LMCane said:

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agwrestler said:

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Forgive my ignorance. I only took a single class on west campus. Is there a post that summarizes this situation in layman terms? ....and who are we upset with?

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a very large bank in California massively grew over the last three years from "free money' being loaned at near 0% interest rates

they purchased billions of dollars worth of bonds with a low yield

when the Federal Reserve began to raise rates a year ago, those bonds and investments began to lose value for the bank customers. because you can get 7% return on I-Bonds and 6% returns on some other types of bonds and treasury bills.

so the clients of the bank start saying 'I want my money moved to better paying investments" but to do that then the bank has to sell of what they have- at a steep loss

eventually, other people at the bank hear about what is going on- and they all want their money out as well. then everyone demands their money back- and the bank can't pay them anymore.

now imagine this same scenario at numerous banks right now..

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Good post, thanks.

96ags said:

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LMCane said:

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agwrestler said:

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Forgive my ignorance. I only took a single class on west campus. Is there a post that summarizes this situation in layman terms? ....and who are we upset with?

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a very large bank in California massively grew over the last three years from "free money' being loaned at near 0% interest rates

they purchased billions of dollars worth of bonds with a low yield

when the Federal Reserve began to raise rates a year ago, those bonds and investments began to lose value for the bank customers. because you can get 7% return on I-Bonds and 6% returns on some other types of bonds and treasury bills.

so the clients of the bank start saying 'I want my money moved to better paying investments" but to do that then the bank has to sell of what they have- at a steep loss

eventually, other people at the bank hear about what is going on- and they all want their money out as well. then everyone demands their money back- and the bank can't pay them anymore.

now imagine this same scenario at numerous banks right now..

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The bolded part isn't really correct.

The early drawdowns were a function of customers needed operating cash AND not receiving additional investments from VC. The rest was a bank run.

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This is correct. The bank bought the treasury bonds with their own money. The increase in rates lowered the value to where they could not cover the amount owed depositors, word got out, then the run began.

i mean, it certainly feels like a game of chicken

banking collapse vs the chuds complaining about egg prices

LMCane said:

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U.S. Regional Bank Stocks Now:


1. Western Alliance, $WAL: -75%
2. First Republic, $FRC: -65%
3. Zions Bancorp, $ZION: -43%
4. PacWest, $PACW: -41%
5. Comerica, $CMA: -33%
6. Fifth Third, $FITB: -20%

Markets are betting that SVB's collapse broke the regional bank system.

I am still amazed that Pook claimed earlier in this thread the best financial course of action would be to put your money in a medium or small regional bank!!

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There is no regional banking system. There is only the banking system.

Wall Street sentiment was certain there would be one more quarter point increase only, and the Fed surprised them all by signaling more would happen. So one has to wonder if some players on Wall Street are causing this deliberately.

Liz Warren going to absolutely claim she stared down Powell.

Thanks to actions we've taken over the past few days to protect depositors from Silicon Valley and Signature Banks, Americans can have confidence that our system is safe.

People’s deposits will be there when they need them – at no cost to the taxpayer.

— President Biden (@POTUS) March 13, 2023

cone said:

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Liz Warren going to absolutely claim she stared down Powell.

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Yeah, and Powell continues to raise interest rates...and holds them there.

This is the kind of stuff Powell wants...I mean...he has been basically saying this.

Dies Irae said:

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The market is pricing in a Fed rate cut. The 2 year t-bill is .72% below the Fed rate, which means its likely going down.

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So now they have essentially backed themselves into a corner and pouring gasoline on a fire is their best option.

They are normalizing inflation/stagflation. Welcome back to the late70s - early 80s. Eventually you have to take the medicine, it tastes like crap, and it doesn't get better with age.

At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

First Republic Bank, $FRC, has been able to meet withdrawal demands on Monday with the help of additional funding from JPMorgan Chase, $JPM, per CNBC.

