[Bank failure discussion mega-thread]

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Harry Livermore
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Re: [Bank failure discussion mega-thread]

Post by Harry Livermore »

dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
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Re: [Bank failure discussion mega-thread]

Post by Weathering »

exodusing wrote: Mon Mar 20, 2023 6:26 am
invest2bfree wrote: Sun Mar 19, 2023 8:54 pm
exodusing wrote: Sun Mar 19, 2023 4:29 pm
The deal will entirely wipe out around $17 billion of a special class of Credit Suisse bonds known as AT1s. These bonds were created after the last financial crisis and get written down in times of stress. Authorities said the measure was needed so that creditors shared a burden along with the Swiss government, and that there was a clear legal basis for the write-off.
Equity getting paid ahead of bonds seems odd. Can someone explain? Was this just an explicit risk of the bonds?<snip>
AT1 bonds prospectus says that they will be zeroed out if the bank becomes insolvent which happened in this case.
I'd have expected equity to be zeroed out first if the bank becomes insolvent. Based on articles I'm reading this morning about the CS AT1s I'm not the only one with this expectation, for example, from the WSJ:
AT1 bonds—also known as contingent convertible bonds, or CoCos—were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios.

“What’s shocking is that it looks like equity holders will recover better than tier 1 bondholders,” said Justin D’Ercole, co-founder of ISO-mts Capital Management LP, a fund focused on bank securities. The resulting losses will likely prompt individual and institutional investors to sell similar securities of other European banks, he said.
Although
Holders of CoCo bonds in Spain’s Banco Popular Español SA got wiped out in 2017 when the bank got bailed out through a merger with Banco Santander SA. Popular’s shareholders also took losses, but the restructuring was seen as an isolated event.
Credit Suisse regular bonds (senior unsecured) are trading down today. As of last week, they were trading with around an 8% yield to maturity. Today, they are well above a 10% yield to maturity. I would have expected the opposite to occur - that their price would have traded up to nearly the level of UBS senior unsecured bonds. This may be the result of confusion due to the AT1 bond issue (unlikely because bond brokers are informed professionals who work for knowledgeable firms) or due to a limited market for the bonds now because many brokerages temporarily will not trade them. In either case, there definitely seems to be unrest in all investments related to Credit Suisse despite the UBS acquisition.
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Re: [Bank failure discussion mega-thread]

Post by Flymore »

Harry Livermore wrote: Mon Mar 20, 2023 10:44 am
dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
I remember reading during the 2008 financial crisis that Paul Volker was called to Washington DC and asked for advice. His response was immediate, put back the Glass Steagall act. The response was a gasp followed with, we can't! Volker said something like, well there's nothing I can do here. I'm going to go play with the grand kids. Then left.

President Bill Clinton who signed the repeal of the Glass Steagall act later regretted it.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

Flymore wrote: Mon Mar 20, 2023 11:21 am
Harry Livermore wrote: Mon Mar 20, 2023 10:44 am
dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
I remember reading during the 2008 financial crisis that Paul Volker was called to Washington DC and asked for advice. His response was immediate, put back the Glass Steagall act. The response was a gasp followed with, we can't! Volker said something like, well there's nothing I can do here. I'm going to go play with the grand kids. Then left.

President Bill Clinton who signed the repeal of the Glass Steagall act later regretted it.
No one wants regs until stuff blows up. If we had an actual free market, far more companies would fail. The CEO of SVB got it right. Juice the company for pay and then go to HI.
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

This article has an inflation adjusted FDIC history, and how the level of protection that backstopped the Great Depression bank failures was around half the $250k we have now (possibly unlimited, if the FDIC/Fed liked your bank). Comments also below on the moral hazard issues of insuring large depositors for the safety of the banking system.

https://rationalwalk.substack.com/p/the ... -insurance
The absence of any market discipline from depositors to police the activities of banks will require the government to step up regulatory oversight of all banks in order to limit exposure of the government to losses. In the absence of market discipline from depositors and sufficient regulatory oversight, only the shareholders of banks will be left to care about enforcing sound banking practices. In reality, agency problems have become so severe that it is doubtful that effective oversight will occur.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

Harry Livermore wrote: Mon Mar 20, 2023 10:44 am
dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
Whatever the merits of bringing back Glass Steagall, the current US problems are not due to the lack of a wall between investment banking and consumer banking. The current problems are due to fears of bank runs that would make a bank unable to pay all depositors in full, leading in some cases to withdrawals that make the bank unable to pay all depositors in full. It's not even the last war, which was caused be risky and exotic loans.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

