not that compelling. Remember, the treasury yields were OK for the last 8 years, to many safety seeking entities. It is the pension funds who need 7% that hire money managers to chase yield, they are the yield chasers. As well as individual investors, who buy black box funds or high yield debt. I disagree respectfully. If one wants safety, stay on the short end and roll over. My understanding is that SVB had longer dated treasuries. Certainly correct now. Pretty clear in hindsight. But not clear when the economy was moving along without inflation worries, 16 months ago. Treasures were the safe place to be. So if companies and sovereigns have always done treasuries for years because it is ultra safe, backed by the US govt., you cannot turn on a dime and get out. Like one story said, they could have but it would have had a major hit to profits and they choose to ride it out. How many on this forum chose to ride it out knowing full well that: Inflation=rate hikes=lower profits=potential recession. Also that the Fed corrects inflation by breaking things. So many times Powell said, "There will be pain"! And we as individuals should all be able to pivot and sell out in a week. Just one tiny example, back on 02/28/2020 the 5 year note had a low coupon rate and sold 42.9 billion dollars worth. Everyone, buying treasuries, was happy at that time. Incidentally, look who bought half...funds (not SBV). home.treasury.gov/system/files/276/March-7_2023-IC-Coupons.xlsQuestion is, who owns the rest of the billions and billions of treasuries sold when the Fed fund rate was near zero. It didn't go to just SVB. Actually we can forget the treasuries as an example. It is the trillions in debt sold during the low Fed rate period that will ALSO have to be marked to market. You were however smart if you issued debt (or :-)bought a house) at that time. Another side of the "buy short term maturities" argument, I heard analysts say don't buy on the short term debt because things will rebound and you will stuck at redemption with nothing to buy at a decent rate. Investing is not easy. Guess the only positive thing for the vultures is that SVB has $6 billion in operating losses that can be deducted from future taxable income by someone.
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Post by newtecher on Mar 15, 2023 20:46:26 GMT
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Post by mnfish on Mar 16, 2023 11:50:17 GMT
I'm too simplistic to understand so explain if you can. I create a startup company based on some app I hope to sell. I get $100k from my parents and others for seed money. I present my app to a group of investors(a VC?) and they agree to invest for a portion of my company's profits down the road(hopefully) and agree to back a loan from the bank for $1m. The bank agrees and deposits $1m in my checking account and only $250k is insured and requires my company to keep the money there. I hire 10 people to help with development. The bank has many of these relationships, rates rise and things quickly become iffy. The VC calls me and says pull out your money and I am successful in moving it to another bank. Who owes the first bank the remaining balance of the $1m loan? You, or your start up company, still owes the loan to the bank that lent you the money. You loan is still an asset owned by the bank. Another bank or VC firm may come along and buy your loan, but they are not likely to pay full price for it because of the risk that you, or the VC company that backed your loan, may be unable to repay the loan. "‘What happens to all the debt?’ Founders and VCs have a host of questions about the fate of Silicon Valley Bank’s venture loans" (from Fortune)Some startup founders that took loans from SVB are now wondering what happens to that debt if SVB or its loan book is acquired. Silicon Valley Bridge Bank, N.A., and its new CEO Tim Mayopoulos, said on Tuesday that they are “open for business,” including with their loans. On a private Zoom call on Wednesday, attended by Fortune, Mayopoulos said the bridge bank is “honoring all of our existing loan arrangements and facilities,” and currently “making advances” on those facilities as well as “taking new applications for loans.” But ask founders and you’ll hear that “they don't know what to do,” one venture investor said of their portfolio companies, who added that roughly 80% of their portfolio had loans with SVB. One founder who spoke with Fortune on the condition of anonymity said “It made no financial sense to go with anybody other than SVB, for sure,” for their venture debt. This startup got an $8 million loan in total with certain parameters for drawing on it, at a 4% interest rate in late 2021, and said the next best interest rate they were offered while shopping around for their loan was 13%.They said they are wondering, as others are, about who is going to buy SVB, and “when they get bought, what happens to all the debt? Like, will it be called? So, more poor business decisions by the bank in the loan department. I didn't take the time to calculate the difference between the total interest they left on the table on $8m @ 4% vs $8m @ 13% but I bet it would make you say, Wow!
