How deep is the rot in America’s banking industry? • Hacker News Board

Re: How deep is the rot in America’s banking industry?

#101

Post by qotgalaxy » Thu, Mar 16, 2023, 7:36 PM UTC

mcherm wrote: post #32

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

I am one of those who has been harmed. I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect th…

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Re: How deep is the rot in America’s banking industry?

#102

Post by TuringNYC » Thu, Mar 16, 2023, 7:42 PM UTC

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

>> SVB would have held them to maturity had the bank run not happened, and now somebody else will instead.

If that were the case, they wouldn't have had to raise emergency funding last week. The assets were indeed impaired. Hiding the true values via AFS accounting treatment doesn't magically make the dire circumstances sustainable.

Re: How deep is the rot in America’s banking industry?

#103

Post by opportune » Thu, Mar 16, 2023, 7:43 PM UTC

phkahler wrote: post #34

tptacek wrote: post #9

Earlier quoted context omitted.

By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.

>> By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. Clearly not safe. IMHO anyone buying 10 year treasuries in the last several years is an idiot. Those rates were guaranteed to rise, as they could not fall below zero. Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So…

Agreed in general but I don’t think there is anything structurally preventing It would of course be deeply unintuive to a regular person and likely very unpopular if rates went negative enough to require it to be reflected in consumer banking (eg negative rates on a checking/savings account). But I don’t think it’s impossible and we may see it in our lifetimes.

That is just a nitpick though because I think the US public as-is would throw a fit if it happened, making it unlikely. Fully agreed that purchasing a 10y bond at 1% was boneheaded given plenty of people predicted interest rates to need to increase to fight inflation (come on, just because the fed said it was transitory for a while, doesn’t give professionals an excuse to blindly take that at face value). The effective yields could have been so much higher just keeping the cash uninvested or in short term treasuries, then purchasing 10y bonds after the rate hikes started or stabilized.

Yeah that is much more obvious in hindsight but it’s not like it was a fringe position even in 2021

Re: How deep is the rot in America’s banking industry?

#104

Post by aeyes » Thu, Mar 16, 2023, 7:44 PM UTC

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

> SVB would have held them to maturity had the bank run not happened, and now somebody else will instead

This "somebody" is the government aka the central bank putting these bonds on their balance sheet. This is a new form of quantitative easing.

Re: How deep is the rot in America’s banking industry?

#105

Post by Ilverin » Thu, Mar 16, 2023, 7:45 PM UTC

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

Stylized example of how the game works:

Bet on every number but 0 on a roulette wheel

Not 0: you and your investors make 3 billion this year

0: you and your investors lose your 20 billion you have invested, and the government bails out your depositors who kept 200 billion with you

This stylized bet is a good deal for the investors and management and bad for the government. Sometimes investors lose everything but it's still a very good bet in expectation. This stylized example is a case of "privatized gains, socialized losses".

Then the question is: was SVB reckless? They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return. IMO they should have either diversified their business or stopped opening new accounts for tech companies because when depositors are uninsured and concentrated in the same industry, that is risky.

Re: How deep is the rot in America’s banking industry?

#106

Post by dh2022 » Thu, Mar 16, 2023, 7:48 PM UTC

TuringNYC wrote: post #102

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

>> SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. If that were the case, they wouldn't have had to raise emergency funding last week. The assets were indeed impaired. Hiding the true values via AFS accounting treatment doesn't magically make the dire circumstances sustainable.

The assets are impaired at today's interest rates. The yield curve is very inverted (is that gramatically correct??) this signals interest rates will be quite a lot lower in a few years. At that time the assets will not be impaired - they may even be at above-par value.

Re: How deep is the rot in America’s banking industry?

#107

Post by d23 » Thu, Mar 16, 2023, 7:50 PM UTC

vajrabum wrote: post #33

Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If th…

> Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year

I'm not an expert in this area, but in what way is this true? Interest rates are still quite low by historical standards. The 80s saw massive increases to a much higher level (approaching 20%) in a shorter amount of time. There were large jumps in the late 60s and early 70s as well.

Re: How deep is the rot in America’s banking industry?

#108

Post by cronix » Thu, Mar 16, 2023, 7:51 PM UTC

basseq wrote: post #89

jjoonathan wrote: post #51

Earlier quoted context omitted.

They chose to invest in those 10 year securities, proverbial pennies in front of the steamroller. I'm sure this was framed as a smart move at the time and they gave themselves big bonuses while investors were out to lunch. Ultimate responsibility does lie with investors, but management definitely hustled them and got away with it.

I guess my point is that they still got hit by the steamroller : they lost their jobs and future earnings, they lost any equity (which certainly was part of aforementioned bonus), etc. Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.

They cashed in millions in stock just before they announced they needed to raise $2B in capital to offset losses on their bond sales, which led to a crash, on top of their bonuses. If that's getting hit with a steamroller, sign me up.

Re: How deep is the rot in America’s banking industry?

#109

Post by miohtama » Thu, Mar 16, 2023, 7:53 PM UTC

mcherm wrote: post #32

tptacek wrote: post #18

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management w…

I am one of those who has been harmed. I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect th…

As you have insight,

1) Is this outcome better than (expected) panic on the banks and bank runs? There still seem to be runs going on e.g. First Republic. Are the markets “calm” now?

2) Because insurance fund is not designed for the task it is currently experiencing, how the gap will be plugged?

3) Could this cause depositors move money from smaller banks to larger ones, and then larger banks just lend this money back to small banks w/some nice profit?

Re: How deep is the rot in America’s banking industry?

#110

Post by TuringNYC » Thu, Mar 16, 2023, 7:53 PM UTC

dh2022 wrote: post #106

TuringNYC wrote: post #102

Earlier quoted context omitted.

>> SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. If that were the case, they wouldn't have had to raise emergency funding last week. The assets were indeed impaired. Hiding the true values via AFS accounting treatment doesn't magically make the dire circumstances sustainable.

The assets are impaired at today's interest rates. The yield curve is very inverted (is that gramatically correct??) this signals interest rates will be quite a lot lower in a few years. At that time the assets will not be impaired - they may even be at above-par value.

>> At that time

It doesn't matter that prices might recover in the future. I'd argue they might not -- and if anyone believed otherwise they would buy up the assets at inflated prices (why arent they?!) SVN rolled the dice, made bets, the value is way down and...they didnt have enough money to allow customers to withdraw money. That is a fail. They needed to raise a lot of cash, they didnt/couldnt raise enough. That is a fail.

Further, they underwrote tons of LoCs for startups which are underwater due to down-rounds. That isnt a temporary impairment, that is a permanent impairment.

Their customers are burning funds (as most VC-funded companies do) and VC funding is down, so declining balances via continued withdrawal is the natural state they need to support (even in the absence of a bank run.)