> The alternatives may include a capital raise, the sources said, which could dilute current shareholders. A sale of the bank is also a possibility.
This is why we need to stay very very strong on the "no help for shareholders" policy when banks fail. The potential for moral hazard is extreme otherwise.
See SVB's stock price in the last few years. The signal is clear to banking execs: take on risk, show growth metrics, and the stock market will reward you.
If your salary is tied to stock price, and whatever risky behavior you adopt won't show up for years, you have no real incentive to play nice.
Banking execs are not going to stick around at the same bank forever. Do a 3 year tenure, pump up the stock, get paid, and gtfo with someone else left holding the bag.
If FRC goes under it will be because Janet Yellen put her foot in her mouth by saying that banks that are not too big to fail will not get a depositor guarantee.
Seems like fair warning to me. If you have a few million in a bank you may lose it. That's the law.
Pretending you are going to break the law by issuing fire insurance on houses that are on fire and then not doing it wouldn't really be more ethical would it?
It's true, but it's possible (quite likely actually) that the Fed and the FDIC looked at SVB's balance sheet, and concluded that they can make good on all the deposits given the FDIC insurance (of $250k per depositor) plus the new funding facility that allows banks to borrow against high quality collateral valued at par, rather than fair value. It does not follow that the math will work out with every single bank that's underwater out there.
She did what she was ordered to do which is not something she could claim she was going to do as the powers of her office are not wildly out of control.
If this had happened in 2008 I don't think the government would have reacted as quickly or as well. We would have seen a wave of bank failures.
One of the lessons learned from 2008, especially after the collapse of Lehman, is that acting too late or sending mixed messages can make the problem worse.
The SVB run started on a Thursday, and the government announced a plan to stabilize the banking system the next Sunday before the markets were about to open. It was a pretty fast reaction all things considered.
What we didn't learn well enough from 2008 was the extent to which small bank failures can create systemic risk for the entire system. It's not like SVB was the only bank with long-term investments that lost market value after rates rose. When people realized that, they freaked out.
The other thing people realized too late was that we have had a two-layer system of deposit insurance since 2008: the too-big-to-fail banks effectively have infinite insurance (because they can't fail) and smaller banks didn't. That creates an incentive for depositors to run on the small banks and move all their money to the ones that cannot fail. It seems like nobody understood that until a few weeks ago, including the regulators.
Another problem, which is older than 2008 but needs to be fixed, is that our current system of deposit insurance doesn't make sense for the way businesses use banks. If it did, we wouldn't be in a situation where only 60% of deposits are insured nationwide. That blunts the effectiveness of deposit insurance for preventing bank runs. The solution may not be more insurance, but perhaps caps on account balances or limits to the percent of uninsured deposits at a given bank.
The useful thing we learned from the 2008 crisis is that the state will actually save big institutions because it is not willing to risk civil unrest. This was not sure before 2008, many assumed big banks can go under.
Now with that knowledge there is little incentive for banks to
play it safe and a bailout every couple of years is to the benefit of everyone except the taxpayer and a few unlucky scapegoats.
Of course this is not sustainable either and maybe this time or next time what we learned 2008 will prove untrue...
> everyone except the taxpayer and a few unlucky scapegoats
Something I did not realize until recently, which I think is very important here, is that the FDIC is not funded by taxpayers. It is funded by fees levied against the banks themselves.
The group of people who are unbanked (not funding a bank that funds the FDIC) and only interacting with other unbanked people and but are paying taxes must be rather small.
Its the same failure mode regardless if played via everyone paying taxes or everyone paying FDIC, privatize the gains and socialize the losses until collapse.
I think what you're describing is insurance, not taxes. I'm sure almost all auto insurance is paid by taxpayers, too, but I wouldn't call auto insurance a tax
> Its the same failure mode regardless if played via everyone paying taxes or everyone paying FDIC...
