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Implications of the Silicon Valley Bank Failure (Updated)

March 12, 2023 Russ Winter Articles by Russ Winter, Business, US News, Winter Watch Articles 1

As I write this post at 12:00 AM EST Monday these are the known aspects of the SVB bank failure. This post will likely be updated. The 16th largest US bank’s assets are being liquidated at auction. If this is done fairly it means the mortgage securities on SVB’s books will be marked to market and transferred. Correct pricing as of now and assuming contained contagion is roughly 70 cents on the dollar for the low coupon securities SVB larded up on.

Signature Bank has been closed too.

All depositors of SVB and Signature will be fully protected by FDIC. Federal Reserve to roll out new program to lend against bank collateral for up to 1-year, Bank Term Funding Program (BTFP).  The facility is backstopped with $25bn from the Treasury’s Exchange Stabilization Fund (ESF), which has a net balance of $38bn.

Goldman No Longer Expects Fed To Hike In March Due To “Stress In The Banking System”. 

Goldman adds- it is “an open question is whether the FDIC would continue to address other institutions in the same manner if they are of smaller size than the two banks in question.” WW takeaway: will depositors stick around in their small/regional banks eager to find the answer? SVB deposits being transferred piece mill to other banks.

Reuters also reports that the FDIC was trying to find another bank willing to merge with SVB:

“Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances.”

-aka bailout terms.

According to the following reporting from Charlie Gasparino: “Bankers increasingly pessimistic a single buyer will emerge for SVB, laying out options for clients w money in there: 1-ride it out. 2-sell deposits for around 70-80 cents on dollar to other financial players; borrow against deposits JP Morgan at 50 cents on dollar.”

Banks in general are not eager to acquire deposits at the moment. The market for low coupon mortgage securities is cool as well.

The demise of this bank was their willingness to hold 2 and 3% mortgages in front of the Fed’s normalizing of interest rates. Recall that at the time short duration T-bills were under 0.50%. So they reached for extra yield. This isn’t even a severe credit event yet.

In fact investment grade bonds are mispriced to risk due to stretching for yield.

Bonds are priced inversely to interest rate moves and duration. This is one of the first concepts taught to me as a young stockbroker back in the 1970s. It still applies as the math is basic. SVB isn’t the only bank with mark to market losses on bond and mortgage holdings. The unrealized losses mismatch in the banking system is put at $700 billion. Lines are forming in front of other problematic banks.

Update: Watch this First Republic as a canary in the mineshaft as Fed has provided $70 billion in additional funding through the discount window. This allows the bank to send underwater collateralized treasuries and mortgages to the Fed for cash. There is stigma involved for doing so, it is a form of being put in the dog house.

Update:

Additionally I have always maintained on this site that the biggest issue facing western finance and governance are too many woke sub-zero negative selection types running the ship. The image of a George Bailey is arcane – replaced by moronic and connected HB-2 visa holders.

And imagine a “venture capitalist” putting $10m, $20m, and $50m in a bank and not even bothering to look at the maturity mismatch – duration on the bank balance sheet? Or worse just leaving the cash at the bank as interest rates on liquid short term T-bills spiked over the last year. The “market” has just ignored the signals of the Fed in their inflation fight. Rating agencies tagged as worthless.

Today these yields are well over 5%. I note on a tweet.

SVB monkey business before the end.

Excessively overpriced IPO money sat in the poorly run bank. Firms like Roku left staggering deposits at SVB.

A bevy of companies have started releasing filing information, sending out calls for help, and putting holds on their company’s payroll systems. Roku, Vox Media, and Etsy are among them.

Silicon Valley VCs/CEOs getting word from White House that Joe Biden is (so far) against any bailout of SIVB like extending deposit insurance well above $250k. The political will toward more aggressive bailouts is tepid – so far.  That might change before markets open

Meanwhile the FDIC will cover the losses of the insured depositors up to 250k. No taxpayer funded bailouts to equity, debt. The FDIC will pay uninsured depositors an advance dividend within the next week. The problem with SIVB is that 88% of of the $175.4B deposits were uninsured:

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