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

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

#121

Post by michael1999 » Thu, Mar 16, 2023, 8:07 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…

Agree on SVB.

But the bailout that people are complaining about is for all the other banks that aren't SVB. There are many insolvent banks out there that would otherwise have had to raise capital at punishment prices this year. Those banks are unambiguously better off with the Fed taking their underwater collateral at par, and this is a clear subsidy to (non-SVB) bank shareholders.

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

#122

Post by mercyandgrace » Thu, Mar 16, 2023, 8:13 PM UTC

FreakLegion wrote: post #88

kasey_junk wrote: post #68

Earlier quoted context omitted.

A regulatory regime that makes depositors whole when a bank fails due to not managing their interest rate risk appropriately but not when they mismanage their credit risk feels even stranger than just admitting that the fdic cares more about some depositors than others.

First Republic now has a sweep account that spreads up to $100m across 400 banks in increments of up to $FDIC_INSURANCE_LIMIT. What's the difference between the FDIC insuring all deposits at US banks directly and US banks doing it themselves by forming a complete graph? (Other than there being a clear upper limit in the latter case, which is currently greater than $1b per account.)

Insurance only pays out to $FDIC_INSURANCE_LIMIT if a bank fails. I can't say what the scenario looks like where 400 banks fail simultaneously, but I can image it would not be good. I'm not sure the current FDIC payout models account for that, either.

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

#123

Post by ericd » Thu, Mar 16, 2023, 8:14 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…

There were some proposals from the treasury for ways to make below zero rates work.

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

#124

Post by taeric » Thu, Mar 16, 2023, 8:15 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…

I confess I feel like I've taken crazy pills with all of the takes I've seen. This post sums up my understanding perfectly.

Many of the takes further complicate by implying that they had no assets. Which just feels like lying at this point.

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

#125

Post by rcme » Thu, Mar 16, 2023, 8:19 PM UTC

All banks are suffering, buy some are suffering more than others. It's also unclear how the Fed's actions are going to impact the situation going forward. Here are my unanswered questions:

1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk?

2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently.

3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.

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

#126

Post by tangjurine » Thu, Mar 16, 2023, 8:20 PM UTC

Ilverin wrote: post #105

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…

No.

First SVB was bailed out by FDIC funds which all banks pay into.

Second, to say 'privatized gains, socialized losses', you are assuming that banking is like gambling, with no value being created through the banking process.

Even if banks were being very very safe, they would still make money by lending out deposits. (Whether that is good or bad for society, is another question, which I would argue the answer to would be bad).

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

#127

Post by trifurcate » Thu, Mar 16, 2023, 8:20 PM UTC

tptacek wrote: post #71

jandrese wrote: post #61

Earlier quoted context omitted.

This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell. Investing involves risk. Sometimes that means losing money, even if you are the bank.

No, they don't, right? They simply hold them to maturity. The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount. But the bank doesn't normally sell the bond to begin with. That's why people say banks "borro…

The bond is impaired in that sense. The concept of present value isn't made up just for fun, it's because the value of money depends upon the time at which it is available. $10 in 10 years is obviously worth less than $10 right now, which is not only captured by present value calculations but it's also plainly and intuitively visible if you make the chain of associations of high interest rates -> higher price levels -> lower monetary value. So yes, if your bond sells for $87, you can be reasonably sure that $87 is the value of all of its payments back to you. It doesn't matter that the nominal payouts sum to $100, because they are denominated in future dollars which are worth less than present dollars! You need to cover the shortfall when you move those payments from the future to now!

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

#128

Post by rcme » Thu, Mar 16, 2023, 8:21 PM UTC

ajkjk wrote: post #14

I was pleased to read Nathan Tankus' take[1] on all this, although I wish I understood it better, which was that a lot of policy ideas that have been somewhat fringe are becoming mainstream in the last week: > The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars. I imagine that's usually how real policy pr…

It depends on your view of "progress." Early in the pandemic, people thought you really could print money indefinitely and MMT was right. Now people see that classical notions of inflation are still valid.

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

#129

Post by [deleted] » Thu, Mar 16, 2023, 8:23 PM UTC

TuringNYC wrote: post #110

dh2022 wrote: post #106

Earlier quoted context omitted.

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…

[deleted]

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

#130

Post by ElevenLathe » Thu, Mar 16, 2023, 8:23 PM UTC

tptacek wrote: post #25

kurthr wrote: post #21

Earlier quoted context omitted.

They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.

Yes, by all accounts, SVB was managed incompetently. But look at the thread we're on, which starts with the idea that Glass-Steagal might have prevented this, as if SVB had gone long on upper tranche subprime loans.

Also, if we expect government regulators to protect bank executives from their own incompetence and make sure no banks ever go under, this brings up the question of why we need bank executives at all. Just let the government run the banks or, since there would no longer be competition between banks, roll all deposits and assets into one big government-run bank. An alternate, roughly equivalent scheme is to shut down all private banks and give everyone a Fed account.