Just a complete garbage company that is rotten to the core. Hell, its president is still the same person that was in charge before and during the recession caused, in large part, by his choices.
There’s definitely an unholy relationship between banks, rating agencies, and regulators. Just like Art appraisers, agreeable ones eat a lot better than skeptical ones.
But it also reminds me of the joke: if the Pope tells you he believes in God that just means he’s doing his job. If he tells you he’s beginning to have doubts, maybe he’s onto something.
In US Law (Hearsay doctrine) that's called "admission against interest". Demonstrably self-harming statements are presumed to be honest. (The ways this can be abused by liars are interesting. Example: a parent confessing to a crime their child committed.)
I just realized it’s really easy to upvote a comment accidentally while scrolling on my phone with my left thumb (I’m a lefty). But what the heck, I like that joke.
You should have been here before the "unvote/undown" links (which, BTW, might be what you're looking for: it's on the same line as the comment header). "Apologies for the downvote, on mobile", "why isn't there undo for votes?", etc. A lot like discussions when a paywalled article comes up. :-)
You are correct and also wrong concurrently due to it being such a large organization with fingers in too many kitchens to be responsible.
They have done good work in certain fields and are not the only game in town. Are the other agencies any better? My experience is a big phat NOPE same porn-set-relationship-odor in the business for my taste. There are minors in munis that stick to being legit, but ratings are ephemeral the moment they're published anyway.
Funny you don't mention AIG and how nobody there went to jail. I even know of one guy who back-dated securities to help out a buddy. Using taxpayer money. The industry is rife for a 70% pay haircut so real people can do real work in the real world. Finance itself shouldn't be an industry, it's a service.
It's hard for me to take anything seriously which is why I prefer the barter system and being an outlaw from society and only dropping in when I need. All of this is a sad, broken joke with no viable paths upward. Not yet at least.
>Finance itself shouldn't be an industry, it's a service.
Two weeks ago people would have described SVIB just like this. Have a look at Twitter, people all over describing how they did things that no one else would do, the people's bank.
> hard to take Moody's seriously following their ratings for garbage MBSs
Do you have evidence their MBS ratings failed?
Obviously, it's impossible to say given the massive government intervention. But AAA-rated mortgage products paid out as statistically expected. What they didn't do is hold mark-to-market value. That is what screwed people in banking who, seemingly repeatedly, can't get their heads around the difference between intrinsic and market value, on one hand, and liquidity, on the other hand. It's analogous to the hold-to-maturity debacle that felled Silicon Valley Bank.
> they're talking about what happened in 2008, not in 2023
Yes. The AAA-rates tranches which traded pennies on the dollar in ‘08 largely paid out as expected. That didn’t help banks trying to rely on them as their capital. But it noisily validated the ratings quality of those tranches. (Noisily because, again, massive government intervention.)
That seems unlikely that they paid out as expecting considering we had record levels of default. The mark to market value of the MBSs didn't collapse because of increasing interest rates. They collapsed because of heavily increasing defaults.
> seems unlikely that they paid out as expecting considering we had record levels of default
Risk cannot be destroyed, but it can be moved. Tranching lets one control this. So if 95% of a pool default, and 5% don't, and you prioritize their payments to a premium tranche, that premium tranche will continue performing. (The specifics are more complicated [1].)
> They collapsed because of heavily increasing defaults.
And when the borrowers defaulted on their mortgages, the property backing the mortgage went to the holders of the mortgages and got sold off to pay off the MBS holders.
Nevertheless, a 1% risk of default does not mean you might lose 1% of your money - it means 1% of the time you are going to lose 100% of your money, and 99% of the time you are going to lose 0%.
Serious question: why did their price crash if they were in fact still AAA quality in terms of long-run expected payout? Is the "they were overrated junk and everyone looked the other way" narrative not true in your eyes?
Nobody knew how bad defaults would get. Risk cannot be destroyed, simply moved. After a point it poisons the top tranche. The number of buyers who understood these complex instruments, moreover, was small. So if a bank held a bunch of them and needed liquidity fast, they would set off a fire sale.
