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Fun times with American banks

OK, so Silicon Valley Bank, a bank run. Triggered by their losing their capital in long dated Treasuries. OK.

Now the grubby detail. So, if you hold bonds to maturity then you don’t have to mark to market. SIVB was doing exactly that. The bond portfolio had large losses in it because they’d bought long dated Treasuries then interest rates rose. In the portfolio marked hold to maturity you don’t have to crystalise this loss. It becomes more of an opportunity cost than a direct bite out of the capital base.

SIVB had a forced conversion of that hold to maturity portfolio to a tradeable on the market one. Which is when you do have to mark to market. At which point their capital base vanished – those opportunity costs suddenly crystalised into a vanishing of their capital.

One amusement here is going to be watching where ‘Tater goes with this one. Should banks mark to market? Or not? It’s possible to divine either response from his earlier writings. Also, look how lovely and safe government debt is as a savings vehicle, eh?

But the actually important point is, well, who else has that same gremlin on their books. Losses on the hold to maturity portfolio which will bankrupt the bank if crystallised?

My guess – guess – is that it’s quite a lot of people.

17 thoughts on “Fun times with American banks”

  1. A quick gander at the most recent 10Q – – shows that SVB isn’t (wasn’t) just holding treasuries. It’s also holding lots of MBSes and (as of Sept 31) was seriously out of the money in those too.

    In fact if I’m reading the 10Q right almost all the long dated treasuries were in the AFS pile and had already had their loss booked while what was in the HTM pile was almost all MBS (about $85B bought, valued at $71B in september and probably less now).

  2. SomeBlokeFromCambridge

    This isn’t my field at all, so interested in comments.

    There is a lot of stuff on t’ interwebs about how it was all coz they/them woz woke. But then I saw this quoted and linked on SmallDeadAnimals:

    SVB was the poster boy of banking management by the book. They followed a conservative policy of adding the safest assets -long-dated Treasury bills- as deposits soared.

    SVB did exactly what those that blamed the 2008 crisis on “de-regulation” recommended. SVB was a boring and conservative bank that invested the rising deposits in sovereign bonds and mortgage-backed securities and believed that inflation was transitory as everyone except us, the crazy minority, repeated.

    SVB did nothing but follow regulation and monetary policy incentives and Keynesian economists’ recommendations point by point. SVB was the epitome of mainstream economic thinking. And mainstream killed the tech star.



  3. He’s already at it Tim

    It seems appropriate to share this entry on money that I posted to the glossary yesterday in light of the Silicon Valley Bank failure.

    SVB would have survived if they had realised that all money is debt.

    They failed to match their current and longer-term cash liabilities.

    They did not realise that this double entry was really their job.

    As a result there is a cost to society.

    Understanding money matters.

    That’s entry 2 – the first one I’ll need to post across in bits and pieces as it’s a stellar example of utter ignorance

  4. “One amusement here is going to be watching where ‘Tater goes with this one. ”

    Let me guess, the solution will be moar tax and moar money printing…….

    Incidentally, I see now that the US monetary authorities are now saying they are guaranteeing all bank deposits. Bit of a big move in response to one small non-retail bank failure, especially as US banks are sitting on over $600bn of unrealised investment losses. And what exactly happened to the ‘In future financial crises bank depositors will have to take a haircut’ line that was taken after the GFC?

  5. Just curious, but if “SIVB had a forced conversion of that hold to maturity portfolio to a tradeable on the market one.” – who/what forced the conversion?

    When your Chief Financial Risk officer has been very publicly making Woke her #1 priority & things go boom, well, good luck blaming something else.

  6. The bastard’s calling for another lockdown on Twitter – my God I could almost strangle myself on my hatred of this bloated cretin (Whom my taxes are funding in his pseudo -academic role) but let’s address his ‘commentary’ on the SVB fallout.

    The first, and most obvious is that these bankers clearly had no clue as to what they were doing. Yet again the so-called ‘masters of the universe’ have got things wrong.

    Well there’s an argument their internal auditors and governance teams over seeing capital and liquidity were asleep on the job. However, I thought there was no demand for deposits. Banks don’t actually need them, right? that’s what a dozen posts on the reality of MMT have been saying?

    Second, regulation failed. The risks in this bank were obviously incorrectly appraised by them, and it was allowed to continue trading when there was obviously too much risk implicit in an apparently well funded balance sheet.

    The bank did exactly (in terms of assigning its investments) what the regulation said to do – Bonds were needed as Tier one capital? Noone invests in Equities anymore, right? So where would he have them put the cash?

    Thrd,the bank had insufficient capital for the risks it took. If there had bern sufficient capital it would not now be bust.

    I thought his theory was that the banks didn’t need any working capital (hence no demand for deposits)? They can just go in and create more? Which is it?

    Fourth, as ever, this bank presumed the state would cover its risk. As ever that has proved to be correct. The mockery of privately owned banks continues when what they actually do is extract value for private gain safe in the knowledge that governments will not let them fail.

