8:30 p.m. Central Sunday Evening
It is too early to know how markets will trade tomorrow, except we all know that this is one of those times we could see huge swings–up and down. Easily we could move in a 1000 point range on the DJIA.
We can be certain that regulators will close more banking company’s – who that will be is unknown of course. In my opinion every bank is at risk–because of old fashioned bank runs–actually not old fashioned because all I need to move money is a computer. Money moves fast.
As I understand it the U.S. Treasury will be backstopping deposits that are beyond the typical $250,000 account limit thus reducing reasons depositors would want to flee an institution–but depositors will do what they want to do. Banks, much like insurance company’s, are holding lots and lots of bonds and other fixed income securities many have very large losses on their portfolios. Now this is a manageable situation–if you look at Silicon Valley Banks financials on 12/31/2022 they were rock solid. Their capital position was stellar and way, way above required levels, but none of this means anything if capital starts to ‘flee’. Sales of securities are necessary to meet customer demand–thus requiring the bank to book a loss–and then it snowballs when folks like Billionaire Peter Thiel begin withdrawing funds and recommending to others they do the same.
From what I can see this all unraveled very quickly, BUT certainly bank officials and their regulators knew days in advance there was potential for the unraveling. During the weekend I found numerous ‘lists’ of banks with large portfolio losses published on line by various sources–these lists are NOT helpful at this time. I did note that Customer Bancorp (CUBI) made the lists–I hold 2 of their preferred issues at this time and don’t plan to sell them as they are modest positions and I believe they are money good–as are most banking issues.
So from what I can see NOW S&P500 futures are UP 1.3%, but there are 11.5 hours until markets open and so much can change. We know the markets will be wild–with news hitting the wire continually. ‘Rumors’ will be hitting the newswires – whispers of this bank or that bank being in trouble.
I am unlikely to be a buyer. I think there are likely deals out there NOW–but I am a low risk person and by and large leave the ‘hero’ role to others–but you never know, because I don’t know where the reward warrants the risk.
So folks always have to do what they have to do – some will panic, some will exit the market with large losses only to see shares bounce back sharply in a week or two. Some will reinstate their ‘mayonnaise jar’and bury their stash in the backyard. There will be the brave who step in front of the falling knife and buy, buy buy. Others like me will mainly ‘watch’ and see if this thing gets sorted out quickly.
Buckle up!!
And a bunch of banks with preferreds seem to be absolutely falling off a cliff in the pre-market, though their preferreds are falling, just not to the same degree.
Zions, PacWest, Schwab.
I made a joke about what not to invest in, which was the price of the preferred divided by the face value times the price of the common with the outliers the guys you should stay away from…
I guess the same thing applies here.
my original guy was POWW, which was a preferred trading at par, but with a common that was on the value menu at MickeyD’s….
and I guess FRC fits that bill as well..
FRC common-81.00
FRC-preferred 16.00 (as of last Friday)… or 60% of face….
Are we all ignoring the proverbial elephant? What do we know about the liquidity of Credit Suisse? It’s trading at less than 25% of book and it lost billions in 22. Would problems at Credit Suisse affect mainly Europe or would it affect American banks and security firms also?
Credit Suisse would be Lehman Junior, and reverberate worldwide, and part of the problem is that the financial institutions are literally larger than the government of the country they are headquartered in, so the entire Swiss financial system could collapse if they went under. Deutsche Bank is in a somewhat similar position.
though these are more multinationals and not really banks with depositors.
(also, let me say that a good number of the people who bank at Credit Suisse have fewer banking options than the rest of us…/s)
And there goes Credit Suisse….
While it obviously can change, the 2 year treasury yield has really tumbled ( it was down 70 basis points at one point ) and Goldman is out saying they now predict NO rate hike in March with considerable uncertainty beyond March
Aka the Fed broke something
Yes, considering how far the 2 and 10 have dropped, if ones goal was to get a 5% two year non callable CD or longer real soon, I wouldnt dilly dally. I bought 10k more of 2 year at 5.25% today from Morgan Stanley. But then again, I havent needed any encouragement to buy these the past couple months so I am preaching to my own personal choir here.
https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/
Signature Bank – Closed $110 yards
“if you look at Silicon Valley Banks financials on 12/31/2022 they were rock solid”
They were nowhere close to “rock solid” at SIVB. Look at the $15B in MTM losses they didn’t have to admit to on their balance sheet under “held to maturity” GAAP accounting:
https://www.bamsec.com/filing/71973923000021/1?cik=719739&table=240
That loss was essentially 100% of their equity, and of course rates moved higher, so their holdings in treasuries lower, since EOY. They were insolvent and once people noticed, then you have a run and a liquidity crisis as well.
They were rock solid from a credit quality standpoint. When held to maturity they will pay off at par, and they will get all the interest payments along the way.
The FED’s New BTFP program fixes the Mark to Market problem that you point out. Of course this only matters for banks are are not Silvergate, Silicon Valley Bank or Signature Bank.
xerty–there is nothing there that was not accounted for per normal banking rules. Per normal banking rules they were solid. Solid capital levels all throughout. Very simply the ‘run’ occurred–which changed the dynamics. Have you been reading all the large insurance company financials? Are we changing the rules now?
And the normal bank accounting rules are dumb. If you’re insolvent on a MTM basis, you’re vulnerable to any meaningful withdrawals and when those come, for example from people noticing you’re insolvent faster than the FDIC can bail you out, someone ends up holding the bag.
