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2023-03-11 07:00 by Karl Denninger
in Banking System , 1651 references Ignore this thread
So What of SVB?
[Comments enabled]

Lots of questions flying around about SVB and what it means.

There are plenty of moving parts here and lots of unknowns, most-specifically who's connected to what, where, and with what reserves?

Apparently the firm attempted to raise capital, failed, and now is looking for a buyer.  The FDIC stepped in and locked the doors -- they typically do this on a Friday after the market closes but acted early this time.

One very interesting element of this situation is that the bank, being a bank, is supposed to have reserves against this type of loss, especially startup funding which is extraordinarily risky even in the best of times.  As I've repeatedly noted one of the big concerns anyone with a brain ought to have is the wildly-distorted market picture you get from a long-term run of negative interest rates in real terms.

I can run a cash furnace, basically, that looks pretty good so long as I can keep financing it at ever-lower interest rates because I can roll over my alleged "debt" (whether I do it formally by redeeming the former debt or informally by issuing more at much lower coupons, thereby diluting the "blended" total rate) on a continual basis.

In theory these sorts of loans are supposed to be backed by assets when held by a bank.  The question of course is always what are the assets worth if you need to sell them?  The price of a used truck, for example, is very different if there are no new ones because there are no chips yet the roofers all need one to haul their stuff to jobs .vs. the converse -- the economy is in a deep recession, there are fifty new trucks on the local dealer's lot, people are putting blue tarps up instead of reroofing their house when it leaks and nobody is building new houses.

Reality is that if you hold paper at a below market rate it is always discounted to its market value.  Why?  Because if you have to sell it that's all you'll get; the buyer would be stupid to buy your 2% 10 year Treasury when he can have a new one at 3.94%.  Therefore while it is absolutely true that if you hold it for the entire 10 years you'll get your entire $10,000 (for example) back you will also get the old coupon rate until then instead of the new one.  While you can certainly make the claim that for Treasuries you can hold them to maturity that claim only holds up if they're not the backing for something else; if they are (e.g. deposits) and someone demands their money you must sell.  Therefore any logical accounting practice is that on any rise in rates you may only count them as "hold to maturity" and thus "money good" if they are not part of your collateral base for something that can be called -- such as a demand deposit.

To do otherwise -- and I don't care what the Federal Reserve, Congress or FASB claims -- is fraud.

Let's remember that Colonial claimed in an earnings report that they were fine during the crash -- and about a month later the FDIC came in, closed them, and when BB&T bought the remains they published a valuation which essentially claimed the assets had lost roughly a third of their value over a month's time.

The odds of that being real across an entire portfolio are basically zero, never mind that if you're so-poorly underwriting things that it is true you're basically running a scam outfit in the first place.  Either way there's no plausible legitimate explanation.

Now we're doing it again, and at the core of the problem was a known false premise -- rates would never rise and thus the cash furnace game was permanent.

No, it isn't.  It never was.  It never could be.

Everyone knew it too and that means representing otherwise was fraud.

So is allowing an institution to mark assets to a model when there is no guarantee that the asset will be worth the modeled price when it matures.  There is only one such asset that meets this criteria and that is a Treasury obligation of some description which does not back anything that can be called, such as a demand deposit, because if Treasury fails so does the monetary system and government -- and thus the rest is irrelevant.

This specific instance is about a bank that has a portfolio of assets with very long duration that allegedly "back" its deposits and which were issued at much lower rates than today.  If there is a demand for funds you can't sell them at par because nobody is obligated to buy and the other alternatives are trading at a higher coupon.  Its even worse in this case than usual because roughly half, from what I can see, is 5+ years out in duration!  So if that paper yields 3% but the new paper of equivalent quality yields 6% you have to discount the face to get someone to take it by the difference times the duration.

Anyone who thinks that the very same regulators that should have stomped on this six months ago didn't let other institutions do the same stupid crap has rocks in their head.  Said "regulators" were, just as back in 2008, watching Redtube instead of doing their jobs so yeah, there's more to come.

If you remember we were all told back in February of 2008 that Bear Stearns was "fine"; it then failed.  The next lie was that it was contained and not an indication of systemic fraud writ large among the banking and financial system generally -- the deliberate statement that alleged "assets" are in fact money good.  That was a lie.

Indeed the Federal Reserve knew, as did Citibank, that Lehman was insolvent weeks before it formally blew up.  How do we know this?  Because it was documented in the post-mortem; they attempted a tri-party repo with Citibank (the other party being the NY Fed), Citi rejected the collateral as not worth its claimed value and thus both unsuitable and unstable and Lehman had nothing else to put up.  The attempt failed and was deliberately concealed from the public as a whole but of course both The Fed and Citi knew it at that moment in time.