Weathering wrote: Mon Mar 20, 2023 11:03 am Credit Suisse regular bonds (senior unsecured) are trading down today. As of last week, they were trading with around an 8% yield to maturity. Today, they are well above a 10% yield to maturity. I would have expected the opposite to occur - that their price would have traded up to nearly the level of UBS senior unsecured bonds. This may be the result of confusion due to the AT1 bond issue (unlikely because bond brokers are informed professionals who work for knowledgeable firms) or due to a limited market for the bonds now because many brokerages temporarily will not trade them. In either case, there definitely seems to be unrest in all investments related to Credit Suisse despite the UBS acquisition.
In normal times I would also have expected the bonds to trade near UBS. You'd think UBS's financial condition and the support provided by the Swiss government and regulators would be enough. It could be due to delay until UBS closes (hard to see the deal not closing, although has a signed acquisition agreement been filed?), lack of absolute clarity on what will happen to these bonds or general fear surrounding CS, etc.
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Re: [Bank failure discussion mega-thread]

Post by Beensabu »

Harry Livermore wrote: Mon Mar 20, 2023 8:54 am Now, I'm not saying, in the case of SVB, it would have been proper for dozens of companies to act in a self-sacrificial way, necessarily. But I observe, with much cynicism, that the "Tech VC Bros" who INITIATED the run, to a man, acted like the grumpy old guy who insisted on his $242.
The thing is: everyone knows what they did, while knowing the consequences their actions would have.

It will likely make banking more difficult and expensive for most of them in the future.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Harry Livermore
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Re: [Bank failure discussion mega-thread]

Post by Harry Livermore »

exodusing wrote: Mon Mar 20, 2023 11:31 am
Harry Livermore wrote: Mon Mar 20, 2023 10:44 am
dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
Whatever the merits of bringing back Glass Steagall, the current US problems are not due to the lack of a wall between investment banking and consumer banking. The current problems are due to fears of bank runs that would make a bank unable to pay all depositors in full, leading in some cases to withdrawals that make the bank unable to pay all depositors in full. It's not even the last war, which was caused be risky and exotic loans.
True, I don't think Glass Steagall would have prevented this after all. I think I over-caffeinated this morning. And I'm fired up about what I perceive is the cause of the run: tech bros protecting their own; and the result: many individual depositors worried (unnecessarily, as has been pointed out in this thread) and a general ratcheting up of fear. I was expecting the "grownups in the room" to act like grownups.
I guess I'm wishing for a magic rule that does not exist, or divine punishment for those who behave badly.
Cheers

ETA: punctuation/ clarity
Last edited by Harry Livermore on Mon Mar 20, 2023 4:37 pm, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm
exodusing wrote: Mon Mar 20, 2023 11:31 am
Harry Livermore wrote: Mon Mar 20, 2023 10:44 am
dagsboro wrote: Mon Mar 20, 2023 10:00 am
Personally, and as an investor in financial markets, I would like to see banking regulations like Dodd-Frank greatly strengthened and consistently enforced and I would like to see depositor safety nets increased exponentially.
Or bring back Glass Steagall. I long for a world where overconfident "Masters Of The Universe" can blow themselves up without it affecting my checking account.
<<<investment banking>>> |||||WALL|||||<<<consumer banking>>>
Cheers
Whatever the merits of bringing back Glass Steagall, the current US problems are not due to the lack of a wall between investment banking and consumer banking. The current problems are due to fears of bank runs that would make a bank unable to pay all depositors in full, leading in some cases to withdrawals that make the bank unable to pay all depositors in full. It's not even the last war, which was caused be risky and exotic loans.
True, I don't think Glass Steagall would have prevented this after all. I think I over-caffeinated this morning. And I'm fired up about what I perceive is the cause of the run- tech bros protecting their own; and the result- many individual depositors worried (unnecessarily, as has been pointed out in this thread) and a general ratcheting up of fear. I was expecting the "grownups in the room" to act like grownups.
I guess I'm wishing for a magic rule that does not exist, or divine punishment for those who behave badly.
Cheers
T bills and chill. The VCs shot themselves in the foot. They’ll have banking trouble in the future.
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Re: [Bank failure discussion mega-thread]

