Silicon Valley Bank fails

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Seppia
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Re: Silicon Valley Bank fails

Post by Seppia »

The interaction between Janet Yellen and the Oklahoma senator may not have helped small regional banks.
https://youtu.be/Bcvl104tyRY
Starts at around 1.15

The long short is
Senator: “so now all banks deposits in Oklahoma are fully insured right?”
Yellen: “lol no we will do it only if we consider it systemic”

So what any rational person should do is move all cash from small to big as they get better protection.

Personally, I don’t get why anybody would keep their cash at “small bank X” when they can hold it in “gigantic and very well run bank Y”, but they are now making it very obvious and clear that there is a significant advantage.

Warren Buffett is going to make a killing in the next few days

chenda
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Re: Silicon Valley Bank fails

Post by chenda »

Seppia wrote:
Sat Mar 18, 2023 3:27 am
Warren Buffett is going to make a killing in the next few days
What's he done ?

I assume the banking executives will still get their bonuses paid in April...

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Ego
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Re: Silicon Valley Bank fails

Post by Ego »

Seppia wrote:
Sat Mar 18, 2023 3:27 am
The interaction between Janet Yellen and the Oklahoma senator may not have helped small regional banks.
Depends how you define help. Was that an unfortunate interaction or was it purposeful?

Stress tested or not, every bank makes quarterly reports to regulators. Can anyone say with a straight face that they did not know of these risks? And what are the implications of them knowing?

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Slevin
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Re: Silicon Valley Bank fails

Post by Slevin »

Ok so there’s a few distinctish problems, right?

1) Hold to Maturity (HTM) accounting is allowed, which allows insolvent banks to look solvent. This lets systemic risks be hidden, and it’s why most people didn’t notice SVB was going broke as large depositors pulled their money out. I get why it was allowed, as yes if you don’t have to sell your zirp era bonds and mortgages you will stay solvent, but the fact is that your exposure should be on the table for everyone to see (this is what causes the losses that cause the bad quarterly reports that start the bank runs).

2) FDIC insurance, deposit assurances, etc. From the view of the non-government, right now it looks like there’s a very good sales deck for software that automatically spreads your funds across X banks in accounts of 250k or less, so that your money is always insured. You could make a lot lot of money making this startup right now. Unfortunately, you also probably can’t raise the VC to make this startup right now because the above product didn’t already exist, so there’s no VC money on the table for the next few months.

Overall, agree with @Seppia. If you are a large company, you move your money to a systematically important bank (SIB), which is very unlikely to fail. You need more than 250k for payroll, expenses, etc, so this is the best heuristic for risk minimization. Unfortunately overall this just increases system fragility, as it means one banking fuckup is now systemic risk to the economy, and a much bigger fiscal deal to the government to bail out. From a risk standpoint my Multibank software proposal is infinitely safer, but also probably makes day to day operations a bit more of a chore.

As a normal human like us, yeah have a couple bank accounts with your cash in them in case one bank implodes for a minute. As long as you are FDIC insured, and I think all of us here are smart enough to not have >250k cash lying around depreciating, and especially not in one bank account, then worst case your money becomes inaccessible for some short-medium amount of time. So are all my treasuries, so nbd not the end of the world, and we should all have low fixed expenses because ERE anyways.

As the government, they pretty much need to decide, do we want to insure deposits, or do we not want to insure deposits? It’s a rock and a hard place situation, except anyone can always have all their money safe by just spreading it in 250k chunks across banks. People do it already. So the FDIC already does insure infinite amounts of money, so they should probably just say they insure infinite amounts of money, or else it incentivizes companies who seek safety to use my software proposal from up above, and companies who seek simplicity to only bank at a SIB. This will just make the ecosystem both extremely fragile, and a huge pain to operate any time anyone wants to verify all the bank accounts of any semi large institution (apparently my employer had around 200+M in SVB until Wednesday/ Thursday, in which they pulled 95+% out. This would require on the order of 100 bank accounts to spread out the risk to insured accounts). Basically just increases friction in every transaction for no good reason. So why not just insure everything, and charge a premium for the insurance?

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Re: Silicon Valley Bank fails

Post by jacob »

Berkshire materially reduced their stake in regionals before this happened. It's almost as if some actually read the quarterly financial statements of the companies in their portfolio. I don't know if that was Buffett himself or it was team "Ted and Todd" who increasingly handle the portfolio side of things.

Many institutions have been involved in a giant carry trade, borrowing short (at near 0%) and lending long (to the government in the form of long term treasuries at 3-4% and increasingly backing riskier assets like crypto) using leverage to squeeze a profit from the difference. Now that short term interest is increasing to the point of inverting the yield curve this is no longer profitable---it is even a losing position. It therefore has to be unwound. This means either selling at a loss (which require capitalization which many lack) or waiting (which require a few decades to run off which they also don't have).

