Silicon Valley Bank Failure

[glennds]

While the FDIC was stepping in to make all depositors whole at SVB, the Fed was setting up the lifeline for all depository institutions called the Bank Term Funding Program. Pretty cool, they will make term loans to institutions on assets AT PAR. So if a bank holds a bond or MBS portfolio that has been demolished in value due to the increasing rate environment, they can access this liquidity from the Fed. This will give the bank the time to hold their assets until they either recover in value or mature.
https://www.federalreserve.gov/newseven ... 30312a.htm

Where will these funds come from? The Fed will create them obviously. No mention of amount limits, rates or other details.
So are we tightening or loosening? To the point being discussed in one of the other forum threads, maybe both.

This new mechanism is not getting much press but IMO it is really big news, maybe bigger than the FDIC insuring the SVB and Signature Bank.

[DogBreath]

Where will these funds come from? The Fed will create them obviously.

So basically, it was a lie that taxpayers wouldn't fund the bailout. That dang inflation....

[Maddy]

While the FDIC was stepping in to make all depositors whole at SVB, the Fed was setting up the lifeline for all depository institutions called the Bank Term Funding Program. Pretty cool, they will make term loans to institutions on assets AT PAR. So if a bank holds a bond or MBS portfolio that has been demolished in value due to the increasing rate environment, they can access this liquidity from the Fed.

Isn't it make-believe asset values that got the banks into trouble in 2007-08? Has no one learned anything?

[Xan]

Where will these funds come from? The Fed will create them obviously.

So basically, it was a lie that taxpayers would fund the bailout. That dang inflation....

I think you mean "wouldn't".

But, strictly, taxpayers and people who use the dollar are not exactly the same set of people. So I suppose it's true that while people who use the dollar will fund the bailout, taxpayers will not.

Interestingly, the people who use the dollar but who are not taxpayers are likely to be the poor. Or foreign holders of US bonds.

[glennds]

While the FDIC was stepping in to make all depositors whole at SVB, the Fed was setting up the lifeline for all depository institutions called the Bank Term Funding Program. Pretty cool, they will make term loans to institutions on assets AT PAR. So if a bank holds a bond or MBS portfolio that has been demolished in value due to the increasing rate environment, they can access this liquidity from the Fed.

Isn't it make-believe asset values that got the banks into trouble in 2007-08? Has no one learned anything?

Here I think it's a little different. At least with regard to the bank portfolios of Treasuries. Let's say its a 5 year maturity portfolio. Even that maturity is enough to have been crushed in the current rate environment.
So if the Fed gives them a lifeline for a year, it gets them that much closer to maturity. And if in a year the problems persist, I assume the bank will be allowed to kick the can down the road and there will be a non-descript press release announcing the extension program.

Now, if the underlying asset portfolio was MBS and we have a housing correction, then yes, your point then may be very applicable. But I think post 2007-08 the underwriting standards have reduced that risk substantially.

On a related note, anyone who says these banks should have managed their interest rate risk exposure more prudently would be 100% right. So it feels unjust to be throwing these idiots a lifeline like none of us could ever expect, but then a banking crisis would be worse.

[DogBreath]

Where will these funds come from? The Fed will create them obviously.

So basically, it was a lie that taxpayers would fund the bailout. That dang inflation....

I think you mean "wouldn't".

But, strictly, taxpayers and people who use the dollar are not exactly the same set of people. So I suppose it's true that while people who use the dollar will fund the bailout, taxpayers will not.

Interestingly, the people who use the dollar but who are not taxpayers are likely to be the poor. Or foreign holders of US bonds.

Yes, typo, I corrected it, thanks for clarifying.

But I maintain my position that printing more dollars out of thin air will lead to inflation, the cost of which will be borne by taxpayers who spend money (i.e., all of them) as well as, as you pointed out, the poor and foreign holders of US bonds.

[glennds]

Where will these funds come from? The Fed will create them obviously.

So basically, it was a lie that taxpayers would fund the bailout. That dang inflation....

I think you mean "wouldn't".

But, strictly, taxpayers and people who use the dollar are not exactly the same set of people. So I suppose it's true that while people who use the dollar will fund the bailout, taxpayers will not.

Interestingly, the people who use the dollar but who are not taxpayers are likely to be the poor. Or foreign holders of US bonds.

