The collapse of Silicon Valley Bank

[divs4ever]

Classic corporate skullduggery.

SVB had no risk chief through much of 2022, proxy statement shows

Last year, Silicon Valley Bank’s risk committee doubled the number of meetings it held, suggesting board-level concern over the bank’s financial position.

www.bankingdive.com

“Legitimate questions … swirl about CEO Greg Becker selling $3.6 million of SVB stock just days before the proxy filing and capital raise disclosure,” said Barsky. “Other insider trades show the current CFO and CMO selling shares too. What did these executives and others anticipate? When did the insider selling really begin?”

Silicon Valley Bank crash is a red flag on rate risk

Investors need to look harder at vulnerabilities across the big banking markets

www.ft.com

Banks exist to take and manage liquidity, interest rate and credit risks. It is therefore stunning to hear that a US bank has just failed because it invested much of its swollen base of deposits, mostly redeemable at demand, into a long-term, held-to-maturity bond portfolio without any interest rate hedge.

Disastrous Risk Management Is Not the Fed's Fault | Investing.com

Market Overview Analysis by Alfonso Peccatiello covering: United States 10-Year. Read Alfonso Peccatiello's latest article on Investing.com

www.investing.com

This means SVB was not applying basic risk management practices and exposing its investors and depositors to a gigantic amount of risk.

am looking at what several other banks were doing and SVB just looked less refined on their risk-taking , some rivals seem to be leveraging the treasury holdings 4 or 5 times over , and M.B.S. ( as they are alleged to have sold at a loss ) while the buying was poorly timed wasn't that outrageous when trying to get some yield on the capital inflows .( forced selling is always a problem )

let's see how the 'sophisticated ' players look once they start to unravel , i suspect they hoe their hedging bets will be some entangling the Fed and government will have to save 'the system '

 

[Belli]

I hope they both get sued and charged. Skullduggery in spades A captain who hits the iceberg that he steered at should go down with the ship.

The CEO Greg Becker must be the biggest banking idiot in modern history.
He obviously has no understanding of risk! He was the one that led the charge to reduce the regulations.

I am astounded. We all know of people who get where they are because of connections, not brains, but this takes the cake. Pond scum.

SVB CEO Greg Becker lobbied the government to relax some Dodd-Frank provisions on regional lenders in 2015. Trump did in 2018.

When Silicon Valley Bank busted, it had assets of $220 billion. Trump's rollback lifted the "systemically important" threshold from $50 billion to $250 billion.

fortune.com

What perplexes me is the attitude of the depositors. Sure, initially establish an account with SVB as the majors won't fund you and it is a method for paying staff and bills but are they saying if they rolled up to a national major with a spare $10m to deposit, the majors will reject that? I get the impression the start-ups and venture capital companies didn't lay off the risk by spreading the funds elsewhere within the banking system.

 

[divs4ever]

What perplexes me is the attitude of the depositors. Sure, initially establish an account with SVB as the majors won't fund you and it is a method for paying staff and bills but are they saying if they rolled up to a national major with a spare $10m to deposit, the majors will reject that? I get the impression the start-ups and venture capital companies didn't lay off the risk by spreading the funds elsewhere within the banking system.

while i agree , i also wonder if the issue is other banks are unwilling to accept them as customers ( in many cases )

monitoring of money-laundering and other reporting obligations

the smaller banks probably prefer the model they are well experienced in , while the larger banks would rather not have such customers ( with colorful reputations )

 

[Knobby22]

while i agree , i also wonder if the issue is other banks are unwilling to accept them as customers ( in many cases )

monitoring of money-laundering and other reporting obligations

the smaller banks probably prefer the model they are well experienced in , while the larger banks would rather not have such customers ( with colorful reputations )

Not sure about that. The big banks specialise in those customers e.g. Goldman Sachs. Sure, they get caught now and again but how many do they get away with?
Malaysia etc.
https://www.bbc.com/news/business-64906691

 

[divs4ever]

Not sure about that. The big banks specialise in those customers e.g. Goldman Sachs. Sure, they get caught now and again but how many do they get away with?
Malaysia etc.
https://www.bbc.com/news/business-64906691

the BIG banks take big risks for big rewards ( so settlements for wrong-doing barely dent the management pay-packets )

fines over 'helping' a $10 billion startup might even make that exercise a loss-making effort

i would expect less than 10% of breaches are detected/penalized ( at the big end of town )

the Hayne Royal Commission gave great insight to the local scene ( i would expect the international players to have a more refined game )

 

[mullokintyre]

Moody's have pretty much downgraded the entire US banking system.
From CNN

New YorkCNN —
Moody’s Investors Service cut its outlook for the entire US banking sector and placed six US banks on review for potential credit rating downgrades, in the wake of last week’s collapse of Silicon Valley Bank.