Post by peppers »

The "tech bro's". I like that.
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

exodusing wrote: Mon Mar 20, 2023 6:26 am
invest2bfree wrote: Sun Mar 19, 2023 8:54 pm
exodusing wrote: Sun Mar 19, 2023 4:29 pm
The deal will entirely wipe out around $17 billion of a special class of Credit Suisse bonds known as AT1s. These bonds were created after the last financial crisis and get written down in times of stress. Authorities said the measure was needed so that creditors shared a burden along with the Swiss government, and that there was a clear legal basis for the write-off.
Equity getting paid ahead of bonds seems odd. Can someone explain? Was this just an explicit risk of the bonds?<snip>
AT1 bonds prospectus says that they will be zeroed out if the bank becomes insolvent which happened in this case.
I'd have expected equity to be zeroed out first if the bank becomes insolvent. Based on articles I'm reading this morning about the CS AT1s I'm not the only one with this expectation, for example, from the WSJ:
AT1 bonds—also known as contingent convertible bonds, or CoCos—were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios.

“What’s shocking is that it looks like equity holders will recover better than tier 1 bondholders,” said Justin D’Ercole, co-founder of ISO-mts Capital Management LP, a fund focused on bank securities. The resulting losses will likely prompt individual and institutional investors to sell similar securities of other European banks, he said.
Although
Holders of CoCo bonds in Spain’s Banco Popular Español SA got wiped out in 2017 when the bank got bailed out through a merger with Banco Santander SA. Popular’s shareholders also took losses, but the restructuring was seen as an isolated event.
The ever informative Matt Levine has more on this, including:
The prospectus also says (page 23): “In the case of any such cancellation, FINMA may not be required to follow any order of priority, which means, among other things, that the Notes could be cancelled in whole or in part prior to the cancellation of any or all of CSG’s equity capital.”
After the 2008 financial crisis, European banks issued a lot of what are called “additional tier 1 capital securities,” or “contingent convertibles,” or AT1s or CoCos. The way an AT1 works is like this:

It is a bond, has a fixed face amount, and pays regular interest.
It is perpetual — the bank never has to pay it back — but the bank can pay it back after five years, and generally does.
If the bank’s common equity tier 1 capital ratio — a measure of its regulatory capital — ffalls below 7%, then the AT1 is written down to zero: It never needs to be paid back; it just goes away completely.
This — a “7% trigger permanent write-down AT1” — is not the only way for an AT1 to work, though it is the way that Credit Suisse’s AT1s worked.
most AT1s outside of Switzerland don’t work like this — they tend not to be permanent write-down AT1s
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

nisiprius wrote: Mon Mar 20, 2023 1:56 pm
Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
Now, we’re in super consolidation mode, where the best result is one super large bank to rule them all. At that point, we should nationalize.
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Re: [Bank failure discussion mega-thread]

Post by PersonalFinanceJam »

rockstar wrote: Mon Mar 20, 2023 1:58 pm
nisiprius wrote: Mon Mar 20, 2023 1:56 pm
Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
Now, we’re in super consolidation mode, where the best result is one super large bank to rule them all. At that point, we should nationalize.
There are still over 4000 banks in the U.S. we are going to have to get on it if we are going to consolidate down to one any time soon. I don't believe Glass-Steagall should have been repealed the way it was, but I still don't see how that would have limited the panic caused by SVB. So maybe SVB wouldn't have had branches outside of California. I'm guessing they would have still had the same issues and be of similar size because of the clients they chose to cater to. Maybe we would be calling it the local bank crisis instead of the regional bank crisis. We'd still have people panicking because their favorite news outlet published a list of banks which had a bunch of uninsured deposits, or had under water hold to maturity portfolios.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

PersonalFinanceJam wrote: Mon Mar 20, 2023 3:26 pm
rockstar wrote: Mon Mar 20, 2023 1:58 pm
nisiprius wrote: Mon Mar 20, 2023 1:56 pm
Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
Now, we’re in super consolidation mode, where the best result is one super large bank to rule them all. At that point, we should nationalize.
There are still over 4000 banks in the U.S. we are going to have to get on it if we are going to consolidate down to one any time soon. I don't believe Glass-Steagall should have been repealed the way it was, but I still don't see how that would have limited the panic caused by SVB. So maybe SVB wouldn't have had branches outside of California. I'm guessing they would have still had the same issues and be of similar size because of the clients they chose to cater to. Maybe we would be calling it the local bank crisis instead of the regional bank crisis. We'd still have people panicking because their favorite news outlet published a list of banks which had a bunch of uninsured deposits, or had under water hold to maturity portfolios.
A bank run will blow up any bank if it has a small number of depositors with large accounts. Nothing will save a bank as they don’t hold all of that cash on hand. Banks have never held a lot on hand. That’s not new.
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Re: [Bank failure discussion mega-thread]