It's expansionary credit in theory but zero velocity, because likely not money that will end up in the economy.
I see it like the TARP bailout money that stayed in reserves but this money has to be paid back, it's not a gift.
The depositor withdrawals themselves are not expansionary.
It's interesting, and other than the interest expense to the borrowing bank, I'm not seeing a negative effect on anyone, even though something about it feels like sleight of hand to the layperson.
The more I think about it, the less I think it even conflicts with, or negates the rate increases in terms of fighting inflation. Perhaps an elegant solution, really.

[Mark Leavy]

...
It's interesting, and other than the interest expense to the borrowing bank, I'm not seeing a negative effect on anyone, even though something about it feels like sleight of hand to the layperson.
...

The negative aspect is that the loans are secured with crap collateral. 30 year treasuries and mortgage securities that are "valued at par" (i.e. the value at maturity). The banks are in a pickle because the "market value" of those securities has taken a nose dive and the banks are deep underwater.

Since the loans are only good for a year (and fat chance the interest rates will be back down to zero in a year) then the feds will likely need to roll these loans. And maybe even offer new loans to more failing banks if interest rates continue to rise.

So... while it may look all fine on the surface, there is something very not fine about issuing credit to unqualified borrowers and securing it with crap collateral.

Ask me what I really think

[glennds]

...
It's interesting, and other than the interest expense to the borrowing bank, I'm not seeing a negative effect on anyone, even though something about it feels like sleight of hand to the layperson.
...

The negative aspect is that the loans are secured with crap collateral. 30 year treasuries and mortgage securities that are "valued at par" (i.e. the value at maturity). The banks are in a pickle because the "market value" of those securities has taken a nose dive and the banks are deep underwater.

Since the loans are only good for a year (and fat chance the interest rates will be back down to zero in a year) then the feds will likely need to roll these loans. And maybe even offer new loans to more failing banks if interest rates continue to rise.

So... while it may look all fine on the surface, there is something very not fine about issuing credit to unqualified borrowers and securing it with crap collateral.

Ask me what I really think

Well if these banks were reckless enough with their treasury management to put their excess funds into long bonds (or something else that volatile), then yes, absolutely.

I was under the impression that we were talking 2, 3, maybe 5 year maturities. Even the 5 year bond I bought two years ago that's in the toilet today will be redeemed for 100% in three years.
The other issue is whether there is an environment a year from now where large numbers of depositors are trying to withdraw and whether other banks have mismanaged their portfolios as grossly as SVB did.
And whether Peter Thiel turbocharges the situation by tweeting about it.

EDIT: The mortgage securities could be a different issue. In 2007-08 MBS portfolios deteriorated because of the underlying collateral when the housing market crashed. They were mostly held on the balance sheets of investment not commercial banks. I *think* underwriting standards are more stringent now.
But if the credit underlying those portfolios is now crap, yes you're right that would be a problem.

This is basic short term treasury management 101. If a commercial (not investment) bank is taking excess funds that it cannot write out as loans, and parking those funds into long maturity MBS portfolios, they are (pick one): insane, grossly negligent, pendejos, troglodytes, or sweat from a baboon's balls.

[yankees60]

And whether Peter Thiel turbocharges the situation by tweeting about it.

I am in the midst of listening to Sunday's NBC Meet the Press.

One of the people on a panel brought up that this is the first bank run that has occurred during the digital age. He also asked if a single tweet could cause a bank run. Peter Thiel was cited as one of those who had tweeted about this.

[Kriegsspiel]

While the FDIC was stepping in to make all depositors whole at SVB,

Speaking of the FDIC rescuing the depositors... I'm no expert, but it looks like the FDIC Deposit Insurance Fund (DIF) had $128.2 billion as of Dec 2022. That was 1.27% of insured deposits. If you were expecting to rescue up to the first $250k, you could probably do a fair amount of accounts with that much; they list the amount of assets in "problem institutions" as $47 billion, and I don't think that's all insured.

If they're going to rescue all of SVB's deposits, then that one bank is going to wipe out the entire fund (apparently ~$149 billion of SVB's deposits are outside the FDIC limit according to Time). I guess that depends on how much of SVB's capital they can use, but if the bank failed I'd assume there's not enough to keep the DIF from getting obliterated.

