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RE: SVB - Mick - 03-13-2023

(03-12-2023, 08:48 PM)BostonCard Wrote:  Per NPR, the FDIC will backstop all depositors.

BC

But not SVB investors, bondholders or shareholders. I wonder if they're having a difficult time finding a suitor? I'm not all that concerned about the employees, the bank's 12/21 11-K indicates that only about 20% of their collective portfolio is SVB stock.

RE: SVB - rogpodge - 03-13-2023

(03-13-2023, 03:29 AM)chrisk Wrote:  Of course, part of the problem is that bank regulations on banks this large should not have been loosened by Trump in 2018.  It is also a black eye for KPMG.

I've seen a bunch of these takes online, including from Stephanie Ruhle, who supported the deregulation at the time. To be clear, SVB was one of the main lobbyists for the stress testing rollback. But would a quarterly stress test have detected SVB's issue? If so, please explain how. 

https://twitter.com/balajis/status/1635228632275877888

My take is that it would not have mattered, and this is just an attempt to find a convenient political scapegoat. The reality is, that Congress passed the largest increase in federal spending on record, which created inflation. The Treasury and the Fed both tried to tell the public that inflation was transitory for a year. Relying on that, SVB (and other banks) bought the "safest" investment possible... 10-year Treasuries. When the Fed finally started raising rates, at the fastest pace ever, those assets became worthless. A liquidity crisis forced SVB to sell what assets it could, but a large amount of 1.25% yielding Treasuries is now worthless and can't be sold. People in Silicon Valley smelled something was up, and that deposits were vulnerable and started a bank run.

https://twitter.com/Nouriel/status/1634925544889540612 

One of these banks' risk management program, as shown by their assets w/ unrealized losses, was not like the others. Also, BAC, what are you doing? 

https://twitter.com/balajis/status/1635223897233829889

Covering up Treasury / Fed malfeasance, and the complete abdication of hedging interest rate risk by smaller banks with this regulation gloss is classic deflection. Do I really care about the deregulation at issue? No. Regulate away. But the reasons for this bank collapse are not because of deregulation, and absolutely because the Treasury Secretary and the Fed Chair told banks that inflation was transitory, and they wouldn't have to raise rates quickly.

CPI comes out tomorrow. We'll see how much wiggle room the Fed has tomorrow.

RE: SVB - French Rage - 03-13-2023

(03-13-2023, 07:29 AM)rogpodge Wrote:  Relying on that, SVB (and other banks) bought the "safest" investment possible... 10-year Treasuries.

"Safest" in terms of credit risk, but not in terms of interest rate risk, when you're buying long and rates are at the most historical of historical lows.  Regardless of what anyone assures you about inflation, if you're running a bank you should know enough to now buy those.

RE: SVB - BostonCard - 03-13-2023

(03-13-2023, 07:29 AM)rogpodge Wrote:  My take is that it would not have mattered, and this is just an attempt to find a convenient political scapegoat. The reality is, that Congress passed the largest increase in federal spending on record, which created inflation. The Treasury and the Fed both tried to tell the public that inflation was transitory for a year. Relying on that, SVB (and other banks) bought the "safest" investment possible... 10-year Treasuries. When the Fed finally started raising rates, at the fastest pace ever, those assets became worthless. A liquidity crisis forced SVB to sell what assets it could, but a large amount of 1.25% yielding Treasuries is now worthless and can't be sold. People in Silicon Valley smelled something was up, and that deposits were vulnerable and started a bank run.

10-year treasuries are only safe if you plan to hold to maturity; otherwise they are susceptible to interest rate risks.  Given that 10-year treasuries were at all-time low yields, it might have been prudent to worry that their values might fall (obligatory explainer that yields and prices move in opposite directions).  Even if inflation had proven to be transitory, it seems likely that interest rates were going to rise at some point.  Remember, the federal reserve raised the federal funds rate from 2016 to 2019 despite inflation remaining at or below the 2% target.  None of this is a problem if you hold the treasury to maturity, but a bank probably needs to be prepared to sell at least some of its assets to refund customer deposits, in the event of an event that is exactly what happened.

