|
Post by bizman on Apr 5, 2023 3:17:39 GMT
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? Sadly, I agree that it is quite common. Think of the flaws in human evolution and cognition. Rather than cautious, super-thoughtful people, the highly confident and always certain people with charisma tend to end up in the C suite. Of these that have had 10 or 20 years of success, what percentage of them are from big bets that went their way as opposed to genius risk management and being able to see around corners? Probably most. So these big dawgs, full of themselves, think they are geniuses and take bigger and bigger risks, right up until the point they crap out. And then they say, no one could have seen it coming. B.S. But even with these flaws in human nature and organization and the boom-bust nature of human endeavor, capitalism seems to create much better outcomes in the long term than allowing a bunch of government commissars to make the decisions. They are flawed humans who always fight the last war, as well. So history is a very biological seeming thing. There are dead ends and painful setbacks, but even so progress seems to continue over the long term, especially in the last couple hundred years or so since the start of the Industrial Revolution and capitalism, however fettered. While it seems like good regulation should be able to solve our problems, it never does. Not for good anyway. Chaos and stupidity seem to be features and not bugs of any system involving humans. But that's just my opinion, I could be wrong.
|
|
|
Post by steadyeddy on Apr 5, 2023 18:48:34 GMT
The good news - if there is good news - coming from bank failures is suddenly everyone woke up. All banks will make every effort to shore up their deposits, reduce risk, lend less (due to fear of deposit flight), and pay attention.
Likewise, the Fed will be cautious in their rate hike cycle. All in all this is a bullish sign for the stock market.
|
|
|
Post by richardsok on Apr 5, 2023 19:05:47 GMT
The good news - if there is good news - coming from bank failures is suddenly everyone woke up. All banks will make every effort to shore up their deposits, reduce risk, lend less (due to fear of deposit flight), and pay attention. Likewise, the Fed will be cautious in their rate hike cycle. All in all this is a bullish sign for the stock market. I hope you're right, eddy. Truly do. I keep thinking about the FRC preferreds for income. Earnings report due soon. They'll be down from previous, of course, but HOW bad? Enough to pay the common dividend? Every day I chart the common for signs of interest (to consider risk in the preferreds) .... but they remain flat-lined at about 13.90.
|
|
|
Post by steadyeddy on Apr 5, 2023 21:15:18 GMT
The good news - if there is good news - coming from bank failures is suddenly everyone woke up. All banks will make every effort to shore up their deposits, reduce risk, lend less (due to fear of deposit flight), and pay attention. Likewise, the Fed will be cautious in their rate hike cycle. All in all this is a bullish sign for the stock market. I hope you're right, eddy. Truly do. I keep thinking about the FRC preferreds for income. Earnings report due soon. They'll be down from previous, of course, but HOW bad? Enough to pay the common dividend? Every day I chart the common for signs of interest (to consider risk in the preferreds) .... but they remain flat-lined at about 13.90. richardsok, would preferred stock get wiped out if common stock gets wiped out? If yes, I would not touch any investments with FRC capital structure. There is something going on there - as well as at Schwab. No one is talking about it. One day it will stink to high heavens.
|
|
|
Post by archer on Apr 7, 2023 17:07:54 GMT
Question about banks in general, and insured deposits, How solvent is the FDIC compared to the amount of cash it insures? If widespread failures come to pass, and the only way the FDIC can make good on their insurance coverage is to print money, if they have to print a lot, we are looking at hyperinflation with the more they print the less valuable it becomes.
I use the word print loosely, and understand they don't really need to print physical money, but the results are the same.
On the other hand if newly printed money is only replacing money lost, is there a canceling effect, thus not inflationary?
|
|
|
Post by johntaylor on Apr 10, 2023 13:31:50 GMT
Money supply and currency are interesting topics. At one time, TX, VA, TN, and other states had currency with value only in the state. The National Bank Act came in 1863.
