How many people can calculate a coupon equivalent yield? Before you invest in something, sometimes its good to understand the why and where alls of where the numbers come from and what makes them work or not work.
Speaking with a client the other day about SVB. He is a smart guy, lawyer by education but not practicing. He says the thing about banks is they are "run by stupid people."
Individualizing profits while socializing losses - every bankster's wet dream.
I know the general political position of this blog, but I don't know if it's really useful or good to use "neo-marxist sjw" slogans, like "the rich get richer, and the poor get poorer." It's just not true - the "Obama coalition" is/was a top-bottom one. I'd argue the "uniparty" coalition, after 2016, is the same.
I wouldn't put it past these "progressives" to nationalize banking even further....."don't let a crisis go to waste."
Look what these people did: A large bank failed, and then hedge fund managers started threatening smaller banks with 10-15x less assets.....THE BOTTOM WILL FALL OUT! I know a threat when I hear it.
Just a tangential point, however in a sane and legally run system something would naturally happen with the lower rate of return, long duration assets. Yes, they would be sold discounted somewhat and be valuable to interests seeking secure return over time such as pension funds and other annuity investments. Karl has described how those paying those low rate mortgages have very little incentive to give them up. These are the perfect situations for long money good returns.
There is a place for every type of quality product.
Problem now is that banks have to offer quality to those with cash now.
Like Karl i profited in terms of rental RE for my business operations. Property owner had his back to the wall in other ways. He had a class D property in a bad market period amongst other handicaps and inabilities and i had the cash and expertise to turn it into a class A, which was returned to me in that my tenant improvements had a massive residual value which he kept after my lease. Consequently i paid significantly less over the course of the lease and got to amortize a portion of the improvements during my time there, complex relationship and mutually beneficial. The property owner could not find a developer interested in the site or existing buildings and a bad location in terms of roads and public transit had deteriorated there. No lender was going to give him money without tenants other than the strip mall stuff for which it was destined. Those stores last less than a year; he was over half vacant for two decades. We became the anchor tenant of sorts and exclusive property manager. I had all of the negotiating power in the beginning as he needed our cash merely to stop losing money on the thing and get current on his taxes. Then we made it profitable and essentially got back every dime in what we paid up front for the improvements and the effectively $1 per month lease.
Ah yes TG....I recall with the same frustration and anger at the Wamu shit when I first started reading your very prescient posts back then .....I guess we should be thankful as it seemed to propel you to doing this blog (across several topics) to our collective education and benefit.
The best predictor for future behavior is past behavior. I think now it is safe to say that the CBs will bail out banksters regardless of consequences. Laws are meaningless. It's not like we don't have decades of experience to go by.
I know the bit about the banks's loss of stock value and stuff....but deposits (regardless of size) now have a de facto FDIC insurance....without the cost of paying for insurance at extreme levels? This is what it looks like to me. And the more I think about the Fed being the (dumb) buyer of last resort for their un-defaultable bonds (albeit with a continual devalued currency---imagine what the dollar will look like 10 years from now)....and at extreme low interest?...bought at par?.....I doubt any of us could get that kind of deal. So the banksters need not worry about hedging their bonds or whatnot....the CBs ostensibly have their backs.....Or am I wrong? Credit Suisse just got a hookup of some sort. They have been circling the drain for years, like some other big Euro banks (who no doubt will get lifelines if needed).
Regardless, once again the laws & regs were ignored and/or changed when the connected got into trouble, led by the wailing and gnashing of teeth by our financial paragons via Twatter and the financial media. The masses either don't care, don't know or are too stupid to understand the fleecing they just took "for their own good" in order to keep asset prices high....and guess who owns most of the assets, kids? Hint: it ain't you.
There seems to be absolutely no political will to reign in banksters. I mean at all. There hasn't been since the S&L crisis. It's time we start to understand that, despite what we may think, we are ruled and dominated by them. We work for them. Everything hinges on their whims. They are our monarchy. And have divine rights. When their assets get into trouble via mismanagement or bad luck.....expect to get the bill. It will come. With a corrupt gov and media leading the charge.
