Jeffrey - I read the tea leaves a little differently.
Banks don’t typically liquidate their Available For Sale portfolio. The fact that SVB did so suggests a liquidity crisis. Most likely causes are: 1. Massive draws on previously unfunded credit lines, 2. Huge loan losses, or 3. Large institutional fund providers pulling their money out. My guess is a combination of all three but we will find out soon enough.
Fair point. You are correct that these things are more complex than I laid out. It does look like they were unhedged though. In my linked Epoch Times article, I talk about their target market and what happened to their target market in 2022 which caused the stress.
Most banks don’t explicitly hedge their securities portfolio. A retail funded bank has a sort of natural hedge with checking/savings accounts that gain in economic value as investment portfolios depreciate. Wholesale funded banks are always riskier and it looks as if SVB is wholesale funded.
I was just reading the S&P downgrade press release from yesterday - it sheds a little more light on the subject. They still have an investment grade rating lol.
These kids/Progressives (running the bank) don't know anything. Markets will always adjust. Thank God we have these shocks to the system to keep us on course!!!!
Should we setup a betting market for who purchases the deposits and operations of SVB?
I just went back to look at the financials they released back in February. It did not make a whole lot of sense from reading the articles. Yeah, $1.8 bb is a big number but its not crushing to SVB. However, when you go back and actually read the 12/31 audit financials, the unrealized losses at that time was way over their NBV. They had unrealized losses of $17 bb in total. Over $10 bb was in agency MBS and that was at 12/31. It is worse now. So kinda get it. Surprised at the timing - maybe announcing the first set of realization of those losses triggered
I would like to read the FDIC's audit report for SVB. If the management did not want to deal with interest rate risk, they could have easily gone to someone like GS or MS and developed a hedging program customized for the bank. This paper from the FDIC does not explicitly define interest rate hedging but does describe how deposit accepting banks hedge their interest rate risk. https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-02.pdf
Right, easily MS or GS would have done that for them but they were probably too smug to do that. Even in their own backyard Wells Fargo could have done that for them or BofA.
And I bet the management was well compensated. Did the board of this bank not ask if there was a Chief Risk Officer? Who prepared and signed off on the risk reports for the board?
Deposits increased $100bn in 21’ and they bought $60-$80bn long duration MBS weighted avg yield 1.5% for some reason (assets were 108bn in treas/agen, 15bn equity, 15bn other, 78bn loans).
Nov 7th 10q showed unrealized losses for HTM of over $15bn surpassing shareholder equity which would deem the company illiquid - when confronted SVB said they had enough liquidity.
Thurs SVB comes out and says they are selling $21bn AFS (almost their total available AFS) at a $2bn loss, to reinvest short term, and raising $2bn spooking investors who initially were told there was abundant liquidity.
Word of mouth spreads like wildfire in SV especially if you spook a bunch of whales when 93% of $ is uninsured. Thurs investors started telling their portfolio companies to get anything over $250k out causing a max exodus - what would be the outcome if this didn’t happen?
We just closed a bank with $200+bn in assets. Wamu was only closure bigger with $300bn+ assets for $1.9bn. SVB client Rippling does payroll for startups. They took their money out Thurs and transferred to JPM. Their payroll pmts are probably stalled till Monday.
Is Dimon going to come in and purchase SVB like his $2 proposal for Bear with the gov taking on the $30bn garbage MBS? Dimon has been fighting tech for decades. Now he’s going to own it.
As of Dec 22’ banks have over $620bn in unrealized losses on their balance sheets - this number has been max +-120bn historically. SVB isn’t deemed systemically important and isn’t big enough to abide by lcr and nsfr thresholds. Would full adoption of Basel III solve this?
Im not sure their gap without a CRO made much difference as they made the purchase of long duration low yield MBS in 21’. When they did bring in a new CRO this year they should have waited on this AFS sale - as part of being a CRO - bank run risk and anti procyclical measures are real. Where was the communication with investors on their MBS strategy?
SV, the bloodline to innovation and growth, is spooked and regulators are coming. We all saw how educated congress was when SBF addressed them.
I have not been paying that much attention, but i noticed SVB last night. FYI - as an audit partner at a CPA firm, yes, we are for the most part and in most instances backward looking.
My first big wonder was since they had carried the loss this far, what prompted them to sell on Tuesday (i believe)? Was it regulatory? They could have said nothing, done the shelf and used the proceeds to provide sufficient liquidity. Or they could have borrowed $3bb against the portfolio and then bought protection to any further downside and then just ride out to expiration and get paid the $5 billion. Doesn't make much sense?
Jeffrey - I read the tea leaves a little differently.
Banks don’t typically liquidate their Available For Sale portfolio. The fact that SVB did so suggests a liquidity crisis. Most likely causes are: 1. Massive draws on previously unfunded credit lines, 2. Huge loan losses, or 3. Large institutional fund providers pulling their money out. My guess is a combination of all three but we will find out soon enough.
Fair point. You are correct that these things are more complex than I laid out. It does look like they were unhedged though. In my linked Epoch Times article, I talk about their target market and what happened to their target market in 2022 which caused the stress.
