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US Politics: They're Gunnin' 4 Us


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2 hours ago, Mlle. Zabzie said:

There is now more or less officially a run on SVB.  Interestingly, the losses on their balance sheet were not a secret and were well-disclosed.  A lot of other banks have very similar positions (basically treasuries that have a stated rate of like .5% that are now significantly discounted in a higher prevailing rate environment).  However because SVB is much smaller, they don't have the deposits of like a B of A that can absorb those losses.  Since the primary they were trying to sell fell apart overnight, we are basically in "run on the bank" territory.  The ultimate outcome is probably that the bank gets bought by a white knight and the bank holding company files for bankruptcy.  But this sort of thing tends to have ripple effects and there are other smaller banks that may follow and then there could be follow on from that.  Sort of shades of 2008 with Bear Stearns.  Hopefully not, but here we are.

Exactly so.

I would add just two more items to think about.  The first is the amount of FUD that suddenly filled the investor community, seemingly originating from a few of the usual suspects like Thiel.  As you correctly pointed out, SVB's actions on their Treasury position weren't a secret, but the rumors made it out to be a huge deal and put a lot of focus on SVB's remediation all out of proportion to the actual situation.  Again, as you mentioned, SVB isn't the only bank that has been slow to get around to adjusting their T position, but it is the only one that PE has been calling members of various company boards about. 

Secondly, SVB has a disproportionate number of customers / clients who are in economically productive industries - fabless semiconductors, semiconductor suppliers, small OEMs who form part of key supply chains, engineering firms who do NRE for high-tech manufacturing, etc.  When Bear Stearns fell apart, one of the biggest knock-on effects was that access to capital for these types of companies dried up almost immediately.  None of the banks would provide loans or extend credit to these secondary and tertiary support and supply companies here in the US.  By 2010, the Silicon Valley, Desert and Hills had all seen a corporate mass extinction event in this sort of second-tier supplier as they lost access to capital.

So for example, today there are only two companies left in the world that provide lead-frames for the semiconductor industry in any quantity, and both of them are Japanese.  Fifteen years ago I could drive by two such firms within a fifteen-minute drive from my house.  Supply chain variations and second sources dried up, and primary companies ended up reporting a lot more single-source items on critical BOMs to their boards of directors.  Given our recent look into how shaky supply chains are in the recent health crisis, if SVB and similar banks get swallowed up by vulture capitalists and more secondary and tertiary suppliers die off, it will just make American manufacturing and fabrication that much more precariously balanced on a series of single-source suppliers.

And unfortunately the CHIPS and Science Act won't do anything to ameliorate the situation, as Intel has backed their truck up to that particular money dump and is siphoning off most of the cash to build a fab in Ohio.  Maybe banks ought to be better regulated than so as to allow rumors to put them into FDIC administration, but that is another discussion.  And yes, a lot of the $200 billion in loans that SVB has outstanding are made to companies that make software for people to play games on their phones or whatever, but still some significant portion of productive firms are now going to have to go shopping for a new bank, and another group is definitely going to be out of capital before too long.

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4 minutes ago, Wilbur said:

Exactly so.

I would add just two more items to think about.  The first is the amount of FUD that suddenly filled the investor community, seemingly originating from a few of the usual suspects like Thiel.  As you correctly pointed out, SVB's actions on their Treasury position weren't a secret, but the rumors made it out to be a huge deal and put a lot of focus on SVB's remediation all out of proportion to the actual situation.  Again, as you mentioned, SVB isn't the only bank that has been slow to get around to adjusting their T position, but it is the only one that PE has been calling members of various company boards about. 

Secondly, SVB has a disproportionate number of customers / clients who are in economically productive industries - fabless semiconductors, semiconductor suppliers, small OEMs who form part of key supply chains, engineering firms who do NRE for high-tech manufacturing, etc.  When Bear Stearns fell apart, one of the biggest knock-on effects was that access to capital for these types of companies dried up almost immediately.  None of the banks would provide loans or extend credit to these secondary and tertiary support and supply companies here in the US.  By 2010, the Silicon Valley, Desert and Hills had all seen a corporate mass extinction event in this sort of second-tier supplier as they lost access to capital.

