You get an excel sheet with all the assets and their current mark. Then you typically have until late sunday to put the bid in so they can resolve the bank before market opens on Monday.
Source: was part of a team doing this valuation analysis over a very fun weekend in 2008 for one of the famous bank failures
Like the Excel Spreadsheet that FTX was shopping around but accurate and with no "“Hidden, poorly internally labeled ‘fiat@’ account" entry. SVB may have screwed up badly but I don't think anyone is accusing them of bad record keeping or any other impropriety.
The data is full detail. You know if you don't put the winning bid in that one of your competitors are holding those assets, and in certain cases even know who is holding it [1]. In this case it doesn't really matter that much because most of the assets that caused the problem are not the loans but the MBS that SBV bought because it had massively increased deposits and couldn't find enough eligable borrowers to lend out to.[2]
[1] For various reasons it's not just "the winning bidder holds all the stuff". There's a lot of horse trading where people buy chunks of it and the winning bidder gets the rest. This is important from a TBTF point of view because the bank had a problem (ldo that's why it failed) so the FDIC and regulators don't really want a single other bank to just inherit all the problems. They would prefer them to be spread about a bit so there isn't just one bank under massive stress.
[2] Yes yet another bank failure caused by mortgage backed securities although in this case it seems from the public information that it was actually the hedging strategy that caused SBV to go down, not the MBS. The reason MBS means it doesn't matter that much is all the information about individual MBS is public anyway and although you don't know who holds what on a line by line basis you know generally how much each bank on the street has and you know someone is holding all the pieces of a given bond.
The only factor MBS had in any of this, and it was relatively small, was compared to "normal" notes and bonds (govt or corp) the duration of mortgages extends in a risking rate environment due to fewer prepayments. So rather than say a 4% change for every 100bp move in interest rates, the MBS might change 4.5 or 5%.
How much of a haircut do the assets take during the process. I’m assuming nobody is paying market rate so how much under is the bid? Like 80% or like 30-40%
Deciding that is exactly what the auction is and it will depend on market conditions, the quality of the assets etc. In the case I was familiar with the assets were "AAA but actually garbage" for the most part and there wasn't a liquid market price so we bid really where we were guestimating the true market price would be but it was a heavy discount to where the failed bank had been holding it.
I don't think I'm actually at liberty to say what our bid was but if you think about the gathering storm of the financial crisis in 2008 and "AAA but garbage" illiquid instruments were very hard to price and very expensive to fund so were trading in the 60s (cents in the dollar that is). So if you're on teh weekend and you get offered a massive parcel of that stuff marked in the 90s that you don't really want to hold in the first place you're going to bid significantly south of where the market closed given you know this news is going to really rock the market when it opens on Monday.
In this case I think the MBS they are holding is going to be more liquid and with a reasonably secure secondary market, and you're not going to be able to do a proper valuation on the SME loans they have in a single weekend and there isn't a liquid market given each loan is it's own special creature so you're going to have to put a bit of a finger in the air on those. So probably somewhat of a haircut but less extreme.
In 2008 mortgage bonds were toxic waste looking for a bottom, today they're not nearly so bad. I doubt SVB had a team reading the tape on mortgages, so whatever they were buying must have been sufficiently standard as to be fairly liquid. (Unless they were COMPLETE idiots, which, I grant, is certainly does not seem impossible right now.) So I expect the question for most of it is interest rate risk rather than credit and pricing that isn't super complicated.
I would think SVB's book of startup/venture capital/commercial loans would be harder for most banks to value. They were a big player in that space and I doubt many have the expertise to do a fast read on that book.
Also, SVB's size is a real problem. There are only a few banks large enough to do this, and the regulators won't love the resulting consolidation.
They may sell it in pieces to deal with all that.
One big question is, does SVB have any franchise value? It really looks like their model depended on cozy relations with the VC community. You have to figure their whole board and C-suite will be replaced after this, how much of those relations remain after that? Nor am I sure players like JP Morgan can or want to play that game.
There may be coalitions of smaller banks being formed, where they agree to submit a single bid, and then internally split up the carcass into the parts they each want should they win.
I haven't seen the terms of the FDIC auction but I suspect it's winner take all, so any coalition will also need a plan how to split up or share the undesirable pieces.
I don’t have any inside scoop because I’m not in that world any more, so take this purely as my personal opinion, but I wouldn’t be at all surprised if that happens.
A lot of seemingly successful business models are hard to distinguish from the beneficial effect of ultra-low rates and a stable, growing economy[1] so the sudden raising of rates is going to hurt a lot. I also think the full effects are taking a while to filter through into the real economy so I personally don’t think we’ve seen the worst impacts yet. I see a lot of empty office and retail space and know that someone took out a loan to build or buy that building and now don’t have the rental income to pay back that loan. Like I say just one person’s opinion so take it with a pinch of salt.
Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid.
Given all the uncertainty about the assets and other regional bank dominoes that are yet to fall, it seems like even the winner will be a low-ball offer.
Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?
> Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid.
Maybe. Or maybe the winner's curse will apply.
> Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?
