Go woke, go broke

[Brainster]

No. The failure of SVB was down to seveal factors, mainly it's over-reliance on USGov Treasury Securities ('T-Bills') whose market value declined precipitously as interest rates increased. This was worsened by endemic short-selling.
In fact SVB was lending in the hope of long term profits.
The proximate cause (as usual in USian bank collapses) was the beginning of rumours of imminent failure.

T-Bills or T-Bonds?

 

[lobosrul5]

They sound pretty middle-of-the-road woke for 2023. And the reason why they went bust is because they chased after fairly small profits. Like every other bank they were offering negligible interest to their depositors, which should mean they were pretty safe. But most of the other banks maintained sizeable cash reserves and their short-term lending operations during the low-interest rate era, while SVB, with huge net deposits in the last few years was unable to lend out the money traditionally and decided to invest in bonds and mortgage-backed securities. Those are actually quite safe investments, and SVB would have been fine if either one of two things happened:

1. Their depositors in the tech industry had continued to make large net deposits in the bank as they had during the last few years.
2. Interest rates had remained stable.

Unfortunately neither of those things happened. Interest rates increased rapidly, and as a result bonds had their worst year in 2023 in memory. SVB was forced to sell their bonds at a loss in order to meet the withdrawal demands of their tech clients who were experiencing a sudden and sharp recession in the industry. When news of the loss hit, large, uninsured depositors became nervous and the run was on.

It is possible, and I'm sure some studies will be done, that if they were still under Dodd-Frank regulations they would have failed the "stress-test" that the mega banks are still subject to. What I mean by stress-test:

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20220210a1.pdf

I have not, and will not, take the time to read that entire document. However, you would hope they'd test out, well what happens if there is high inflation and the fed raises rates? I mean it is bewildering to me to begin with that a major bank didn't think of this scenario in the first place, so it might be that the Fed's stress test didn't cover something so basically obvious.

There has been a ton of FUD about this from both sides. I've seen posts on reddit bitching how its always the taxpayers who get the shaft and now we're out over 200 billion... no. For two reasons. First off the FDIC will raise some fees on banks to cover. Secondly, SVB wasn't in THAT bad of shape. They reportedly have assets to cover about 95% of the deposit funds.

 

[lobosrul5]

T-Bills or T-Bonds?

Technically theres only 2 bonds issued by the US Treasury... the 20 and 30 year. And they got slaughtered. If they'd been in T-bills then they wouldn't be in any trouble.

 

[Brainster]

Technically theres only 2 bonds issued by the US Treasury... the 20 and 30 year. And they got slaughtered. If they'd been in T-bills then they wouldn't be in any trouble.

They suddenly discovered the consequences of duration gap.

 

[Puppycow]

I'm kinda surprised that a bank went bankrupt because they invested in too much treasury bonds. Usually it's something riskier.

But it makes sense actually. It was a bet that interest rates would stay low, which is a bet that inflation would stay low. Inflation didn't stay low, and therefore interest rates didn't stay low.

 

[Francesca R]

SVB is a "tech focused" lender that has funded large swathes of venture capital-type programs for its clients. Sort of a high risk area VC, easy to go broke, specialist due diligence required and all that.

So it seems somewhat comic that the thing that undid SVB was a massive wrong bet on mortgage-backed and government-backed bonds, which are supposed to be safe (unless you bet stupid amounts you really can't afford to lose), not VC stuff going bad.

Lots of banks buy bonds and have little ability to forsee bear markets, so "contagion", or rather, other banks suffering from the same type of trade, is more likely than if SVB had lost the money in, well, Silicon Valley

 

[bruto]

I'm kinda surprised that a bank went bankrupt because they invested in too much treasury bonds. Usually it's something riskier.

But it makes sense actually. It was a bet that interest rates would stay low, which is a bet that inflation would stay low. Inflation didn't stay low, and therefore interest rates didn't stay low.

That's the thing, they didn't really go bankrupt. They went illiquid, as noted by others above. If there had not been a run on their cash assets, they would not have had to sell the bonds at a loss. If they'd been able to cover their expenses at a normal rate, they would have matured, and returned their face value plus their interest. It's still at least partly their fault for not managing their assets better and having more foresight, but it's partly the fault of nervous investors' mob mentality. And of course it's still partly the fault of both themselves and the Trump administration for insisting that they should be excused from the scrutiny and regulation that now apply only to larger banks. The sudden discovery that they're too big to fail is woefully and willfully belated.

 

[marting]

SVB is a "tech focused" lender that has funded large swathes of venture capital-type programs for its clients. Sort of a high risk area VC, easy to go broke, specialist due diligence required and all that.

So it seems somewhat comic that the thing that undid SVB was a massive wrong bet on mortgage-backed and government-backed bonds, which are supposed to be safe (unless you bet stupid amounts you really can't afford to lose), not VC stuff going bad.

Lots of banks buy bonds and have little ability to forsee bear markets, so "contagion", or rather, other banks suffering from the same type of trade, is more likely than if SVB had lost the money in, well, Silicon Valley

It's actually pretty simple what happened to SVB.