Post by arcticpineapplecorp. »

what, no one saw that First Republic lost 50% today (-47.11% to be exact)?
Last edited by arcticpineapplecorp. on Mon Mar 20, 2023 4:43 pm, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

arcticpineapplecorp. wrote: Mon Mar 20, 2023 4:41 pm what? no one saw that First Republic lost 50% today (-47.11% to be exact)?
Ted Lasso or Bufffett will find buyers for it.
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Re: [Bank failure discussion mega-thread]

Post by JBTX »

Tanelorn wrote: Mon Mar 20, 2023 11:29 am This article has an inflation adjusted FDIC history, and how the level of protection that backstopped the Great Depression bank failures was around half the $250k we have now (possibly unlimited, if the FDIC/Fed liked your bank). Comments also below on the moral hazard issues of insuring large depositors for the safety of the banking system.

https://rationalwalk.substack.com/p/the ... -insurance
The absence of any market discipline from depositors to police the activities of banks will require the government to step up regulatory oversight of all banks in order to limit exposure of the government to losses. In the absence of market discipline from depositors and sufficient regulatory oversight, only the shareholders of banks will be left to care about enforcing sound banking practices. In reality, agency problems have become so severe that it is doubtful that effective oversight will occur.
I guess I don’t think it is realistic to expect depositors to be able to constantly reevaluate the riskiness of a banks asset portfolio, especially when they aren’t always reported at market value. I don’t know what the merit is for punishing depositors if and when a bank run happens.

While a lot has been said about SVB’s lack of bond duration management, it is also true that lots of banks have bonds that are upside down. Banks are a large holder of government bonds. If all these banks were to sell longer bonds to duration match their portfolios, the price of bonds would go down even more.

One idea I heard was that those mid level banks that have a certain level of uninsured deposits have regulations similar to the large banks. Made sense to me.
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

nisiprius wrote: Mon Mar 20, 2023 1:56 pm Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.
I don’t think that’s completely accurate. I banked with First Interstate Bank in the 80’s and 90’s and they had branches in different states, specifically near my hometown and in the state where I went to college.
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Re: [Bank failure discussion mega-thread]

Post by km91 »

rockstar wrote: Mon Mar 20, 2023 1:58 pm Now, we’re in super consolidation mode, where the best result is one super large bank to rule them all. At that point, we should nationalize.
LOL come on. The US still has 1000's of banks. It is certainly the outlier. How many banks are there in Canada? In the UK? Germany?
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

rkhusky wrote: Mon Mar 20, 2023 6:55 pm
nisiprius wrote: Mon Mar 20, 2023 1:56 pm Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.
I don’t think that’s completely accurate. I banked with First Interstate Bank in the 80’s and 90’s and they had branches in different states, specifically near my hometown and in the state where I went to college.
I guess it's complicated. Some very cursory searching suggests that the prohibition might have only applied to federally-chartered banks, and that some states allowed state-chartered banks to branch across state lines.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

km91 wrote: Mon Mar 20, 2023 7:00 pm
rockstar wrote: Mon Mar 20, 2023 1:58 pm Now, we’re in super consolidation mode, where the best result is one super large bank to rule them all. At that point, we should nationalize.
LOL come on. The US still has 1000's of banks. It is certainly the outlier. How many banks are there in Canada? In the UK? Germany?
It's the same old story. Bank fails. Bigger one buys it. Rinse and repeat. It's only a matter of time. Our current regs favor the bigger banks anyway. Everything else is too small, so let it fail or be eaten.

And oh, look at that balance sheet grow again:

https://www.federalreserve.gov/monetary ... trends.htm
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Re: [Bank failure discussion mega-thread]

Post by km91 »

rockstar wrote: Mon Mar 20, 2023 7:04 pm It's the same old story. Bank fails. Bigger one buys it. Rinse and repeat. It's only a matter of time. Our current regs favor the bigger banks anyway. Everything else is too small, so let it fail or be eaten.