Maybe. Equally the longer depositors can't access their deposits, the worse things are. FDIC would rather get the depositors their 100% quickly than get maximum recovery for junior debt or equityholders. Now, if there's no offer coming in that covers 100% of deposits, then that gets more interesting; it's always possible that the FDIC will decide to keep running the bank and purse that kind of strategy.
It sounds like they are selling the bank, not the assets. If they are selling the bank then I think the depositors will be made whole by the buyer. This will factor into the bid.
This is just my understanding, I am very open to being wrong.
Since you're on this thread..who normally runs the investment decisions inside of a bank, whether retail or investment. Is there a CIO office or is that the function of their Treasury department? Does it go by other names?
And in your experiences in 2008, what sort of strategy planning/what if scenarios were being played out since it was unprecedented and no one knew what was going to happen the next day
At the end of the day did everyone walk out of the deal knowing they made a boat load of money or were folks wondering if they would be able to offload and hedge the garbage they bought fast enough.
The most (in)famous example is Bank of America buying Countrywide in the early stages of the 2007 crash. They ended up losing like 40 billion on that deal.
On Friday’s thread someone posted that the average return SVB bought was ~1.5%. If the average 30 year rate today is ~7.0%, an ~80% discount sounds correct.
You're off by around a factor of 10 because you're valuing MBS as if they're annuities without a terminal value. MBS are backed by the USG and you get the full principal back at by maturity.
They bought 10 year bonds at 1.5% yearly. For every 100$ they will get 116$ at maturity.
Right now there are 10 year bonds at 4% that will pay 148$ at maturity.
To be able to sell your 1.5% bonds right now you need to discount them sufficiently so they have the same value as the new 4% 10 year bonds. (otherwise why would anyone buy them)
I'd guess you'd need to discount 148$ - 116$ = 32$.
This means selling your 100$ bonds at 68$ right now to have buyers... Otherwise money is stuck for 10 years which is unfortunate if you ran out of available cash.
I believe I read that the average maturity of their holdings are ~6 years out of the full ten. It looks like T-notes with similar maturity are yielding around 3.9-4.0%.
> Right now there are 10 year bonds at 4% that will pay 148$ at maturity.
How are you calculating that? My impression is:
> Notes and bonds are issued to pay a fixed rate of interest called the coupon rate. A $10,000 treasury note with a seven percent coupon rate pays an investor $700 per year interest in two semi-annual payments of $350 each. The interest from notes and bonds paid out to investors is simple and does not compound
Over a 10-year duration, I think that 4% bond would pay $140 on $100. 6-year to maturity notes at 3.9% would pay, I believe, $123 on $100 today; and at 1.56%, $109.
I think you'd value the 1.56% notes by something like the ratio of the two values at maturity? About 89% of what you'd pay for a 3.9% note. ($100 / 0.886 => $112.87; $112.87 * 1.0936 => about $123.)
(I don't work in this sector and I might be mathing it wrong.)
They have also been marked down already, that is what the big unrealised losses are about.
I am not 100% sure what the accounting rules for htm vs afs are anymore. I believe htm allows you to amortize losses over the term of the loan (which is, of course, still as controversial as it was in 2008). But SVB has already taken fairly substantial markdowns already on securities that were transferred into htm after they dropped significantly.
And the purpose of receivership is to preserve value for depositors. So the problem is that the losses have absorbed the firm's capital, not that other sources of funding have taken losses. A book of MBS is not going to be trading at a 30% discount to the mark a few weeks ago when their financial period ended. All of this stuff is liquid, unless their corporate lending was awful (unlikely) then there won't be a massive discount.
Btw, this did happen last year in the UK. The BoE essentially left the market to sort out problems caused by higher rates/falling bond prices, and hedge funds absolutely rinsed pension funds. Some made hundreds of millions in a few hours. This won't happen in this case because FDIC has stepped in and is running a proper auction.
The rule of thumb is every 100 bp increase in rates means a reduction in the market value of the security equal its years to maturity as a percentage.
So if rates are up 250 bp and there are 9 years remaining to maturity, that would be a 2.5 * 9% = 22.5% reduction in market value.
But I believe current yields on 10-year MBS are greater than 4%, the numbers I've seen put them at about 110 bp over 10-year Treasurys, which would make the reduction in market value even deeper.
> But I believe current yields on 10-year MBS are greater than 4%, the numbers I've seen put them at about 110 bp over 10-year Treasurys, which would make the reduction in market value even deeper.
Presumably they were yielding more than treasuries when they bought them as well. The relevant thing is whether the spread has narrowed or widened (too lazy to check and too coward to guess...).
I don't think 10-year T-notes are up 250 bps from 1.56% (might be mistaken -- looks like 235 bps to me), though 10-year MBS might be, and my impression is that SVB's average maturity is more like 6 years than 9. Those would both soften the impact on market value.
Another thing that may have helped would be if they hedged their interest rate risk. That’s discussed on this podcast[0] by some folks who do that sort of thing for big banks.
It’s pretty nuts that they didn’t have a hedge in place, given the pretty clear policy of the Fed.
The stuff I read is that it was the hedge implementation that lost them all the money. It's very hard to know for sure how that happened without being inside the situation.