— unusual_whales (@unusual_whales) March 13, 2023

Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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Lolz.

Well, even the out of the closet gay guy, former U.S. Congressman Barney Frank couldn't save Signature Bank.......did DEI fail here?

Barney Frank....BOD Signature Bank

Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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Your funny

Bull**** that they're bailing his tanks out. Crony capitalism is all the same. I'll make bad decisions get bailed out

cone said:

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LOL I actually watched this last week on youtube! it's not a very good movie so I turned it off shortly before the ending

the problem with that movie is that no real human beings talk and act that way- they are all portrayed as stereotypes of what a bank employee would act like.

they literally spoke like robots and hollywood actors playing brokers

That post on systemic financial problems in the financial system reads like an 8th grader right speeches for Kamala and KJP.

Lesson of the day, if your cash inflows are not greater than your cash outflows your negative cash flow will invariably lead to a cash flow problem. Got it?

Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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the banks don't have any money because it turns out long term US bonds are not "risk free" and are actually subject to policy risk. and the people in control of the monetary policy are incompetent. but yeah, everything is fine.

Ag87H2O said:

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Dies Irae said:

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The market is pricing in a Fed rate cut. The 2 year t-bill is .72% below the Fed rate, which means its likely going down.

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So now they have essentially backed themselves into a corner and pouring gasoline on a fire is their best option.

They are normalizing inflation/stagflation. Welcome back to the late70s - early 80s. Eventually you have to take the medicine, it tastes like crap, and it doesn't get better with age.

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I'm guessing this is why the markets have whipsawed 600 points over the course of 3 hours

the larger market is licking their chops at JPow finally being beaten into submission and "pivoting" to lower rates.

ZIRP days from now until infinity!

will25u said:

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People are pulling their money out from Bankrupt Credit Suisse. pic.twitter.com/NE2iZu5WXL

— IamFed (@IamFed2) March 13, 2023

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Talked to somebody at UBS a couple years ago who told me that 50% of UBS and CS revenue comes from Wall Street. Point is that nobody is insulated from anything.

Quote:

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5. Deposits were pouring in too fast to lend responsibly. SVB recognized that. Rather than make dumb loans, SVB bought assets guaranteed by the US government - Treasuries and MBS. BUT, it bought long duration. Often 10+ year bonds.

Mistake!

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Understatement of the century and mind-numbingly stupid. This takes me back to '20-21 when Goldman Sachs was telling us that there is no inflation and there wouldn't be any inflation all the while ignoring all the money printing happening.

Did these dumbasses at SVB think that printing 40% of all money that has ever existed wasn't going to lead to rate hikes when they were buying 10+ year bonds? How in the world do you make that decision? Maybe that was their only option and they simply gambled? Don't know.

In my mind, the explanation continues to be that we have largely forgotten, ignored, or memory-holed the fact that inflation is caused by printing **** loads of money chasing the same output as before. We had people on here arguing that money printing didn't cause inflation. I listened to Goldman talk about inflation and blame it solely on supply chain issues (therefore it would be transitory) while NEVER mentioning any of the money printing.

I asked my advisor why that wasn't being covered in their ISG calls and he had no answer other than failed smile. He knew and I knew and we operated in reality as opposed to what Goldman was saying at the time.

Zombie banks with over valued assets.

Ag87H2O said:

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Dies Irae said:

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The market is pricing in a Fed rate cut. The 2 year t-bill is .72% below the Fed rate, which means its likely going down.

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So now they have essentially backed themselves into a corner and pouring gasoline on a fire is their best option.

They are normalizing inflation/stagflation. Welcome back to the late70s - early 80s. Eventually you have to take the medicine, it tastes like crap, and it doesn't get better with age.

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They've lost their only real tool to fight inflation.