|
|
|
Post by steadyeddy on Apr 10, 2023 14:44:15 GMT
I hope you're right, eddy. Truly do. I keep thinking about the FRC preferreds for income. Earnings report due soon. They'll be down from previous, of course, but HOW bad? Enough to pay the common dividend? Every day I chart the common for signs of interest (to consider risk in the preferreds) .... but they remain flat-lined at about 13.90. richardsok , would preferred stock get wiped out if common stock gets wiped out? If yes, I would not touch any investments with FRC capital structure. There is something going on there - as well as at Schwab. No one is talking about it. One day it will stink to high heavens. richardsok, you may have seen this first republic suspends preferred dividends
|
|
|
Post by steadyeddy on Apr 10, 2023 14:46:02 GMT
Question about banks in general, and insured deposits, How solvent is the FDIC compared to the amount of cash it insures? If widespread failures come to pass, and the only way the FDIC can make good on their insurance coverage is to print money, if they have to print a lot, we are looking at hyperinflation with the more they print the less valuable it becomes. I use the word print loosely, and understand they don't really need to print physical money, but the results are the same. On the other hand if newly printed money is only replacing money lost, is there a canceling effect, thus not inflationary? For "insured deposits," solvency is really not a question... print baby print. For "deposits in excess of insured amounts," I suspect the govt will likely take care of folks as well. So.. print baby print.
|
|
|
Post by archer on Apr 10, 2023 14:54:24 GMT
steadyeddy, For more context, the Fed does have reserve to cover some of its insurance liability, after that printing is the only option as I see it. However, the credit rating of the Fed could be downgraded which depending on how bad, can have widespread effects.
|
|
|
Post by newtecher on Apr 10, 2023 15:58:20 GMT
steadyeddy , For more context, the Fed does have reserve to cover some of its insurance liability, after that printing is the only option as I see it. However, the credit rating of the Fed could be downgraded which depending on how bad, can have widespread effects. The Fed does not have a credit rating separate from US government. There is no need for it since the Fed does not issue bonds. Also, FDIC is not a part of the Fed. When FDIC runs out of money, the Treasury steps in (via Federal Financing Bank) to keep it solvent.
|
|
|
Post by archer on Apr 10, 2023 16:19:54 GMT
steadyeddy , For more context, the Fed does have reserve to cover some of its insurance liability, after that printing is the only option as I see it. However, the credit rating of the Fed could be downgraded which depending on how bad, can have widespread effects. The Fed does not have a credit rating separate from US government. There is no need for it since the Fed does not issue bonds. Also, FDIC is not a part of the Fed. When FDIC runs out of money, the Treasury steps in (via Federal Financing Bank) to keep it solvent. Thanks for clarifying. Looks like I need to brush up on my research!
|
|
|
Post by richardsok on Apr 10, 2023 17:07:37 GMT
Yeah, I saw it, Eddie. Thanks. Didn't take a position. It just came across my radar -- and disappeared from interest.
|
|
|
Post by steadyeddy on Apr 10, 2023 23:04:14 GMT
Yeah, I saw it, Eddie. Thanks. Didn't take a position. It just came across my radar -- and disappeared from interest. richardsok, glad you stayed away.
|
|
|
Post by johntaylor on Apr 11, 2023 13:54:19 GMT
SVB had a member of the "Fixed Income Hall of Fame":
"Mary J Miller served as...Treasury’s Under Secretary...responsible for Treasury debt management...and implementation of the Dodd-Frank financial reform legislation....received the Alexander Hamilton Award for Distinguished Service. Miller spent 26 years...with T. Rowe Price...Director of the Fixed Income Division...Ms. Miller currently serves on the boards of the Silicon Valley Bank Financial Group...earned a B.A. from Cornell...master's in regional planning...She is also a Chartered Financial Analyst."
|
|
|
Post by liftlock on Apr 11, 2023 19:48:14 GMT
SVB had a member of the "Fixed Income Hall of Fame": "Mary J Miller served as...Treasury’s Under Secretary...responsible for Treasury debt management...and implementation of the Dodd-Frank financial reform legislation....received the Alexander Hamilton Award for Distinguished Service. Miller spent 26 years...with T. Rowe Price...Director of the Fixed Income Division...Ms. Miller currently serves on the boards of the Silicon Valley Bank Financial Group...earned a B.A. from Cornell...master's in regional planning...She is also a Chartered Financial Analyst." And I believe Congressman Barny Frank, one of the co-authors of Dodd-Frank, was on the Board of Director's of one of the other failed banks.