You could create an insurance company, do your own analysis, and correct for bad ratings by offering insurance to those you think are more solid than their ratings suggest and refuse it from those who you think are rated too highly. (My Dad is about to retire from a company that does this)
There is academic research into ratings quality, i.e. ex post facto analysis of credit ratings. Sort of like buying skis, there's no best rating agency for all products.
all joking aside, these sorts of watermarks regardless of their altruistic authenticity or perfection were routinely downplayed and ignored during the 2008 collapse. the Bush administration for all its best efforts literally devolved into a propaganda instrument with daily or weekly updates amounting to little more than wishful thinking at best, or wholesale deception at worst.
It feels like the finance of capitalism is some Heisenbergian monstrosity that, when functional and performant is observable and available for introspection and critique however once the wheels begin to fall off all hell breaks loose and we wind up with adolescent thinking that does all it can to elicit thoughts and prayers in an almost cargo cult performance random crap that often just serves as noise to drown out the human misery of the system itself.
Could one argue this is a slightly coordinated play to pressure the Federal Reserve to stop hiking interest rates/stop keeping them "high" (higher than 0.25%, which they used to be) so corporations (shareholders) can go back to debt fueled by all-time-cheap debt again?
The average person will interpret this and say "wow, the Federal Reserve is going to break the U.S. banking system if they keep interest rates too high!"
Why would the Board of Governors at the Federal Reserve care about corporate shareholders? Their main constituency is the banks, especially those that sit on the boards of the regional Feds. Those banks benefited from quantitative easing, and similar policies, as it allowed them to originate a lot of loans and make a lot of money. Raising interest rates is very bad for investment banks.
That said, I don't think there is any sort of complex plan. They're not as clever as you give them credit for, and it seems like things have spiraled out of control.
> Why would the Board of Governors at the Federal Reserve care about corporate shareholders?
> According to a 2020 Gallup poll, 55% of Americans reported owning stocks, either through individual stock purchases, mutual funds, or retirement accounts. This is down slightly from the high of 65% in 2007, but still represents a majority of the population.
The population has a portion of their retirement portfolios exposed to U.S. equities?
> When a company's stock price is down, executives may face pressure from shareholders to improve performance, which can lead to cost-cutting measures such as layoffs or reduced compensation for employees.
Additionally, if the stock market is not healthy (aka down), corporate executives probably aren't giving employees bonuses/raises and probably aren't going on a hiring spree.
aka, if the stock is down, more unemployment, more wages not keeping up with inflation
If that's the case then the Board of Governors would want to preserve their constituent banks and keep interest rates at current levels and not raise them, right? If they were to do that would they be doing the right thing?
If they really cared about their constituent banks, they wouldn't have raised interest rates at all.
This all depends on how seriously you think they take the inflation mandate, versus how much they care about their constituent banks and other political pressures. I happen to think that they really do care about inflation, as they know it is what will matter in the history books.
I think that the Governors underestimated the long-term impact of extremely low rates, and how they would magnify the impact of increased rates on (commercial and investment) bank balance sheets. They love historical analogies, and there isn't one for this (yet).
Sustained 10% year over year inflation is hyper inflation, which was a real possibility without any serious interest rate hikes and no change in fiscal policy from Congress.
Per Hanlon, you're mistaking stupidity for malice. It's hard to prove Moody's knowingly rated "junk" as AAA, versus not knowing how to rate the instruments at all.
I for one am glad the US banking system roped in the Germans and brought the entire global system down too just so we didn't have to eat our own shit alone.
It's always CNBC trying to sell some fraud or scam or bullshit opinion. The single worst financial news group I think I've ever seen. Every second article of theirs is about how some trust fund kid utilized their nepotism to make $400k this year "And you can too" or such bullshit.
What other banks have half their deposits in 10 year lockup with zero hedging and an extremely undiverse group of depositors that will all act in lockstep?
Why threaten when the period was already in the pudding? Are their decision makers drunk, incompetent, or bought and paid for? Missing this should be grounds to shut down or nationalize their ratings. The fact that this is outside the overton window is telling in and of itself.
This recent trend of blaming the fires on the people who sounded alarms is really bizarre. The "bank runs" were caused by the banks being bad at their jobs, not by those who noticed it and said something. If Moody's has a share of the blame, it's because they said too little too late, not too much.
