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FDIC Takes over Silicon Valley Bank

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Re: FDIC Takes over Silicon Valley Bank

#641

Post by actionablefiber »

hervature wrote: post #533
rsync wrote: post #445

Earlier quoted context omitted.

"97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%." I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ? I understand the inverse relationship between bond price and yield ... ... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%. Are there other fac…

I will first try to explain with simplified numbers and then do the equivalent calculation somewhere else. Let's assume you buy a $100 bond with 0% rate for 10 years. For simplicity, let's assume it's a riskless bond. Now, let's suppose those same bonds now pay 5% a month later. Well, the smart thing to do would be to sell your 1-month old bond and buy the new one. Of course, everyone is doing the same thing so the p…

> You would get $100/1.05^10 = $61.39.

Emphasis on the exponential decay relationship between market price and time-to-maturity. If you change that 10 to a 30, the bond is worth $23, and if you change it to a 50, it's $8.72. For a bond that pays $100 at maturation.

I think laypeople intuitively guess that long-dated bonds are safer, because that is sort of how it feels when you are borrowing money to buy a house. But in terms of the market value of the bond, you add exponentially more interest rate sensitivity as the time-to-maturity increases.

Re: FDIC Takes over Silicon Valley Bank

#642

Post by zomglings »

weego wrote: post #601
somenameforme wrote: post #367

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate): "- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021. - As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!…

When the fuck are retail banks going to be ring-fenced away from being able to trade in MBS. They're consistently cancerous to our banking systems.

I do not think this is a problem of mortgage-backed securities.

The problem is that SVB tied up their liquidity for 10 years at a yield far lower than they would get with more secure investments after the FED's rate hikes.

The specific assets they invested into are immaterial.

Re: FDIC Takes over Silicon Valley Bank

#643

Post by lapcat »

jamiequint wrote: post #629
lapcat wrote: post #608

Earlier quoted context omitted.

> An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate): [1] - https://twitter.com/jamiequint/status/1633956163565002752 That tweet is unattributed verbatim from https://www.livemint.com/news/world/explainer-silicon-valley... [EDIT:] See the thread, it seems that the story may have stolen from the tweet! Pretty shocking for one of India's biggest business pu…

My tweet was posted before that article.

What are you saying?

1) You wrote the Mint article.

2) Mint took the text from your tweet unattributed.

3) ???

Re: FDIC Takes over Silicon Valley Bank

#644

Post by manquer »

dragonwriter wrote: post #101
karpierz wrote: post #9

Earlier quoted context omitted.

The difference is that SVB's depositors will see most of their money back, which is the point of the FDIC taking over.

> The difference is that SVB's depositors will see most of their money back Depositors will see all of their insured money back, uninsured deposits will be recovered based on available assets and/or terms of any resale by the FDIC, but could be lost in whole or substantial part. Large depositors could potentially see substantial losses.

The assets are all regulated t-bills and MBS with real interests and secured by hard assets not made up first party coins with manipulated values

Re: FDIC Takes over Silicon Valley Bank

#645

Post by dragonwriter »

dahfizz wrote: post #550
walrus01 wrote: post #468

Earlier quoted context omitted.

> As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) Do we now have people making decisions on stuff like this who are too young or clueless to remember what happened with the 2004-2007 mortgage backed security bubble that popped in the 2008-2009 financial crisis? Seriously? Did nobody learn the lessons on this? Countrywide and other originators of MBS and CDOs?

Do you think MBS are always and forever a bad investment because of a bubble 15 years ago? The MBS wasn't even the problem here. If they had 10Y corporate bonds or Treasury notes paying the same rate, they would have had the same problem.

> Do you think MBS are always and forever a bad investment because of a bubble 15 years ago?

I think heavy exposure to a single type of long-term asset for a retail bank is always going to be a bad investment decisions, because risks materialize, and correlated risks tend to materialize together, and when a retail bank suddenly lacks liquidity...

Re: FDIC Takes over Silicon Valley Bank

#646

Post by kmod »

havkom wrote: post #619

If someone has both a loan from and an account with Silicon Valley Bank, can they skip paying the difference of the amount they are compensated and their account balance towards the loan?

IANAL but I think yes and no? I think you're still obligated to pay your loan payments, but there's also a concept of "netting" where in certain circumstances you are entitled to what you describe.

Definitely don't take my word for it, just throwing this out there as maybe a starting point for more research.

Re: FDIC Takes over Silicon Valley Bank

#647

Post by eftychis »

opportune wrote: post #638
eftychis wrote: post #625

Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here are some definitions: https://www.investopedia.com/terms/s/solvencyratio.asp#toc-s... Defn. (informal) A company is illiquid if they can not service short term liabilities/debt as it comes due. This includes the ability to quickly sell assets to raise cash. Acco…

The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them. These things trade on the open market and adjust to interest rate c…

The regulation to my knowledge does require marking to maturity. Yes as I have commented elsewhere in this post, all banks do this.

SVB had the unique situation of being the canary in the mine, as they had to get a lot of MBS during low interest rates of 2021/2020. Your question is the jackpot one, yes: how many other banks are following closely by.

If the Fed continues or increases the rate hike I would be surprised if we don't hear more -- assuming no other action.

The silver lining might be that SVB might give the heads up for the Fed, FDIC and government to act.

Re: FDIC Takes over Silicon Valley Bank

#648

Post by opportune »

twelve40 wrote: post #635

So it seems like they mismanaged their assets and their liabilities, taking on a lot of expensive deposits while investing at low yield. What I don't get is all this pro-SVB, anti-VC sentiment, how "some VC's yelled fire in a crowded theater" and caused the poor bank to collapse. Isn't it just common sense though, to protect your money? The bank fucked up by doing risky reckless things, it got exacerbated because the…

This, these bonds/mbs are liquid instruments, they just lost value at market prices. When I make a deposit in a bank I am not purchasing a CD - I expect full liquidity. If the bank invested my deposit in something that lost money but should be worth my deposit amount in X years that is purely the bank’s fault, not my fault.

Re: FDIC Takes over Silicon Valley Bank

#649

Post by FireBeyond »

boosting6889 wrote: post #504
somenameforme wrote: post #367

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate): "- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021. - As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!…

[flagged]

Because most of the potential investors are sophisticated enough to realize they wouldn't be 'investing' as plugging holes in what would be rapidly turning into a Ponzi scheme.

Re: FDIC Takes over Silicon Valley Bank

#650

Post by dheera »

kibwen wrote: post #620
dheera wrote: post #381

Earlier quoted context omitted.

Maybe it's time to get rid of fractional reserve banking and change it to full reserve banking. We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.

Full-reserve banking doesn't eliminate risk, it pushes it elsewhere. The nice thing about fractional reserve (yes, there are nice things about it!) is that it allows people to have a savings without completely paralyzing the money supply. Money that is "saved" can still be used for productive purposes. Yes, this introduces risk (of the sort that the FDIC is intended to ameliorate), but the alternative is to either di…

> Money that is "saved" can still be used for productive purposes.

If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.

Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.

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