Most banks don’t explicitly hedge their securities portfolio. A retail funded bank has a sort of natural hedge with checking/savings accounts that gain in economic value as investment portfolios depreciate. Wholesale funded banks are always riskier and it looks as if SVB is wholesale funded.
I was just reading the S&P downgrade press release from yesterday - it sheds a little more light on the subject. They still have an investment grade rating lol.
Jeff, you called it. SVB did have hedges against interest rate increases, but let them expire in 2022. 🤦🏻♂️ https://www.wsj.com/livecoverage/stock-market-news-today-03-13-2023/card/silicon-valley-bank-dropped-a-hedge-against-rising-rates-in-2022-6MiD9ZLVY9CF8zbIM7ze
Intuitively obvious....there was no way possible they lost money if they were hedged.
These kids/Progressives (running the bank) don't know anything. Markets will always adjust. Thank God we have these shocks to the system to keep us on course!!!!
Man oh man! 128% loss in two days? That’s a toughy! (Just kidding🤣)
Should we setup a betting market for who purchases the deposits and operations of SVB?
I just went back to look at the financials they released back in February. It did not make a whole lot of sense from reading the articles. Yeah, $1.8 bb is a big number but its not crushing to SVB. However, when you go back and actually read the 12/31 audit financials, the unrealized losses at that time was way over their NBV. They had unrealized losses of $17 bb in total. Over $10 bb was in agency MBS and that was at 12/31. It is worse now. So kinda get it. Surprised at the timing - maybe announcing the first set of realization of those losses triggered
I would like to read the FDIC's audit report for SVB. If the management did not want to deal with interest rate risk, they could have easily gone to someone like GS or MS and developed a hedging program customized for the bank. This paper from the FDIC does not explicitly define interest rate hedging but does describe how deposit accepting banks hedge their interest rate risk. https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-02.pdf
Right, easily MS or GS would have done that for them but they were probably too smug to do that. Even in their own backyard Wells Fargo could have done that for them or BofA.
You are too polite. I would call the management incompetent.
And I bet the management was well compensated. Did the board of this bank not ask if there was a Chief Risk Officer? Who prepared and signed off on the risk reports for the board?
I do a lot of biz with First Republic. They are awesome.
SVB is run by a bunch of wokies. apparently.
Blowing up the house of a firm like this has to be indicative of massive fraud underneath the hood.
Am I crazy or is this the next theranos/ftx type of affair?
Random reader - ramble here:
Deposits increased $100bn in 21’ and they bought $60-$80bn long duration MBS weighted avg yield 1.5% for some reason (assets were 108bn in treas/agen, 15bn equity, 15bn other, 78bn loans).
Nov 7th 10q showed unrealized losses for HTM of over $15bn surpassing shareholder equity which would deem the company illiquid - when confronted SVB said they had enough liquidity.
Thurs SVB comes out and says they are selling $21bn AFS (almost their total available AFS) at a $2bn loss, to reinvest short term, and raising $2bn spooking investors who initially were told there was abundant liquidity.
Word of mouth spreads like wildfire in SV especially if you spook a bunch of whales when 93% of $ is uninsured. Thurs investors started telling their portfolio companies to get anything over $250k out causing a max exodus - what would be the outcome if this didn’t happen?
We just closed a bank with $200+bn in assets. Wamu was only closure bigger with $300bn+ assets for $1.9bn. SVB client Rippling does payroll for startups. They took their money out Thurs and transferred to JPM. Their payroll pmts are probably stalled till Monday.
Is Dimon going to come in and purchase SVB like his $2 proposal for Bear with the gov taking on the $30bn garbage MBS? Dimon has been fighting tech for decades. Now he’s going to own it.
As of Dec 22’ banks have over $620bn in unrealized losses on their balance sheets - this number has been max +-120bn historically. SVB isn’t deemed systemically important and isn’t big enough to abide by lcr and nsfr thresholds. Would full adoption of Basel III solve this?
Im not sure their gap without a CRO made much difference as they made the purchase of long duration low yield MBS in 21’. When they did bring in a new CRO this year they should have waited on this AFS sale - as part of being a CRO - bank run risk and anti procyclical measures are real. Where was the communication with investors on their MBS strategy?
SV, the bloodline to innovation and growth, is spooked and regulators are coming. We all saw how educated congress was when SBF addressed them.
https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf
Also Substack should allow inline editing
Jeff, this website https://archive.is/ can get past about 98% of websites that have paywalls.
Jeff, is this the article you are referring to by Robert Armstrong from the FT? https://archive.ph/DpqFg
Thanks! I was hoping you posted on SVB as I wanted to read your $0.02 before reading the MSM.
I have not been paying that much attention, but i noticed SVB last night. FYI - as an audit partner at a CPA firm, yes, we are for the most part and in most instances backward looking.
My first big wonder was since they had carried the loss this far, what prompted them to sell on Tuesday (i believe)? Was it regulatory? They could have said nothing, done the shelf and used the proceeds to provide sufficient liquidity. Or they could have borrowed $3bb against the portfolio and then bought protection to any further downside and then just ride out to expiration and get paid the $5 billion. Doesn't make much sense?