SVB collapse

You're right, this was just an off-the-cuff comment upon seeing the headline before reading into it. It was in fact even more unbelievably dumb. They were holding billions in 10yr MBS for roughly half a point of yield over treasuries w/ no rate hedging in a rising rate environment (while their CEO was a member of the SF Fed no less). Other members of their C-level overseeing this type of stuff must be Lehman Brother-tier risk management... 

Meet Mr. Meltdown - Chief Administrative Officer Silicon Valley Bank -And- Prior To Joining In 2007 Was CFO At Lehman Bros. Global Inv. Bank-Joseph Gentile
 

I suppose they just couldn't imagine a run on the bank. Bank runs are a pretty rare thing in modern banking (though they obviously do happen) and I guess it just didn't occur to them that this could all happen. Credit downgrade, liquidity crunch, raising capital--I don't know. Maybe it just hit them all at once and they didn't know what to do or how to approach the sequence properly. Maybe they made one decision (sell securities to bolster liquidity) and then the inertia of that decision couldn't be slowed as they made another impactful decision. Hard to say. There was probably some logic behind it that's explainable, but it's hard to understand. 

It was a MTM loss- and we knew it was coming from their financials for at least a few weeks.

Probably a legal matter where you would have to disclose as that would heavily impact investment decision-making.

financeabc

GregMadeMeDoIt

It's been an interesting day at work. We've been drilling down into our own institutions to see what kind of risk they have in the case of deposit runoff. We have a weird situation in the economy where the larger economy is fairly healthy and there is still considerable hunger by borrowers for loans, but there is increasingly insufficient cash available as deposits are running off to chase better rates (the 6- and 12-month Treasuries are +-5%, for example). So in 2022 we had a huge runup in loans in conjunction with a huge runoff in deposits (acutely bad runoff in some institutions). Loans get funded by cash generated by deposits, the sale/runoff of securities, or some other third party borrowing (e.g., FHLB, correspondent banks), or, on the margins, common and preferred equity and subordinated debt. But as deposits (the main source of funding) leave and with loan demand remaining high, the larger banking industry is increasing their liquidity risk OR they are forcibly telling their lenders--whose pay is based on production--to stop or slowdown production. It's a helluva thing to witness. 

Ultimately, this insane uncertainty in the market is the fallout from policies enacted 36 months ago with respect to our response to Covid-19. They shut down the economy, spent insane sums of money, then when the economy was recovering normally in Q1 2021 the Dems juiced the economy with insane sums of spending for no apparent reason, contributing to 40-year high inflation. To get inflation under control (which the Fed hasn't really done yet) they've enacted historically fast rate hikes, which has made managing bank liquidity extremely difficult. SVB management, which catered to a niche segment that is also being uniquely negatively impacted by the macroeconomy, failed to manage the risk.   

- expand -

The dems did not cause SVB to fail.  Poor risk management is probably the reason a bank would fail.  They can't be the only bank to have losses on their portfolios.

He said it was management's inability to manage risk that caused it to fail. The only thing he blamed the Dems for was the spending policies pushed forward by Congress in early 2021 when the worst of the pandemic was over because it put us on the runaway inflation train for the last 2 years - which is accurate. The emergency funding that passed in 2020, while also very bad in hindsight, could at least be somewhat justified by the extreme situation and rapid onset of the markets nearly collapsing. The decision to add to that with more blind spending in 2021 was just blatantly dumb posturing.

Every bank has losses in their portfolios right now. And I don't think we will have to wait too long before we start finding out how much and how bad.   

We should erect a statue for Joe Manchin, because lord knows where we would be if that bill passed.

financeabc

GregMadeMeDoIt

It's been an interesting day at work. We've been drilling down into our own institutions to see what kind of risk they have in the case of deposit runoff. We have a weird situation in the economy where the larger economy is fairly healthy and there is still considerable hunger by borrowers for loans, but there is increasingly insufficient cash available as deposits are running off to chase better rates (the 6- and 12-month Treasuries are +-5%, for example). So in 2022 we had a huge runup in loans in conjunction with a huge runoff in deposits (acutely bad runoff in some institutions). Loans get funded by cash generated by deposits, the sale/runoff of securities, or some other third party borrowing (e.g., FHLB, correspondent banks), or, on the margins, common and preferred equity and subordinated debt. But as deposits (the main source of funding) leave and with loan demand remaining high, the larger banking industry is increasing their liquidity risk OR they are forcibly telling their lenders--whose pay is based on production--to stop or slowdown production. It's a helluva thing to witness. 

Ultimately, this insane uncertainty in the market is the fallout from policies enacted 36 months ago with respect to our response to Covid-19. They shut down the economy, spent insane sums of money, then when the economy was recovering normally in Q1 2021 the Dems juiced the economy with insane sums of spending for no apparent reason, contributing to 40-year high inflation. To get inflation under control (which the Fed hasn't really done yet) they've enacted historically fast rate hikes, which has made managing bank liquidity extremely difficult. SVB management, which catered to a niche segment that is also being uniquely negatively impacted by the macroeconomy, failed to manage the risk.   

- expand -

The dems did not cause SVB to fail.  Poor risk management is probably the reason a bank would fail.  They can't be the only bank to have losses on their portfolios.

Yeah, I definitely didn't blame the Dems for the SVB collapse. They do, however, share principal responsibility in championing insane, illogical economic lockdown policies and then spending inordinate sums of money to "correct" their own mistakes, which has contributed to one of the most bizarre economic cycles in 100 years. Not the worst economical cycle in 100 years--but I think clearly most bizarre. SVB management is responsible for poor liquidity management as thousands of banks and credit unions have managed the uncertainty so far without collapsing, so they share principal responsibility for bad management. But this bizarro world economy ALL stems from the Democratic Party's desire to defeat Donald Trump (who I personally can't stand and I don't support in 2024) by destroying the 2020 economy through the most draconian and deranged and authoritarian policies we've seen since the 1860s. Their behavior was atrocious and this high inflation, high volatility economy is the outgrowth of those insane policies. 

CREsyndication

PEarbitrage

Looks like another major bank failure was just announced. 

Which one?

Signature Bank

I'm just reading the announcement. Didn't provide a lot of detail. I assume FDIC covers the losses and is made whole in the short-term by the Federal Reserve Bank or some other entity and then repays that entity by selling off SVB's assets and taxing the banking sector with higher insurance fees. But that's just a guess.

TBH, looking at SBV's most recent annual report, their tangible common equity was around 7.5% (which is actually pretty good). They should be able to cover the depositors with some left over. The whole bailout of depositors may just be a moot point.

I could easily be wrong but doesn't the risk depend on the borrower's credit profile and the quality of the collateral.  What if the crypto market collapses and the collateral loses a lot of value.   What is the main risk in crypto lending?

Silvergate "failed" but not to the same way.  They voluantrily went to the FED Window and Treasury to seek assistance for a dissolution of the bank.  So the banking regulators didn't take them over in the same way they did for SVB and now Signature.