Long answer: Hedging rate risk in general is a very deep topic. Investment banks have massive swaps desks that are built on the back of this and there are numerous examples of people losing a ton on hedges and in certain cases the dealer banks have been fined for miss-selling etc. Not saying that's the case here but it is at least possible. For example in the UK there was this[1] and in the US from memory there were numerous munis who settled and received payouts after losing a ton on rates hedges.
On top of that, hedging rate risk on an MBS is slightly more complex than for a regular bond because it amortizes and as the underlying loans prepay or default this affects future cashflows from the bond. So you can only hedge the forward rate risk given certain assumptions about prepayment/default and if those assumptions turn out to be off you will be imperfectly hedged. Normally that isn't that big of a deal if you have a big portfolio as you can roll swaps on or off to fix the problem [2] but the cost of that adjustment is going to be a factor of how "wrong" you are about the default profile of the collateral and how much rates have moved.
[1] https://www.theguardian.com/business/2013/oct/23/interest-ra...
[2] There is also the problem of default correlation skew here meaning you have so called "wrong way risk" where if your assumptions are wrong on one bond they're highly likely to be wrong across your portfolio. This is as opposed to normal portfolio thinking where a diversified portfolio helps.
Hedge costs money, and the instruments in question were not going to default, given they were government backed, so if they could just hang on until maturity they would get the yield from the day they bought them.
Holding bonds in a rising rates environment also costs money.
Hedging could have been a way to reduce the duration without selling - i.e. without realizing losses as the bonds could still be classified as hold-to-maturity - and avoid further losses.
Maybe. Essentially anything they could've bought would've had a similar kind of interest rate exposure. Laddering maturities would definitely have helped, but they expanded their portfolio quickly, and off-the-run issues are much less deeply traded, especially if you're a newcomer that doesn't have connections with the rest of the market.
Competitive advantage. If bigTechA and bigTechB discuss merging there will come a point in the due diligence where certain employees are asked to review competitive secret sauce of the other company with the understanding that if the merger unravels for some reason they will have to take a package and stop working for their current employer. I can't imagine the mbs/loan portfolio is that proprietary though.
SVB is dead. The company has failed. There is no competitive advantage because SVB is not in competition anymore, it is dead. The former SVB employees are sticking on for 45 days (at 1.5x pay) to tie up loose ends according to the FDIC. But SVB is dead, the assets are being sold and might as well be public record at this point.
Isn't there goodwill value left over because of relationships and institutional knowledge, even after SVB is stripped of assets and after debt is accounted for? Might some larger bank retain that operation and return some value to taxpayers?
Their liabilities are greater than their assets, there is no equity value left. Someone can acquire them for $1 if they want to assume their liabilities.
Not sure how much goodwill is left, given that a big herd of depositors left on thursday. But there's probably some. If you kept continuity with a more diversified client base, that's probably enough for many customers to stay.
If you're a competing bank in that sector (like First Republic, for example), why wouldn't you pay full price for the good will and customer list? Even if you end up having to (potentially) pay 5% of the assets over time, that's a small price to pay to take over the entire market of startup customers overnight.
SVB itself knows which assets it has, and therefore the FDIC knows. They then send out invitations to bid to banks with the list of assets as an attachment.
EDIT: It's not only the assets that are being bid on, the curator could just sell those themselves. But SVB has (even now) some amount of intangible value in terms of relations with customers, built up expertise in serving startups, etc etc. A bank looking to diversify into providing banking services for startups might be willing to bid more for such expertise and customer lists than a bank which is happy with the customer base it has. So I'd expect it would be mostly the intangibles which drive the potential differences in bids, with the market price of the assets merely serving as floor.
I read that the FDIC is brutally efficient and, if this is true and SVB opens Monday under a different owner as if nothing happened, this statement will certainly be an understatement.
It would be quite funny if JPM ends up being the owner and the startups who rushed to transfer their accounts presumably to JPM just login on Monday and click the cancel button.
They are almost certainly not going to let the bidder leave the deposits. The way the fdic actually protects deposits most of the time is by selling the business to another bank, so that’s what this auction is for.
FDIC probably will not put in anything: there are sufficient assets to cover the insured amount.
The SVB name is worth something. If FDIC can liquidate assets and pay 90 cents on the dollar for deposits, a bank who will acquire and give 95-100 cents on the dollar is better for everyone.
It would be more accurate to say, the expertise and relationships that come with SVB, and the access to the market that SVB served... are worth something. Even if all of these are damaged.
> “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again,” Yellen told CBS’ “Face the Nation.” “But we are concerned about depositors and are focused on trying to meet their needs.”
Senator Mark Warren said:
> “The shareholders in the bank are going to lose their money, let’s be clear about that. But the depositors can be taken care of,” he told ABC’s “This Week.”
These statements tend to indicate that the government is not going to bail out the bank owners (shareholders of the bank). But they are concerned about the depositors, presumably because they realize that there's a risk that if a fairly large (top 20) bank is allowed to go under, many smaller banks could be at risk of a run.