1. They had a very high percentage of depositors with well over 250k (FDIC insured) deposits.

2. Mostly in the VC and startup community. They talk (twitter) to each other and have aspects of a herd.

3. They invested deposits excessively in long term govt. bonds. While safe, increases in long term interest rates cause a drop in the present value of the bonds. The longer the bond term, the more the present value drops when long interest rates go up. A 1% increase can easily result in a 10% drop in the market value if sold.

4. These HTM (hold to maturity) bonds do not have to be marked to market because they are not normally the current reserves for expected possible depositor withdrawals. They are, however, disclosed in the SEC filings. Drops in the market value of such reserves are "unrealized losses"

5. If, for whatever reason, a large number of depositors decide to withdraw their deposits, the bank may be forced to sell some of these HTM bonds or raise capital by selling stock or other securities in the bank. SVB did, or tried to do, both.

6. Silicon Valley is a tight group. They talk to each other. A lot. And on Twitter. So 40% of the total deposits were withdrawn in a single day. That killed the bank because the remaining invested bonds and other liquid equity could not cover the remaining deposits.

Here's a twitter thread by one of the folks that actually reads SEC bank filings who blew the warning much earlier.

https://twitter.com/RagingVentures/status/1615826089456148491

Here's a sample:

$SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!!

Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10

 

[catsmate]

That's the thing, they didn't really go bankrupt. They went illiquid, as noted by others above. If there had not been a run on their cash assets, they would not have had to sell the bonds at a loss. If they'd been able to cover their expenses at a normal rate, they would have matured, and returned their face value plus their interest. It's still at least partly their fault for not managing their assets better and having more foresight, but it's partly the fault of nervous investors' mob mentality. And of course it's still partly the fault of both themselves and the Trump administration for insisting that they should be excused from the scrutiny and regulation that now apply only to larger banks. The sudden discovery that they're too big to fail is woefully and willfully belated.

Blame Twitter.

 

[marting]

That's the thing, they didn't really go bankrupt. They went illiquid, as noted by others above.

Sure everything would have been fine without a bank run. But they were not just illiquid. When they were closed down, they had a negative net worth because they had to sell highly liquid assets at a discount to meet withdrawals.

For example, a 1B$, 1% 30Y treasury is only worth about .8B$ if the interest rate increases to 2%. These had been carried on the books at full, notional value but once they were forced to sell them to meet the high withdrawal demand, they had to book the losses.

And hence they became bankrupt between thursday and friday.

 

[Roger Ramjets]

Sure everything would have been fine without a bank run. But they were not just illiquid. When they were closed down, they had a negative net worth because they had to sell highly liquid assets at a discount to meet withdrawals.

No buts, that's the whole of it. Had there not been a bank run they wouldn't have had to sell their assets at a discount.

In my business I had one simple principle - always keep enough cash in reserve to cover any possible expenses. And one day that got tested. The bank assured me that running an overdraft would be fine, but I said no. Of course the result was that my business didn't grow like others did. But it didn't fail either.

I would make a terrible banker, because I wouldn't loan out any funds I couldn't afford to lose. 40% in one day is ludicrous. If we can't stop that sort of thing from happening the banking system is in trouble. But that's the 'invisible hand' doing its thing - ain't Capitalism wonderful?

It's easily fixed though. Just nationalize the banking industry, and make usury illegal - punishable by death.

 

[marting]

In my business I had one simple principle - always keep enough cash in reserve to cover any possible expenses. And one day that got tested. The bank assured me that running an overdraft would be fine, but I said no. Of course the result was that my business didn't grow like others did. But it didn't fail either.

I am similarly conservative financially. My partner and I started a tiny tech manufacturing business with our savings. So small that I didn't even draw a salary for 5 years. We grew it from a corner of the toolshed to a fair sized operation employing almost a thousand people over 20+ years. Built on the equity, profit and accumulated retained earnings. No loans until we were large enough and had a diversified customer base then we opened a recivables LOC. Mostly because we had to pay taxes on profits we hadn't recieved (accrual accounting) because we sold OEM and standard payment terms were 30 days. Rarely had to use much of the recivables line.

 

[marting]

Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers
https://www.fdic.gov/news/speeches/2023/spmar0623.html

This was presented on March 6.

The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022.
....
unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs. That is because the securities will generate less cash when sold than was originally anticipated, and because the sale often causes a reduction of regulatory capital.

And then, just a few days later.....


It's a good read that discusses the recent issues and environment.

 

[Dr. Keith]

So, it was money that brought down the bank, not wokeness?

 

[bruto]

So, it was money that brought down the bank, not wokeness?

Of course. The term has begun its inevitable decoupling from fact, to become just another catchall for the imagined sins of the other side.

 

[Brainster]

Sure everything would have been fine without a bank run.

Actually they had taken the $1.8 billion loss on the bonds two days prior to the bank run. Their tech clients had been drawing down funds due to the tech recession, which caused the initial liquidity crunch. The run came about because they announced they were trying to sell $2.25 billion in stock, and investors looking at the financials realized that wasn't going to be enough.