Smaller banks justify their existence by ostensibly being able to take more informed (and hence lower) risk that big banks don't have the local knowledge to handle. As such smaller banks generally offer better terms than big banks for large customers. Simple as that.

One outcome of this [kerfuffle] is that banks will finally tighten up credit and underwriting standards for their customers and stop lending to their riskier customers. This is how higher interest rates translate into consumer behavior. Ditto inflation. Insofar the Fed just gives money to banks but the banks just stick it "under the mattress" it does not cause consumer inflation as much as it causes asset inflation (in stocks and bonds). Consumer inflation doesn't happen until consumers get money in THEIR hands via the COVID stimulus packages (everybody who could fog a mirror in 2020 got a thousand bucks more than once whether they need it or not) or substantially higher minimum wages due to ongoing labor shortages (flipping burgers now pays 50% more than it did a few years ago). These are two different effects that are not necessarily connected. For example, consumer inflation remained low after the 2009 bailouts because the banks channeled that money into equity and bonds leading to inflated stock and bond prices instead but very little consumer inflation.

As Slevin noted, a business account can not for practical purposes diversify a business account to 100 different banks for practical purposes. Insofar this was solved by software, you can be sure that FDIC would change its terms as this kind of insurance mainly exists for retail customers. Big customers have a somewhat different arrangement. As the saying goes, if you owe the bank a million dollars, that's a you-problem, but if you owe the bank 100M, then that's the bank's problem. Here it would seem that some of the Silicon Value risk takers got stuck in a prisoners' dilemma with a few local banks and managed make enough noise on the internets to convince everybody and the government that the sky was falling. An alternative would have been to wipe out those banks along with the VC money and have FDIC cover the <250k retail customers at those banks. There's the issue of moral hazard here. It's already clear that risk assets (NDAQ and crypto) are handling this better when technically it should be the other way around. This is because the expectation is now that they will be covered again the next time it happens.

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Ego
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Re: Silicon Valley Bank fails

Post by Ego »

Slevin wrote:
Sat Mar 18, 2023 10:12 am
As long as you are FDIC insured, and I think all of us here are smart enough to not have >250k cash lying around depreciating, and especially not in one bank account, then worst case your money becomes inaccessible for some short-medium amount of time. So are all my treasuries, so nbd not the end of the world, and we should all have low fixed expenses because ERE anyways.
How many of us have money in money market funds? Last week hundreds of billions were transferred from bank accounts into MMFs. They do not have the problem of FDIC insurance because they are not FDIC insured. They are certainly vulnerable to Twitter fueled runs and there has been chatter about the illiquidity of the commercial paper they invest in.

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Re: Silicon Valley Bank fails

Post by jacob »

Ego wrote:
Sat Mar 18, 2023 1:20 pm
How many of us have money in money market funds? Last week hundreds of billions were transferred from bank accounts into MMFs. They do not have the problem of FDIC insurance because they are not FDIC insured. They are certainly vulnerable to Twitter fueled runs and there has been chatter about the illiquidity of the commercial paper they invest in.
Money market deposit accounts, which is probably what people have if they're holding it at a bank, are similarly FDIC insured. Money market mutual funds, which is probably what people have if they're holding it at a broker, are not insured. As with investing in any fund, past results are not ... blabla .. you may lose money. However, fund holdings are diversified across multiple banks. Not any different from a bond fund. Investors get a higher yield in return for accepting some risk. TANSTAAFL.

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Seppia
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Re: Silicon Valley Bank fails

Post by Seppia »

jacob wrote:
Sat Mar 18, 2023 11:11 am
An alternative would have been to wipe out those banks along with the VC money and have FDIC cover the <250k retail customers at those banks.
That is precisely my point.
That would have been a much better alternative IMHO.

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Seppia
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Re: Silicon Valley Bank fails

Post by Seppia »

Ego wrote:
Sat Mar 18, 2023 9:15 am
Depends how you define help. Was that an unfortunate interaction or was it purposeful?

Stress tested or not, every bank makes quarterly reports to regulators. Can anyone say with a straight face that they did not know of these risks? And what are the implications of them knowing?
What do you mean by purposeful? You mean Yellen&C are directing who survives and who doesn’t?
Not allowing zombies to die is bad for the long term.
The VC bros bank should not have been bailed out, other badly managed regional banks would have failed (still a possibility), the strong would have come out of the crisis stronger.
That’s how capitalism works and why it builds thriving societies.

I don’t understand the second part.
chenda wrote:
Sat Mar 18, 2023 5:39 am
What's he done ?
He sold out of regional banks a while ago (avoiding the fallout) and now again he will probably get great terms by prepping a few of them up (there were reports of MANY executives of regional banks flying to Omaha in the last few days).