These statements are incredibly vague and could mean anything. I certainly don't interpret them as that the US government has decided to pitch in additional money, because if they have, it makes a whole lot of sense for them to explicitly, clearly and undeniably announce that: the whole goal of such an action would be to aid confidence in the financial system, and announcing that the US government is standing behind it with its full faith and credit is the best way they have to do that.
There are not unambiguous statements, and the senator's statement is alone not sufficient to guarantee anything (he's one of 100 senators, to say nothing of the House). But if high level officials are making statements like these, it does tend to indicate that there's a significant chance that depositors will be looked after (perhaps not fully, but to some extent beyond the $250k FDIC limit).
Which they would have been _anyways_... Seriously, the FDIC insures 250k$ IF and only if the banks assets are insufficient for _that_. In other words, as long as SVB has enough assets to pay out 250k$ per ~account. All the FDIC is going to be doing is the administration [1] of the distribution.
Whatever assets are left beyond the first n_accounts * 250k$ will be distributed among the account holders with extra balance. Some of _that_ money will also be distributed tomorrow morning. So in fact all depositors with more than 250k$ balance will be "looked after, but not made whole" TOMORROW. The question remains ,IF there aren't enough funds to make everyone completely whole, what happens then. There is _zero_ indication in those statements, that there would be money added to the pile that will be generated by the auction of SVB's assets.
[1] not sure if there's a fee for that, but it would be negligible anyhow
The FDIC is looking to sell (actually give away) the business whole with the minimum possible contribution, they aren't differentiating between deposit classes, unless the buyer specifies that as a part of their bid, which is unlikely in the case of SVB.
Scene: Erlich Bachman's house in Palo Alto.
The team is sitting in the den around their computers.
We see Jin-yang on the TV with a chyron saying he's the new owner of SVB, now DINB, and that depositors now own equivalent to their deposits in PiperCoin.
Erlich Bachman storms into the room, bellows: Jay Powww!
Not an FDIC auction, but if you’re interested in what this sort of bidding looks like the book Barbarians at the Gate details the LBO auction of RJR Nabisco. That auction was a lot of bankers squired away in conference rooms on separate floors of an office building while the auctioneers walked bids between the various groups.
Somewhat completely off topic, but with interest rates "skyrocketing" compared to recent history, would it be feasible to "buy back" one's fixed rate debt? Or sensible?
When you have a 10% mortgage and interest rates drop to 2%, you refinance. You borrow a new loan at 2%, buy out your old 10% loan (so you never have to deal with 10% interest rate payments again).
If you have a 2% loan, and interest rates skyrocket to 10%, you absolutely do not sell your 2% loan to reup to 10%. That's just stupid. You keep the 2% loan and even try to slow down payments (if you were double-paying or otherwise cutting down principal before, you stop doing that).
I understand the question to be whether you can liquidate a 2% 20-year loan paying fifty cents on the dollar or whatever the fair amount is. (I guess the answer is no for the usual US mortgages but it could be yes for some kind of loans.)
The US Treasuries, like 10Y and 30Y, trade on the basis like you describe.
All you gotta do is put a dollar value on it, which is actually relatively easy. Just calculate the approximate worth of 2033 dollars vs 2023 dollars, and adjust the prices today to match your expectations.
There "is no risk" in US Treasuries because we're screwed if there are risks. (Aka, everyone ignores things like the Debt Ceiling debate).
Sure, but for many reasons (including taxes and other administrative issues) having two more-or-less-offsetting positions in completely different contexts is not the same as paying a debt.
Interesting thought, treating your debt like a bond.
If you no longer need the debt, i.e. you have the cash to pay it back, you could _theoretically_ loan out that cash to someone else at the higher current market interest rate. Loaning money involves credit risk of course, so practically this would mean buying something like higher interest paying Treasuries or AAA bonds. Effectively, the spread between your borrowed fixed rate debt and the bonds you bought are the _profit_ you make, the NetPresentValue of which is roughly what you would get if you could "buy back" the debt.
That's sorta what I'm doing with my car loan - instead of paying extra principal, I'm putting the money into an FDIC-insured account that pays about twice the interest that I'm paying on my car loan.
Do you pay tax on personal bank interest where you are? Here in Aus you'd be paying tax on the interest at your marginal rate, but if the car is personal that interest is not a tax deductible expense. So you will be ahead at twice the rate, but not by as much as you'd hope so you have to be careful if it's lower.
You mean you want to pay off 90% of the remaining principle today in order to "buy" the paper at the same haircut that another bank would be able to buy it for? Nope.
In Denmark this is possible and common. Danish mortgages can always be bought back at 100% value (if the rate drops), and for example a 2% mortgage from a few years ago can be bought back around 85% value.
This is really interesting. Nothing like it exists in the US as far as I know.
I am ignorant of current and previous Danish mortgage interest rates. Assuming a 2% mortgage from a few years back, and current interest rates at say 6%, I would expect to buy back at less than 85% value.
So the reason SVB had trouble with their assets is that they had to reprice the mortgage based securities they had to sell off.
If I wanted to buy back my house's mortgage from the bank, they'd ask me to pay the full principal.
But if JP Morgan buys it off SVB, they'd discount the mortgage and pay either 80 cents to the dollar or 50 cents (!), while they get to collect the whole principal & interest back from me as I repay.