Many people were shorting Lehman at the time, which looked extraordinarily dangerous unless you knew they were bankrupt, in which case it was the trade of the century as you knew you couldn't lose.  Was it ever run to ground as to exactly who knew, who told who and that nobody shorting the stock knew -- that is, had material inside information and was trading on it, which is illegal by the way?  No.

Is this incident localized?  I have no idea.

But what I'm quite-certain of is that a lot of financial institutions have loans out at crazy leverage due to the zero reserve requirements Ben Bernanke had made available to him via the TARP bill that was eventually passed (which I reported on at the time) which, in point of fact, simply accelerated a timeline that had already been there.  In other words Congress had already planned to give the banks the ability to do this sort of thing before the 2008 blow-up despite it being ridiculously unsound and fraudulent.  Neither party has done a thing to reverse that in the 15 years since and you'll note that not one word has been spoken about it in recent years during the Fed Chair's semi-annual testimony either.  Every single one of the 535 fraudsters in Washington DC and every President since Bush has been intimately and personally responsible for same.

So is there a ticking bomb -- or three -- out there in the financial system today?  Yes.

There has been for the last 15 years and nobody has been willing to cut the burning fuse.

The fuse is now in the box and nobody knows how long it is or how big the explosive is inside.

It might be a very long fuse and a firecracker.  Whoopie de-doo-dah.

But given the incentives while the length of the fuse is not necessarily tied to incentives that the explosive is extremely large and might surround a hollow sphere with a pit in the center is in fact rather likely.

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Comments on So What of SVB?
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Cmoledor 1k posts, incept 2021-04-13
2023-03-11 08:15:24

Hmmmm. Yet more frauds and scams. Im shocked I tell you. Thanks for always teaching in a way I can grasp.

The whole world is one big fucking scam
Why are you giving a vulgarity warning here? Our genial host is an advocate of both skullfucking and sodomy via rusty chainsaw. Credit to Rollformer
Blanca 527 posts, incept 2020-07-25
2023-03-11 08:15:24

I just read that Meghan and Harry and Oprah had millions in SVB. Why? If you want liquidity that is "safe" you invest in short-term US treasuries. They are yielding 5% now (KD right again!) If you have money in a bank, you keep the amount to within the FDIC insured limits. What were they running over at SVB that attracted this kind of money from celebrities? Also noteworthy is that Cramer recently recommended buying SVB stock and Forbes included SVB in its 2023 list of "America's Best Banks". Astonishingly stupid elite. I hope these people who were outside of the FDIC insured limits are not made whole with taxpayer funds.

We little guys are the chumps who accepted the meager crumbs of 0% interest rates for over a decade while the rich elite found these alternative investments. Let them suffer the collapse.
Invisiblesun 689 posts, incept 2020-04-08
2023-03-11 08:15:24

How many long-term loans were sold with 2% rates? What is the market value of these loans now? Who is holding this bag?

The Monetary and Fiscal policy of 2020 & 2021 was a massive bomb of self destruction, as was the Domestic / Public Health policy. I suggest investing in Kleenex and Depends because we are going to see a whole lot of crying and crapping in the pants.
Missjlb 21 posts, incept 2021-12-29
2023-03-11 08:15:24

TG, I appreciate the education you provide on this forum. I have a lot of knowledge on personal finance but corporate/ national finance? Not so much. My sense is that the uber-financially-privileged in Silicon Valley played a game and got burned and I'm talking about their customers as well. So would the next logical step be for SVB to call in their loans to recoup some cash? Maybe some of the customers would have to sell the second home in Bolinas. Pity.
No doubt SVB will come to congress begging for a bailout which would be another wealth transfer from the middle/ lower class in the US to prop up the millionaire/billionaire crowd. That is a hard NO as far as I'm concerned. There is no such thing as "too big to fail". As my grandmother used to say: "you have burned your a$$, now sit on the blister."
Quantum 775 posts, incept 2021-05-18
2023-03-11 08:15:24

Banks that are prudently run (which may not be many) might be ok by themselves but if bank runs start they'll go down because of the fractional reserve issue.

During the S&L, then energy bust times of the 1980s, there were a lot of bank failures. People now are not accustomed to them.

Our God, will you not judge them? For we have no power to face this great multitude that is attacking us. We do not know what to do, but our eyes are on you. --2 Chron. 20:12
Greenacr 768 posts, incept 2016-03-15
2023-03-11 08:15:24

So if anyone of us has money in the bank we better make sure we are under the $250K FDIC insured level, even if that means spreading your wealth across several banks.....
Tonythetiger 827 posts, incept 2019-01-27
2023-03-11 08:15:24

Posted elsewhere, but directly applicable here:

Wall Street Journal wrote..
The banking industry has more than $600 billion in unrealized losses on its securities holdings, according to the Federal Deposit Insurance Corp., the result of stowing extra cash in bonds when rates were super low. Now that rates have risen, the prices of the bonds have gone down significantly.