But if everyone is paying FDIC via fees levied against private banks, then the POTUS and Yellen and everyone else can release a statement saying "no taxpayer funds will be used to bail out SVB". That way everyone can breathe an ironic sigh of relief: "Oh good, I was worried I was going to have to foot the tax bill for that. It's bad enough I have to pay all these greedy capitalists at my local bank a new fee every other week, at least the government is looking out for the little guy!"
The first few banks to fail did have some consequences on those responsible, but all the actions to make deposits whole are, in practice, making it it far harder for the next layer of unsafe banks from getting wiped out.
Imagine that the Fed guarantee for SVB had been put forward two weeks before it was. Would SVB shareholders and managers had received the same level of consequences? Any consequences at all? I am not sure of how big the difference would have been, but I would be surprised if it wasn't significant.
> Imagine that the Fed guarantee for SVB had been put forward two weeks before it was.
The fed guarantee is only for banks that are solvent. Banks that are insolvent have been put in receivership. In fact, the fed didn't guarantee SVB anything, they guaranteed that deposits at National Bank of Santa Clara, the successor to SVB, are safe.
> save big institutions because it is not willing to risk civil unrest
On the other hand effective control of the media (including the web) is much tighter now compared to the late 2000s - early 2010s, I personally cannot see a Occupy Wall Street-like movement happening again in the States.
The web is a much wilder and less controlled place than it was a decade ago. All kinds of stuff the government doesn't like is being published all the time.
Did the shareholders really suffer in 2008? Honest question, no snark. Sure, the SVB shareholders will suffer but this is different from the 2008 bailouts.
Selling begets fear which begets selling, which can also make it harder for poorly capitalized banks to raise money via equity/bonds. Self fulfilling in a way. Moving quickly can short-circuit this cycle.
Unfortunately the ability to predict this situation was lacking. Apparently the Fed was monitoring SIVB for a year before this happened, but why they didn't force asset sales or equity issuance is beyond me. The fact that the bank stress test only looked at credit quality issues and not duration risk was surprising to me. These issues would have been quite obvious months ago if the HTM system that allowed pegging asset values at par instead of market values didn't exist.
I think it's conceivable that things stabilize beyond this week. Lots of scary headlines, but the fundamentals of the economy are still strong... for now.
its the same bank they were two weeks ago, but with a $30 bln buffer
why do anything?
so what, the stock collapsed...if the business is still basically sound (and I have yet to see material evidence to the contrary), then it will move back up
maybe there is evidence not brought to light...but otherwise, we're talking about a mid-size bank on good terms with regulators that has a P/E under 2 (!!!)
this almost feels manipulated to the downside...
and please don't respond with "bank run blah blah" every bank in the world is subject to that risk
FRB seems actually better off in that its depositors don't need to empty their accounts to pay off the lease on a used minivan
If First Republic bleeds depositors (especially HNW depositors where they're concentrated) then it is going to go out of business. It doesn't matter if the bank run is "justified" or not -- the perception of fear is enough to scare depositors away, which would make it a self fulfilling prophecy.
That said, there are good fundamental reasons to be bullish, which is why (full disclosure) I am still long $FRC. But I'm feeling increasingly unhappy about it.
FRC is now down to $15/share from a high of $170 so it's no surprise that anyone that's holding FRC is running scared. If it fails, however likely/unlikely as it may be, what we've seen is that shareholders will be zeroed out by the FDIC (at least in the immediate term, there's at least one lawsuit pending, and we'll have to see how much can be recovered), or in a purchase by, say, JPM, then it's likele not even worth that much. A bank in recievership after a bank run is worth about as much as a Snickers bar, as Matt Levine opined, and a Snickers bar split a million ways is not worth the digital bits the certificate is printed on.
There are so many people who are long FRC because they like the service or want the bank to survive, but the only thing that matters for valuing a bank stock is the deposits and the revenue they can make off of them.