What if I could buy it off SVB at fire sale prices, instead of some other financial firm?
This is probably most relevant when you think of medical debt, for example John Oliver's medical debt give away where he bought 14.9 millon dollars in debt for 60k & just forgave it through a non-profit (because debt forgiveness is a taxable event, which is just a tax loophole otherwise).
If you owe a hospital a million dollars and they are willing to sell it for 100k, why should you keep owing a million after its been sold for that price?
These shares are not worthless at all if the bank has a future. SVB's main issue is that you have to wait for the treasuries to get back to the par value once they mature.
If SVB distributes shares of itself in prorata of the liabilities that they have toward their customers, then customers would essentially have majority of voting rights, and they can decide on what to do.
They can vote a resolution to get physical delivery of the underlying bonds, and individually decide to wait it out and/or sell portions of bonds on the market progressively (when they need cash).
SVB's main issue is that their depositors are leaving, and they have to pay their depositors _RIGHT NOW_, as this ongoing bank run occurs.
They cannot afford to wait. Depositors have higher priority than shareholders, so any shareholder equity is obviously wiped out and $0. Such is the curse of seniority: the depositors have a stronger legal priority on those bonds than the shareholders, so the depositors get paid first... and the share holders are paid whatever is remaining (probably $0)
The bank's shares were at $270 on Wednesday, $106 on Thursday and $34 on Friday before trading was finally halted and feds took over. So under standard definitions of "worth", there is approximately zero in this company. It does not have a future.
Well good thing shareholders aren't on the hook for those, and the floor value of the shares is zero. Imagine a world where that wasn't the case though.
Well, that world would be closer to a true free market. The legal protection of limited liability makes modern stock markets work, but it is absolutely a massive benefit given from the working+middle class towards investors (of course there is an overlap between those groups). It’s my first argument any time I hear someone complain about capital gains tax being double taxation on top of corporate taxes.
> and individually decide to wait it out and/or sell portions of bonds on the market progressively
You don't need SVB to be an ongoing concern to do this. If SVB is liquidated and its depositors are paid from that sale, they can just buy back those same bonds on the open market for the same price if they want to wait them out.
One issue with this approach with SVB liquidating everything is that suddenly a lot of bonds are going to be sold, and this creates a big risk to have depressed assets prices, and prices of the bonds spiraling down further if there are no buyer on the other side.
This is what happened during the Kerviel scandal in France, when Societe Generale tried to unwind the risky positions of a trader.
Unless the government steps in and decides to purchase these bonds that SVB is selling and add them on its balance sheet... Which essentially would put the burden on the random non-Silicon Valley guys who didn't ask for anything (and it's not fair).
The other thing, is that many companies don't need 100% of their cash. They may just use SVB as storage, and waiting for the bonds to mature may be totally fine rather than take a loss.
Also, during this interval that they have to wait. If capital is needed, VCs may have better capabilities to raise capital at good conditions, rather than a failed bank.
That’s what they are doing:
“ The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
My prediction is that the result of the auction will be a merger whereby SVB stockholders will be compensated in stock of the acquiring bank valued at a few dollars per share down from ~$300 a month ago. Depositors made whole, stockholders lose 90-99%, creditors get paid. The purchase likely sweetened by a sizable cheap Fed loan or guarantee, or maybe the Fed buying some of the distressed assets at nominal value.
If they find a way to agree with the creditor to exchange the cash against shares, they won't owe anything. These shares are backed by long-maturity treasuries, MBS and future business of the bank.
Then the new owners of this bank, can decide whether to liquidate long-maturity treasuries at a loss, or raise new capital, or just wait it out.
The reason SVB collapsed is because there's not enough treasuries to possibly even pay depositors, let alone bondholders or shareholders. If there were enough treasuries to pay shareholders, then the bank run wouldn't have happened in the first place. (The bank run on Thursday was caused by the sudden realization that there might not be enough money at the bank).
A buyout / successful auction is the best case scenario. If some bank out there is willing to buy SVB and make all their depositors whole again, then win/win for everybody.
The problem is that they invested in 10 years duration bonds, instead of 0-3 months or 1 year duration.
This essentially means, that if interest rates raise, then temporarily (the time of the duration of the bond) the bond may be worth less because there are new bonds which are more attractive to the investor.
Once the bond matures, then the full sum is returned to the holder of the bond.
The bond is worth less not temporarily but permanently. The (low) market price of such a bond is appropriate - it might rise (if the current interest rates fall), but it might as well fall even more (if the current interest rates rise even higher). Sure, in nominal dollars you get the 'full' amount back after xx years, but a 203x-dollar is worth less than 2023-dollar, and the market price of that bond reflects the markets' current best estimate on how much less that future dollar is worth.
You can't make whole the current depositors by saying that they'll get the same quantity of 203x-dollars (because you owe them 2023-dollars which are worth more), you can't make whole the current depositors by trading the future claims on these 203x dollars (i.e. bonds) to someone else because the price you can get is not enough to make them whole; and you can't make whole the current depositors by paying them back in year 203x their dollars with market-rate interest because you don't have enough assets to cover that market-rate interest, only the low, low interest that SVB fixed last year or before.