And oh, look at that balance sheet grow again:

https://www.federalreserve.gov/monetary ... trends.htm
Yes, when a company becomes insolvent but still has productive assets, a larger competitor will typically purchase it. This isn't exclusive to banking. Banks have been failing in the US for hundreds of years, yet there are still 1000s of banks
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

rkhusky wrote: Mon Mar 20, 2023 6:55 pm
nisiprius wrote: Mon Mar 20, 2023 1:56 pm Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.
I don’t think that’s completely accurate. I banked with First Interstate Bank in the 80’s and 90’s and they had branches in different states, specifically near my hometown and in the state where I went to college.
Here is the trick.

FI would have had a bank called FI New York NA, FI California, FI Florida NA, etc. All of these banks would have been owned by the same holding company, FI. These banks would have had a separate charter, separate reserve requirements, etc.

Now lets say that FI New York NA had surplus capital but FI California had a deficit - lets say because FI California NA had a bank run. Well, all you had to do to transfer capital is that the NY bank would have to apply to the NY bank regulators to pay a special dividend, once approved it would be transferred to the mother ship, who would then apply to the CA regulators to make a equity investment in the CA bank. Easy pease. Only takes a few months to do.

Norwest was a exception.
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

Looks like the US want to insure all accounts. What could possibly go wrong?

https://www.bloomberg.com/news/articles ... #xj4y7vzkg

Of course, I'm a bit worried about due diligence. I don't want to get stones out of the atm.

https://www.businessinsider.com/jpmorga ... nes-2023-3
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Re: [Bank failure discussion mega-thread]

Post by km91 »

rockstar wrote: Mon Mar 20, 2023 7:34 pm Looks like the US want to insure all accounts. What could possibly go wrong?

https://www.bloomberg.com/news/articles ... #xj4y7vzkg

Of course, I'm a bit worried about due diligence. I don't want to get stones out of the atm.

https://www.businessinsider.com/jpmorga ... nes-2023-3
Oh no, me and hundreds of millions of other depositors aren't at risk of having our savings wiped out? This will surely create moral hazard. Granny deserves to get wiped out if she's not going to diligence her banks balance sheet
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

km91 wrote: Mon Mar 20, 2023 7:47 pm
rockstar wrote: Mon Mar 20, 2023 7:34 pm Looks like the US want to insure all accounts. What could possibly go wrong?

https://www.bloomberg.com/news/articles ... #xj4y7vzkg

Of course, I'm a bit worried about due diligence. I don't want to get stones out of the atm.

https://www.businessinsider.com/jpmorga ... nes-2023-3
Oh no, me and hundreds of millions of other depositors aren't at risk of having our savings wiped out? This will surely create moral hazard. Granny deserves to get wiped out if she's not going to diligence her banks balance sheet
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
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Re: [Bank failure discussion mega-thread]

Post by coachd50 »

nisiprius wrote: Mon Mar 20, 2023 1:56 pm
Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
I believe that the regulation specifically limiting the geography of branches was the 1927 Mcfadden Act, not Glass Steagall, and the deregulation actually occurred a bit earlier, in 1994 through the Riegle-Neal Interstate Banking and Branching Efficiency Act which allowed them to operate interstate starting June 1, 1997.


But the main idea is still the same. For the majority of the 20th Century, the footprint in which banks could operate BRANCHES were limited.

However, it is important to recognize that holding companies could still operate subsidiary banks in multiple states- although some legislation in the 50's gave states the power to regulate that.
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Re: [Bank failure discussion mega-thread]

Post by km91 »

technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by Random Musings »

technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
It's a great idea, but somehow, the three magical words "special interest groups" came to mind.

RM
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

rockstar wrote: Mon Mar 20, 2023 7:34 pm Looks like the US want to insure all accounts. What could possibly go wrong?

https://www.bloomberg.com/news/articles ... #xj4y7vzkg

Of course, I'm a bit worried about due diligence. I don't want to get stones out of the atm.

https://www.businessinsider.com/jpmorga ... nes-2023-3
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

Random Musings wrote: Mon Mar 20, 2023 9:30 pm
technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
It's a great idea, but somehow, the three magical words "special interest groups" came to mind.