“No losses associated with the resolution of Silicon Valley Bank will be borne by taxpayers,” the FDIC said in a press release. The money will come from the Deposit Insurance Fund—which is mainly funded by quarterly fees levied on banks—as well as liquidated assets from SVB. Those losses to the fund “will be recovered by a special assessment on banks, as required by law.” link

Ok, so if the fund gets wiped because they choose to rescue all deposits at SVB, not just the FDIC-insured ones. How long would it take to replenish itself? According to the QBP from FDIC's website, the fund's balance increased by $2.3 billion in the last quarter of 2022. So that doesn't sound promising for a quick re-stocking of the DIF. Unless of course, the FDIC raises the amount that it collects from the banks, possibly risking kicking them while they're down?

Hmm.

[yankees60]

Comprehensive article

https://www.reuters.com/business/financ ... ce=twitter

Tech pressure, Yellen everywhere: How Washington scrambled as SVB collapsed

[yankees60]

This topic is currently being talked about now on Washington Journal. I'd never heard it before. Anyone here familiar with it?

Vinny

https://en.wikipedia.org/wiki/List_of_s ... tant_banks

List of systemically important banks

[dualstow]

It certainly came up in 2008-9, along with other too big to fail institutions like insurers.

[Xan]

So... Is it stupid to have money in any bank that isn't one of these?

[Maddy]

So... Is it stupid to have money in any bank that isn't one of these?

"Systemically important": Meaning what? That the reach of their malfeasance has become so extensive that the federal government has no realistic choice but to continue propping them up?

There are a number of commentators, one of them being Catherine Austin Fitts, who for the last year have been warning that the "systemically important" banks are the worst possible place to be, that many of them would be insolvent if their assets were marked to market, and that many have been receiving nightly injections in the billions of dollars just to stay afloat.

I'm about the least knowledgeable in the room about matters of this kind, but betting on the continued bailout of banks that Wikipedia regards as too important to fail strikes me as foolhardy. Look at how some of these banks rank in terms of their exposure to derivatives:
https://www.usbanklocations.com/bank-ra ... tives.html

In fact, I've wondered whether the manner in which the SVB matter was handled wasn't designed to cause depositors to flee to the large banks.

[glennds]

So... Is it stupid to have money in any bank that isn't one of these?

"Systemically important": Meaning what? That the reach of their malfeasance has become so extensive that the federal government has no realistic choice but to continue propping them up?

There are a number of commentators, one of them being Catherine Austin Fitts, who for the last year have been warning that the "systemically important" banks are the worst possible place to be, that many of them would be insolvent if their assets were marked to market, and that many have been receiving nightly injections in the billions of dollars just to stay afloat.

I'm about the least knowledgeable in the room about matters of this kind, but betting on the continued bailout of banks that Wikipedia regards as too important to fail strikes me as foolhardy. Look at how some of these banks rank in terms of their exposure to derivatives:
https://www.usbanklocations.com/bank-ra ... tives.html

In fact, I've wondered whether the manner in which the SVB matter was handled wasn't designed to cause depositors to flee to the large banks.

Theoretically the systemically important banks are subject to greater regulatory oversight, so they should be the safer ones. It's getting a lot of attention that SVB WAS in this category until the roll-back of the Dodd-Frank threshold during Trump's administration (which, to be fair, had support from some Democrats too).

I still say the Fed's pronouncement on Sunday regarding the open ended lending facility has effectively insured all deposits at all institutions. On some levels I would call it a big step toward nationalization. It's just not getting that much attention and I think its because they're purposely keeping it under the radar.
Kriegs puts another interesting dimension on it above because the Fed's new debt facility also shelters the FDIC fund from its risk of depletion.

Remember, just because these asset portfolios are underwater due to rising interest rates isn't a liquidity problem in and of itself if the holding bank didn't need to sell them to cover deposits. Even if they're marked to market, it's a paper earnings problem for the bank as an institution, not a cash liquidity problem that would affect a depositor.

Holding reserves in bad portfolios + mass deposit withdrawals = liquidity crisis
Holding reserves in bad portfolios + no mass deposit withdrawals = no liquidity crisis
Holding reserves in bad portfolios + mass deposit withdrawals + an open ended debt facility from the Fed = no liquidity crisis (and no public attention)

I will be very surprised to hear of any more domestic bank failures. If that Fed facility had been in place last week, we would not even be hearing about SVB. This said, I still tend to believe SVB had some unique circumstances and probably isn't emblematic of the entire banking system unlike 2008 when most all the investment banks were holding the toxic assets.