That assume that the bank can keep their depositors while offering uncompetitive interest rates on deposits. For example, a bank that bought 3-12 month t-bills could offer depositors 4% interest on their savings accounts and still make a profit. Why would anyone leave their deposits with SVB for the next ten years if they can only afford to offer 1.5%, because they made a bad bet on long duration bonds?
Sure, banking has a fair amount of inertia, but eventually people realize that they are leaving FDIC insured money on the table.
> Why would anyone leave their deposits with SVB for the next ten years if they can only afford to offer 1.5%, because they made a bad bet on long duration bonds?
Chase is still offering 0.01% on savings accounts, and somehow has deposits. 1.5% is generous compared to that, even though it's much less than you can get with a little shopping around.
The bank run already happened, so the bank has to sell those bonds for a loss to meet its obligations to their depositors. Because of the interest rate changes, they are forced to sell those 10Y and 30Y bonds for a 20% loss (or greater).
As such, the bank is underwater. FDIC is looking for a buyer who is willing to lose a little bit of money in the short term, but maybe gain some customers in the long term.
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There's no time to wait 10 Years. The bank needed the money 3 days ago.
The interest rate is the opportunity cost of investing elsewhere. Why would someone buy a bond at a 1% discount when they can buy the exact same bond at a 2℅ discount?
Aside from not making large unmatched unhedged yield curve bets, not marking portfolio prices to market was a problem for SVB.
It does owe something. They have a cash flow problem, because the bank made a poor risk management decision and when big money people like Thiel figured it out, they had their minions and companies run the bank. If you have $100 in cash and a $1M house and you owe me $10k, I’m gonna put a lien on your home and liquidate it for my money.
Now the people who missed the memo are crying about it. Guys like Sacks have taken to Twitter to cry and whine about how they are like poor farmers or whatever.
The reality is the FDIC is good at what it does, and it’s probably best to wait until tomorrow before getting hot and bothered about it. If you want to get angry, ponder how the people who coordinated the bank run got the information used to trigger it.
Their remaining assets after they were hacked. They gave everyone's account a 36% haircut and issued a kind of equity to "cover" the rest. I guess it ended up working for them because they're still around, but personally I wouldn't touch Bitfinex with a ten foot pole.
And I think I read that SVB's losses this week exceeded their cumulative profits since inception so it seems likely that even 100% ownership of the company wouldn't be valuable enough to make their customers whole.
It's not a good solution to give pieces of equity and/or claims on future cash distributions, but it sounds better than forcing to liquidate everything in a rush immediately.
Another way could also be to apply when you are withdrawing the money:
Or, you could liquidate everything now and give people cash today that they could choose to put into treasuries themselves, earning a rate much better than your proposed lockup fee schedule. That sounds much faster and simpler and ultimately better for everyone.
A company has different values for different customers depending on what they are going to do with it.
The software and customers would have some value. If they can provide digital capabilities to a traditional bank it will certainly be a plus against the negative in financial products.
All of that has some value, but this value will be taken away from the shareholders, sold to someone, and the proceeds used to pay back part of the liabilities. The shares are still worth zero because they have no claim on that value.
It's worth what the market deems it's worth, if the SEC doesn't keep dipping their hands in the market and halting trading, Reddit would have a chance to bid up the stock to some nonzero value.
It's not like the valuations of any other tech stock are based on fundamentals either.
turning depositors, probably the most senior possible form of debt, into shareholders, the least senior form of debt, is a garbage deal that nobody in their right mind would take.
Could Microsoft, Apple, Google, or Amazon place a bid
Strategically, a consumer or cloud co w/ a banking arm might make a great strategic position. And the new relationships with the customer base of SVB could accelerate the acquirer
I think they need to be a member of the FDIC to even make a bid. But even if they did not, I doubt these companies would want to be regulated under banking laws or setup the infrastructure to do so. There's a reason why these companies establish "partnerships" with well known banks (ie, Apple x Goldman Sachs). They are simply not setup to deal with the regulation. It's better to farm it out to a well established bank and let them take the hits from violating banking laws at all levels (ie, state vs federal vs international).
I doubt it. Part of the point of the exercise is to calm the rest of the banking market. Letting an inexperienced (re banking) company take over will increase the uncertainty.
Apple had $51bn in cash at the end of 2022. They could easily raise whatever additional funds needed to submit a winning bid. But I don't see them wanting to own a bank. They already have financing options for people to buy their hardware, and Apple Cash is working fine with whatever level of regulation it has.
Insured deposits are paid on first day the bank opens. More than 50% of uninsured deposits are paid within a week. Another 20% or so gets paid within a year or sooner in quarterly installments. Remaining amount gets paid in yearly installments and in all cases was paid within 3 years.
Haircut is guaranteed in this political climate since there is no appetite for a bailout. At least not for SVB. The later ones could be bailed out but SVB is a goner.
> Haircut is guaranteed in this political climate since there is no appetite for a bailout. At least not for SVB. The later ones could be bailed out but SVB is a goner.
SVB stock and bond holders will lose everything but it is far from guaranteed that depositors will take a haircut.