So for example, today there are only two companies left in the world that provide lead-frames for the semiconductor industry in any quantity, and both of them are Japanese.  Fifteen years ago I could drive by two such firms within a fifteen-minute drive from my house.  Supply chain variations and second sources dried up, and primary companies ended up reporting a lot more single-source items on critical BOMs to their boards of directors.  Given our recent look into how shaky supply chains are in the recent health crisis, if SVB and similar banks get swallowed up by vulture capitalists and more secondary and tertiary suppliers die off, it will just make American manufacturing and fabrication that much more precariously balanced on a series of single-source suppliers.

And unfortunately the CHIPS and Science Act won't do anything to ameliorate the situation, as Intel has backed their truck up to that particular money dump and is siphoning off most of the cash to build a fab in Ohio.  Maybe banks ought to be better regulated than so as to allow rumors to put them into FDIC administration, but that is another discussion.  And yes, a lot of the $200 billion in loans that SVB has outstanding are made to companies that make software for people to play games on their phones or whatever, but still some significant portion of productive firms are now going to have to go shopping for a new bank, and another group is definitely going to be out of capital before too long.

Don't forget the Intel Fab in Arizona. But that's another story.

You are exactly correct on all of this.  There are going to be a lot of knock on effects here that we haven't really internalized.  All is not well in the US economy...

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SVB is the 19th largest bank by assets in the country - not a systemic institution per se, but still large enough to send jitters through markets and raise a few questions about other similar institutions with less-sticky deposits. 

This one looks idiosyncratic to me, as it had the unfortunate circumstance of:

An extremely flighty deposit book

An ostensibly safe bet on three-year bonds that turned bad because of rapid interest rate rises

When SVB booked the losses on the bonds, deposits started running and the bank failed (textbook bank run). I wouldn't expect to see these kind of failures repeated in this cycle, until and unless we see much more unemployment (and hence credit losses) than we currently have.  

FDIC is pretty awesome in these cases. Depositors will have access to their insured deposits on Monday. 

ETA: The folks on CNBC think that SVB screwed the pooch on this one. They believe SVB could have tried to raise fresh cash at the same time as announcing the bond loss. Their thesis is that this would have prevented the deposit run. I am not so convinced as it's not always easy to raise capital in these circumstances. 

Edited by Paxter
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1 hour ago, Larry of the Lake said:

Speaking of immigration, bunch of chatter about the administration considering going back to family detention at the border.  Hopefully this doesn't happen, but hey, if it does, at least the GOP is worse, right? lol sob

I have seen articles on this. Those articles - the more honest ones, anyhow, point out two things:

First, Team Biden never slowed down the rate of deportations from the Trump years. If anything, he increased it.

Second, the number of 'unauthorized immigrants' has increased two or three fold (or better) since the Trump regime.

To those items...

Many (a majority?) of 'unauthorized immigrants' *leave* the US, either because of fear or lack of opportunity.

Best I can figure, the *only* reason the US population has increased for the past decade or so is because of *combined* legal and illegal immigration.  Birth rate across the US (and North America, for that matter) is well below 'replacement level.' Central and South America are right at the replacement levels. I expect these downward trends to continue as just fifty years ago birthrates in these places were substantially greater. Relevant because current economic models have continued population growth as a built-in core feature. That growth fails to happen, those models are in serious trouble.

 

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1 hour ago, Paxter said:

FDIC is pretty awesome in these cases. Depositors will have access to their insured deposits on Monday. 

The trouble is that the depositors appear to be mainly corporations (which tend to hold more than $250K per account) so it's not clear how much of the money was FDIC insured:

Quote

A recent 10-K filing showed more than 90 percent of its deposits were uninsured, and the FDIC says today that “At the time of closing, the amount of deposits in excess of the insurance limits was undetermined.”

