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.
And now…. I’d like to introduce the director of signature bank pic.twitter.com/XmmACl3GVI
— steph pomboy (@spomboy) March 13, 2023
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.
Crypto: Stablecoin issuer Circle to transfer $3.3 billion in cash held at Silicon Valley Bank to BNY Mellon https://t.co/gCrmvOuSUi #Business
— Business News (@15MinuteNewsBus) March 13, 2023
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.
Jaime Dimon watching closely… pic.twitter.com/1aYf0YwuxA
— Bandoyle (@Bandoyle) March 12, 2023
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.
People lining up to pull money out of First Republic Bank in Brentwood, LA this weekend.
Wealthy neighborhood with many uninsured accounts over $250,000.
The bank’s stock is down 33% in the last week.
Is this what the start of a bank run looks like? pic.twitter.com/yU1xR8JKUw
— Genevieve Roch-Decter, CFA (@GRDecter) March 12, 2023
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.
First Republic slumps more than 60% in US premarket trading as measures taken by US authorities to calm investor concerns failed to provide relief to the regional lender’s shares. (BBG) pic.twitter.com/Jf49izSvcu
— Holger Zschaepitz (@Schuldensuehner) March 13, 2023
Dick Bove did an interview on CNBC Asia today. He pointed out that the “net worth” of the US Federal Reserve is -1.1 Trillion dollars due to essentially the same funding/investing mismatch that took down SVB. So the only way for the Fed to backstop the system is to print money.
— Jeffrey Gundlach (@TruthGundlach) March 13, 2023
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.
Maybe we should develop a virtue signaling index. Contra indicator? Asking for a friend????
— Jonathan Stephens (@EquityNY) March 13, 2023
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.
Large depositors rely on investment grade ratings. $SIVB went from investment grade to default overnight. Again we have rating firms turning a blind eye and collecting fees.
— Jonathan Stephens (@EquityNY) March 13, 2023
Today these yields are well over 5%. I note on a tweet.
Why do they have to use banks at all? Straddle into treasury bills maturing every week. Almost all brokerage firms have Treasury Direct. Even a pleb like me knows how to use them. https://t.co/LluZ4QLxUv
— Winter Watch (@New_Nationalist) March 12, 2023
SVB monkey business before the end.
— Invariant Perspective (@InvariantPersp1) March 11, 2023
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:
Companies With Silicon Valley Bank Deposits:
1. Circle: $3.3 billion
2. Roku: $487 million
3. BlockFi: $227 million
4. Roblox: $150 million
5. Ginkgo Bio: $74 million
6. iRhythm: $55 million
7. Rocket Lab: $38 million
8. Sangamo Therapeutics: $34 million
9. Lending Club: $21… https://t.co/BIgFCiBo2s
— Connor Bates (@ConnorJBates_) March 11, 2023
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