> More than 50% of uninsured deposits are paid within a week. Another 20% or so gets paid within a year or sooner in quarterly installments. Remaining amount gets paid in yearly installments and in all cases was paid within 3 years.
The data does not support these statements. E.g. for a random bank I selected on the FDIC site [1], "American National Bank", uninsured depositors got paid 77.8% in three installments: the first 57% two weeks after bank closure, 7.4% after three years and the last 13.3% after five-and-a-half years.
If SVB is acquired, the acquirer also takes on the liability to depositors (most likely all of it, but a haircut could be negotiated) so everyone should get everything back (unless a haircut is negotiated) and handling the shortfall is a cost to the acquirer. Perhaps they believe the future value of the business justifies that, perhaps they don’t and the government pushes them to do it anyway.
If it’s not acquired depositors will take a haircut (get paid less) in the unwinding process so that the amount paid out doesn’t exceed the assets available.
A buyer might be willing to pay a premium (above the assets alone) for the business, which was worth $15.5B to shareholders as recently as Wednesday. Levine's column on this failure is great, you should check it out: https://archive.is/cN3CD .
There's really no good history for this kind of a case.
Washington Mutual was a bigger failure, but there was another lender who had already attempted to take it over, and had done due diligence, and Washington Mutual had a large amount of unsecured debt which allowed those lenders to take the hit and left depositors completely unscathed.
IndyMac was a smaller bank but it was over $10B in assets and the FDIC had to setup a Bridge Bank because the attempt to auction it off failed, so the FDIC had to impose a loss of 14% of total deposits on the depositors.
> Since 2007, the FDIC has served as receiver for over 525 banks. Only 9 of these failed banks had assets over $10 billion. Thus, the overwhelming majority, over 98 percent, had assets under $10 billion.
The FDIC routinely liquidates banks under $10B. What we have here is not routine, and is Washington Mutual-sized. The smoothness of Washington Mutual being taken over though was probably not something you can expect to rely on.
Worth noting though that this list covers everything from cases of incompetence and mismanagement to outright fraud. It's relatively easy to recover money if it is tied up in T-bills. Not so if the bank owner decided to go buy a yacht with customer funds.
That’s the list for all creditors, not depositors. Almost all deposits get transferred to another financial institution. It will be listed on the failed bank report.
> the BoE said: “SVB UK has a limited presence in the UK and no critical functions supporting the financial system. In the interim, the firm will stop making payments or accepting deposits.” SVB UK confirmed it would be put into insolvency from this Sunday evening (tomorrow).
No, as the article states, it intends to place SVB UK into an insolvency procedure but has not placed it yet. It makes a conservative assumption that this procedure might be needed "absent any meaningful further information", but if SVB UK provides such information and shows that it is separate and solvent, then it can avoid this procedure, in which case it would probably get sold to someone to pay the parent company's liabilities.
I doubt it’s 1/5 of all web total purchases on the planet, but either way they’re not the ultimate exchange provider so most of that 3% + 30 cents goes likely to JP Morgan (and then split up amongst others), and they’re always looking for ways to expand their core competencies.
Nothing about that is a “license to print money,” which when we’re talking about banking, sounds like making fiat currency.
Well it's a ballpark estimate, most sources I've seen put them at around 19-21%, with Paypal at around 30-40% and various other small ones at a few percent each.
If Visa and Mastercard manage to run their entire business on less than 1% from every transaction then I would expect Stripe to have at least 1% of pure profit from what they charge. I assume that's what JPM gets if they're the stockholder.
I mean printing money in the colloquial way of making tons of cash without any effort (which this frankly ought to be if the system is set up right), not with JPow's xerox.
That would suggest Amazon, Walmart, target, Macys, etc are in the 50% bucket. Then there’s medical billing which I doubt uses Stripe or PayPal, adult services… these numbers don’t sound right to me. I think square is a bigger player here too, but maybe that’s largely in person rather than online. Perhaps it’s number of transactions versus told spend? But even that doesn’t quite sound right to me. I’m happy to be wrong here.
Googling around it seems Visa/MC are more in the 1-2% range, but there are lots of additional fees and money grabbers on top of this. Im finding it difficult to get a total breakdown of parties and percentages - this is likely by design.
Stripe isn’t public yet, so we don’t actually know how much they’re making.
I guess when you say “they have a license to print money” in the context of no reason to buy a bank, that’s confusing.
The comparison would be FTX where they handed the auditor a pile of Excel spreadsheets and some vague, "I thought they were in last week's email" kind of accounting.
Real banks have real controls and want to know where every fractional cent (blast, my Superman 3 scheme is foiled in the crib) is at any moment.
Every big bank[x] has to submit daily risk reports. If those reports are late by more than (IIRC) 48h, they feel the consequences. Then there are end-of-week, end-of-month, and end-of-quarter reports too.
The daily reports may take a couple of hours to run. Spread across a compute grid of few thousand cores. I work for a company that provides a quant analysis and computation platform for financial institutions. We tend to skip our weekly client-facing code promotion at the end of quarter, to make it absolutely sure that there are no unexpected changes that could mess up their gargantuan report runs.