With some critical thinking one can both blame the banks for misbehaving, but also see the irony in a rating agency's early warning of an impending downgrade being a partial catalyst in something a lot worse than a simple downgrade.
An overly simplistic world view means dealing in absolutes that are generally not compatible with the concept of fractional banking (or really any complex system).
SVB and Signature bank suffered from a liquidity crisis rather than a solvency crisis. The fed has often stepped in to provide liquidity in such situations but instead here shut them down. This could be a trend to shut down smaller regional banks to force consolidation to larger banks. This is helped by these downgrades and other pundits triggering further liquidity crises. The big question is why this is happening and what is their outcome desired. Could it be paving the way for CBDC?
Signature bank has $110B in assets and $102B in liabilities. 7.8% more. 3y Treasuries took a 9% loss in just the last year. You're certain their assets are less risky than that? They have a rapidly declining cash pile, down to just $5.8B now, and all their assets are in various "Other Securities," Real Estate loans, and "Unspecified/Other Loans."
> if you could have valued their government bonds at face value rather than market value, they had plenty of money
that is not technical definition of insolvency. if you can cover your debts but need time to do so, thats the definition of being illiquid, not insolvent.
my understanding of their books is that they could not cover their debts. the change in market conditions drove down their bond portfolio to the point of insolvency.
There is, of course, a complication here. If they had the option to take loans against their bonds at face value, there is an argument they would still exist. And that option is now on the table for everyone that didn't get shutdown. Per the news over the weekend.
Granted, I think there is also a strong argument that shutting them was as much to stop the ability for the run to continue? Such that even with that loan option (that, again, didn't exist last week), something had to stop the run.
Are you sure about the technical definition of insolvent?
Any definition I can find defines insolvent as the inability to pay debts as they come due.
Insolvent is when your current liabilities exceed the current market value of your assets.
Otherwise, one could remain forever solvent by simply putting $100 into a total market index. Sure, I owe $1m right now, but in 1,000 years, my $100 will be worth more than enough to pay off the debt.
Under this definition, every non-central bank would become insolvent if subjected to the same conditions as SVB. If you take away $42B in one day in withdrawals, every single bank no longer pay its debts to depositors.
Which is fine but not all that useful. We know bank runs make banks fail.
> Insolvent is when your current liabilities exceed the current market value of your assets.
If I have a bank, and it's solvent (by jeaff's definition), and then it faces $42 billion in withdrawals in one day, then it's still solvent by jeaff's definition. It may be illiquid (unable to come up with $42 billion in cash in 24 hours), but the assets still exceed the liabilities. (Or, they might not even have been illiquid, if they could sell the assets at full price within a day.)
So, no, your argument does not disprove jeaff's definition.
Their liabilities (deposits) can be called on demand, at any time, and they couldn't cover the value of those liabilities. This isn't complicated. Imaginary worlds where the bonds were worth more are irrelevant.
They had to liquidate some assets to cover withdrawals. In doing so, they lost money on their investments, which put them underwater in term of assets.
If you'd like to value my 10-year 1%-yield treasures at face-value, I have a lot of them I'd be happy to sell you.
I don't suppose you would like to pay a dollar for eighty cents, though.
The hold-to-maturity rules seem reasonable to me, and it's insane that SVB actively and voluntarily turned themselves from 'insolvent under a particular accounting interpretation' to 'actually insolvent'.
Withdrawals turned them from "insolvent under a technical rule" to "actually insolvent". That's kind of why they were insolvent under the technical rule - because withdrawals could make them actually insolvent.
For those who, like me, don't recognize CBDC: Central Bank Digital Coin.
I think the reality isn't that there's a desired outcome or conspiracy to move things in a direction. Reality is often boring.
This is really just a few banks in a country of over 4,000 banks. Shutting down SVB, Signature, and maybe a few others isn't going to dramatically change the banking landscape toward some desired end-game. Visa and Mastercard will still be giants, none of these banks are part of the 33 large banks that get extra stress-test scrutiny or the 30 Global Systemically Important Banks, etc. This will impact the banking sector. It's likely that we'll go back to some Dodd-Frank rules that Trump repealed. Some banking profits might be impacted by FDIC assessments. Banks might reassess their risk profiles. Some might offer higher interest rates to lure deposits. However, it's hardly creating something that goes toward some radical end-game.