Dodd-Frank prior to the EGRRCPA would have required SVB to be subjected to a stress test.  Among the scenarios modeled by the stress test are changes in interest rates:

Quote:Six measures of interest rates: the rate on 3-month Treasury securities; the yield on 5-year Treasury securities; the yield on 10-year Treasury securities; the yield on 10-year BBB-rated corporate securities; the interest rate associated with conforming, conventional, 30-year fixed-rate mortgages; and the prime rate.

https://www.federalreserve.gov/publications/2022-Stress-Test-Scenarios.htm

So yes, the Dodd-Frank stress test would have identified that SVB would need additional capitalization in 2022 because it would have failed the stress test scenario where 10-year treasury yields rise.

BC

RE: SVB - oldalum - 03-13-2023

(03-13-2023, 07:29 AM)rogpodge Wrote:  a large amount of 1.25% yielding Treasuries is now worthless and can't be sold. 
Not so. The Treasuries market is enormous and among the most liquid there is, if not the most. SVB's Treasuries (and other bonds) can be sold for a value low enough to generate a yield-to-maturity equal to the current yield on a similar bond of equivalent time to maturity. The problem is, selling those Treasuries won't generate the needed amount of cash because their value has decreased relative to when they were bought. By how much? Plugging numbers into an online bond value calculator, if SVB bought a 10-year Treasury when 10-year Treasury interest rates were at their low in 2020 (~0.55%), by last week that bond would have lost very roughly about 25% of its value. That's more than enough to fuel a liquidity crisis, but it ain't 100%. But SVB might have bought bonds with longer terms than 10 years (I don't see any published description of their actual portfolio's characteristics) in which case they could have lost a lot more than that (but still not 100%).

RE: SVB - rogpodge - 03-13-2023

Yes, that was my point, that the 10-year was still being touted by the Treasury in 2021 as a safe investment. Why? Because it was in their own best interests.

https://twitter.com/WallStreetSilv/status/1635335898886995969

https://twitter.com/balajis/status/1635228632275877888

Maybe a 2022 stress test detects the problem, but SVB's risk management department was going through a transition, AND the bonds hadn't been devalued completely at that time.  It would have required timing of the stress test in Q4 (when the Q3 declarations would be most evident see above chart). At least one quant doesn't think the stress test would have made a difference. 

https://twitter.com/StanFeldman2/status/1634970847961300994

The Fed's 2022 stress test scenario assumed interest rates would stay below 3%.

https://www.federalreserve.gov/publications/2022-Stress-Test-Scenarios.htm

Based on the 2022 balance sheet and the Fed's 2022 stress test scenario, would the issue have been detected? Probably not. Most of the devaluation occurred in the back half of 2022. By then, I doubt SVB could have found counter-parties willing to take on that interest rate risk (as shown by how few parties were willing to buy the devalued assets and the failed auction over the weekend). 

https://twitter.com/balajis/status/1635308195282583559

Let's pretend that Barney Frank of Dodd-Frank was not on the Board of Directors for Signature Bank. Yes, SVB was mismanaged and didn't properly hedge interest rate risk. But they were significantly suckered in by the Fed and the Treasury (and the general mismanagement of inflation and the economy). We'll see tomorrow whether the pause bond traders are pricing in will be viable, or if CPI will force the Fed's hand.
(03-13-2023, 11:33 AM)oldalum Wrote:  
(03-13-2023, 07:29 AM)rogpodge Wrote:  a large amount of 1.25% yielding Treasuries is now worthless and can't be sold. 
Not so. The Treasuries market is enormous and among the most liquid there is, if not the most. SVB's Treasuries (and other bonds) can be sold for a value low enough to generate a yield-to-maturity equal to the current yield on a similar bond of equivalent time to maturity. The problem is, selling those Treasuries won't generate the needed amount of cash because their value has decreased relative to when they were bought. By how much? Plugging numbers into an online bond value calculator, if SVB bought a 10-year Treasury when 10-year Treasury interest rates were at their low in 2020 (~0.55%), today that bond would have lost very roughly about 25% of its value. That's more than enough to fuel a liquidity crisis, but it ain't 100%. But SVB might have bought bonds with longer terms than 10 years (I don't see any published description of their actual portfolio's characteristics) in which case they could have lost a lot more than that (but still not 100%).