[jalanlong]

Where will these funds come from? The Fed will create them obviously.

So basically, it was a lie that taxpayers wouldn't fund the bailout. That dang inflation....

I think you meant to write that dang Putin Price Hike.

[jalanlong]

Check the date on this:

Capture2.JPG (41.65 KiB) Viewed 119663 times

[Mountaineer]

Well now, that’s certainly a confidence boost!

[Xan]

Theoretically the systemically important banks are subject to greater regulatory oversight, so they should be the safer ones. It's getting a lot of attention that SVB WAS in this category until the roll-back of the Dodd-Frank threshold during Trump's administration (which, to be fair, had support from some Democrats too).

I still say the Fed's pronouncement on Sunday regarding the open ended lending facility has effectively insured all deposits at all institutions. On some levels I would call it a big step toward nationalization. It's just not getting that much attention and I think its because they're purposely keeping it under the radar.
Kriegs puts another interesting dimension on it above because the Fed's new debt facility also shelters the FDIC fund from its risk of depletion.

Remember, just because these asset portfolios are underwater due to rising interest rates isn't a liquidity problem in and of itself if the holding bank didn't need to sell them to cover deposits. Even if they're marked to market, it's a paper earnings problem for the bank as an institution, not a cash liquidity problem that would affect a depositor.

Holding reserves in bad portfolios + mass deposit withdrawals = liquidity crisis
Holding reserves in bad portfolios + no mass deposit withdrawals = no liquidity crisis
Holding reserves in bad portfolios + mass deposit withdrawals + an open ended debt facility from the Fed = no liquidity crisis (and no public attention)

I will be very surprised to hear of any more domestic bank failures. If that Fed facility had been in place last week, we would not even be hearing about SVB. This said, I still tend to believe SVB had some unique circumstances and probably isn't emblematic of the entire banking system unlike 2008 when most all the investment banks were holding the toxic assets.

I had the same thought re: nationalization, and I'm wondering if it wouldn't be better just to nationalize them rather than pretend we aren't.

So if I'm a bank I can now make terrible investments at no risk? Maybe we should all open banks?

I'm reminded of Maddy's point earlier about nobody knowing what the rules are. Are banks allowed to fail or not? If I found a bank will the rules be different for me? It seems like the Powers That Be are just making stuff up as they go along, and finding some justification for whatever it is they want to do or not do.

[Tyler]

Check the date on this:

Speaking of the wise authors at Forbes, I like this idea from PensionCraft.

https://twitter.com/PensionCraft/status ... 0347991043

[glennds]

So if I'm a bank I can now make terrible investments at no risk? Maybe we should all open banks?

This is a key question.
It would be very interesting to know how many banks take advantage of this lending in the coming days/weeks. Will that be reported? Shouldn't it be a red flag in itself if a bank needs the capital?
But even if they didn't, why not take it? And yes, where is the incentive now, to practice sound risk management with excess reserves?
Are there limitations on use of the funds? Can they pay out exec compensation with it?
Also lending against a portfolio of 3 year Treasuries is one thing, but what if the borrowing bank has invested in low grade MBS portfolios or derivatives or something outrageously irresponsible? Seems the Fed will lend against those assets at par.

Someone pointed out that it's only a one year term on these loans, but I see no limitation on refinancing by taking out a second loan to pay back the first.
Or maybe some intrepid bank will tell the Fed to extend their loan or else they'll go public with their cash insolvency. Admittedly a terrorist move.
Do you think the Fed (and the Administration) would capitulate knowing the alternative would be depositor panic at Twitter speed?

Not that I want depositor panic, but have we traded it for moral hazard?

Reminds me of how I felt when the PPP loans were announced. At first a sigh of relief that a complete economic meltdown was averted. Then as I watched in my own circle a feeding frenzy of businesses taking funds when they weren't genuinely in businesses adversely affected, treating the money like manna from heaven. Law of unintended consequences.

[yankees60]

So... Is it stupid to have money in any bank that isn't one of these?

I'd say that local community banks are probably less risky than many on that list?

[yankees60]

Check the date on this:

Speaking of the wise authors at Forbes, I like this idea from PensionCraft.

https://twitter.com/PensionCraft/status ... 0347991043

Somewhat akin to this?

https://en.wikipedia.org/wiki/Sports_Il ... cover_jinx


Sports Illustrated cover jinx