RM
Of course, as with any proposal to pass a regulation of any kind.
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Re: [Bank failure discussion mega-thread]

Post by WoodSpinner »

fsrph wrote: Sun Mar 19, 2023 7:25 pm Looks like regulators knew about SVB's problems. They issued warnings but didn't follow up when SVB didn't correct the problems.

https://www.nytimes.com/2023/03/19/busi ... -bank.html

"Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.

But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose."

Francis
Any ideas how Moody’s and the other Rating agencies missed these warning flags?

Something seems off …
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Re: [Bank failure discussion mega-thread]

Post by rockstar »

WoodSpinner wrote: Mon Mar 20, 2023 9:44 pm
fsrph wrote: Sun Mar 19, 2023 7:25 pm Looks like regulators knew about SVB's problems. They issued warnings but didn't follow up when SVB didn't correct the problems.

https://www.nytimes.com/2023/03/19/busi ... -bank.html

"Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.

But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose."

Francis
Any ideas how Moody’s and the other Rating agencies missed these warning flags?

Something seems off …
Like rating agencies have never screwed up.
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Re: [Bank failure discussion mega-thread]

Post by coachd50 »

technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
A few things:
1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall.
2) How many of these uninsured depositors were grannies and how many were commercial accounts?
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
4) Off shoot of 3-- again SVB's DANGEROUS investments seemed to be Treasury Notes...and unfortunately because of the economic conditions and prevailing rates, the only way to make a spread was to push the duration on Treasuries or make more commercial loans.
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Re: [Bank failure discussion mega-thread]

Post by fsrph »

WoodSpinner wrote: Mon Mar 20, 2023 9:44 pm
fsrph wrote: Sun Mar 19, 2023 7:25 pm Looks like regulators knew about SVB's problems. They issued warnings but didn't follow up when SVB didn't correct the problems.

https://www.nytimes.com/2023/03/19/busi ... -bank.html

"Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.

But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose."

Francis
Any ideas how Moody’s and the other Rating agencies missed these warning flags?

Something seems off …
The SVB's CEO was a director at the Federal Reserve Bank of San Francisco. The very organization that issued warnings to SVB but didn't follow up with action. Maybe a little too cozy of a relationship?

https://www.thestreet.com/technology/sv ... rful-board

Francis
Last edited by fsrph on Tue Mar 21, 2023 8:42 am, edited 1 time in total.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

coachd50 wrote: Mon Mar 20, 2023 10:25 pm
technovelist wrote: Mon Mar 20, 2023 8:45 pm
km91 wrote: Mon Mar 20, 2023 8:16 pm
technovelist wrote: Mon Mar 20, 2023 8:03 pm
Do you or granny have more than the $250k limit in one account?
Because that's what T-bills are for.
I mean the entire banking system is premised on the belief that for all intents and purposes deposits are money. If the government is faced with the choice between maintaining faith in the financial system or teaching me and granny a hard lesson about the limits of FDIC insurance, I think they should probably aim for supporting the banking system
I'm not saying that anyone should be taught a hard lesson.

How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?

Having an unlimited "limit" for FDIC insurance destabilizes the banking system by giving bank executives more reasons to swing for the fences because no depositor will care how dangerously the executives invest, even to the extent that they do now.

My proposal would be a lot less disruptive to the banking system than that.
A few things:
1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall.
2) How many of these uninsured depositors were grannies and how many were commercial accounts?
3) Do you really think that depositors as a group will be able to monitor how management uses those deposits? Having worked in retail banking as a teller at ages ago, the amount of customers who didn't understand how they could be overdrawn when they still had checks, or who didn't understand why I wouldn't cash a "not on us check" for $2,000 when they had an ACB (average collected balance) of $17.50 was shocking. You think these people will provide the checks and balances for bank management to avoid "dangerous" investments?
4) Off shoot of 3-- again SVB's DANGEROUS investments seemed to be Treasury Notes...and unfortunately because of the economic conditions and prevailing rates, the only way to make a spread was to push the duration on Treasuries or make more commercial loans.
I agree the average depositor cannot be relied upon to perform any kind of prudential estimate of the risk of a bank. Nor exert any power over that bank-- no governance role.

Very few companies have the expertise to be credit risk experts on banks. And indeed the real experts, Moody's S&P Fitch etc, often get it wrong.

Whether deposit insurance should be permanently increased I do not know. The British approach of legally separating the retail bank from the rest of the bank's activities, providing it with a regulatory ring fence with its own capital, and being able to "activate the Living Will" and "electrify the fence" in a crisis, might offer a way forward.