Maybe in general terms, in a normally functioning market, but SVB reported that they sold all available securities for sale.  This is what they yielded on a $122B bond buy.  Once these losses were realized, they needed to raise more capital, because they didn't have anything more to sell (that people were willing to buy). 

On March 8, Silicon Valley Bank parent SVB Financial Group said that it was taking "strategic actions," including selling almost all of its available-for-sale securities — $21 billion in bonds. It also said it planned to issue stock as part of the plan to raise capital and strengthen its finances.

RE: SVB - BostonCard - 03-13-2023

Oh, FFS, as early as 2020, SVB’s management  was being warned to buy shorter maturity bonds.

[tweet]https://twitter.com/matthewstoller/status/1635342897330655232?s=46&t=tTMJoVUyV69NbVTC5DVNgw[/tweet]

That Bloomberg piece is brutal.  SVB management has no one to blame but themselves.

BC

RE: SVB - French Rage - 03-13-2023

(03-13-2023, 11:42 AM)rogpodge Wrote:  Yes, that was my point, that the 10-year was still being touted by the Treasury in 2021 as a safe investment. Why? Because it was in their own best interests.

How much would they have lost if they held to maturity?  When was the last time Treasury bonds were defaulted on?

The Treasury can give you a safe investment, but they can't control what you do with it in the meantime before it matures.  They can't stop you for selling it from magic beans.  That's on you, not on them, if you do.

RE: SVB - rogpodge - 03-13-2023

Right. I've been consistent that SVB messed up. They didn't hedge interest rate risk (apparently at all). They didn't have a functioning risk management department at a critical period. 20/20 hindsight and all that. 

It doesn't change the facts that the Treasury and the Fed were still touting 10-year bonds in 2021 as safe investments (and therefore adequate assets for capitalization purposes), and that a stress test in 2022 would probably not have detected the interest rate risk based on the Fed's 10-year Treasury yields rise to a "worst case" 2.5% scenario. Stress tests aren't a magic bullet.

Look at Bank of America's balance sheet and their unrealized losses. They also didn't hedge risk to the extent that most of the other large banks did.

RE: SVB - BostonCard - 03-13-2023

10-year treasuries were at 1.5% in January of 2022.  They peaked at 4.2% in October, and are now down 3.56%.  So, a worst case scenario of 2.5% looks to have been pretty close to accurate.

BC
[tweet]https://twitter.com/nickwritesit/status/1634257397601411079?s=20[/tweet]

LOL.

BC

RE: SVB - oldalum - 03-13-2023

Seems like a root cause of the problem is that regulators let banks value their bonds at a hold-to-maturity basis; they only have to mark to market when they are actually sold. According to Lawrence Kotlikoff (B.U. Econ prof):

"The trigger for the run on SVB was the sale of a collection of Treasuries that forced SVB to acknowledge that what it sold was worth $1.8 billion less than it had been advertising."

The bonds' value when they were bought seems irrelevant. What is the downside of requiring banks to disclose market values of their portfolio on a regular basis? (genuine question; there must be some issue with that?)

RE: SVB - Softball Fan - 03-13-2023

(03-13-2023, 03:29 AM)chrisk Wrote:  Of course, part of the problem is that bank regulations on banks this large should not have been loosened by Trump in 2018.  

As soon as I saw the topic I knew this comment would appear somewhere in the thread.

RE: SVB - BostonCard - 03-13-2023

(03-13-2023, 01:49 PM)Softball Fan Wrote:  
(03-13-2023, 03:29 AM)chrisk Wrote:  Of course, part of the problem is that bank regulations on banks this large should not have been loosened by Trump in 2018.  

As soon as I saw the topic I knew this comment would appear somewhere in the thread.

Good reminder to do our best not to politicize things, or this thread will have to be frozen.  There are other places to relitigate political battles from five years ago.

BC
(03-13-2023, 12:59 PM)oldalum Wrote:  Seems like a root cause of the problem is that regulators let banks value their bonds at a hold-to-maturity basis; they only have to mark to market when they are actually sold. According to Lawrence Kotlikoff (B.U. Econ prof):



"The trigger for the run on SVB was the sale of a collection of Treasuries that forced SVB to acknowledge that what it sold was worth $1.8 billion less than it had been advertising."