    Murphy approved all of the bailouts in 2008 and accused anyone opposed to them of wanting to harm the poorest in society. Furthermore, anyone advocating restraint on money supply growth and QE you advised was a neoliberal, or possibly as of yesterday a fascist.

    Fifth, the fallout from the over-inflation of interest rates by the Fed is clear. These are being artificially manipulated upward when there is no need for that, most especially when there is no US wages spiral. Artificial risk is being created instead by over deflating asset prices too quickly for markets to handle. This crisis was created by the Fed.

    Had we followed Murphy’s policies inflation would now be accelerating out of control, as one can see from observing a country (Turkey) where a deranged autocrat has decided that fundamental economic laws can be bucked.

    Sixth, this bank was used by the well off and the companies they own. There is always an excuse for bailing them out. None is found for anyone else. Wealth flows upwards, as ever

    A policy Murphy (as mentioned often) approved of in 2008 and which he is looking to double down on in seizing control of the bulk of the private sector without need for shareholders and bondholders to be compensated

    Seventh, cash deposits served no economic purpose here: most of what this bank did added no economic value. Despite that it will secure an expensive bail out. At some time we will realise that savings do not equate to investment, and the models we have for saving make no economic sense, as this failure proves. But we are not there yet.

    The money (cash deposits) needs to be seized and turned over to the likes of Murphy to be deployed in ‘sustainable’ fashion. Once deposits deemed ‘surplus’ can be seized the precedent is set to grab ISAs and pensions and use them in similar vein.

    Eighth, this is market failure because this bank could not even manage cash, the most basic task asked of it. It was said to be reality good at tech. Based on this are we really expected to believe that? Surely we can do better than this?

    The notion that a failed and fraudulent academic reduced to issuing a periodic begging bowl and desperately looking to various Marxist organizations to provide him with a sinecure having got assets below the minimum state pension level is one to advise on management of anything related to money is an entertaining one.

    As Jim said – although there wasn’t much around tax, there was the complete refusal to take any responsibility for his role in the crisis, and the continued belief that if he could just steal all the savings in the UK then things would be a lot better. Still dangerous and as close to pure evil as we can see in the blogosphere.

  7. Esteban – a slow down in new tech funding, or subsequent rounds, from VCs generally – see all the layoffs not just those at Twitter. The startups burn through cash from previous rounds, so SVB has to start selling the bond portfolio, taking the hit.

  8. “long-dated Treasury bills”: is that right? I thought “bills” were short-dated jobbies, fitting in below “notes” and “bonds”. Open to correction.

  9. Silicon Valley venture capitalists are screaming for a bail out in response to the recent sudden collapse of Silicon Valley Bank — the second-largest bank failure in history, behind the collapse of Washington Mutual at the height of the 2008 financial crisis.

    Entrepreneur Joe Lonsdale insisted that he is “opposed to bail outs,” but nonetheless flirted with the idea of one for the Silicon Valley Bank, tweeting, “Am curious if the innovation world is the only part of our economy that doesn’t deserve a depositor bailout?”

    “And can’t help but ask how many equivalent aid packages to Ukraine (0.5 of them?) it takes to resolve the crisis impacting thousands of promising US technology companies,” he added.

    From Ace.

    No. Absolutely not.

    These people call themselves entrepreneurs.
    An entrepreneur is an individual who creates and/or invests in one or more businesses, bearing most of the risks and enjoying most of the rewards.

    If your business is that great simply suck it up and start again. You’ll still become a billionaire unless of course your promising US technology company is actually just an over-hyped pile of sh1te.

  10. Something I know about. T-bills = short dated (months to years). Treasuries = longer dated (years to decades). In UK same applies.
    This is a basic failure of risk management at SVB. They are exposed to liquidity risk (commercial deposit flight) so they invested in liquid assets (Gov securities) and not illiquid credit (loans). They then ignored the risks on the assets themselves (interest rate risk). Or, if they didn’t ignore the rates risk, they measured the risk against their deposit base rather than their capital base which is much smaller.

    Either way.. muppets. [Caveat – cross risks are hard to manage as most people don’t think more than one step ahead, even if they are paid a lot of money]

  11. Jim
    “And what exactly happened to the ‘In future financial crises bank depositors will have to take a haircut’ line that was taken after the GFC?”

    We’re told the depositors are Silicon Valley high-tech companies; it would be interesting to cross-reference the bail-out beneficiary list against the Democrat donor list.

  12. My guess – guess – is that it’s quite a lot of people.

    Good guess. Trading suspended at more than 30 US banks.

  13. Yes, all the banks will have similar problems if they mark-to-market. Lending will obviously be constrained for a few years; that’s an explicit part of the Fed’s goal in raising rates.

    But you can’t have a bank run on all banks simultaneously, can you? When you withdraw your money from one bank, you always put it in another bank. Somebody wins this game of musical chairs.

    The worst-case scenario – and a rather plausible one – is that you end up with just the Big Four (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo).

  14. Haven’t the Fed agreed to lend money to banks on the basis of assets valued at face value, not marked to market? So they’ll be able to offload all their losses to the Fed (and thus the taxpayer??) instead?

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