I mean, if your end game is "Trump shouldn't have rolled back certain Dodd-Frank protections," then yes I could see that happening. But this isn't really paving the way for something like CBDC. That doesn't mean CBDC won't happen, this just really doesn't do anything to help it along. Really, the case for CBDC is more made by the 2-3% tax Visa and Mastercard are putting on our economy. "We need a secure digital payments system that doesn't cost merchants (and by proxy consumers) 2-3% on most of their purchases," is really unrelated to a few bank failures.
I'd also note that the Fed is basically made up of the banks - not in any conspiracy theory way. The regional Fed boards are mostly chosen by the member banks of that regional Fed (with some being appointed by the Board of Governors who is appointed by the President and confirmed by Congress). The FOMC (Federal Open Market Committee) has 5 members that are regional Fed presidents (chosen by the regional Fed board who is chosen by the member banks) and 7 that come from the Board of Governors (President/Congress appoint/confirm). These aren't people who are plotting the end of commercial banking and trying to pave the way to some government-controlled single-bank.
And I don't believe that a CBDC would need to be some overbearing thing. The US needs a better way of making payments. Europe has regulated fees and also makes it really simple to send money between people. Here we're left with weird things like multi-day ACH, banking hours, and third-party cash-sending apps.
But I digress, this isn't really something that offers some major end-game. We'll probably see some regulations to ensure that banks don't face this issue in the future and that's about it.
> SMB and Signature bank suffered from a liquidity crisis rather than a solvency crisis
Solvency is complicated when we're talking about things that aren't cash. Let's say that you hold treasuries that the government will redeem in 10 years for $1.1M. You bought them for $1M and they're paying 0.96% interest per year. Normally, you could just sell them for somewhere around $1M because people are happy to buy US government debt. Now let's say the government is offering 2.5% interest on new debt. If I buy your treasury and hold it, I'm only getting $1.1M at the end. If I buy a new one, I'm getting $1.28M at the end. That's a big difference. I'm not going to buy your's at $1M despite the fact that it might nominally be worth $1M. Maybe I'll only give you $0.9M. $1.1M-$0.9M would mean a $200k gain which isn't as much as the $280k gain I'd get on new debt, but the maturity is a year closer. Still, you're losing $100k.
Ok, but that's just a liquidity issue for you, right? If someone just gave you the liquidity to hold you over until maturity, you'd get your $1.1M and be whole. Well, sorta. Realistically, with high interest rates and inflation, you're likely to lose some customers over time (who leave for banks that can offer them better rates) and you're recouping less due to inflation outpacing your investment. Plus, if someone just gives you the liquidity, you're asking them to lose money unless you're willing to pay them interest on that liquidity. Of course, if you're willing to pay them interest on that liquidity, then we're back to you being insolvent since the interest on that liquidity would be outpacing the interest in the treasuries you hold.
Assets on companies' books often don't get reevaluated every day and what something is worth can also be a bit complicated - people can disagree.
Insolvency means the value of their liabilities exceeds the value of the assets. The bank owned long term bonds that lost value and could no longer cover deposits. That's what happened, that's why people started pulling money from the bank.
bank run is silent. The fact you don't hear about doesn't mean its not happening.
Retail (regular persons) are insured since almost everyone has <250k per account. They have no reason to change banks, that's why you don't hear anything.
Small/medium/large businesses however are changing their treasury options right now as we speak, and run from regional banks towards big systemically important banks (top4 basically)
Why? Everyone from SVB is going to be fine, they can withdraw their funds. It is not a good situation if the US ends up with 3-4 banks, this is why the guarantee is there from government.
I wonder how many of the people in this thread bringing up the completely irrelevant and unrelated MBS stuff from 2008 would have had any idea what they were if movies like The Big Short or Margin Call hadn't been made.
At some point you could argue that Moody’s is the reason for the deteriorating operating environment given that their downgrade of SVB is what caused the need for the asset sale which caused the run (following media/VC fund reports).
https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...
Just a complete garbage company that is rotten to the core. Hell, its president is still the same person that was in charge before and during the recession caused, in large part, by his choices.