The credit ratings firm said it expects more banks will come under pressure after SVB’s failure — particularly those with large hoards of uninsured deposits and long-term Treasury bonds that have crumbled in value. Moody’s said it expects pressure on the banking sector to persist as the Fed continues to hike interest rates to combat inflation.

Another concern: US banks are raising the interest rates they pay on savings accounts. Although they hope the higher rates will retain customers worried by the collapse of SVB, that could also eat into profits, Moody’s warned.

The good news, Moody’s said, is that America’s banking system is generally healthy. It has enough cash and liquid assets to withstand an economic downturn. The bad news, for banks anyway, is that US regulators may require them to hold more capital after SVB’s rapid failure.

SVB was brought down by a bank run, but its exposure to long-term Treasuries that tumbled in value during the Fed’s historic rate-hike campaign aggravated its liquidity problem. Moody’s predicts the newly “stressed operating environment” for banks could lead some to lend less, buy back fewer shares or cut dividends to preserve capital in case of emergency.

Also, the credit ratings firm late Monday downgraded Signature Bank deep into junk territory following that bank’s failure. Ratings downgrades can make it more expensive for companies to borrow money.

Moody’s warned it could similarly downgrade First Republic Bank (FRC), Zions (ZION), Western Alliance (WAL), Comerica (CMA), UMB Financial (UMBF) and Intrust Financial. The firm cited the “extremely volatile funding conditions for some US banks exposed to the risk of uninsured deposit outflows.”
The move comes after shares of regional banks got clobbered on Monday even after the US federal government stepped in with a massive intervention designed to protect depositors and prevent further bank runs. Regional bank shares rebounded in premarket trading on Tuesday.

For San Francisco-based First Republic, Moody’s pointed to the bank’s “high reliance on more confidence-sensitive uninsured deposit funding,” high unrealized losses in its bond holdings and a “low level of capitalization” relative to its peers.

First Republic has a high amount of deposits above the FDIC’s insurance limit, Moody’s said, noting this makes the bank’s funding profile “more sensitive to rapid and large withdrawals from deposits.”

And the killer?
You want volatility, I'll give you volatility!

After plunging 62% on Monday, First Republic shares climbed 56% Tuesday.
Mick

 

[farmerge]

Moody's have pretty much downgraded the entire US banking system.
From CNN

And the killer?
You want volatility, I'll give you volatility!

After plunging 62% on Monday, First Republic shares climbed 56% Tuesday.
Mick

Who's got the answer to that one.

 

[farmerge]

while i agree , i also wonder if the issue is other banks are unwilling to accept them as customers ( in many cases )

monitoring of money-laundering and other reporting obligations

the smaller banks probably prefer the model they are well experienced in , while the larger banks would rather not have such customers ( with colorful reputations )

Nah the larger banks don't need more colourful reputations, they already have it.

 

[Dona Ferentes]

hopefully, this subject is closed. Bookending with part of Jarad Dillian's newsletter

Not So Good at Finance​

We’re about a week into this, and already, I am sick of talking about Silicon Valley Bank (SVB). Soon, it will just be a footnote in market history, like Orange County and Procter & Gamble.

But as it turns out, the bankers at SVB were pretty good at tech but not so good at banking. They waved in billions of the lowest possible coupon mortgage-backed securities and Treasuries and forgot to hedge with interest rate swaps. I’m not entirely sure they even knew what interest rate swaps were. I’m being serious. They were that dumb. They had no business running a bank. It was basically just a grandiose Jiffy Lube for venture capital funds.