As were are repeatedly reminded.....the banksters get golden parachutes......we get golden showers.
Next time will be no different. Nor the time after that. And so forth.
I've been a Farm Loan Manager and Senior Farm Loan Officer for USDA Farm Service Agency for just short of 40 years. My job has been to make loans to, and/or guarantee bank loans for, farmers and ranchers who cannot get commercial credit. Much of my job on a day to day basis requires that I work with bankers.
Don't get me wrong, there are a lot of good banks and bankers out there. However, the lack of depth would scare the hell out of the average person. I have literally trained bankers on how to do their jobs including things as simple as completing, let alone comprehending, financial statements.
Just like any profession, the 20% of the good bankers do 80% of the work while the other 80% don't carry their own weight.
For the most part, front line bankers are underpaid, inexperienced sales people in cheap suits. Management is populated by family, friends, and politically or socially connected.
Disclaimer: I mostly work with local and regional banks so can imagine it's much worse at the national level. Don't get me started on Wells Fargo...
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"Economists are no different than the prophets of ancient Pompeii who reassured that Mt Vesuvius would never blow. After all, it never had before." Baxter Black, DVM and Cowboy Poet
Look what these people did: A large bank failed, and then hedge fund managers started threatening smaller banks with 10-15x less assets.....THE BOTTOM WILL FALL OUT! I know a threat when I hear it.
That sounds awfully familiar to the whole "tanks in the streets!" arguments that got TARP passed, despite 50-1 or 100-1 opposition from the entire electorate. Threat? Abso-fucking-lutely.
So what happened to all those cretins who passed TARP? Were they (justifiably) thrown out on their asses? Ah, of course not and many - if not most - are STILL in Congress fucking things up and bailing out their buddies and donors. I am not surprised that we are here, understand pretty damn well why we are, and know the only thing that could actually save the Republic at this point would be an absolute return to The Rule of Law.
I am just as certain that it will not happen, so violence and destitution is on deck instead.
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We're fucked. There will be no happy ending here; there is no going back to 'normal.'. There are only bad outcomes and worse outcomes. And we don't get to choose those, either.
Yep. treasuries seeing inflow now. I started with i-bonds last year when our host mentioned the nice % it paid. Only thing is limit of 10k/yr. Better than nothing. Then from this forum I saw some of us buying treasuries, so I did some reading to understand buying and selling. Into the 6 months at about 4.6% I go this morning. Linked to my savings bank account. Uncle Sam may become the biggest savings bank pretty fast.
I received a call yesterday from the new branch manager at one of my banks. She was the head teller. She called me to ask if I needed to purchase anything and would need a loan, under the guise that interest rates are going up. I have a CD and money market checking account at this bank I am planning to close out at the end of the month when the CD matures. I had an issue with their lending department when I paid off my loan early a few months ago. I disagreed with their payoff figure and the loan department wouldn't return may call. When I close my accounts, she will know why. The loan was a 20 year commercial real estate loan at 6.28% and I was at least 2 years ahead on the payments and set to pay it off in less than 10 years.
I am assuming they are looking to prop up their loan base for with higher interest payments on loans to cover their interest payouts. I am sure they were not happy I paid this loan off early. I am getting out of debt and not getting into it. I am down to one car payment (1.9% interest rate) and my mortgage payment (2.25% interest rate). Some of the money I am taking out will go to replace my current 2011 Ford (paid for with cash) with a newer used one with less mileage. Prices are coming down and I have been watching them for the right deal. The rest will likely go into T-bills for now. I will let her know that is another reason why I am closing the account.
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(Politicians), 536 commoditized temple monkeys pawing through the ruins of America in search of bribes. (The District of Corruption) works like a vending machine. You put coins in the slot, select yo
As far as ECB raising rates today the reality is they are irrelevant. Only the Fed matters. I expect them to pause next week. I'm not saying I think that's right or wrong just what I think they'll do.
Andrew
166 posts, incept 2014-09-24
2023-03-16 13:26:10
Only somewhat "off topic". I joked about this bank failure with a guy I went to college with. He said "should I pull my money out and put it UTM"?