Anyone who thinks there isn't more of this kind of thing coming is in for a rude awakening.

"War is when the Government tells you who the bad guy is. Revolution is when you decide that for yourself." - Benjamin Franklin
Bzelbob 454 posts, incept 2021-09-12
2023-03-11 08:18:41

The fuse is now in the box and nobody knows how long it is or how big the explosive is inside.

Gives a new meaning to the word "Luckbox". smiley
(Waiting for the Earth shattering kaboom...)

Question: When bank regulators fail; why shouldn't they be on the hook personally for failure to regulatedo-their-damn-job?

"Failure. It's what's for dinner."

"Threats are illogical. And payment is usually expensive." - Sarek of Vulcan
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:18:31

@Greenacr the only place to put "cash" over FDIC limits is in a Treasury-only money-market fund, or directly via Treasury Direct. If you're over FDIC limits otherwise and the institution fails you can lose some or all of the money, and if even if you don't lose it it will be locked up until the assets of the failed institution are run down, which can take years.

I fully expect that credit lines are going to be cut back starting Monday, both corporately and personally. If you're one of those folks who has outstanding balances you may be about to get a rather nasty surprise.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:20:08

@Bzlebob because we don't insist that they are, and if they refuse we have yet to take a single head for their either jacking off or worse, being bribed.

The last three years of sitting on one's ass cost several hundred thousand lives in America alone, and God knows how many more are being racked up daily due to that same sort of failure.

Nobody who is a piece of shit stop because you asked nicely.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Tappedout 268 posts, incept 2020-09-21
2023-03-11 08:29:07

"So if anyone of us has money in the bank we better make sure we are under the $250K FDIC insured level, even if that means spreading your wealth across several banks....."

Not having an account over the FDIC limit has always been a no brainer. It costs nothing to open accounts.

If someone's financial manager does not point this out and make it happen, they fire them.

In the long run, it may not matter. The FDIC can only do so much. In the event of widespread collapse they will say: "No one could have seen this coming" and "Rick peoples problem."
Dingleberry 684 posts, incept 2011-11-06
2023-03-11 08:29:21

So what will happen to the SVB bag holders? These are not your typical Joe 6-packs.

These are VC types, celebs and/or otherwise politically connected.

Which tells me that we (my fellow rubes and plebes) are probably on the hook for losses via the Fed or some such.

Of course it's for our own good.
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:31:23

Nope @Dingleberry; most of that money is not in fact gone. It is, however, locked up until the assets run off. Which means that "demand account" is now a time deposit at zero coupon -- oops.

The real problem comes from the businesses with their operating cash (e.g. payroll) requirements in there. If they're not profitable (and most startups are not) then the fact that they will eventually get that money doesn't mean anything to a potential lending source as they won't exist by then.

I expect ratchet actions on open credit lines to be computed over the weekend and to be imposed on both consumers and businesses next week.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Blanca 527 posts, incept 2020-07-25
2023-03-11 08:38:26

Uninsured depositors: The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors, the FDIC said and provided a phone number for this folks to call. It looks like they will get at least a portion of their funds.

Early_retirement 4k posts, incept 2007-06-26
2023-03-11 08:38:33

If the credit line ratcheting isnt done somewhat universally wont it just put a target on whichever banks do it
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:40:56

Yes, which is why you're going to see it all over the place; there is somewhat of a game of chicken that gets played with this (was true in 2008, and will be again) but this is a nearly-universal thing at times like this.

A friend of mine the 1990s had a very nice little business which was doing ok, but was utterly reliant on an operating line from a local bank. Then we had a little recession, there was some noise about credit risk and he got ratcheted. He couldn't find a replacement for the bank that would take the roll and leave the open capacity intact -- it forced him out of business.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Neal 289 posts, incept 2014-01-09
2023-03-11 08:48:07

How big are the FDIC reserves and are they all in a secure location and available anytime needed?
If a whole bunch of banks collapse is there a few trillion lying around to make depositors whole and without delay? Can they be Cyprussed in or otherwise left waiting for their money? Im at work right now and another worker mentioned he has 20,000usd that cannot be withdrawn from an account in Lebanon, could the US sink as far as Lebanon?
Does the bank run even need to start in the US? I think there are a couple of big banks in Switzerland and Germany that could lead the way.
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:52:00

@Neal meh. Its $250k per person per institution and if you tried to get cute in a serious dislocation (e.g. factoring outfits that do this) you might get fucked if multiple institutions that held your actual paper all were impacted at once.