In this bailout, it looks like bagholders will be SIVB common, prefs, creditors, and via the emergency bailout fund, bank customers and shareholders everywhere when their banks get billed for their share of the depositor shortfall.
xerty–they may or may not be ‘dumb’, but if you advocate for a change in rules it is on a forward basis not with the benefit of 20/20 hindsight. I am not an advocate for many rules and regulations that currently exist–whether they are for BDCs, REITs, insurance companies, asset managers and on and on–but they are the rules/regulations and whether we like them or not we have to play by the rules.
This is not to say the SVB folks were the best managers–likely they were not–it is their job to manage risk and certainly they didn’t do it well.
“This is not to say the SVB folks were the best managers–likely they were not–it is their job to manage risk and certainly they didn’t do it well.”
They had one of our betters from the SF Fed as their CEO! (they did fire him the day his bank failed) Doesn’t exactly bode well for the Fed’s oversight of the economy at large with such luminaries running risk management for the country.
As for changing the rules, if I as a non-banker can figure out to short a bank like SIVB just from a cursory reading of their balance sheet notes about unreflected MTM losses showing them to be insolvent despite having a $15B market cap as of a few days ago, maybe that should be codified into the accounting so things don’t get quite to this point? Just a thought.
SVB’s demise is pretty well summed up in this filing…
https://www.sec.gov/Archives/edgar/data/1958337/000156218023001140/xslF345X03/primarydocument.xml
Xerty, SVB is small potatoes in recognizing unrealized losses in their portfolio. The last report from the Fed, Q3 2022, shows them with an unrealized loss on their portfolio of $1.12 trillion. This was down from a profit of $127 billion at the end of 2021. Maybe we should make them mark it to market and be declared insolvent. . .
Elsewhere I reported the cumulative number for FDIC insured banks was an unrealized loss of $750 billion, so SIVB is far from alone with this issue.
https://www.federalreserve.gov/publications/files/quarterly-report-20221129.pdf
Table 2 System Open Market Account (SOMA) Holdings in the footnotes
Any accounting report is just a snapshot trying to represent a point in time. Things covered by those reports change every day.
IIRC, a lot of the focus on MTM came in after the 2008 crisis. Very useful for some purposes, but it has its problems too.
In the “old days” (meaning before last week, but after the 2008 crisis), when a bank hit a liquidity problem, the “system” could provide extra liquidity to help them along. IMHO, these recent failures just happened too fast for the system to react, so the only viable alternative (under the system’s rules) was to close the banks.
I suspect we will see changes to the rules as the system tries to come to grips with these failures. I have no idea what they will be – but hopefully they will help. Unfortunately, rule makers are always trying to “fix the last problem” , and to predict the next problem by looking backward. Just human nature – and the lack of good crystal balls.
The Fed’s new liquidity program (BTFP) is important IMO. Banks can post UST, Agency Bonds and Agency MBS as collateral for 1 year loans using the *par* value of the collateral rather than marking to market.
I think this BTFP generally solves a large portion of the liquidity constraints at these banks and represents the return of a “Fed Put” at least as far as banks are concerned.
Yes this program has a $25B reserve, but we all know they will raise it.
One is free to ask why the Fed Chairman didn’t say anything about bank liquidity at last week’s Congressional Testimony and then found himself in this position less than 1 week later…. Let’s hope they are on top of it and that this was not a surprise (I have my doubts…)
Fed’s new program – BTFP – Buy The False Pivot (you can substitute a different F word if you choose)
Good question August. This shouldn’t have been a surprise to regulators–in particular for a top 20 bank.
They are under a lighter supervisory regime than other banks.
You can see which financial institutions are part of the Fed Stress tests here on page 13.
https://www.federalreserve.gov/publications/files/2022-dfast-results-20220623.pdf
Neither SVB nor Signature was included.
Very insightful Justin. By my quick count, there are 34 banks (Table 2) on the list, but the purported 16th largest bank was not. Hmmmm
Because of how they measure largest.
SVB had a significant non-US business, which bumped them up 5 places to 16th. See here and the difference between total and domestic.
https://www.federalreserve.gov/releases/lbr/current/
Good to know Justin–but disturbing. Really my confidence level in the regulators is diminished from an already low level.
SVB was exempted from stress testing by way of the 2018 deregulation changes to Dodd Frank. Due to the change, banks smaller than $250B would be exempt from stress testing. SVB had lobbied hard for these changes.
As far as I can tell, there’s nothing in the stress tests that test interest rate risk. So even if SVB was subject to the stress tests, I don’t think they would have passed just fine.
Here’s what they test
“The severely adverse scenario is characterized by a severe global recession accompanied by a period of heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. The U.S. unemployment rate rises nearly 6-1/2 percentage points from the starting point of the scenario in the fourth quarter of 2022 to its peak of 10 percent in the third quarter of 2024. The sharp decline in economic activity is also accompanied by an increase in market volatility, widening corporate bond spreads, and a collapse in asset prices, including a 38 percent decline in house prices and a 40 percent decline in commercial real estate prices. The international portion of the scenario features recessions in four countries or country blocs, with heightened stress in advanced economies, followed by declines in inflation and an appreciation in the value of the U.S. dollar against all countries and country bloc’s currencies, except for the Japanese yen.”