But don't worry, I'm sure they'll do the right thing and cut spending…

LMCane said:

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cone said:

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LOL I actually watched this last week on youtube! it's not a very good movie so I turned it off shortly before the ending

the problem with that movie is that no real human beings talk and act that way- they are all portrayed as stereotypes of what a bank employee would act like.

they literally spoke like robots and hollywood actors playing brokers

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I like the movie

LMCane said:

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Ag87H2O said:

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Dies Irae said:

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The market is pricing in a Fed rate cut. The 2 year t-bill is .72% below the Fed rate, which means its likely going down.

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So now they have essentially backed themselves into a corner and pouring gasoline on a fire is their best option.

They are normalizing inflation/stagflation. Welcome back to the late70s - early 80s. Eventually you have to take the medicine, it tastes like crap, and it doesn't get better with age.

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I'm guessing this is why the markets have whipsawed 600 points over the course of 3 hours

the larger market is licking their chops at JPow finally being beaten into submission and "pivoting" to lower rates.

ZIRP days from now until infinity!

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That's what they think will happen. Maybe they just think it wont be a half a point raise.

But he will raise a quarter point (and maybe even the half point depending on the consumer data this week). Its also staying there.

Powell is no where close to being beat into submission.

cone said:

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it's not

but my point is that it's human nature to think maybe we can make it through this perceived gauntlet without any of the potential pain

why call foul when we're not in real trouble yet?

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Beyond human nature it's a question of what risk is fundamentally, and that's uncertainty about future events. Everyone is looking for an optimal path forward to maximize long term returns, but that requires balancing real cost (losses) with opportunity cost (failure to make gains). I think it really comes down to an incorrect estimation of the likelihood of future events, which is basically a guarantee based on the law of large numbers. Decisions on what options to pursue are made based on certain assumptions that create boundary conditions for the validity of the decision. If those assumptions are wrong, the decision goes out the window.

In Margin Call it was a question of volatility. Their risk and financial models had the underlying assumption of staying within certain levels of volatility, but when those limits were removed and tested and then shown to exist in the real markets, that's when their decisions began to unravel.

With SVB, it may be a question not of whether the Fed would raise rates, but by how much and how fast. The assumptions on that would drive SVB's modeling and decision making, but if the Fed raised rates higher or faster than assumed, then SVB's investment decisions could ultimately prove to be incorrect and costly.

The part that makes this even harder is that just because the assumptions are violated does not mean the decision will prove costly. It could be completely unaffected, or it could prove to be even better. All the assumptions do is establish a set of conditions under which the decision is valid.

ABATTBQ11 said:

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cone said:

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it's not

but my point is that it's human nature to think maybe we can make it through this perceived gauntlet without any of the potential pain

why call foul when we're not in real trouble yet?

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Beyond human nature it's a question of what risk is fundamentally, and that's uncertainty about future events. Everyone is looking for an optimal path forward to maximize long term returns, but that requires balancing real cost (losses) with opportunity cost (failure to make gains). I think it really comes down to an incorrect estimation of the likelihood of future events, which is basically a guarantee based on the law of large numbers. Decisions on what options to pursue are made based on certain assumptions that create boundary conditions for the validity of the decision. If those assumptions are wrong, the decision goes out the window.

In Margin Call it was a question of volatility. Their risk and financial models had the underlying assumption of staying within certain levels of volatility, but when those limits were removed and tested and then shown to exist in the real markets, that's when their decisions began to unravel.

With SVB, it may be a question not of whether the Fed would raise rates, but by how much and how fast. The assumptions on that would drive SVB's modeling and decision making, but if the Fed raised rates higher or faster than assumed, then SVB's investment decisions could ultimately prove to be incorrect and costly.

The part that makes this even harder is that just because the assumptions are violated does not mean the decision will prove costly. It could be completely unaffected, or it could prove to be even better. All the assumptions do is establish a set of conditions under which the decision is valid.

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Fundamentally you are left with survivorship bias. Winners and losers are basically random.