As I put it, "you're FDIC insured, but you should have an emergency cash fund regardless". I based that off of "Post Hurricane Ike" in central Ohio, when for up to a week the power was out in some places. Gas stations running off generators. That meant ATM and banks were shut. So people had to wander and find one operational, and they emptied out, people had to go further. I remember being at work on about "day 2" sitting in the dark. Guy came in to buy a bundle of shingles to repair his house from wind damage. (I work at a lumberyard, then and still) Pulls out a credit card and I said... "The VISA machine needs both electric and a phone to function, and I have neither." He laughed, and said "silly me...I'll go get cash." About 4 hours later he comes back. "I had to drive to Newark to find a place that was both open, and had money to dispense. This is nuts." I mean, I had cash at home at that point but it wasn't much or enough, and was starting to dwindle as time passed. But I certainly had more than the "0" that customer had, way back when. The push to "credit" has so many folk carrying "0 dollars" in their pocket, only plastic, and it is disconcerting.
Don't forget the corpus. The corpus at 2% is worth $820.35. At 4% it's worth $675.56. $145 out of PV difference. You can about split the $325 to get the difference in discount of the income stream, giving about an 18% loss.
I think I will offer a little disagreement with what went on with SVB. The banking system works as a monopoly. They wash each other's dirty laundry. Being a large percentage of SVB's deposit base were large corporate accounts, they weren't paying much interest on deposits. $42 billion left in one day. Count that, 42,000 million. If they had 10,000 customers line up, the average withdrawal was $4.2 million. This wasn't Mom and Pop lining up. I doubt they were paying anything like 4%, likely closer to 10 bp.
SVB's problem was their customers were burning cash. The risk of a bank making too many loans is the customers spend the money and it ends up in another bank. That money is derived from the overnight market known as Fed funds. You have to post collateral to borrow overnight. Couple that with the Fed selling securities, producing pressure on the supply of Fed cash, they were likely met with a declining availability of cash in the system. I will connect the dots.
It wasn't the bank that got caught with its pants down, but the many start ups they were funding that were going public and didn't because it all went to crap last spring were. Daja Vu 2001 all over again. These companies often burn cash. This made SVB eventually cash poor and exposed their security base. I kind of wonder how much of the $42 billion was the pulling of overnight funding.
The other problem with SVB was their major holdings were mortgages. I was on the phone with my sister, who sells real estate and brokers mortgages as well. I asked her what the rates were, 6.25%. She said higher. The mortgage rates aren't going down. You would expect a rate around 5% to 5.5%, based on historical spreads with the 10 year treasury. What we are seeing is a lack of capital to consume the supply of mortgages. There was no opportunity to get off mortgages, the market wasn't there to clear the load. Had they been in treasuries the game would have been different.
SVB was 90% uninsured, meaning they were sitting on near free money. None of these banks are paying anything on demand deposits. I had to bludgeon one to get them to 2%. The bank I deal with day to day won't give you anything. I remain liquid because you can't get cash when you need it or have a real opportunity.
I don't think any of these snake oil salesmen are taking the change in direction seriously. I turn on business news on daily and listen to the stream of snake oil salesmen they have as guests. They expect to see zero in a flash. The day of any long term appearance of 2% and under treasuries is in the past. The emerging markets won't be taking many rubber checks in few years. Pressure on the dollar will require a Fed funds rate well north of Zero. If there isn't a spread between longer dated paper there will be no financial arbitrage.
Another miss is the idea money leaves banks, besides currency. The Federal government spends it as fast as they get it. The only places money goes is from one bank to another or into the Fed or out of it.
I recall reading in 2007 that BAC had Fed funds liabilities of $200 billion. I'm sure that was more than 10% of their asset base and they were insolvent, but too big to fail. The direction in interest rates saved them. This time, its different. Fed funds liabilities are an indication of how overextended a bank is.
I heard on Bannon's War Room, the Fed had a trilion dollar hole in their balance sheet. I expected that, because they are full of long dated paper. The Government is going to have to swap paper with them. This amounts to nothing in financing costs, as the government gets the interest on its own debt. It will be big time difference in the markets, as the Fed will be back in t-bills instead of bonds. The banking system will follow suit.