So there could then be 2 kinds of deposits "unconditionally guaranteed" (say up to $1m) and "not guaranteed" (above $1m).
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Re: [Bank failure discussion mega-thread]

Post by coachd50 »

Another issue that I have not really seen discussed by those advocating that the moral hazard philosophy be adhered to and excess deposits not be insured is differentiating between personal accounts and business accounts containing working capital necessary for business operations and current liabilities.

Perhaps having 2 different limits- one for personal one for business would make sense
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

coachd50 wrote: Mon Mar 20, 2023 10:25 pm...1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall...
How were Treasurys "culprits" in any way? It was the bank's bad risk management and excessive use of Treasurys. And that wasn't because of "economic conditions and prevailing rates," it's because they cultivated a monoculture of one particular idiosyncratic kind of depositor.
Matt Levine wrote:At the Financial Times, Robert Armstrong writes: "Few other banks have as much of their assets locked up in fixed-rate securities as SVB, rather than in floating-rate loans. Securities are 56 per cent of SVB’s assets. At Fifth Third, the figure is 25 per cent; at Bank of America, it is 28 per cent."
So Fifth Third and Bank of America are using the same securities under the same economic conditions without problems.

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Re: [Bank failure discussion mega-thread]

Post by Harry Livermore »

technovelist wrote: Mon Mar 20, 2023 8:45 pm
How about if they pass a regulation that banks have to tell depositors with over $250k that they should buy T-bills with the excess, and maybe even provide education and help as to how they can do that?
Not a bad idea! Maybe even have a pathway to buy said bills right there in person/ online, through the bank. Education would be the key. Explain the duration and interest rate risks, in plain language.
I'm sure our regulators and bankers have a dozen reasons why this is a "bad" idea. But it sounds pretty good to a dumb old layman like me.
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Re: [Bank failure discussion mega-thread]

Post by Harry Livermore »

coachd50 wrote: Tue Mar 21, 2023 6:08 am Another issue that I have not really seen discussed by those advocating that the moral hazard philosophy be adhered to and excess deposits not be insured is differentiating between personal accounts and business accounts containing working capital necessary for business operations and current liabilities.

Perhaps having 2 different limits- one for personal one for business would make sense
Also a good idea.
I'm beginning to think that the FDIC and Federal Reserve folks should consult with the Bogleheads prior to any new regulations!
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

fsrph wrote: Tue Mar 21, 2023 12:41 am
The SVB's CEO was a director at the Federal Reserve Bank of San Francisco. The very organization that issued warnings to SVB but didn't follow up with action. Maybe a little to cozy of a relationship?

https://www.thestreet.com/technology/sv ... rful-board

Francis
That should not be allowed. Clear conflict of interest.
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Re: [Bank failure discussion mega-thread]

Post by HootingSloth »

coachd50 wrote: Mon Mar 20, 2023 8:06 pm
nisiprius wrote: Mon Mar 20, 2023 1:56 pm
Harry Livermore wrote: Mon Mar 20, 2023 12:39 pm...I don't think Glass Steagall would have prevented this after all....
Under Glass-Steagall, until 1999, it was illegal for a bank to have branches in more than one state.

That certainly would have had some kind of effect in limiting the size of banks, and preventing the existence of banks "too big to fail." It would also have made banking less appealing to ambitious people wanting to built national financial empires.
I believe that the regulation specifically limiting the geography of branches was the 1927 Mcfadden Act, not Glass Steagall, and the deregulation actually occurred a bit earlier, in 1994 through the Riegle-Neal Interstate Banking and Branching Efficiency Act which allowed them to operate interstate starting June 1, 1997.


But the main idea is still the same. For the majority of the 20th Century, the footprint in which banks could operate BRANCHES were limited.

However, it is important to recognize that holding companies could still operate subsidiary banks in multiple states- although some legislation in the 50's gave states the power to regulate that.
Yes, there was a sort of piecemeal deregulation of the interstate banking restrictions that was separate from the (later) repeal of Glass-Steagall. Starting in the early 1980's, states one-by-one began allowing holding company structures where a bank from another state could form a holding company that could acquire a bank in the deregulated state. By the early 90's, most of the states had enacted this kind of deregulation to the point where there was effectively an interstate banking system in forty-six states using this holding company model. This led to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which repealed most of the remaining interstate banking restrictions from the McFadden Act. All of this was before G-L-B repealed and replaced Glass-Steagall in 1999. More on this history is available here.
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Re: [Bank failure discussion mega-thread]

Post by alex_686 »

rkhusky wrote: Tue Mar 21, 2023 7:57 am
fsrph wrote: Tue Mar 21, 2023 12:41 am
The SVB's CEO was a director at the Federal Reserve Bank of San Francisco. The very organization that issued warnings to SVB but didn't follow up with action. Maybe a little to cozy of a relationship?

https://www.thestreet.com/technology/sv ... rful-board

Francis
That should not be allowed. Clear conflict of interest.
How so? The Fed is owned by it’s members banks.