Problem is, SVB was the 16th-largest bank in the US in assets, and while you probably don’t remember who came in 16th in the race for the batting title last year, 16th-largest is big enough to be systemically important. If the Federales didn’t stop the run, it could have spread to several other banks. Hence, the unlimited deposit insurance. I disagree with it on libertarian principles, but we’ve abandoned free market principles to save the free market. I wonder where we’ve heard that before.

The politicians are framing this as “saving innocent depositors,” but the majority of SVB’s deposits were placed there by about 35,000 depositors with $4 million in deposits each, on average. These people were not innocent. They were big boys and girls and supposedly sophisticated enough to understand the risks. As it turns out, they were as dumb as SVB management. Dumb people losing money is supposed to be a feature of capitalism. It has a cleansing effect. But we never let it happen...

... ... Do I think we will see more bank failures? Not likely. Although one interesting wrinkle is that Dodd-Frank incentivized banks to hold Treasuries and mortgages instead of commercial loans, whereas commercial loans are typically floating rate and would have been fine in a rising interest rate environment. The unintended consequences of regulation strike again.

I think this was an isolated case of financially unsophisticated people being responsible for billions of dollars. If I were a depositor, I wouldn’t be worried about rising rates as a threat to banks — I would be worried about competency. Is the guy running my bank a donut?

I am fond of saying that nothing is safe. If you want to avoid all of this, just buy a money market fund or invest in T-bills directly. You could do a lot worse.

 

[wayneL]

People reading all sorts of things into policy of the US government on this matter, a lot of which has some pretty compelling reasoning.

 

[farmerge]

hopefully, this subject is closed. Bookending with part of Jarad Dillian's newsletter

Not So Good at Finance​

We’re about a week into this, and already, I am sick of talking about Silicon Valley Bank (SVB). Soon, it will just be a footnote in market history, like Orange County and Procter & Gamble.

But as it turns out, the bankers at SVB were pretty good at tech but not so good at banking. They waved in billions of the lowest possible coupon mortgage-backed securities and Treasuries and forgot to hedge with interest rate swaps. I’m not entirely sure they even knew what interest rate swaps were. I’m being serious. They were that dumb. They had no business running a bank. It was basically just a grandiose Jiffy Lube for venture capital funds.

Problem is, SVB was the 16th-largest bank in the US in assets, and while you probably don’t remember who came in 16th in the race for the batting title last year, 16th-largest is big enough to be systemically important. If the Federales didn’t stop the run, it could have spread to several other banks. Hence, the unlimited deposit insurance. I disagree with it on libertarian principles, but we’ve abandoned free market principles to save the free market. I wonder where we’ve heard that before.

The politicians are framing this as “saving innocent depositors,” but the majority of SVB’s deposits were placed there by about 35,000 depositors with $4 million in deposits each, on average. These people were not innocent. They were big boys and girls and supposedly sophisticated enough to understand the risks. As it turns out, they were as dumb as SVB management. Dumb people losing money is supposed to be a feature of capitalism. It has a cleansing effect. But we never let it happen...

... ... Do I think we will see more bank failures? Not likely. Although one interesting wrinkle is that Dodd-Frank incentivized banks to hold Treasuries and mortgages instead of commercial loans, whereas commercial loans are typically floating rate and would have been fine in a rising interest rate environment. The unintended consequences of regulation strike again.

I think this was an isolated case of financially unsophisticated people being responsible for billions of dollars. If I were a depositor, I wouldn’t be worried about rising rates as a threat to banks — I would be worried about competency. Is the guy running my bank a donut?

I am fond of saying that nothing is safe. If you want to avoid all of this, just buy a money market fund or invest in T-bills directly. You could do a lot worse.

Dona tis a good post and worth a read again.

 

[divs4ever]

People reading all sorts of things into policy of the US government on this matter, a lot of which has some pretty compelling reasoning.

oh i understood the policy , right back in 2020

we will 'back-stop' * our mates no matter how big they are

everything else is merely words

* can't use 'bail-out ' lest it activates the 'misinformation police ' this time

 

[Value Collector]

oh i understood the policy , right back in 2020

we will 'back-stop' * our mates no matter how big they are

everything else is merely words

* can't use 'bail-out ' lest it activates the 'misinformation police ' this time

I stumbled upon this great video, it’s from back in the GFC, but it shows the process of how the FDIC deals with a bank that fails.

