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

finance.yahoo.com

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

#21

Post by kurthr »

tptacek wrote: post #9
jgeada wrote: post #2

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

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.

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.

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

#22

Post by toomuchtodo »

kurthr wrote: post #21
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.

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.

If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk.

https://news.ycombinator.com/item?id=35130813

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

#23

Post by colpabar »

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…

Every few months the mainstream media jumps on some new thing about how big tech is finally collapsing because of X or we should be mad at big tech for doing Y and it's usually blown way out of proportion. Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage.

What I am confused about is - if everything went "according to plan", then what did happen? Is it really all peter thiel's fault? Surely someone as smart as him saw something that made him do what he did, given that it was a pretty massive thing to do.

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

#24

Post by giantg2 »

rolobio wrote: post #15
giantg2 wrote: post #8

Earlier quoted context omitted.

Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?

SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?

I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.

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

#25

Post by tptacek »

kurthr wrote: post #21
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.

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.

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

#26

Post by jjoonathan »

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…

Yeah, people are flailing.

The only party that made out like bandits is the SVB management that piled on the risk in the first place -- but investors are ultimately responsible for letting them do that and investors have been punished.

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

#27

Post by ihaveajob »

kurthr wrote: post #21
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.

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.

You can argue that incompetence is not the same as recklessness. Incompetence was sufficiently penalized in this case, IMHO.

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

#28

Post by jhallenworld »

So what should SVB have done instead? It's well known..

https://www.proshares.com/browse-all-insights/insights/bond-...

But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...

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

#29

Post by GabeIsko »

rolobio wrote: post #15
giantg2 wrote: post #8

Earlier quoted context omitted.

Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?

SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?

It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments.

I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.

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

#30

Post by avidphantasm »

tptacek wrote: post #9
jgeada wrote: post #2

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

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.

Seems like if they had just laddered their mortgage backed or other securities more, they could have survived?
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