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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?

#41

Post by Nick87633 »

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 think the outrage would be for/at all the -other- bankers who made the same poor decisions but now still get to keep their bonuses and jobs due to the new Fed Backstop lending. SVB lost their pound of flesh but the rest (or most) are getting a free pass. We still have to see how the first republic bank run plays out... but according to some other comments which I can't find right now, there are more than just these two banks which have heavily exposed themselves to rate risk.

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

#42

Post by geodel »

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…

Well, people are specially angry about Depositors were made whole almost immediately among other things.

And depositors to their dismay are learning they are about as much loved as Wall street bankers, corporate execs and billionaires. More than any particular moral deficiency I think people are finding a general lack of self-awareness common among SV startup founders infuriating.

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

#43

Post by SkyMarshal »

basseq wrote: post #38
jjoonathan wrote: post #26

Earlier quoted context omitted.

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.

It’s probably a reference to reports of some SVB execs selling their stocks in the weeks before the failure.

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

#44

Post by corbulo »

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…

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.

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

#45

Post by kurthr »

toomuchtodo wrote: post #22
kurthr wrote: post #21

Earlier quoted context omitted.

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

Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning.

Edit: I went looking and PWC has a nice overview...

6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge.

... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.

https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...

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

#46

Post by tptacek »

ouid wrote: post #36
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 the…

The "insolvency" here was detailed in the SEC statements, which is, as I understand it, how the run happened --- there was chatter about it last year.

Further: the "market value" thing here is complicated. The reason there is separate available-for-sale and held-to-maturity accounting for bank assets is that, in the ordinary course, the assets are held --- the only reason you sell them is because of extrinsic distress. There isn't anything wrong with the agency MBS portfolio SVB had; they're worth less because if you have to sell them in Q1'2023, they compete with even more attractive bonds and are discounted accordingly. But if you just hold them, they pay back dollar for dollar, and that's what the bank normally does anyways.

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

#47

Post by stametseater »

geodel wrote: post #42
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…

Well, people are specially angry about Depositors were made whole almost immediately among other things. And depositors to their dismay are learning they are about as much loved as Wall street bankers, corporate execs and billionaires. More than any particular moral deficiency I think people are finding a general lack of self-awareness common among SV startup founders infuriating.

> I think people are finding a general lack of self-awareness common among SV startup founders infuriating.

Exactly this. I even read a comment from such a founder saying essentially: "Why are people so angry, don't they know I oppose brogrammer culture?" As if brogrammer culture were the meat of of the reason why people are sick of the hypocrisy of the capital class, or even American startup culture specifically. Totally out of touch, completely clueless. Utterly tone deaf.

Particularly, the decision to change the rules in the middle of the game and make depositors over the FDIC limit completely whole again is clearly an unfair favor to the rich. Normal people don't get to have the rules changed mid-game in their favor. If all the depositors were merely semi-wealthy commoners with only $300k in their accounts, they would have only gotten $250k back. Nobody would expect the rules to be changed in that scenario. But if you're much richer than that, then the rules are apparently just guidelines. It isn't fair and that's why people are mad. Anybody confused by people being mad is completely out of touch, and voicing that confusion is only going to make people even madder.

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

#48

Post by kasey_junk »

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…

Covering uninsured deposits is common as they retain their senior debt status. Guaranteeing them on the other hand is very new.

And if we are going to expect them to be guaranteed in the future insurance rates must go up, not just to cover more things but to cover the riskier behavior it creates.

If we aren’t going to cover them 100% in the future then apparently it’s true that there are not just different classes of banker but different classes of depositors.

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

#49

Post by matwood »

GabeIsko wrote: post #29
rolobio wrote: post #15

Earlier quoted context omitted.

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…

And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine.

With that said, it's good they got punished for poor decisions given their depositor profile.

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

#50

Post by tptacek »

corbulo wrote: post #44
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…

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.
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