 

[divs4ever]

I stumbled upon this great video, it’s from back in the GFC, but it shows the process of how the FDIC deals with a bank that fails.

YEP !

so healthy , here we are again ... but who is concerned now one of the 'roadkill' is Credit Suisse ' ( allegedly a MEGA bank ) ... not a single UBS Franc paid ( AND government guarantees given )

 

[Value Collector]

YEP !

so healthy , here we are again ... but who is concerned now one of the 'roadkill' is Credit Suisse ' ( allegedly a MEGA bank ) ... not a single UBS Franc paid ( AND government guarantees given )

Well I don’t know the details of how bad credit Susie’s situation was, but if their balance sheet was in a rocky situation UBS absorbing them should be a good thing for the banking system, of course the investors of credit suisse have taken a hit as they should. The remaining assets now belong to UBS who have to invest capital stabilise the situation.

It’s not much different to other large important businesses that go broke, a new group moves in, recapitalises it and continues on.

 

[Value Collector]

This video is a great documentary of the financial crisis and why banks are always going to have some vulnerabilities, but that’s what the central banks and deposit insurance etc are there for.

 

[divs4ever]

Well I don’t know the details of how bad credit Susie’s situation was, but if their balance sheet was in a rocky situation UBS absorbing them should be a good thing for the banking system, of course the investors of credit suisse have taken a hit as they should. The remaining assets now belong to UBS who have to invest capital stabilise the situation.

It’s not much different to other large important businesses that go broke, a new group moves in, recapitalises it and continues on.

there have been hints/rumors about Credit Suisse for years , now whether that was malicious gossip by a rival/competitor or a disgruntled client ( or 'trickle truth ' ) is yet to be fully disclosed ,
interesting that the low-ranking bond/hybrid holders got wiped out and not converted into shares ( since UBS is doing an all scrip deal ) and everyone else got a compromise deal

similar folks holding low-ranking debt elsewhere should be increasingly alarmed ( especially when UBS shares was a cheap consolation prize .. aka more picking winners )

now getting shares in a previously rescued ( in the GFC ) bank , might not be the greatest consolation prize , considering BOTH the largest banks in Switzerland have needed radical rescues within the last 20 years .

one might then ask if anyone with serious money should leave any of it in Switzerland

will be interesting times going forward

 

[Value Collector]

there have been hints/rumors about Credit Suisse for years , now whether that was malicious gossip by a rival/competitor or a disgruntled client ( or 'trickle truth ' ) is yet to be fully disclosed ,
interesting that the low-ranking bond/hybrid holders got wiped out and not converted into shares ( since UBS is doing an all scrip deal ) and everyone else got a compromise deal

similar folks holding low-ranking debt elsewhere should be increasingly alarmed ( especially when UBS shares was a cheap consolation prize .. aka more picking winners )

now getting shares in a previously rescued ( in the GFC ) bank , might not be the greatest consolation prize , considering BOTH the largest banks in Switzerland have needed radical rescues within the last 20 years .

one might then ask if anyone with serious money should leave any of it in Switzerland

will be interesting times going forward

Yes, that’s the one part I don’t understand, the junior bond holders should have been given a slice in the new deal.

As for whether people should leave money in Switzerland, deposits haven’t been touched, and the senior bonds remain intact.

 

[Dona Ferentes]

Yes, that’s the one part I don’t understand, the junior bond holders should have been given a slice in the new deal.

As for whether people should leave money in Switzerland, deposits haven’t been touched, and the senior bonds remain intact.

Evidently, the Saudis had money in the headstock and not AT1 stuff.

So, who's the bitch?

 

[divs4ever]

Yes, that’s the one part I don’t understand, the junior bond holders should have been given a slice in the new deal.

As for whether people should leave money in Switzerland, deposits haven’t been touched, and the senior bonds remain intact.

am not familiar with those specific junior bonds , but when playing with similar in earlier times ( 2011 to 2016 ) many of those securities where convertible into shares ( making them entirely acceptable as Tier 1 capital for Basel III and bail-in purposes )

reeks of 'picking winners' to me