The next crisis? The lack of capital everywhere. I think they call that Leverage. Credit from a bank that has 10% capital to a customer that might have a 4 to 1 debt to equity ratio is wearing thin. What kind of bond market are we going to have with the Fed out of the market? I suspect capital is going to become dear. How much of the country are we going to liquidate, before foreign interests own most of it?
Financial problems make for dangerous governments. Declining rates have drained the entire system of capital, as debt has been priced too cheaply. The 20% revaluation of the stock market is permanent and if they let go of inflation it will be more. We have $1.7 trillion deficit with a 3.6% uemployment rate and that is with a large tax increase coming. The system has run on free government finance for over a decade. When the interest on government debt could be headed to $2 trillion, how can they not do something besides hit the gas while going off the cliff. No one knows where rates are headed in the years ahead, but there is going to be an opportunity to make the same mistake over and over, buy bonds at higher and higher rates. The failure of socialism will be branded by these criminals as a failure of the free market.
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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Yeah the problem with concentration (of which SVB was the poster child) is that you borrow $60k to buy a truck and the dealer deposits that in a bank. Probably not the same one you borrowed it from.
So long as the transaction spread is reasonably balanced around this is not a problem, as the small amounts that aren't cost the banks that are short a bit on the overnight market to keep the books balanced.
Weeeeeeelllllll so then you have all these funds from these startups, the checks get cashed but how much of it comes back into that bank? Basically zero; the checks go out to and get deposited in everywhere else, but since this bank is basically a one-trick pony almost none of it gets deposited back in there, nor does anyone else's loan get deposited in there. Now it gets expensive to balance those books....... and if someone comes along (like Theil) and grabs a couple billion, NONE of which comes back to the same place, oh boy, now you got problems.
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The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
This is why you want recessions, bankruptcies and other similar dislocation events where those who do stupid things go out of business.
I agree with you that bankruptcies can lead to innovation. It frees up capital, at attractive prices, so that those with new ideas they want to try can afford to try them.
Re the 18 months you mentioned. Do you think we are inside the 18 months for this go-around? What would have started the clock? The first rate increase back in 2022?
Banking/Education/Healthcare. Those should almost completely be thought of as social goods in which workers should expect decent but not extravagant incomes. Of course there can be exceptions like a private bank (investment bank, Glass-Steagal hint hint)with no government backing, a private school, and a private healthcare facility. The catch on all three would be no access to government money.
Flap
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Here are my predictions for everyone to see: S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu. No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13 Trying to leave
@KD: Kind of makes me wonder how many of those startups are going tits up. Jovan Pulitzer tells a story where he was supposed to walk out with $3.8 billion going public, back in 2001. The market dried up and he went bankrupt. He had brought in Wall Street and they destroyed the financial structure of his operation to impress people. He went from profitable to burning $10 million a month. 22 years later, I suspect the new generation forgot. Same song, different verse. Losses coming, including the works of a new group.
This thing isn't going to get any easier out there. SF is now proposing $5 million reparations. I think the white people should demand theirs from Europe, for those hundreds of years of serfdom. Again, history doesn't always repeat, but it rhymes.
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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
I gave SERIOUS consideration to taking MCSNet public. Had the legal and banking people to do it.
Decided no.
A competitor stayed private, got through the crash and 25 years later has a lot more than I... But that's ok. I knew the risk of a zero was there and I wouldn't do it differently if it was in front of me today.
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The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
from their own SVB.com website -- "Help make your money last longer with our Startup Money Market Account. Like with a savings account, youll earn up to 4.50% APY on deposits so you gain a longer runway. Certain restrictions apply.3" https://www.svb.com/how-we-help-clients/....
I think those who withdrew feared return of principal. I read somewhere large deposits earned close to 5 1/2. Sounds like another Madooff scheme investment.
Observation from a different system over in London now. They have many places that are "no cash accepted". Pretty much all mass transit. Have they never had an event that took out the communication or power? When it goes badly here, it will go fully badly. I guess it really is just a theme park with a river.
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Vaccination required? Not if we leave. Now in Florida, heart rate dropping, nicer people
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