Based on the news from the last several weeks, it's clear that the uninsured deposits have fled First Republic. The hole is being plugged temporarily by the consortium of banks but that will only be temporary. The next disclosure date will make it clear that FRC is not worth anything close to what it was previously.
Buying the common stock is a huge bet that First Republic can bounce back to what it was prior to this crisis, but that's looking extremely unlikely.
> it's clear that the uninsured deposits have fled First Republic
their customers are high-net-worth so this would basically means almost all customers have left FRB, which is obviously not the case
at this point the stock is so cheap you don't even need it to get back to previous levels to make a killing...even if it ends up at a 50% discount from its peak, thats 4x from the current price...which gives you an indication of how irrational the panic selling has become
Assuming that it doesn't go bankrupt or get fire-sold - both of which are very possible outcomes at this point.
#1 on Peter Lynch's list of mistakes an invester can make : "It can't go any lower." Any stock - including stocks of high-flying blue-chips - can go to zero.
For example, in the 2009 chapter 11 bankruptcy of GM [1], the assets of "old GM" (the one publicly traded on the NYSE) were sold to NGMCO ("New GM Corporation"), owned by the creditors of GM. Old GM continued to trade on the pink sheets as GMGMQ, and then was renamed MTLQQ ("Motors Liquidation Company") and then MTLQU ("Motors Liquidation Company General Unsecured Creditors Trust") [2]. New GM went public again in 2010 after emerging from bankruptcy protection, which is why if you look up "GM" on Yahoo Finance its history only goes back to 2010.
You can still trade MTLQU on the pink sheets [3], but its market cap is about $10M and it makes no profit - it's basically just a trust to settle litigation. If you held old GM stock going into bankruptcy in 2009 you were basically wiped out. The new company is owned by the creditors (which is kind of the point of bankrupty).
> Buying the common stock is a huge bet that First Republic can bounce back to what it was prior to this crisis, but that's looking extremely unlikely.
Why not? If they do bounce back, I don't think that in ~10 years from now people will still think of them as being any worse than any other bank.
Sure but if you got in at, say, $80/share, you have to wait 10 years to get back to that , you'd need to get 8% return every year just to break even unless the sector has a serious bounce. Right now that doesn't seem likely, but whoo knows.
Well it's $12.18/share now, so now doesn't seem like a bad time to take up a long position. Maybe if you've already lost something then it will be a while before you've made up the difference (or never), but having lost money at $80 as a reason not to be long at $12 seems like the sunk cost fallacy to me.
FWIW, banks are priced on Book Value (that's literally what the stock in a bank represents, whether it's public or private - banks aren't like normal operating companies), since earnings are volatile and dependent on outside factors. FRB's book value is anyone's guess ATM, but it's probably quickly becoming negative given the bank run blah blah
Also, for companies that are priced on earnings, they're priced on forward earnings, which is assumed to be extremely negative for FRC.
Bank equity is weird because it directly feeds into the funding cost for the bank’s massively-levered balance sheet. That said, I agree something is off here. First Republic (and Credit Suisse) may be (and have been) better off as private companies.
I find it funny that people take money out of First Republic and deposit into the big banks. The big banks then proceeds to return the money to First Republic. They call it a bank run but ultimately there's really no place to run.
SVB is (was?) 16 and First Republic is 14th "largest commercial banks" based on this report (not sure what it is measuring? assets at the Fed?) as per this December 2022 (probably outdated) report: https://www.federalreserve.gov/releases/lbr/current/
Cash deposits in banks are supposed to be “low risk, low reward”, but at First Republic they’ve suddenly become “more risk, low reward”. Individuals will decide for themselves if this causes their portfolio to be unbalanced (and apparently for many of them the answer is “yes my funds in First Republic are too risky, I must rebalance.”)
Large banks have different portfolios and may have funds available to assign to these (now riskier) investments.
This is why we need to stay very very strong on the "no help for shareholders" policy when banks fail. The potential for moral hazard is extreme otherwise.