Investment Thread

[Jeffrey]

No taxpayer funds will be used.

I know you think I take things too literally, but this is not true. Ultimately, taxpayers, investors, and banking customers will always pay for regulatory incompetency!

[PackMan97]

I know you think I take things too literally, but this is not true. Ultimately, taxpayers, investors, and banking customers will always pay for regulatory incompetency!

Just quoting the article. I am skeptical as well, but to say more would enter territory not for this board.

[Bluedog]

https://abcnews.go.com/amp/Business/...ry?id=97807268

All depositors will be made whole. No taxpayer funds will be used. Not sure how.. Can anyone with more knowledge speak to how this bailout, not a bailout will happen?

Well, it's not the company that they're making whole, just depositors. Not sure the exact mechanics, but isn't it like an insurance company that provides coverage when a loss occurs? They collect premiums all the time, they'll get a large chunk based on assets from SVB, etc.

[PackMan97]

Well, it's not the company that they're making whole, just depositors. Not sure the exact mechanics, but isn't it like an insurance company that provides coverage when a loss occurs? They collect premiums all the time, they'll get a large chunk based on assets from SVB, etc.

This goes above and beyond FDIC limits, which is what I'm wondering. The good news is this isn't a result of fraud, just bad risk management due to over exposure in low yield treasuries.

IIRC an article said that SVB has assets to cover 80-90% of deposits, they just aren't liquid or they'd have to sell at a decent loss (low interest bonds for example have lost a lot of value, but not if held to maturity). I imagine the technical details is someone will pay full value for the assets and maybe FDIC coverage will be enough to make up the shortfall?

I don't know enough about this stuff.

[Jeffrey]

Not sure the exact mechanics, but isn't it like an insurance company that provides coverage when a loss occurs? They collect premiums all the time, they'll get a large chunk based on assets from SVB, etc.

Yes, and who ultimately pays those future (significantly higher) premiums? Taxpayers, investors, and banking customers. Under this structure, mostly investors and banking customers.

Said differently, US citizens will continue paying a huge price for US regulatory incompetency!

[Bluedog]

Yes, and who ultimately pays those future (significantly higher) premiums? Taxpayers, investors, and banking customers. Under this structure, mostly investors and banking customers.

Said differently, US citizens will continue paying a huge price for US regulatory incompetency!

Wasn't suggesting that we're not ultimately on the hook for it, but the coverage in this case seems different mechanically from when we needed Congress to pass bills in 2008 to have huge cash infusions to financial institutions (I think taxpayers may have ended up okay on those deals as the institutions paid back the loans with interest).

Ultimately, though, certainly investors and customers "pay" for it much like increased medical costs (and obscene US billing policies) are borne from increased insurance premiums and the like. Even if we personally don't get impacted by a $10k emergency room bill for a simple scan, we collectively have to cover those cost based on the mechanics that are in place.

[Jeffrey]

Very early in my career, in 1994, I interviewed for a financial institution CFO position. The CEO was a former Chairman of a US Banking Regulatory Agency (IMO, the last to substantially improve a regulatory agency). He asked me what I thought of how regulators utilized Asset Liability Management. I said, “It’s total BS, it can be easily rigged to make it say whatever you want”. I was later told, that answer got me the job offer.

That's just the way it is,
Some things will never change!

[OldPhiKap]

Very early in my career, in 1994, I interviewed for a financial institution CFO position. The CEO was a former Chairman of a US Banking Regulatory Agency (IMO, the last to substantially improve a regulatory agency). He asked me what I thought of how regulators utilized Asset Liability Management. I said, “It’s total BS, it can be easily rigged to make it say whatever you want”. I was later told, that answer got me the job offer.

That's just the way it is,
Some things will never change!

Standing in line, marking time
Waiting for the welfare dime
'Cause they can't buy a job
The man in the silk suit hurries by
As he catches the poor old lady's eyes
Just for fun he says, "Get a job"

[tendev]

This goes above and beyond FDIC limits, which is what I'm wondering. The good news is this isn't a result of fraud, just bad risk management due to over exposure in low yield treasuries.

IIRC an article said that SVB has assets to cover 80-90% of deposits, they just aren't liquid or they'd have to sell at a decent loss (low interest bonds for example have lost a lot of value, but not if held to maturity). I imagine the technical details is someone will pay full value for the assets and maybe FDIC coverage will be enough to make up the shortfall?

I don't know enough about this stuff.

My guess is that whatever the FDIC pays from the insurance fund it will get the first crack at the assets of SVB to make the FDIC whole. The first losers are the shareholders, then perhaps bondholders etc., then the depositors. Banks have a very complicated capital structure. It is not just shareholder equity/capital and deposit liabilities. There must be some kind of priority in paying bank liabilities. The last loser is the FDIC I assume and it only has to cover $250K per account. I read in the NY Times that if a deposit account exceeds $250K, the deposit account holder gets a "certificate" for a claim against the bank in excess of $250K. That claim could be paid in full if the assets of SVB are sufficient to cover them. Or, it is possible that a buyer will simply take all of the assets and assume all the liabilities (bank deposits are liabilities of the bank). It all depends on what those assets are worth.

[Kdogg]

Wasn't suggesting that we're not ultimately on the hook for it, but the coverage in this case seems different mechanically from when we needed Congress to pass bills in 2008 to have huge cash infusions to financial institutions (I think taxpayers may have ended up okay on those deals as the institutions paid back the loans with interest).