 

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54 minutes ago, Altherion said:

The trouble is that the depositors appear to be mainly corporations (which tend to hold more than $250K per account) so it's not clear how much of the money was FDIC insured:

 

Yeah for sure, those uninsured deposits are at risk - and customers know that going in to any banking relationship. Assuming the next step is liquidation, this is probably going to be a mess for the uninsured (e.g. tech startups).

ETA: The more I think about it, the more I think they will look to sell some parts of the banking business over the weekend. SVB’s banking book could be attractive to some large lenders, provided it can be properly valued. If this happens, it will be a major boon for the uninsured.

Edited by Paxter
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15 hours ago, ThinkerX said:

This article says TWO major banks have gone belly up. To me, more and more, this looks like the early phases of the 2007-2008 meltdown. (I had some vicious debates with multiple posters here during that debacle.)

Two US Banks Collapse in 48 Hours. Which One's Next? (msn.com)

Silvergate wasn’t exactly “major”.  It was brought down by its crypto exposure.  Btw there will be more pain in the crypto sector because at least one significant stablecoin banked with SVB.

That said, people have sounded warnings about First Republic and a couple of other mid-tier banks with unique exposure profiles.  

While I agree bank failures are a sign of a big crack in the economy, what is going on is different than 2007/8.  What is going on here is a combination of rising interest rates devaluing bank capital investments/poor hedging decisions by those banks, deposit flight as a result of higher yield products being available outside the bank account context (I.e., for like a decade, a lot of CDs were not attractive investments because the transaction cost was like equal to the yield -no longer true).  In 2007/08 there were a lot of non-performing investments in the bank capital (so, e.g., bad mortgages/loans).  SVB’s money was in Treasuries.  Stupidly unhedged Treasuries, but nonetheless.  The ripple effects are going to be different too. 

That’s not to say that this will be GOOD long term, just that it will be DIFFERENT.  I’m wondering how the fed reacts in June, candidly.

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20 minutes ago, Mlle. Zabzie said:

 

That’s not to say that this will be GOOD long term, just that it will be DIFFERENT.  I’m wondering how the fed reacts in June, candidly.

I saw an interview with Robert Reich a day or two ago, and he said he wouldn’t be surprised if Powell lowered interest rates to ease pressure, as he doesn’t believe the conditions justifying rate increases exist anymore. In fact, he thought Powell will be driven to do that.

Unfortunately I also see recent stories where Powell says rates are still going to go up.

 

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Yeah, Reich is just wrong. Powell is impressive in being as ridiculously predictable and open as anyone in politics can be, and unless numbers come in bizarrely off what they are right now we will be seeing rate hikes for a while.

The looming question in my mind is whether the fed can actually combat inflation with rate hikes any more. Rate hikes are great when your economic base is things like manufacturing or other things to buy which tend to require loans for the capital, but when it's a service based industry its not clear how useful that is.

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I think it’s way too early to draw parallels with 2008. That crisis became systemic because of large, opaque bets taken across the system on housing and related derivatives. No similar bets have been taken across the system in recent years. Plus, large institutions have much more capital and liquidity now than in 2008. And I doubt the unrealized loss on securities plus large-scale bank run (which brought down SVB) would be easily replicated. The run on SVB was a pretty unusual one, since most depositors were tech start-ups and all ran at the same time thanks to direction from a few, large venture capital funds.

Of course, this is the financial system we are talking about. Contagion and a bank run/illiquidity can bring down even a solvent, profitable institution. So buckle up, folks!

ETA: One thing that makes me wince in this situation is that (and I don't know why), it seems that SVB was exempt from Liquidity Coverage Ratio (LCR) requirements. This is a rule that most regulators introduced after 2008 to head-off bank runs. If it had been in place for SVB, one wonders whether the events of the last 48 hours could have been avoided. 

ETA: I did some research and it looks like all smaller US banks are exempt from the LCR. Here in Canada, we rolled out the LCR across all banks, regardless of size...