The bonds' value when they were bought seems irrelevant. What is the downside of requiring banks to disclose market values of their portfolio on a regular basis? (genuine question; there must be some issue with that?)

I think the rationale for not marking to market is that it infuses a lot of volatility in cases where there really is an intent to hold to maturity, and it might have the perverse outcome of forcing a bank to liquidate assets and thus realizing the loss.  I think something like this happened in the UK last year, where as a result of a proposed budget, yields on British Gilts went up, causing a crisis with pensions that required the central bank to step in as a purchaser of last resort:

https://www.ft.com/content/93e3cd70-ee96-44d1-861d-a01e066b34a5

Not exactly the same thing, but a good example of unintended consequences.

BC

RE: SVB - chrisk - 03-13-2023

(03-13-2023, 12:59 PM)oldalum Wrote:  Seems like a root cause of the problem is that regulators let banks value their bonds at a hold-to-maturity basis; they only have to mark to market when they are actually sold. According to Lawrence Kotlikoff (B.U. Econ prof):

"The trigger for the run on SVB was the sale of a collection of Treasuries that forced SVB to acknowledge that what it sold was worth $1.8 billion less than it had been advertising."

The bonds' value when they were bought seems irrelevant. What is the downside of requiring banks to disclose market values of their portfolio on a regular basis? (genuine question; there must be some issue with that?)

They do disclose the unrealized loss in footnotes. But you need to do something with that -- that is the purpose of a stress test, which SVB lobbied to be exempt from and was successful in achieving that in 2018.

Before the regulators took action, the bank announced a sale of holdings at a sizable loss and made a failed attempt to raise additional capital. That was enough fuel for the tech bros to create a $42B bank run through Slack and other channels on Thursday.
The Fed will conduct a review of the supervision and regulation of SVB and report by May 1.

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230313a.html

"The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve," said Chair Jerome H. Powell.

"We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience," said Vice Chair Barr.

RE: SVB - Goose - 03-13-2023

IMO it needs to be made clear that there were TWO "causes" for the SVB cash shortfall. The fact they bought long-term assets that were subject to loss of value due to interest rate fluctuations was indeed one of them and needs to be investigated. The other "cause" was much more unique to SVB.
 
SVB was reliant on deposit growth due to large cash infusions when tech stocks made public offerings and raised lots of cash. Up to a year ago (more or less) tech stocks (mostly biotech) could and did raise hundreds of millions of dollars on vapor. Many deposited the resulting funds in SVB. Most of these companies didn't need much of the money immediately, so it was available to pay out to other depositors. As 2022 went on, that changed. IPOs dried up. Cash was going out as people burned through their money, but no cash was coming in. It was indeed a form of Ponzi scheme where new deposits were counted upon for liquidity. SVB had got by that way for many years, and therefore didn't feel the need to worry about paying out cash to depositors. There was always more on the way. No "hedge" was needed. If IPOs were still happening frequently, SVB's cash position would (probably) have been "good enough" to weather the storm.

Few (any?) other large banks are as dependent as SVB was on this type of "business". Some of the recent layoffs and closures in the tech industry can be traced to burning through cash and the (unexpected) inability to raise any more. SVB is almost collateral damage due to this "bubble" bursting.

RE: SVB - TonyLima - 03-13-2023

For tons of data on bank failures, FDIC is the go-to source. Here’s a link to an interactive database. Hoping to finish my article on this sometime Tuesday. Stay tuned.

RE: SVB - chrisk - 03-13-2023

(03-13-2023, 04:08 PM)Goose Wrote:  IMO it needs to be made clear that there were TWO "causes" for the SVB cash shortfall. The fact they bought long-term assets that were subject to loss of value due to interest rate fluctuations was indeed one of them and needs to be investigated. The other "cause" was much more unique to SVB.
 