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Post by Capital on Mar 16, 2023 13:38:33 GMT
"Some startup founders that took loans from SVB are now wondering what happens to that debt if SVB or its loan book is acquired"
I'm seeing that some hedge funds are interested in the loan book. No matter what happens or who buys it, the loan will remain in place with its current terms and conditions. The big difference will be that the friendly banker down the street who made the loan and wants future business will no longer be there to talk too. It will be someone who only wants to monetize the loan and cares nothing about the long-term relationship. Of course, depending upon the price paid for the loan by the Buyer, a deal for less than par might be reached in settlement. Of course, that will only be available to a borrower with cash or the means to obtain that cash.
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Post by FD1000 on Mar 17, 2023 3:51:06 GMT
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Post by mnfish on Mar 27, 2023 11:22:46 GMT
"The FDIC said that Raleigh, North Carolina-based First Citizens will assume ownership of some $72 billion of assets held by the Silicon Valley Bridge Bank at a discount of $16.5B. It will also assume control of all of SVB's remaining $119B in deposits,"
"Approximately $90 billion in securities and other assets will remain in the receivership for disposition by the FDIC," the FDIC said.
So, a 22% haircut on the loan assets. I wonder what a normal bank buyout discount would be, if any?
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Post by newtecher on Mar 27, 2023 14:19:28 GMT
"The FDIC said that Raleigh, North Carolina-based First Citizens will assume ownership of some $72 billion of assets held by the Silicon Valley Bridge Bank at a discount of $16.5B. It will also assume control of all of SVB's remaining $119B in deposits," "Approximately $90 billion in securities and other assets will remain in the receivership for disposition by the FDIC," the FDIC said. So, a 22% haircut on the loan assets. I wonder what a normal bank buyout discount would be, if any? WSJ says "The purchase includes $56.5 billion in deposits and about $72 billion of SVB’s loans at a discount of $16.5 billion. Some $90 billion of SVB’s securities will remain in receivership." It would have been strange if the acquiring bank got more liabilities (deposits) than assets (loans).
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Post by bizman on Apr 5, 2023 0:45:39 GMT
Thinking about this some more, I'm wondering if the decision to chase yield wasn't intentional ... to pump up the stock price. The SEC will probably want to look at insider sales prior to the collapse. More evidence of the management malpractice that occurred at SVB: www.hamiltonlane.com/en-us/insight/weekly-research-briefing/weekly-research-briefing-spring-has-sprung"We can only hope that the SVB execs responsible will not even be allowed to get a future lemonade stand license...
Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm. In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations. Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact. The new assumptions validated SVB’s profit-driven strategy, but they were profoundly misplaced... The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown. 'Management always wanted to tell a growth story,' one former employee involved in the bank’s risk management said. 'Every quarter, there was always this pressure to deliver earnings.'”
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Post by steadyeddy on Apr 5, 2023 2:29:22 GMT
Thinking about this some more, I'm wondering if the decision to chase yield wasn't intentional ... to pump up the stock price. The SEC will probably want to look at insider sales prior to the collapse. More evidence of the management malpractice that occurred at SVB: www.hamiltonlane.com/en-us/insight/weekly-research-briefing/weekly-research-briefing-spring-has-sprung"We can only hope that the SVB execs responsible will not even be allowed to get a future lemonade stand license...
Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm. In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations. Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact. The new assumptions validated SVB’s profit-driven strategy, but they were profoundly misplaced... The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown. 'Management always wanted to tell a growth story,' one former employee involved in the bank’s risk management said. 'Every quarter, there was always this pressure to deliver earnings.'” None of this is surprising. Is it surprising to anyone? Just imagine how many other corporations (not just banks) are run like this?
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