Assuming that the run had not happened, the bank could still have been in trouble. The negligible interest rates that financial institutions have been offering to depositors for the last 15 years are likely to come under upward pressure, and it is quite possible that SVB could have ended up with a negative spread. This was what devastated the S&Ls back in the late 1970s; they had low-interest rate mortgages that they had made years earlier, and now they had to pay higher interest rates to get depositors.

 

[marting]

Actually they had taken the $1.8 billion loss on the bonds two days prior to the bank run. Their tech clients had been drawing down funds due to the tech recession, which caused the initial liquidity crunch. The run came about because they announced they were trying to sell $2.25 billion in stock, and investors looking at the financials realized that wasn't going to be enough.

According to their filings, they believed it would be more than enough. They touted how all their ratios were excellent and put them in a low risk category. However, they weren't taking into account the exposure that remained. Especially since SVB's depositors were an exceptionally, financially literate bunch. And they had common interests with almost 90% of their deposits not insured by FDIC. And Silicon Valley peeps talk to each other on Twitter. A lot.

The AFS assets, about 23B, had been sold with a 9% haircut. The remaining, HTM assets, > 90B were not sold and would see a much bigger haircut in a forced sale. And their loan portfolio would have been an even bigger issue in a stress sale.

Assuming that the run had not happened, the bank could still have been in trouble. The negligible interest rates that financial institutions have been offering to depositors for the last 15 years are likely to come under upward pressure, and it is quite possible that SVB could have ended up with a negative spread. This was what devastated the S&Ls back in the late 1970s; they had low-interest rate mortgages that they had made years earlier, and now they had to pay higher interest rates to get depositors.

In retrospect, it seems to me their biggest issue is lack of depositor diversification w/o the protection of FDIC. That just amplified herd mentality and when the financially literate realized they might lose funds, a large enough percentage ran for the exits and SVB was doomed. Something of a unicorn if not the kind Silicon Valley is known for.

As it is, SVB has now taken down it's holding company which just filed for bankruptcy.

 

[Brainster]

According to their filings, they believed it would be more than enough. They touted how all their ratios were excellent and put them in a low risk category. However, they weren't taking into account the exposure that remained. Especially since SVB's depositors were an exceptionally, financially literate bunch. And they had common interests with almost 90% of their deposits not insured by FDIC. And Silicon Valley peeps talk to each other on Twitter. A lot.

The AFS assets, about 23B, had been sold with a 9% haircut. The remaining, HTM assets, > 90B were not sold and would see a much bigger haircut in a forced sale. And their loan portfolio would have been an even bigger issue in a stress sale.

I have mentioned elsewhere on the forum but I tutor college kids in finance. A fair amount is basic pv and fv of annuity stuff but every now and then I get a question where I have to do some digging. On those questions I always make a new tab in my notes spreadsheet and try to solve the problem there if I was unable to with the student so I have a constantly expanding knowledge base.

Well, at some point I had a student come in to ask a question about duration gap. I don't remember the session now but I figured it out either then or afterwards. Here's my summary of what it measures:

Duration gap analysis measures the sensitivity of the market value of a financial institution's net worth to changes in interest rates.

Duration is a somewhat annoying calculation of how long it will take one to get paid back on a bond. That's what did them in; they had demand deposits (duration 0) backed by low-interest rate bonds with fairly long terms (duration 3.5 or so as I recall from some reading). That's a fairly short duration so it doesn't look like they were investing in very long bonds; they probably thought 5 years or less were safe.

In retrospect, it seems to me their biggest issue is lack of depositor diversification w/o the protection of FDIC. That just amplified herd mentality and when the financially literate realized they might lose funds, a large enough percentage ran for the exits and SVB was doomed. Something of a unicorn if not the kind Silicon Valley is known for.

If you want to stop runs on banks these days, you need to do away with the notion of insured and uninsured deposits (make them all insured). Although the FDIC has largely done that in the past (and has announced they will with SVB and Signature), Yellen specifically refused to say that today, probably because of the moral hazard issue but they will come up with a rationale as to why those cases are different to avoid admitting the obvious.

I get the argument about depositor diversification but that's the point of having a national banking system in the first place--so that banks in the farm belt aren't broke in the spring and flush with uninvestible cash in the late fall.

As it is, SVB has now taken down it's holding company which just filed for bankruptcy.

The holding company owns other assets that it is protecting with the BK.

 

[Brainster]

Here's one we can watch for in real time. Bud Light apparently decided to go after the transgender market, by sponsoring Dylan Mulvaney, a transwoman TikTok influencer who recently celebrated her "365th day of girlhood."

A fair number of other "influencers" have reacted negatively. Kid Rock shot up a couple of cases, and country stars including Travis Tritt have removed Budweiser products from their shows. It remains to be seen how many ordinary people will really stop drinking Bud Light, which has been the top brand in the USA for years. But I definitely think they stepped in it and they seem to recognize that nothing they can say at this point is going to help matters (hence their twitter accounts have been silent for days).

 

[Puppycow]

This made me chuckle:

Why I decided to shoot all my Bud Light: A letter to my 'woke' liberal neighbors