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Ego
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Re: Silicon Valley Bank fails

Post by Ego »

Seppia wrote:
Sat Mar 18, 2023 2:50 pm
The VC bros bank should not have been bailed out, other badly managed regional banks would have failed (still a possibility), the strong would have come out of the crisis stronger.
That’s how capitalism works and why it builds thriving societies.
This is moving so fast it is hard to keep up. We are long past it being a few VC banks using the discount window.
https://archive.is/8rl76

Image

The CEO of SVB was a Director of the San Francisco Fed up until last Friday, the day his bank collapsed. They knew this was a problem long ago and could have taken steps but didn't. Why?

The convoluted covid crap has made me less inclined to focus on (the distraction) of how fantastically wrong our institutional responses have been and try to figure out where things are actually going. Perhaps the goal as represented in the chart was to get the trash off of everyone's balance sheets and, two birds / one stone, kill a few troublesome banks in the process. But it sure seems bigger than that.

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Seppia
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Re: Silicon Valley Bank fails

Post by Seppia »

Could very well be
One of my mantras I live by is
Don’t attribute to malice what can be explained by incompetence.
Don’t get me wrong I know these things are hard: people need to take decisions that impact a lot of money and a lot of people and have very little time to assess the facts and dig into the details.
I guess I have been so frustrated by the last few years where we have witnessed the survival (and thriving) of shitcos and clowns thanks to the largesse of our regulators, I am reflexively thinking that’s what they are doing again

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Re: Silicon Valley Bank fails

Post by chenda »

It's not really surprising. After 2008 there was a desperate push by the financial service industry to resist tighter regulation to stop them doing stupid things.

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Sclass
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Re: Silicon Valley Bank fails

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jacob wrote:
Sat Mar 18, 2023 11:11 am
Many institutions have been involved in a giant carry trade, borrowing short (at near 0%) and lending long (to the government in the form of long term treasuries at 3-4% and increasingly backing riskier assets like crypto) using leverage to squeeze a profit from the difference. Now that short term interest is increasing to the point of inverting the yield curve this is no longer profitable---it is even a losing position.
Thank you for the clear explanation. I didn’t realize how “inverted” the yield curve has become. Yikes! Analysts have been complaining about an inverted curve for years but the surge in short term rates has inverted the curve to the point it’s flat.

Naively looking at the curve makes me feel like traditional banking (take short term deposits lend long term) doesn’t work anymore. I guess this isn’t the first time people got into trouble this way. I can recall decades of Latin lending crises precipitated by a carry trade. They always seem to end badly.

The fact that Berkshire picked up on this and quietly got ahead of it isn’t surprising. They have an history of being insurance people which is kind of an invisible banking machine. A bank that isn’t officially a bank while mechanically being a bank. Your story reminds me of the chapter in Ed Thorpe’s autobiography where he told his friends to quietly and quickly get out of Madoff’s management.

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Ego
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Re: Silicon Valley Bank fails

Post by Ego »

Evidence that they knew this was a problem in the late spring and early summer of 2022.

Image

In my mind, the fact that they knew a year ago and continued to make the problem worse is manufacturing a crisis. If it is manufactured, then what was (is) the goal? Access to the discount window? What else? Who else is going to want in on the "solution" and what will the implications be?

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Re: Silicon Valley Bank fails

Post by jacob »

Ego wrote:
Sat Mar 18, 2023 7:27 pm
This is moving so fast it is hard to keep up.
Figure that people are working around the clock seven days a week, organizing lots of meetings and phone calls, to untangle it.

This is my favorite Wall Street movie: https://www.youtube.com/watch?v=GTfUENx6uRs (on netflix)
I recommend this book: https://www.amazon.com/Too-Big-Fail-Was ... 670021253/

Similar books and movies will probably be written and made about this crisis. What happening now is very much along the same line albeit for different reasons. (Speculation in risky tech vs speculation in risky mortgages.)

The chart essentially measures the amount of lube ordered to unstick potential friction problems in the financial machine. No doubt banking managers is looking at the previous episode of the same chart thinking that "some didn't borrow enough, so we better ..." As such this is not an indication of how big the problem is as it is about how big people think the problem can be.

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Re: Silicon Valley Bank fails

Post by Sclass »

Nice graphic Ego. I suggest sending your questions and comments to the email address at the bottom. :)

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Re: Silicon Valley Bank fails

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Seppia
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Re: Silicon Valley Bank fails

Post by Seppia »

Interesting that the bond holders are getting wiped out while shareholders are getting 50ish cents in the dollar.
Looking forward to reading Levine on the subject as I don’t understand what’s going on

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Jean
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Re: Silicon Valley Bank fails

Post by Jean »

So now, UBS is the only survivor of the 3 big swiss banks.
It feels weird.

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Re: Silicon Valley Bank fails

Post by ducknald_don »

I wonder if UBS will come to regret that or if they even had a real choice.

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