The issue is not the same (by any stretch) as it was in '08 where institutions were sitting on paper that was worth half of what they had loaned because the collateral was crap and run to the moon on liar loans. Here the issue is more-fundamental; duration mismatch is how a bank operates, but when you have duration mismatch that gets stretched out in a rising rate environment you get fucked if the depositors want their money. At its core the reason you're in trouble is because you're paying coupon on a time deposit sort of return but not imposing the time deposit requirement and claiming there's nothing wrong with doing this.

That's a scam.

Most SVB accountholders will eventually get most or all of their money back. However, its now a forced time-deposit at zero coupon. That's exactly what they deserve to have happen to them given that they were willing participants in the scam itself, just like the people who took out liar loans deserved to lose the house.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.

Jesjohn94 1k posts, incept 2019-05-07
2023-03-11 08:54:41

You would think anyone over FDIC limits is going to take a pretty big haircut considering the Feds closed the bank. Common stock holders in SVIB have lost 100% and the stock had been rising a lot this year which will have pulled investors in. SVB bonds are trading at 31c on dollar after the closure. I would think bond holders come before a regular joe with money in the bank above FDIC limit. That doesn't sound promising if you had money in the bank.
Tickerguy 193k posts, incept 2007-06-26
2023-03-11 08:56:59

Well yeah stockholders are going to get zero but no @Jesjohn94, bondholders are AFTER depositors so yeah, they're gonna get fucked too.

The order is:

Insured depositors.
Uninsured depositors.
General creditors (including bondholders)

The last two usually get zero, or close to it. The reason the bonds are trading 31 cents is exactly that; they're behind the depositors, and are fucked.

If you remember IndyMac blew up -- uninsured depositors got roughly half of their funds. That was a particularly-spectacular failure and involved outright malfeasance by the examiner who had previously been caught doing the same thing -- allowing backdated deposits to meet coverage requirements -- in the S&L blowup. He did not get prosecuted for that, by the way.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.

Bodhi 5k posts, incept 2008-02-23
2023-03-11 09:02:10

How big are the FDIC reserves and are they all in a secure location and available anytime needed?

Sure, no problem. Got a bunch of these in a safe deposit box at Wells Fargo. /s


The proper function of man is to live, not to exist. I shall not waste my days in trying to prolong them. I shall use my time. ~Jack London
Tonythetiger 827 posts, incept 2019-01-27
2023-03-11 09:10:38

Just last week I moved 40% of my checking account balance (the 'emergency fund') into preferred shares of a utility. Partly because it was earning squat in the checking account, partly because of the risks that rising interest rates are imposing on banks. I figured better to spread the money around in smaller piles and if it earns more that way, then it's a bonus.

Not that I had anywhere near $250,000 in the bank, but a liquidity risk over $1,000 sucks every bit as bad as a liquidity risk over $1 Billion. If you need money now and the cash box is empty the result is the same.

Even though the price of my preferred shares bounce around a few percent, it's nice to know they're worth something and that they can be sold to put money in my hands should the need arise. Until then, I'll happily collect the quarterly dividends and add them to the pile instead of watching inflation eat the value away while it sat in the checking account.

"War is when the Government tells you who the bad guy is. Revolution is when you decide that for yourself." - Benjamin Franklin
Ingar 501 posts, incept 2017-02-14
2023-03-11 09:58:34

I remember Bankers Trust Savings and Loan in the late 1970's in Mississippi. They were privately insured by an undercapitalized firm and were paying higher interest on their accounts than federally insured banks and S&L's. Lots of people had accounts there due to the higher returns. Several of the officers of Banker's Trust got into a dispute with one another, got lawyers involved, and accounts were attached. There was a run and not enough cash on hand to satisfy frightened depositors. The business closed and an individual was appointed to straighten out the mess. Fortunately, Banker's Trust hadn't made bad loans and the depositors were made whole ......after a few years. In the meantime, the depositors had to wait for their money which was like not having it.

What happens when a bank has a lot of its loans on overpriced property that needs to be liquidated? It probably won't be a happy ending as shown in the Jimmy Stewart movie "It's A Wonderful Life".
Robodog 496 posts, incept 2011-06-12
2023-03-11 09:58:44

Oddly enough, this post brings to mind "One Thing Leads to Another" by 80s flash-in-the-pan band, The Fixx...

which, then led to this Rube Goldberg contraption commercial, retrieved from memory:


If my 1st try @ embedding YT fails:

Defiance to tyrants is obedience to God. ~Franklin
...the people must fight back how they can. Reverend Syn
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