OT: Stock and Investment Talk
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Same people that created the run on it? The irony.
Good to see. The upcoming Fed pivot will help as well. Powell et al really screwed up once again and has endangered the regional banking system.
Saw an interview with former FDIC head Sheila Bair and she was like it’s ironic that the run was started by supposedly “sophisticated” financial players like VCs etc..
My thinking is human psychology is human psychology no matter how “sophisticated”
Great summary by Fidelity:
What happened to SVB?
Several factors led to the precipitous collapse of SVB. Most of SVB's clients include tech and venture capital companies, in addition to executives for these firms. In an effort to attract clients, SVB offered relatively higher rates on deposits compared with many larger rivals. To help fund these higher rates, SVB bought bonds in prior years when it was cash rich. But that was before the Fed began aggressively hiking rates and the venture capital market experienced some turbulence. The value of most of those bonds SVB purchased has declined substantially (bond values generally decrease as interest rates increase), resulting in big investment losses.
"This is a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage," according to Jurrien Timmer, director of global macro at Fidelity. "Some banks have offered to pay higher rates to their depositors, but as the Fed has raised rates and bond values decreased, banks like SVB are taking losses on their bond assets."
Complicating the situation, SVB kept a lower level of deposits on hand and invested a greater percentage of its capital in order to try and pay its relatively higher rates. Consequently, SVB has been on looser footing than most other banks.
Additionally, some have speculated that SVB developed a reputation for having not-as-strict lending standards. It is speculated that the quality of loans to some riskier venture-backed companies with deposits at SVB has deteriorated over the past year. Many of those firms have come under significant financial pressure as rates have risen and securing capital has become more difficult compared to the low interest rate environment from just a couple of years ago.
After SVB announced recently that it lost $1.8 billion in asset sales, the bank failed to secure additional investment capital and many customers rapidly withdrew deposits. Everything culminated with Friday's seizure by regulators.
"There's an old adage that says the Fed tightens until something breaks," Timmer adds. "It looks like we have a sense of what is breaking during this Fed cycle."
Silicon Valley Bank: What happened? | Fidelity Investments
The collapse of Silicon Valley Bank has many wondering whether the broader economy is at risk.
www.fidelity.com
What happened to SVB?
Several factors led to the precipitous collapse of SVB. Most of SVB's clients include tech and venture capital companies, in addition to executives for these firms. In an effort to attract clients, SVB offered relatively higher rates on deposits compared with many larger rivals. To help fund these higher rates, SVB bought bonds in prior years when it was cash rich. But that was before the Fed began aggressively hiking rates and the venture capital market experienced some turbulence. The value of most of those bonds SVB purchased has declined substantially (bond values generally decrease as interest rates increase), resulting in big investment losses.
"This is a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage," according to Jurrien Timmer, director of global macro at Fidelity. "Some banks have offered to pay higher rates to their depositors, but as the Fed has raised rates and bond values decreased, banks like SVB are taking losses on their bond assets."
Complicating the situation, SVB kept a lower level of deposits on hand and invested a greater percentage of its capital in order to try and pay its relatively higher rates. Consequently, SVB has been on looser footing than most other banks.
Additionally, some have speculated that SVB developed a reputation for having not-as-strict lending standards. It is speculated that the quality of loans to some riskier venture-backed companies with deposits at SVB has deteriorated over the past year. Many of those firms have come under significant financial pressure as rates have risen and securing capital has become more difficult compared to the low interest rate environment from just a couple of years ago.
After SVB announced recently that it lost $1.8 billion in asset sales, the bank failed to secure additional investment capital and many customers rapidly withdrew deposits. Everything culminated with Friday's seizure by regulators.
"There's an old adage that says the Fed tightens until something breaks," Timmer adds. "It looks like we have a sense of what is breaking during this Fed cycle."
Good question. Banks don't have all deposits liquid and ready to return if there is a run. So, I assume all of them have a breaking point to some extent.
The Fed's goal remains to reverse inflation. There will be pain en route. But they will not alter course due to greedy mismanaged high-flyers such as SVB. Things will get worse for many before they get better. We will get thru this.
They might have to pull the reigns a bit on the hikes, but if lender’s are spooked by SVB’s failure you might see access to capital tigthten anyways. SVB might have a deflationary effect on its own.
It's over for the Fed. The WH has already stepped in. Look for the narrative to change this week. Perhaps a 0.25% next week to save face, but the upcoming CPI will give them cover to pause without admitting they f'ed up again.
"survive", would be the proper grammar in this sentence correct? Past tense verse present tense, I did learn that in 8th grade. 😉
Thoughts on whether this apparent vulnerability of "smaller" less-regulated banks will create a windfall opportunity for very large banks such as BAC as depositors seek refuge? Subsequently investors skate to where the puck is going, not where it is?
Of course. If their balance sheet is healthy, it’ll be backstopped by the government.
they didn’t have access because they needed to raise capital to meet banking regulatory ratios. If they had healthy ratio, the Fed would’ve provided the liquidity.
I think there will be some migration to GSIBs etc..at the very least for some diversification purposes of businesses, even small ones I suppose. Is it going to be that much of a windfall? I guess that would depend on how much confidence is shook by depositors.
