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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?

#151

Post by tenacious_tuna »

I'm seeing a lot of comments along the lines of "What should SVB have done? They bought the best bonds they could have for the time, and then the Fed screwed them over."

Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do.

(Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...)

Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view.

Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs.

There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?

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

#152

Post by KingMachiavelli »

tptacek wrote: post #37
mcherm wrote: post #32

Earlier quoted context omitted.

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…

Here is my question about that: whatever the increased costs to insure other banks by making uninsured depositors whole, aren't they ultimately based on the resolution costs for SVB itself? That is to say: in the limit, if it costs almost nothing to wrap up SVB, because their assets are fine (just inconveniently structured), what drives insurance costs up at other banks? I'd also add that covering uninsured depositor…

> because their assets are fine (just inconveniently structured) If assets are so inconveniently structured that the bank fails, then the assets are not fine. A bond that pays 0.01% that never matures has an infinite value over infinite time. So while the FDIC/gov can solve the liquidity issue by replacing a $100 face value bond with $100 cash but that's still a net transfer of actual value from the FDIC i.e other banks.

As far as I know, regulatory requirements require/encourage holding good bonds but if the FDIC is going to start treating gov/muni bonds of any maturity length as good as cash, then there's less reason to hedge against interest rate risk.

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

#153

Post by RC_ITR »

whatshisface wrote: post #120
HPMOR wrote: post #114

Earlier quoted context omitted.

As somebody employed by a company which kept all their assets in SVB, I strongly support the FDIC bailout. Even a couple percent haircut would've resulted in many many second order economic implications. I think even for member banks, strong economic activity not realized through a systemic contagion is much better than slightly lower premiums.

If we're not going to let economic signals tell companies to check who they're banking with before putting all their assets in one place, how can that happen? Regulations saying every small business needs to have a risk officer, and more regulations specifying how that officer has to make decisions?

>If we're not going to let economic signals tell companies to check who they're banking with before putting all their assets in one place, how can that happen

The assumption that an operating company should understand fixed income pricing dynamics, have a POV on future FED interest rate moves, and dive into each potential banking partners' asset duration is an interesting one, especially when most of SVB's deposits were made during a period of perpetually falling interest rates, where duration mismatch helped banks.

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

#154

Post by digitaltrees »

lordfrito wrote: post #86
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 been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests. The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement. From the article: In late 2020, the firm’s asset-liability committee received an internal recommendation to buy short…

Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.

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

#155

Post by mercyandgrace »

Gunax wrote: post #148
mercyandgrace wrote: post #122

Earlier quoted context omitted.

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.

I agree about 400 banks failing would likely be due to some greater catastrophe. But financially I think it's the same. If 400 customers each use 1 bank each, then a single bank failure means the FDIC needs to make whole one customer. But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each. The cost to us as depositors/taxpayers is equal.

I'm not sure I'm following. If the FDIC only needs to insure 1/400 of all deposits, then they only need to have on balance 1/400 of the total funds. So the cost to all accounts is in effect 1/400, no?

If customers are only utilizing a single bank, and the FDIC will insure all deposits regardless of amount, they would need 400 times as much than would be necessary if the balances were swept.

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

#156

Post by UncleEntity »

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…

> The only people not worried have their heads buried so deep in the sand only their feet are showing.

If you haven’t lived through a couple of these things then it’s perfectly understandable.

Back in ‘98 there was a huge monetary problem going on in SE Asia but pets.com could take a loss on every sale and make it up in volume. Everything was fine until it suddenly wasn’t.

In ‘08 cracks were starting to become obvious but housing prices never go down, keep selling $500k houses to someone making minimum wage. Everything was fine until it suddenly wasn’t.

Today you have massive layoffs in the tech sector but the CEOs are just trying to appease activists investors, nothing to worry about because tech companies never fail. That Dot Com Bust? Well, that was Web 1.0 and we have it all figured out this time, nothing to worry about. Everything is fine…

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

#157

Post by alistairSH »

afarrell wrote: post #134
DubiousPusher wrote: post #131

Earlier quoted context omitted.

> 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?

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?

One member of the SVB c-suite was the CFO fr Lehman in the run up to that catastrophe. So, BOD don’t appear to care. They keep on hiring each other, making massive mistakes, but walking away with $$$$ in bonus money.

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

#158

Post by landemva »

basseq wrote: post #85
tptacek wrote: post #79

Earlier quoted context omitted.

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them . Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM. So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market,…

To allow the bond sale before they had a cash infusion basically flushed the business. I wonder if board of directors had an understanding of how it would detonate the balance sheet. After that, the regulators took the obvious necessary action.

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

#159

Post by watwut »

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…

Uninsured accounts are effectively insured and the difference is paid by other banks and their customers. Also, if system actually worked, the bank whose crash means systemic risk would be subject to more serious regulations.

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

#160

Post by joekar »

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…

The unintended consequences here are having a guarantee on uninsured deposits.

Most people are unaware they are loaning money to a bank when they open a bank account.

You've effectively said that bank deposits are now risk-free, meaning that the government is back-stopping 9.2 Trillion of deposits (40% of all deposits).

Can banks still provide a yield for these guaranteed deposits? Are they still able to loan out these deposits? What are the new capital requirements for these deposits, are depositors allow to take their money out when a bank run is happening?

We don't know

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