Well not yet (and hopefully never). The problem at SVB is not isolated to that one bank. Banks hold their reserves in treasuries, bonds and commercial paper. Like Jeffery said the accounting for that is BS. They could have kept it at the Fed or in short term T-bills but they want to extract as much yield as possible. In the short term, those assets aren’t worth what the banks paid for them. Right now US banks have hundreds of billions of dollars of loses…at least on paper. If companies and people start to withdraw money banks have to sell and we got a snowball effect on our hands. Bank collapses become a self fulfilling prophecy. Theoretically, if people kept their money at SVB maybe it could have survived like George’s Building and Loan in “It’s a Wonderful Like.”

It’s not just a US problem. Both the UK and Israeli governments are working out how to protect their tech companies that banked at SVB.

[Bluedog]

Well not yet (and hopefully never). The problem at SVB is not isolated to that one bank. Banks hold their reserves in treasuries, bonds and commercial paper. In the short term, those assets aren’t worth what the banks paid for them. Right now US banks have hundreds of billions of dollars of loses…at least on paper. If companies and people start to withdraw money banks have to sell and we got a snowball effect on our hands. Bank collapses become a self fulfilling prophecy. Theoretically, if people kept their money at SVB maybe it could have survived like George’s Building and Loan in “It’s a Wonderful Like.”

It’s not just a US problem. Both the UK and Israeli governments are working out how to protect their tech companies that banked at SVB.

Yeah, if they could have held to maturity probably would have been fine, which they would have done normally, but the rules dictate that they must sell when depositors withdraw money...Definitely a "self fulfilling prophecy" where people get skittish about the prospects/health of the institution and then withdraw all their funds which sinks the bank. (As they don't want to be the ones holding the bag at the end.) When the bank theoretically would have been able to weather the storm if everyone just stayed put. Didn't the "run on the bank" happen at the end of Mary Poppins?

[CrazyNotCrazie]

Yeah, if they could have held to maturity probably would have been fine, which they would have done normally, but the rules dictate that they must sell when depositors withdraw money...Definitely a "self fulfilling prophecy" where people get skittish about the prospects/health of the institution and then withdraw all their funds which sinks the bank. (As they don't want to be the ones holding the bag at the end.) When the bank theoretically would have been able to weather the storm if everyone just stayed put. Didn't the "run on the bank" happen at the end of Mary Poppins?

So where is all of this money that is being withdrawn going? Under the mattress or into different banks?

[Bluedog]

So where is all of this money that is being withdrawn going? Under the mattress or into different banks?

The money that was withdrawn before the collapse? Different banks I assume. I think SVB is really popular among startups/tech companies. I actually have a client that is impacted by this and are simply telling customers to not use it anymore. Looks like they'll be made whole tomorrow with access to all funds.

[Jeffrey]

Like Jeffery said the accounting for that is BS.

Thirty years ago, and ever since, I called BS on how regulators address ALM (Asset Liability Management). What was the US Government’s largest effort to address The Great Recession? Shock tests (ALM) which have existed since the 80’s. Said differently, the US Government did basically nothing, as I repeatedly informed them!

I strongly agree, the investment accounting, you’re addressing, is also total BS. A financial institution can label and account for an investment as HTM (held to maturity) but it must always be AFS (available for sale) when depositors want their money back.

[CrazyNotCrazie]

The money that was withdrawn before the collapse? Different banks I assume. I think SVB is really popular among startups/tech companies. I actually have a client that is impacted by this and are simply telling customers to not use it anymore. Looks like they'll be made whole tomorrow with access to all funds.

I am just wondering if some of those who withdrew money from SVB before Friday deposited it in banks like First Republic that some fear are the next ones to be challenged, helping to stabilize some of those other banks.

[Jeffrey]

Standing in line, marking time
Waiting for the welfare dime
'Cause they can't buy a job
The man in the silk suit hurries by
As he catches the poor old lady's eyes
Just for fun he says, "Get a job"

What a Long Strange Trip It’s Been!

The man will never change and it’ll always be at our expense!

[Jeffrey]

I am just wondering if some of those who withdrew money from SVB before Friday deposited it in banks like First Republic that some fear are the next ones to be challenged, helping to stabilize some of those other banks.

Hot money will always have legs and no bank should/can depend on it! Tomorrow may be a field day for shorters!

Only the US Government can save First Republic and, thanks to the US Governments total incompetency, they basically have no choice, since there are dozens of similarly positioned banks.

[YmoBeThere]

New York-based Signature Bank was closed down on Sunday. Heavy into crypto lending, it is the 3rd largest bank failure in history with $110 billion in assets as of December 31st.

[Jeffrey]

New York-based Signature Bank was closed down on Sunday. Heavy into crypto lending, it is the 3rd largest bank failure in history with $110 billion in assets as of December 31st.

No need for a DNA test…. Uncle Sam and Rip Van Winkle are closely related!

[Jeffrey]

Hot money will always have legs and no bank should/can depend on it! Tomorrow may be a field day for shorters!

Only the US Government can save First Republic and, thanks to the US Governments total incompetency, they basically have no choice, since there are dozens of similarly positioned banks.

As predicted….

“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.”

https://www.federalreserve.gov/newse...htm?mod=ANLink

Here’s the manipulation… “These assets will be valued at par.” Those assets are currently worth more than $600 billion less than par!

https://www.cnn.com/2023/03/12/inves...ead/index.html

Said differently, US taxpayers are now funding partially unsecured loans at substantially below market rates. Yet again, US taxpayers are paying for US Regulatory Agency incompetency!