Deplorable said:

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Ag87H2O said:

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Dies Irae said:

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The market is pricing in a Fed rate cut. The 2 year t-bill is .72% below the Fed rate, which means its likely going down.

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So now they have essentially backed themselves into a corner and pouring gasoline on a fire is their best option.

They are normalizing inflation/stagflation. Welcome back to the late70s - early 80s. Eventually you have to take the medicine, it tastes like crap, and it doesn't get better with age.

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They've lost their only real tool to fight inflation.

But don't worry, I'm sure they'll do the right thing and cut spending…

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And that's the crux of all of this. Monetary policy will no longer fix this. Those days are over. The debt is $32T. People like to bring up Volcker and we need him again. Our debt has increased 1,000% since then. Volcker isn't doing dick with this backdrop.

On the spending front, both parties have already said Defense, SS, and Medicare are off limits. That leaves just discretionary spending where it was shared this week that for Kevin to hit his deficit goal they would have to cut 85% of all discretionary spending.

Odds on that happening? 0%.

There is no where to go but complete implosion and reset of America.

Quote:

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Volcker isn't doing dick with this backdrop.

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that's a hard pill to swallow

it felt like we were actually getting somewhere when Powell signaled more basis hikes than the street expected back in January

ac04 said:

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Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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the banks don't have any money because it turns out long term US bonds are not "risk free" and are actually subject to policy risk. and the people in control of the monetary policy are incompetent. but yeah, everything is fine.

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If anybody with even the most basic understanding of bonds, including US Treasury bonds, thinks they are without any risk, then maybe they should not include bonds in their portfolio.

No friggin way a bank isn't stacked with people who very much understand the risk they were taking on the longer term bonds. Even little ol fka ftc understands that when I tell my advisor to be very conservative and park money in t-bills that it comes with a pricing risk if we need to sell before maturity.

Banking regulations and banking oversight folks understand this as well and a potential problem should have been blaring with a whole symphony of klaxons.

I think we will find SVB was up to some nefarious things and were allowed to persist as those activities benefited certain people of power, influence and wealth. Stay tuned.

ac04 said:

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Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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the banks don't have any money because it turns out long term US bonds are not "risk free" and are actually subject to policy risk. and the people in control of the monetary policy are incompetent. but yeah, everything is fine.

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Credit is about collective belief in an ability to repay. You could not be more wrong.

again, the duration mismatch problem that ultimately caused this is not limited to this one bank, it is a widespread issue right now.



of course i understand US bonds are not risk free, that's why i put it in quotation marks. but many people believe the 10Y is risk free, that's where the term "risk free rate" comes from. my entire point is that's a ridiculous notion.

Neehau said:

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ac04 said:

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Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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the banks don't have any money because it turns out long term US bonds are not "risk free" and are actually subject to policy risk. and the people in control of the monetary policy are incompetent. but yeah, everything is fine.

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Credit is about collective belief in an ability to repay. You could not be more wrong.

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right, and what you're seeing today is how many people collectively do not believe these banks have enough money to cover their liabilities. and in many cases they are 100% right.

ac04 said:

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Neehau said:

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ac04 said:

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Neehau said:

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At this point, this is not indicative of a general failure or something systemic in the financial system. Ninety percent of the depositors at Silicon Valley Bank are companies, not individuals, and it is clear they failed to hedge their bond position. This is a prime example of why they teach duration matching (aligning cash inflows with outflows with financial assets) in school.

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the banks don't have any money because it turns out long term US bonds are not "risk free" and are actually subject to policy risk. and the people in control of the monetary policy are incompetent. but yeah, everything is fine.

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Credit is about collective belief in an ability to repay. You could not be more wrong.

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right, and what you're seeing today is how many people collectively do not believe these banks have enough money to cover their liabilities. and in many cases they are 100% right.

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In the short term, it is about their capital structure and you are correct.

However, I am sure you are aware that Silicon Valley Bank was very different from most community banks.