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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?

#261

Post by NovemberWhiskey »

tripletao wrote: post #95
tptacek wrote: post #83

Earlier quoted context omitted.

I guess the core of my argument is that SVB's viability and the damage caused by their implosion are separable concerns, and FDIC has rather neatly separated them. Nobody has to take a bath on SVB's bond portfolio; deposits are guaranteed, so they can just be held to maturity; there's no pressure to sell. Meanwhile: SVB's equity is zeroed out, so they've paid the ultimate price for their incompetence.

I think you're assuming here that the HTM accounting means the bonds don't actually lose value if they're held to maturity? That's not the case; it's just arbitrary accounting treatment, and the regulatory decision to permit such accounting is a big part of why the SVB blew up. Accounting rules are supposed to reflect economic reality to some extent, but they obviously don't do so exactly. For example, under FIFO inv…

Say you buy a theoretical 10 year zero-coupon bond with a 5% yield and a face value of $1,000. You should pay about $614 for it. You intend to hold it to maturity.

Interest rates take a random walk from now until maturity.

Under fair-value accounting, the balance sheet value starts at fair-value (obviously), then gyrates, but tends towards face value, and reaches it at maturity, due to time decay of bond premium. As you said yourself, every bond eventually matures in the absence of credit risks and fair-value can't indefinitely diverge from face value.

Under amortized cost basis accounting, the balance sheet value starts at fair-value but then increases every year until maturity, at which point it is also face value.

Surely you acknowledge that these are the same? They both describe the exact same cash flows.

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

#262

Post by s1artibartfast »

xenadu02 wrote: post #240
s1artibartfast wrote: post #225

Earlier quoted context omitted.

Well we already know there are some nominal losses, because the FDIC did take over SVB.

No, that is not known at this time. It will take a few years to fully wind down the assets so as of right now no one knows if recovery will be 100% of deposits (in which case general creditors may get some money). The only thing we can be certain of is shareholders are wiped out and general creditors will take a significant haircut.

I is pretty clear they are underwater from their SEC filings. You know what exactly what their assets are and what their the fair market value of their securities. They reported the fair market value of their underwater loans.

I guess the FED could have bullied some banks into buying the securities at a higher rate, but the books themselves are transparent.

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

#263

Post by nightski »

Waterluvian wrote: post #236
JumpCrisscross wrote: post #224

Earlier quoted context omitted.

> I've seen no well sourced material saying that the FDIC is raising rates Beyond the special assessment, they almost certainly need to raise a new assessment to cover $250k+ deposits. Full insurance can't be on a discretionary basis.

Minus the assets they recovered from SVB which will probably cover most of it given they were just illiquid, not fraudulent. All those bonds didn’t just disappear.

Keep in mind SVB was not the only bank. 3 banks went under (at least so far).

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

#264

Post by s1artibartfast »

JumpCrisscross wrote: post #258
Waterluvian wrote: post #250

Earlier quoted context omitted.

What’s the delta though? Nobody seems to be able to quantify how much this is, but still are able to muster outrage over some unknown amount of harm done to them as bank users.

> What’s the delta though For the Treasuries, this is known but not public. For the MBS, a theoretical value is known but not public. (The federal government has to sell these securities. It doesn't make sense to announce the holdings so they can be front run.)

This is a lie. It says on their SEC filings.

They state clear as day that they had 91 billion of securities, currently worth 76 billion in their hold to maturity portfolio.

In their avalable for sale (AFS) portfolio, they had 28 billion, currently worth 26.

They break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg There is no mystery. I dont know why people keep saying this.

Check out page 124 onward if you are curious: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d...

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

#265

Post by [deleted] »

bandofthehawk wrote: post #257
upsidesinclude wrote: post #140

Earlier quoted context omitted.

>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 t…

> No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative This might have been true for the past ten years or more, it's not true now. You can easily find savings accounts now which offer over 3%, and it's going up as the fed continues to raise rates. This still might not be the best investment when you consider the high inflation, but it's great for emergency fun…

[deleted]

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

#266

Post by NovemberWhiskey »

AmVess wrote: post #69
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…

Banks failing is how it is planned to work? Zero oversight from agencies charged with keeping their eyes on them is how it is supposed to work?

Whether it's planned to work that way isn't so relevant as it is what is probably going to happen from time-to-time due to the fundamental nature of banks - at least, this is what Diamond and Dybvig believed when they published their model[1] back in 1983, concluding that deposit insurance is the better way to prevent bank runs than closing banks.

Presumably they were onto something, as they jointly received the Nobel prize for economics last year for this contribution.

[1] https://en.wikipedia.org/wiki/Diamond–Dybvig_model

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

#267

Post by JumpCrisscross »

s1artibartfast wrote: post #264
JumpCrisscross wrote: post #258

Earlier quoted context omitted.

> What’s the delta though For the Treasuries, this is known but not public. For the MBS, a theoretical value is known but not public. (The federal government has to sell these securities. It doesn't make sense to announce the holdings so they can be front run.)

This is a lie. It says on their SEC filings. They state clear as day that they had 91 billion of securities, currently worth 76 billion in their hold to maturity portfolio. In their avalable for sale (AFS) portfolio, they had 28 billion, currently worth 26. They break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg There is no mystery. I dont know why people keep…

> break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg

Yes, categorically. No, not specifically. 5 and 10 years produce different answers, particularly with current convexity. (It is fine if you're trying to get broad-grained answers.)

Potential buyers over the weekend got a list of CUSIPs. The public does not get that until ex post facto.

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

#268

Post by lmm »

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.

> 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.

Seems like having everyone use at least 400 different banks achieves one of the core goals of the FDIC guarantee - making small/midsize banks viable and preventing everyone from piling into the big four megabanks.

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

#269

Post by lmm »

digitaltrees wrote: post #145
cronix wrote: post #108

Earlier quoted context omitted.

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.

So far as I have seen, every equity sale was part of standard, pre-cleared and disclosed plans. And all those executives had significantly more equity they probably would have loved to sell but couldn't.

> every equity sale was part of standard, pre-cleared and disclosed plans

Not really. They were sold 1 month after the 10-Qs were filed, which is shorter than the holding period most reputable banks require for their executives, and the 1O-Qs had only that one sale in them.

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

#270

Post by lmm »

tptacek wrote: post #50
corbulo wrote: post #44

Earlier quoted context omitted.

There isn't clear messaging on where the money is coming from to cover depositors. Thats whats leading to no one even factually knowing whats happening.

In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? SVB couldn't do that because there was a run that was forcing them to sell early, in unfavorable conditions.

> In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid?

If you're willing to lock the depositors up for 10 years and pay them back when those assets mature, sure. But that probably wouldn't be seen as an acceptable way of making those depositors whole.

Someone's got $100 of deposits with you today; you're holding a 10-year bond that will pay $102 over the 10 years but currently trades at $87. Yes you "can" "pay" "them" "back" eventually, but what if they want to pull their deposit today, perhaps to buy a bond like the one you were holding? If you do the accounting based on today, they're entitled to $100 and you only have $87; if you do the accounting based on 10 years' time, they're entitled to $115 and you only have $102; either way there's a shortfall.

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