Ah, the joys of a self-regulating industry. On the plus side you have many technically inclined people who really want the industry to be stable.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

alex_686 wrote: Tue Mar 21, 2023 8:57 am
rkhusky wrote: Tue Mar 21, 2023 7:57 am
fsrph wrote: Tue Mar 21, 2023 12:41 am
The SVB's CEO was a director at the Federal Reserve Bank of San Francisco. The very organization that issued warnings to SVB but didn't follow up with action. Maybe a little to cozy of a relationship?

https://www.thestreet.com/technology/sv ... rful-board

Francis
That should not be allowed. Clear conflict of interest.
How so? The Fed is owned by it’s members banks.

Ah, the joys of a self-regulating industry. On the plus side you have many technically inclined people who really want the industry to be stable.
The same reason companies generally don’t want parents supervising their kids.
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Re: [Bank failure discussion mega-thread]

Post by You Know What I Mean »

nisiprius wrote: Tue Mar 21, 2023 7:00 am
coachd50 wrote: Mon Mar 20, 2023 10:25 pm...1) it is kind of ironic that you want to force the depositors to buy Treasuries- and yet Treasuries (albeit notes, not bills) are a main culprit in the SVB downfall...
How were Treasurys "culprits" in any way? It was the bank's bad risk management and excessive use of Treasurys. And that wasn't because of "economic conditions and prevailing rates," it's because they cultivated a monoculture of one particular idiosyncratic kind of depositor.
Matt Levine wrote:At the Financial Times, Robert Armstrong writes: "Few other banks have as much of their assets locked up in fixed-rate securities as SVB, rather than in floating-rate loans. Securities are 56 per cent of SVB’s assets. At Fifth Third, the figure is 25 per cent; at Bank of America, it is 28 per cent."
So Fifth Third and Bank of America are using the same securities under the same economic conditions without problems.

"It's not my fault, your honor, it's the highway's fault. I was forced to speed to make up for construction delays..."
That's my feeling, especially after miles and miles of clogged single-lane weekday traffic in a construction zone with not a single worker in sight. In this analogy it is the years and years of -- artificially? repressed? -- low interest rates that "forced" the bank to reach for a little higher yields.
"Well, she was just seventeen, You Know What I Mean, and the way she looked... was way beyond compare."
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Re: [Bank failure discussion mega-thread]

Post by valleyrock »

I recently listened to the latest Wealthtrack. (https://wealthtrack.com/wheres-the-rece ... e-economy/)

The economist there seems pretty savvy, and says these bank failures are something of a canary in the coal mine in terms of indicating a recession is coming. Another indicator of the pending recession (and accompanying drop in share prices) is the layoffs in big tech, which will soon move over to retail when the retail companies can't continue to increase their profits. She says a recession has been staved off due to all the liquidity in the economy.

This thinking seems to make sense, but does it, really? And is it actionable (to some of us; for example, those of us who are retired)?
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Re: [Bank failure discussion mega-thread]

Post by exodusing »

valleyrock wrote: Tue Mar 21, 2023 9:22 am I recently listened to the latest Wealthtrack. (https://wealthtrack.com/wheres-the-rece ... e-economy/)

The economist there seems pretty savvy, and says these bank failures are something of a canary in the coal mine in terms of indicating a recession is coming. Another indicator of the pending recession (and accompanying drop in share prices) is the layoffs in big tech, which will soon move over to retail when the retail companies can't continue to increase their profits. She says a recession has been staved off due to all the liquidity in the economy.

This thinking seems to make sense, but does it, really? And is it actionable (to some of us; for example, those of us who are retired)?
There are a lot of plausible theories out there. Market prices already reflect all of that information. Changing your investments based on the news or someone's predictions or your guess as to what will happen is not a good idea.
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