Edited by Paxter
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23 minutes ago, Paxter said:

I think it’s way too early to draw parallels with 2008. That crisis became systemic because of large, opaque bets taken across the system on housing and related derivatives. No similar bets have been taken across the system in recent years. Plus, large institutions have much more capital and liquidity now than in 2008. And I doubt the unrealized loss on securities plus large-scale bank run (which brought down SVB) would be easily replicated. The run on SVB was a pretty unusual one, since most depositors were tech start-ups and all ran at the same time thanks to direction from a few, large venture capital funds.

My main concern these past few years is a little different. I see institutional investors snatching up houses, then renting them out at inflated prices. These price hikes, combined with inflation elsewhere, effectively put affordable housing - renting or buying - out of reach even for people with decent incomes. Add increasing interest rates to this mess, and it seems to me at least some major institutional investment outfits are going to be in a bind - they can't make their payments (let along maintenance and repairs) with matters as is, but if the jack the rent higher, their tenants walk. Meanwhile, you have an exploding number of people who can't make the rent or mortgage payments *despite* having decent jobs.

Maybe this mess is something vaguely similar to the old Savings and Loan crisis of the 90's. 

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15 minutes ago, ThinkerX said:

My main concern these past few years is a little different. I see institutional investors snatching up houses, then renting them out at inflated prices. These price hikes, combined with inflation elsewhere, effectively put affordable housing - renting or buying - out of reach even for people with decent incomes. Add increasing interest rates to this mess, and it seems to me at least some major institutional investment outfits are going to be in a bind - they can't make their payments (let along maintenance and repairs) with matters as is, but if the jack the rent higher, their tenants walk. Meanwhile, you have an exploding number of people who can't make the rent or mortgage payments *despite* having decent jobs.

Maybe this mess is something vaguely similar to the old Savings and Loan crisis of the 90's. 

Certainly the failure of SVB is straight out of the S&L playbook (rising interest rates, drying up of cheap funding from deposits, speculative investments by banks that lead to losses). I just think that, at least for systemic institutions, we should be able to withstand the S&L type situation. Maturity mismatches are better handled today than in the past and we are still a long way from seeing credit losses large enough to spur a bank run. 

But what you describe is within the realms of possibility. That's why the Fed has had an eye on systemic financial risk caused by rising interest rates throughout this tightening cycle. And this SVB situation may well lead to a 25 rather than 50 basis point hike at the next meeting. 

Edited by Paxter
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So I despise the Section 4501 stock buyback excise tax (it’s incredibly misguided policy on a number of levels).  But one particular thing that will be very important if banks continue to be pressured is that Treasury did not take the invitation in the statute to propose special rules for fixed yield preferred equity that has a maturity.  That is a very common instrument that banks/bank holding companies issue to obtain capital.  That tax has caused that capital to be 1% more expensive (on the gross, not in terms of yield).  Wowee.  

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1 hour ago, Wilbur said:

Mark Cuban AND Mitt Romney both have a good take on the banking industry?  Good for them.

Mitt Romney Drops Truth Bomb on Silicon Valley Bank: Shareholders Should ‘Lose It All' (msn.com)

Well, yes.  The bank is in receivership.  I would be SHOCKED if there is enough recovery to get to the bank holding company.  That's how this works.  However, there is an asterisk because, wait for it, tax.

It is very, very likely that the bank holding company (where the shareholders have equity) has a substantial and very valuable net operating loss balance.  If you take WaMu (or Lehman) as examples, those NOLs ended up being a pretty interesting asset and created a lot of value for the shell (there was also a lot of litigation about refunds from NOL carrybacks but since there are no longer carrybacks, this is not applicable to SVB).  While there will be a tax sharing agreement between the bank and its bank holding company that will be litigated, there is pretty good law (Supreme Court case) that the starting place is that a tax asset of a consolidated group belongs to the parent.  The Wamu/Lehman situation is all very publicly available information at this point.

Also, I bet either a hedge fund with a credit arm or another bank acquires the assets pretty quickly.

Edited by Mlle. Zabzie
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