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

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

#131

Post by DubiousPusher »

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…

> A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there.

This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the banks over performance due to its riskier posture.

And the consequences have been softened. There's a very good chance that the people responsible here have had their guilt assuaged by the reduction in impact. They are probably less likely to become the kinds of pariah that they probably should because while we should always consider decisions in the context they are made, humans seem to always adjust their assessments to final consequences.

I'm in agreement that the decisions here on the part of the government are probably the wisest in this context. But this crisis does hint that perhaps we need to reconsider the structure of this system a bit.

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

#132

Post by digitaltrees »

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…

What bet should management have made instead of buying US treasuries and Grade A MBS? Should they have held all deposits in cash? How should they have funded operations because eventually, holding $180 billion in cash with no interest and thus no profit while running a large operation will start to eat into shareholder equity and eventually depositor capital. I think a thought experiment about what should have been done is important if we are going to assign blame for anyone. When I do that, its not clear that SVB management made some profound mistake as there were structural challenges they faced that were unique to them (large capital inflows that were a majority of deposits during a very low rate interest rate environment, client mix that kept balances that were much higher than FDIC limits, client mix that was highly concentrated in one industry with much greater sensitivity to interest rates than most companies since fundraising is now clearly seen as tightly coupled to rates) and forces outside of their control in that the Fed raised rates very quickly without providing any mechanism for member banks to exchange long term low rate securities.

So Management has to invest in something and it has to have some interest. I would love to hear an investment thesis that would have been able to deploy over $100 billion in new capital during the low interest rate 2018-2021 time period that wouldnt have been ill prepared when rates drastically increased in 2022-2023.

Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).

https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

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

#133

Post by sschueller »

noslenwerdna wrote: post #98
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…

Shouldn't the executives have to pay back their bonuses they got just before the FDIC intervened? Aren't they effectively subsidized by the govt?

Yes, every cent. If they don't it is effectively a ponzy scheme where the last bag holding investors are the ones getting zeroed out. All the previous holders made money on them.

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

#134

Post by afarrell »

DubiousPusher wrote: post #131
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…

> A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the ba…

Alternately, it assumes that the risk matrix of an executive also includes:

1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?

2. Their egos. How much less likely is it that people will be willing to invest time delivering projects whose value can be wiped out by poor risk management in the same way that SVBs has?

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

#135

Post by [deleted] »

lackbeard wrote: post #78
SkyMarshal wrote: post #40

Earlier quoted context omitted.

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk. While there wasn’t counterparty risk with those assets, there was durat…

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

[deleted]

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

#136

Post by digitaltrees »

tangjurine wrote: post #126
Ilverin wrote: post #105

Earlier quoted context omitted.

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 w…

These are great points and show that the system worked as designed. There will always be bank failures. We want depositors to have confidence that their deposits are safe, not altruistically, but to prevent bank runs since those serve no one and re totally avoidable. Management and Shareholders were wiped out.

Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.

The real winner here is Goldman, since they bought the bond portfolio from SVB that triggered all of this at a discount and can hold to maturity and interest rates may need to come down or a broader asset exchange program implemented to stop any contagion, so those bonds will return to book value sooner than expected.

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

#137

Post by digitaltrees »

0xcde4c3db wrote: post #77
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…

The main source of upset I've seen (disregarding the silly "woke bank" hot air) is less about banking industry regulations per se and more about viewing government priorities writ large through a blurry sense of class warfare. For example, there's a particular feeling of a double standard between SVB depositors and people with student loan debt. When the government decided to bend the rules for the former, it was don…

Valid point. It seems that both challenges would have come from the same group, and that group has no mechanism to stop the FDIC or Fed action.

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

#138

Post by digitaltrees »

checkcircuits wrote: post #100
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 dont know if I agree with your assessment. > Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. Part of the problem is that the system that enabled them to end up in this situation is the erosion of Dodd-Frank. The systemic…

This wouldn't have been solved by any thing in Dodd-Frank. SVB invested in highly liquid securities that are considered the safest asset class, interest rate risk wasn't expected to materialize as quickly as it did as the Fed would have been expected to raise rates more gradually over a longer time horizon or provide an asset exchange mechanism for member banks. SVB is not an example of a bank that had engaged in Investment Banking activity with depositor capital or had unacceptable capital reserve ratios.

That being said, I could be wrong and not aware of the specific Dodd-Frank policy that, if followed, would have made SVB safer.

The fed doesn't need to lower rates necessarily, it could simply allow all member banks to exchange low interest rate long term bonds for new higher yield bonds and pay the Fed for the spread with a loan. That would reduce the liquidity risk if the member bank needs to sell some or all of its bond portfolio on short notice to fund depositor withdrawals, it would allow the Fed to hold the low rate securities to maturity while being fairly compensated by member banks.

Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).

https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

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

#139

Post by landemva »

digitaltrees wrote: post #132
Ilverin wrote: post #105

Earlier quoted context omitted.

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…

What bet should management have made instead of buying US treasuries and Grade A MBS? Should they have held all deposits in cash? How should they have funded operations because eventually, holding $180 billion in cash with no interest and thus no profit while running a large operation will start to eat into shareholder equity and eventually depositor capital. I think a thought experiment about what should have been d…

When interest rates began rising about 13 months ago, SVB should have taken a small haircut on the long term bonds and moved to shorter terms and T-bills. They held their losers until last week when they finally sold for a larger loss.

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

#140

Post by upsidesinclude »

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…

>interest rate on savings accounts go up as much as it might...

No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative.

I dont believe anyone should have a single account with 100 million dollars nor should banks allow that, but they do. Perhaps part of the problem is that the $250k coverage is a value that should adjust annually and coverage should be relative to each account as opposed to each account holder

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