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

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

#31

Post by [deleted] » Thu, Mar 16, 2023, 5:54 PM UTC

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.

[deleted]

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

#32

Post by mcherm » Thu, Mar 16, 2023, 5:54 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 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 this means that you will not see the interest rate on savings accounts go up as much as it might have otherwise.

I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole. But using an insurance fund to cover a kind of loss, the insurance was not sized to address is not a choice that has no impact.

If I were in charge of everything (perish the thought!) I would probably have insisted that the uninsured portion of the deposits take some haircut. If depositors had gotten back 90% or 98% of their deposits instead of 100%, it might have increased the chance in the future that institutions with 100 million+ bank accounts would pay more attention to the risk profile of the banks they choose to invest with. Banks are rewarded mostly in proportion to the risks that they take; having a force other than government regulation that pushes in the opposite direction can be very useful.

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

#33

Post by vajrabum » Thu, Mar 16, 2023, 5:56 PM UTC

Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If the fed continues to raise I’d guess we will see more bank failures

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

#34

Post by phkahler » Thu, Mar 16, 2023, 5:56 PM UTC

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.

>> 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 far it's mostly sales volume dropping near zero, but soon...

And then when people are broke, many will raid their retirement investments. The stock market has benefitted for decades from people blindly (via 401k funds) dumping money into the market. More buyers than sellers equals rising prices. Guess what a jump in sellers causes...

And then after the market drops, people with money elsewhere will want to buy, resulting in one more shift of money from here to there.

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

#35

Post by chongli » Thu, Mar 16, 2023, 5:58 PM UTC

colpabar wrote: post #23

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…

Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage

Of course they don't! Look at some charts of newspaper advertising revenue over the past few decades. There's one word that best describes it: apocalyptic.

Where did all that advertising revenue go? Google and Facebook!

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

#36

Post by ouid » Thu, Mar 16, 2023, 5:59 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…

The problem here is that extremely liquid assets like treasury bonds are not being marked to market resulting in completely invisible insolvency. Banks don't have a right to have you keep your deposits when their assets do not cover those deposits, and, by extension, shouldn't have a right to lie about the market value (aka value) of those assets in order to con you into doing so. Executives were still paying out their bonuses during the period of insolvency...

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

#37

Post by tptacek » Thu, Mar 16, 2023, 5:59 PM UTC

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…

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 depositors isn't new behavior for FDIC, at least as I understand it. The mechanics of how it was done here are different than in previous instances.

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

#38

Post by basseq » Thu, Mar 16, 2023, 5:59 PM UTC

jjoonathan wrote: post #26

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.

I'm unclear how SVB management "made out like bandits". I assume they had a couple good years of nice salaries and bonuses, but now their equity is zero'd and they're out of a job. I presume they would have preferred to continue managing the bank as a going concern.

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

#39

Post by hnthrowaway0315 » Thu, Mar 16, 2023, 5:59 PM UTC

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.

Risk management is much more than that. If that's easy then everyone can be a good fund manager: just take people's money and buy bonds. This doesn't work in real life.

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

#40

Post by SkyMarshal » Thu, Mar 16, 2023, 5:59 PM UTC

jjoonathan wrote: post #26

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.

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 duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.