|
|
|
Post by mnfish on Apr 15, 2023 11:38:16 GMT
newtecher - "The Fed does not have a credit rating separate from US government. There is no need for it since the Fed does not issue bonds. Also, FDIC is not a part of the Fed. When FDIC runs out of money, the Treasury steps in (via Federal Financing Bank) to keep it solvent." Read a couple of articles that comment on this - - The most recent data show that the Fed owes the Treasury over $41 billion, which exceeds its total capital - So, the Fed creates fictitious accounts on the assets side of its balance sheet, known as "deferred assets," to offset its increasing liabilities. - Deferred assets represent cash inflows the Fed expects in the future that will offset funds it owes to the Treasury. - The Fed had already accrued $41 billion in deferred assets, and the amount is only getting larger. - The Fed is paying rising rates of interest on bank reserves and reverse repurchase transactions(4.55%) while its balance sheet is stuffed with low-yielding(approx 1.75%) long-term fixed rate securities. - On a $8T balance sheet that's an annual loss of $228B - Similar creative “regulatory accounting” has not been utilized since the 1980s when it was used to prop up failing savings institutions.- The banks that are members of the Federal Reserve System could be forced to cover the capital shortfall - From the Federal Reserve Act "“The shareholders of every Federal reserve bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount subscriptions to such stock at the par value thereof in addition to the amount subscribed. - If the Fed’s losses were passed on, some member banks may face potential capital issues themselves
|
|
|
Post by newtecher on Apr 15, 2023 14:23:16 GMT
newtecher - "The Fed does not have a credit rating separate from US government. There is no need for it since the Fed does not issue bonds. Also, FDIC is not a part of the Fed. When FDIC runs out of money, the Treasury steps in (via Federal Financing Bank) to keep it solvent." Read a couple of articles that comment on this - - The most recent data show that the Fed owes the Treasury over $41 billion, which exceeds its total capital - So, the Fed creates fictitious accounts on the assets side of its balance sheet, known as "deferred assets," to offset its increasing liabilities. - Deferred assets represent cash inflows the Fed expects in the future that will offset funds it owes to the Treasury. - The Fed had already accrued $41 billion in deferred assets, and the amount is only getting larger. - The Fed is paying rising rates of interest on bank reserves and reverse repurchase transactions(4.55%) while its balance sheet is stuffed with low-yielding(approx 1.75%) long-term fixed rate securities. - On a $8T balance sheet that's an annual loss of $228B - Similar creative “regulatory accounting” has not been utilized since the 1980s when it was used to prop up failing savings institutions.- The banks that are members of the Federal Reserve System could be forced to cover the capital shortfall - From the Federal Reserve Act "“The shareholders of every Federal reserve bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount subscriptions to such stock at the par value thereof in addition to the amount subscribed. - If the Fed’s losses were passed on, some member banks may face potential capital issues themselves Good points. I do not think you can say that Fed owes the Treasury over $41 billion, though. If anything, it is the opposite: The Fed remits (transfers) all earnings to the treasury when they are positive but does not get any remittances from the treasury when it loses money, instead accumulating losses that will be offset by future earnings when the yield curve is no longer so inverted. "The deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume." ( from a footnote to the balance sheet). It is hard for me to imagine a scenario where the Fed itself would need a bailout but if it does, it would probably come from the treasury rather than member commercial banks. The Fed can probably just wait it out. If it gets worse, it could also completely stop paying interest on bank deposits with the Fed and start enforcing the fractional reserve requirements instead (as it did before 2020) to control the overnight interest rates. The liability of commercial banks is technically in the law but that is probably an anachronism due to the fact that the Fed has a weird public-private legal structure (I believe all other central banks are explicitly parts of the government). Since almost all profit of the Fed is transferred to the treasury (rather than the bank stock holders), it would be odd to expect the commercial banks to foot the bill for the losses.
|
|
|
Post by yogibearbull on Apr 15, 2023 14:38:23 GMT
Central banks handle this 2 ways.
The deficits/losses are just ignored. This started surfacing last year when the central banks of Australia, New Zealand, and some in Europe had negative balance sheets. They all issued formal statements that these didn't matter because those were central banks of the governments. It was a matter of time that this would happen to the US Fed.
Then, there is the BOE that is formally immunized by the UK Government for the operations the BOE undertakes on behalf of the UK Government (QE, etc). It just puts offsetting entries on its balance sheet that then looks perfect.
Clearly, the commercial banks cannot get away with this.
|
|