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

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

#81

Post by lackbeard » Thu, Mar 16, 2023, 6:33 PM UTC

tptacek wrote: post #79

lackbeard wrote: post #78

Earlier quoted context omitted.

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

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?

I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!

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

#82

Post by jandrese » Thu, Mar 16, 2023, 6:37 PM UTC

tptacek wrote: post #71

jandrese wrote: post #61

Earlier quoted context omitted.

This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell. Investing involves risk. Sometimes that means losing money, even if you are the bank.

No, they don't, right? They simply hold them to maturity. The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount. But the bank doesn't normally sell the bond to begin with. That's why people say banks "borro…

But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life.

It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss then you shouldn't be in a risk based business.

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

#83

Post by tptacek » Thu, Mar 16, 2023, 6:39 PM UTC

ouid wrote: post #80

tptacek wrote: post #46

Earlier quoted context omitted.

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 distres…

I really don't see the market value thing as all that complicated. A banks liabilities are (roughly) instantaneous. They must honor withdrawals when they are requested, so their assets must be measured accordingly. There is no other reasonable definition of instanteous value except for market value. This is an extraordinary advantage of having large markets for things. Granted, it's sometimes hard to establish market…

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.

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

#84

Post by kurthr » Thu, Mar 16, 2023, 6:40 PM UTC

tptacek wrote: post #25

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.

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.

I agree with you about G-S, all it did was separate the Investment banking from regular banking. That doesn't make it boring at all!

But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged)

And that gets to the real issue. Current regulations actually encourage rate risk at banks It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT).

https://www.bis.org/fsi/fsisummaries/irrbb.htm

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

#85

Post by basseq » Thu, Mar 16, 2023, 6:40 PM UTC

tptacek wrote: post #79

lackbeard wrote: post #78

Earlier quoted context omitted.

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

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, which flipped their entire portfolio to MTM and destroyed their balance sheet.

E.g., a simple balance sheet:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     10k    $1k   $0.8k    $8Mn
  Hold To Maturity Bonds   1M     $1k   $0.8k    $1Bn
  Total                                          $1.08Bn

But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.

But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     990k   $1k   $0.8k    $792Mn
  Total                                          $792Mn

$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

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

#86

Post by lordfrito » Thu, Mar 16, 2023, 6:40 PM UTC

SkyMarshal wrote: post #40

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.

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 shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. 

     Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. 

     Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.

[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

[2] https://archive.is/HqVWn

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

#87

Post by tptacek » Thu, Mar 16, 2023, 6:42 PM UTC

jandrese wrote: post #82

tptacek wrote: post #71

Earlier quoted context omitted.

No, they don't, right? They simply hold them to maturity. The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount. But the bank doesn't normally sell the bond to begin with. That's why people say banks "borro…

But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life. It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss t…

Right: SVB was incompetent. Their stock got zeroed out. Meanwhile, institutions that have adequate cushion can step in and hold SVBs assets to maturity.

The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?

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

#88

Post by FreakLegion » Thu, Mar 16, 2023, 6:43 PM UTC

kasey_junk wrote: post #68

tptacek wrote: post #66

Earlier quoted context omitted.

Or just different circumstances? IndyMac famously paid uninsured depositors back 85 cents on the dollar, right? But IndyMac was also plowing depositor dollars into a portfolio of Alt-A MBS's.

A regulatory regime that makes depositors whole when a bank fails due to not managing their interest rate risk appropriately but not when they mismanage their credit risk feels even stranger than just admitting that the fdic cares more about some depositors than others.

First Republic now has a sweep account that spreads up to $100m across 400 banks in increments of up to $FDIC_INSURANCE_LIMIT.

What's the difference between the FDIC insuring all deposits at US banks directly and US banks doing it themselves by forming a complete graph? (Other than there being a clear upper limit in the latter case, which is currently greater than $1b per account.)

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

#89

Post by basseq » Thu, Mar 16, 2023, 6:44 PM UTC

jjoonathan wrote: post #51

basseq wrote: post #38

Earlier quoted context omitted.

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.

They chose to invest in those 10 year securities, proverbial pennies in front of the steamroller. I'm sure this was framed as a smart move at the time and they gave themselves big bonuses while investors were out to lunch. Ultimate responsibility does lie with investors, but management definitely hustled them and got away with it.

I guess my point is that they still got hit by the steamroller: they lost their jobs and future earnings, they lost any equity (which certainly was part of aforementioned bonus), etc.

Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.

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

#90

Post by debacle » Thu, Mar 16, 2023, 6:46 PM UTC

jandrese wrote: post #64

phkahler wrote: post #34

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. 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…

> 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... People who bought a house as an investment might be in trouble, but people who bought a home to live in are making out like bandits with their 30 year fixed mortgages.

In a down economy, fewer people sell their houses, so housing prices haven't fallen as much as they would if interest rates were raised in a vacuum.