SVB was reliant on deposit growth due to large cash infusions when tech stocks made public offerings and raised lots of cash. Up to a year ago (more or less) tech stocks (mostly biotech) could and did raise hundreds of millions of dollars on vapor. Many deposited the resulting funds in SVB. Most of these companies didn't need much of the money immediately, so it was available to pay out to other depositors. As 2022 went on, that changed. IPOs dried up. Cash was going out as people burned through their money, but no cash was coming in. It was indeed a form of Ponzi scheme where new deposits were counted upon for liquidity. SVB had got by that way for many years, and therefore didn't feel the need to worry about paying out cash to depositors. There was always more on the way. No "hedge" was needed. If IPOs were still happening frequently, SVB's cash position would (probably) have been "good enough" to weather the storm.

Few (any?) other large banks are as dependent as SVB was on this type of "business". Some of the recent layoffs and closures in the tech industry can be traced to burning through cash and the (unexpected) inability to raise any more. SVB is almost collateral damage due to this "bubble" bursting.

The type of risk you describe is the type of risk that bank management should be managing. In addition to actual liquidity, the management has to project competence. The tech bros did not buy it and withdrew $42 billion on Thursday.

Note that SVB got itself exempted from stress tests.

The 12-member board of directors was chaired by a woman from Texas who was former Vice Chair of E&Y. 7 of the members have Stanford degrees, mostly MBAs. Mary Miller, on the board for 8 years, worked for T Rowe Price for 26 years, heading up the Fixed Income Division. She then spent 4 years at the US Treasury, as Assistant Secretary for Financial Markets and as Under Secretary for Domestic Finance.

Was all of this fire power on the board used to grease the skids for light regulation or were they hands off when the management was lobbying for exclusion from tighter regulation?

RE: SVB - Leftcoast - 03-13-2023

I though some of you might be interested in the e-mail from new SVB CEO Tim Mayopoulus as sent today to the bank's clients.   Mayopoulus took over today and was previously the President and CEO of Fannie Mae before jumping to a FinTech start-up (Blend).  Sounds like he has the right background to figure out what is salvageable.  Interesting that he is signing as the CEO of Silicon Valley Bank (vs the absolute mouthful that was DINBSC.)

It's also interesting that they are guaranteeing all existing and NEW deposits.  Some of this strikes me as an attempt to keep the bank as fully functional as possible while courting potential buyers but I wonder how many customers will be brave enough to continue making new deposits even with the guarantee?  Given last Friday's scare of locked accounts, un-guaranteed deposits, and threatened payrolls it may be too little and too late.  

But ... I suppose there is 40 years of built up good will and not all of it will have washed away over an awful weekend.


===========================================

Dear Clients: 
 
Silicon Valley Bank, N.A. is open and conducting business as usual. We are here to serve you. I recognize the past few days have been an extremely challenging time for our clients and our employees, and we are grateful for the support of the amazing community we serve. I have joined the company as CEO starting today. 
 
Over the weekend, the FDIC transferred all deposits and substantially all assets of the former Silicon Valley Bank to a newly created, full-service FDIC-operated ‘bridge bank’ in an action designed to protect all depositors of Silicon Valley Bank. Depositors have full access to their money and new and existing deposits are protected. You can read more in the press release issued today. 
 
A few immediate notes: 
We know many of you have questions and we appreciate your patience as our dedicated team works as quickly as possible to serve you. More information will be provided as soon as it is available. 
 
I look forward to getting to know the clients of Silicon Valley Bank. I come to this role with humility. I also come to this role with experience in these kinds of situations. I was part of the new leadership team that joined Fannie Mae in the wake of the financial crisis in 2008-09, and I served as the CEO of Fannie Mae from 2012-18. I am very proud of work we did there to restore the company to profitability and to stabilize the housing finance system in a period of unprecedented challenge. 
 
I also come with experience in and an appreciation for the innovation economy. Until recently, I was the president of a Silicon Valley-based software company that provides technology to financial institutions to serve their consumer banking customers. I know how important Silicon Valley Bank has been and continues to be to the success of its clients and the innovation ecosystem. 
 
We look to restore your confidence and support you and your companies at this time. 
 
Thank you and best regards, 
 
Tim Mayopoulos 
 
CEO, Silicon Valley Bank, N.A.

RE: SVB - BostonCard - 03-13-2023

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

RE: SVB - Leftcoast - 03-13-2023

(03-13-2023, 06:31 PM)BostonCard Wrote:  Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  

I'm pretty sure that is exactly what is being said.  If not, I am misreading the Mayopoulus email posted above.