I don't know that it should matter much for retail clients (most under 250K) but there's that human psychology thing again. I don't put any money I expect any sort of return from at a GSIB. You're likely to get better rates on fixed income products or loans from a regional/smaller bank than a big one whether you're retail client or business. They serve a good purpose for retail, as long as your under the FDIC limits. Daily use and emergency funds, I do keep at GSIBs. Do other retail clients think like that? I don't know.
Peter Thiel's Founders Fund got its cash out of Silicon Valley Bank before it was shut down, report says
Bloomberg reported that Thiel's VC fund took all its cash out of SVB after encountering problems with transfers during a "capital call."
LOL
Well that's a good thing at least.“They had bought all these mortgages at the top of the market and were sitting on a massive unrealized loss,” he said in an interview. “And it was sitting there in plain sight. There were a number of other banks and insurance companies with similar issues, but I haven’t seen anyone anywhere near the scale of Silicon Valley Bank.”
SVB’s Balance-Sheet Time Bomb Was ‘Sitting in Plain Sight,’ Short Seller Says
(Bloomberg) -- The problems that triggered SVB Financial Group Inc.’s death spiral were hiding in plain sight in the firm’s earnings reports.Most Read from BloombergUS Discusses Fund to Backstop Deposits If More Banks FailSVB Fallout Spreads Around World From London to SingaporeStartup Bank Had...finance.yahoo.com
I would've thought they could have tapped it with treasuries etc..as collateral even if MTM the value was down. IIRC the Fed accepted much worse collateral during the crisis but that was a much more systemically stressful period.
Maybe it's an oversimplification, but it does really sound like the issue was stocking up on bonds at their peak.
I guess a concentration in VC was also at play but if they weren't selling bonds at a significant loss to cover withdrawals they probably do OK?
The problem is that they were not MTM. They would’ve come clean no matter what.
Well as of now I didn't read anything about an unusually high percentage of non performing loans but part of the issue was cash burn from their clients and less deposits coming in. So you wonder if that could be a harbinger of problems down the line but it's an unknown.
If they raised money quietly or well ahead of Silvergate, I think they might have been okay. Once one domino falls, people start worry about the next and the next and that can become somewhat of a self fulfilling prophecy if you can't restore confidence.
You are correct. I will not make that mistake again.
You should try it.
Notice I used you are
Stocking up on bonds wasn't illogical back then. Nobody expected the Fed to go insane and raise rates with historic speed. The Fed actions have consequences. Didn't allow time for banks to adjust to the new environment.
How did no one expect it? I 'd like to see the timeline as to when these bonds were bought, but when everyone was saying the Fed was late, they were saying rates needed to go up.
There just is no defending SVB here. It's basic "Risk Management 101." They are grossly negligent. By the way, the CEO cashed out on Thursday. Nice touch.
True but if they were a high concentration of VC companies then they would be more exposed then most.
If they had a higher concentration of low yield bonds then they would also be more exposed then most.
The link above which I quoted said SVB looked in way worse position then most.
Going up like normal is fine. Going up with four 0.75% in a row has consequences. As per Fidelity:
"There's an old adage that says the Fed tightens until something breaks," Timmer adds. "It looks like we have a sense of what is breaking during this Fed cycle."
No defending the Fed either. Raising interest rates with reckless speed has consequences. This morning Yellen was asked about the Fed's actions and SVB. She completely avoided the question and refused to support them. Very telling by the former chair.
I was wondering if the they might come up with a facility to prevent any additional panic similar to the alphabet soup of facilities they created in the crisis.
From the article:
The Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported.
Regulators discussed a new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.
However, it was not clear if regulators would have political support to throw a lifeline to SVB, which catered to Silicon Valley startups and investors.
www.reuters.com
From the article:
The Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported.
Regulators discussed a new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.
However, it was not clear if regulators would have political support to throw a lifeline to SVB, which catered to Silicon Valley startups and investors.
After SVB failure, US acts to shore up banking system confidence
U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of Silicon Valley Bank threatened to trigger a broader financial crisis.
www.reuters.com
It’s not a leverage fund LOL. Rates go up and prices go down. As simple as that. The consequences of hide your loses is on full display.
Again, for the fifth time (?), my friend, "The Fed" has nothing to do with SVB's incompetence and/or hubris. You just don't risk client $$$ or the solvency of your institution as they did. They and their ilk fought to alter Dodd-Frank regulations under the guise of cost-savings and avoidance of cumbersome accounting. Smart guys (and gals).
About 400 failed banks were sold out during the crisis. The difference there is that 2007-2009 was kind of a slow moving car crash. This happened very quickly. As a result, SIVB hasn't been "marketed" to the big banks yet. It may take a few days.
That being said, I think someone will buy them. The franchise value of SIVB's customer base is pretty enticing and would be something that a bank like Goldman Sachs, for example, would be interested in.
Sheila Bair said similar and the closest similarity to this was IndyMac back then. They distributed 50 cents on the dollar and she’d expect a much bigger return in this case if it came to that. She said the difference between this and this was the speed in which it happened, weeks vs days so that makes it a little harder to find buyers quickly and for due diligence etc…
Saying the same thing over and over again doesn't make you right. Most financial reporters, pundits, officials, and pols agree with my POV. Not yours. Fed has blood on their hands.
We had the highest inflation in 40 years, raising rates like normal wasn't a real option.
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