FTX depositors would be over the moon if there was a promise that they were going to get a quarter million of their holdings back on Monday, with an unknown amount back in the next few weeks, and likely be "floated" some proportion of their holdings in the interim.
I don't think you're allowed to limit withdrawals on savings accounts or checking accounts. (Beyond the 6x monthly limit on savings)
Money Market accounts are allowed to have limits (and haircuts) applied. Etc. etc. As a bank, they'd have different accounts with different rules on each kind of account. But Money Markets aren't allowed to be mixed with the long-term treasuries that SVB were holding.
So it really depends on the mix of accounts, various regulations and such.
The Money Market one probably comes as a surprise to many people (it did to me). I believe the financial industry lobbied so that the day-to-day Money Market fluctuations could be hidden from the user so that clients thought they were more stable than reality.
My understanding is this isn't a "run on the bank" situation, they were too successful growing their deposit book and couldn't grow their loan assets fast enough to keep pace. So they bought a lot of MBS so they at least were earning some yield with which to pay interest on their deposit liabilities but took heavy losses when rates moved against them so were inadequately capitalised. They tried to raise additional capital and a couple of key miscommunications in that process really spooked the market and they suddenly collapsed.
Without the run there is a decent chance that the bank would have been able to complete its stock offering, recapitalize, and remain in operations despite past mismanagement. So while information about the mismanagement is what caused observers to trigger a run on the bank, it was the run itself that did it in.
Now there is risk of contagion where better managed regional banks are also at risk of suffering runs on the bank.
sure, a restaurant that serves rotten food could have fired the chef and reinvented itself if it wasn't for all the pesky customers who stopped going there
SVB was offering above market interest rates though:
According JPM: “At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
You can find FDIC-insured savings accounts paying 4%, and bank interest rates are all over the places right now, so I wouldn't read into .6%.
Calling out the 2021 number is disingenuous because the fed funds rate in 2021 was essentially 0%. Its's 4.57% right now. You're comparing kumquats and grapefruit.
They could have limited withdrawals before it started, but not after. Banks used to offer savings accounts, where the bank could impose a delay on withdrawals. That delay was once 30-60 days, then 7 days, and now it's mostly gone. This allowed small banks time to sell off some assets in the event of a sudden increase in withdrawals. In exchange for that, savings accounts paid higher interest. This was part of the dull and boring banking system designed in the 1930s.
See "Savings and Loan Crisis" for how that ended.[1]
i don't think it takes a doctorate or any degree to understand the FDIC needs this to be done ASAP. so, hopefully, it didn't hurt reaching around patting yourself on the back with that non-sense
Joe Rogan isn’t creative enough to come up with this theory before it happens.
I don’t see what’s wrong with prediction/speculation. If the US gov had their way they’d jail people for misinformation. So I’m just making my predictions while I still can.
Why in the world would you want to own the bank? Whoever is buying it is doing so to get the customer list. The assets aren't really worthwhile given that they will all need to be sold to cover the depositors, given that if they opened as DAOBank on Monday everyone would pull their money out.
The only case I see of not having a run on the remaining balances is if someone like Chase buys them.
Couldn't someone with a lot of cash buy them, pay back the depositors without having to sell assets, then hold the assets until maturity, and then make a profit (presumably having bought them at a discount)? As far as I understand, the nominal value of assets still exceeds the obligations?
For the big SVB assets, the outcome of "holding the assets until maturity" is the price at which you can sell these assets; someone who intends to do that will buy these assets at a rate where they roughly break even - they're pretty much a commodity, so the auction price is close to the value.
But buying long-term assets at some small discount (e.g. 10%) and holding them to maturity would not make a profit - the nominal value of these assets + the interest on the (low!) fixed interest rate is far lower than the interest rate you can get elsewhere; if the difference between the interest rate that SVB had fixed and the current market rate is ~2% (which seems roughly in the ballbark) then a crude estimate is that the discount has to be 20%-ish if there's 10 years remaining until maturity and 40%-ish if there's 20 years remaining... so that's appropriately reflected in the (lowered) price those assets can fetch. The nominal value is irrelevant as future money is worth much less than current money.
>As far as I understand, the nominal value of assets still exceeds the obligations?
AFAIK that number was based on the book value (ie. how much it cost for the bank to buy the bonds/MBS), not the current fair market value. Other sources say that SVB is in the hole when using current fair market value for their assets.
>So big was this drawdown that on a marked-to-market basis, Silicon Valley Bank was technically insolvent at the end of September. Its $15.9 billion of HTM mark-to-market losses completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet.
>Whoever is buying it is doing so to get the customer list.
Not a bank or in the financial sector, but this makes no sense to me. It is likely fairly easy to get the list of VCs who used SVB. If nothing else, startup businesses which SVB catered to are significantly less appealing than they were one to two years ago. What fraction of those clients required low interest rates to keep the business viable?
It's easy to get the list. It's not easy to get all of them to move their assets over to your bank. When you buy the bank the assets are yours automatically. They can of course choose to then move it out, but why would they?
Because the hypothetical acquirer would have not only their assets but also all their other products - loans, credit cards, all the established payments to/from their accounts, etc. which are harder to switch.
