The Banks Are Going Down the Tubes YO Discussion

[bizaro86]

Originally Posted by Cali Panthers Fan

EVERY single bank has exposure to buying treasury bonds. This was just an institution that was more vulnerable than most to exposure, and the hedge fund guys called them on it to try and lower interest rates.

Every single bank has treasury securities, but buying long bonds instead of short term bills was a choice that SVB management made to try and make more interest income.

I don't have much sympathy for the VCs and their portfolio companies who both caused this run and are the exposed depositors, and if I was running the Fed/FDIC I wouldn't have backstopped SVB deposits past the 250k.

I would however have backstopped all the other regional banks to stop the run from spreading. That said, if you're going to backstop the regionals then they should have to do the stress tests like the explicitly too-big-too-fail banks. The extra regulations make the large banks structurally safer, but also less profitable, which is unfair.

As just one example, you mentioned First Republic. They have a great reputation among high net worth types because their strategy is to only serve high income people. They offer the best rates on Jumbo mortgages to get clients, and then use a personal relationship manager model with commissions and high service to get other products into their clients. The big banks can't match their jumbo loan rates because of the extra capital they have to put up against jumbo loans. It doesn't seem fair to me that the government/other banks backs their deposits when things are bad but they get to have looser rules so they can offer lower rates to rich people when times are good. Fine their deposits get backed above the limit (which probably saved the bank) but then they should have to play by the same rules as the banks that already had that backing.

As for First Republic's stock price, it was previously way overvalued. Its gone down a bunch, but part of that was the drop from way too expensive for a bank to a normal valuation. Their client base includes tons of investment manager types, and you can find fawning investment write ups about how their great service for rich people is a competitive advantage and so their deserve to be valued like a growth company not a bank.

Edited to add: they also offer the best rates on student loan consolidation and loans to buy into an investment/law/accounting partnership. Same principles, only high income types (usually what they call HENRYs or high-income-not-rich-yet) as a way to build a relationship. Again, not sure looser banking regulations should subsidize that.

[Slava]

Originally Posted by bizaro86

Every single bank has treasury securities, but buying long bonds instead of short term bills was a choice that their management made to try and make more interest income.

I don't have much sympathy for the VCs and their portfolio companies who both caused this run and are the exposed depositors, and if I was running the Fed/FDIC I wouldn't have backstopped SVB deposits past the 250k.

I would however have backstopped all the other regional banks to stop the run from spreading. That said, if you're going to backstop the regionals then they should have to do the stress tests like the explicitly too-big-too-fail banks. The extra regulations make the large banks structurally safer, but also less profitable, which is unfair.

As just one example, you mentioned First Republic. They have a great reputation among high net worth types because their strategy is to only serve high income people. They offer the best rates on Jumbo mortgages to get clients, and then use a personal relationship manager model with commissions and high service to get other products into their clients. The big banks can't match their jumbo loan rates because of the extra capital they have to put up against jumbo loans. It doesn't seem fair to me that the government/other banks backs their deposits when things are bad but they get to have looser rules so they can offer lower rates to rich people when times are good. Fine their deposits get backed above the limit (which probably saved the bank) but then they should have to play by the same rules as the banks that already had that backing.

As for First Republic's stock price, it was previously way overvalued. Its gone down a bunch, but part of that was the drop from way too expensive for a bank to a normal valuation. Their client base includes tons of investment manager types, and you can find fawning investment write ups about how their great service for rich people is a competitive advantage and so their deserve to be valued like a growth company not a bank.

First Republic also has a bunch of assets that don't qualify for the new program that the Fed unveiled to help these banks. I know the stock is rallying and I'm not commenting on that specifically...but it would make me leery.

[bizaro86]

Originally Posted by Slava

First Republic also has a bunch of assets that don't qualify for the new program that the Fed unveiled to help these banks. I know the stock is rallying and I'm not commenting on that specifically...but it would make me leery.

Oh that definitely was in no way a suggestion to buy First Republic stock at all. I did an analysis on it a few years ago and concluded it was hopelessly overpriced at that time, which is why I happen to know a few things about it. I'm neither long nor short and have actually never had a position either way.

I agree they aren't a huge beneficiary of the Fed program, because most of their assets are those low cost loans I mentioned, not treasuries or mortgage backed securities. I doubt the Fed is going to start taking individual mortgages as collateral, and the Jumbo loans they specialize in don't qualify for agency mortgage backed securities, which is why they're more expensive from everyone else.

As a matter of interest, they're actually short deposits to cover their loan book, so have limited treasuries. I manage some USD funds at Interactive Brokers that are automatically deposit swept into banks to benefit from deposit insurance. First Republic has been on that list recently, which is a bad sign because those deposits are expensive for banks - IB basically just takes the highest offer they can get and only goes up to FDIC limit per client.

[bizaro86]

One more post on Silicon Valley Bank. They lobbied hard for the stress test rules to be modified from $50B to $250B, so as a ~$200B bank they didn't qualify and got looser rules. They had all their VC friends lobby also that job creators needed these looser rules for their bank.

Now their bank has gone down because they were to aggressive reaching for yield and the same people want more government intervention.

If this was a bank mostly serving regular people in Kansas and old economy businesses those VCs would all be putting out tweets about the free market at work.

[powderjunkie]

Originally Posted by blankall

That's a shocker.... You mean people with a massive vested interest in an alternative currency system are over exaggerating issues with the current currency system?

This one niche bank got screwed by a group of large investors.... Guess I'd better throw everything I own into a currency system where the best case scenario is multiple massive fluctuations in value per year... And no cryptocurrency has ever gone under before.

Is it too late to pay tens of thousands for pictures of cartoon apes?

The bank screwed itself and exposed itself to the inevitable (albeit not necessarily ethical) actions of those investors.

It's like building a bridge with toothpicks and gum and then blaming the first car that drives over for destroying it.

[blankall]

Originally Posted by powderjunkie

The bank screwed itself and exposed itself to the inevitable (albeit not necessarily ethical) actions of those investors.

It's like building a bridge with toothpicks and gum and then blaming the first car that drives over for destroying it.

It also wasn't a standard bank. It was heavily invested in the recent tech boom, tripling its assets in the last 3 years. It then leant that money out to other startup tech firms, doubling down on an industry that frequently collapses.

Then the bank, who's client was very internet troll heavy, got GameStopped:

https://www.businessinsider.com/sili...ank-run-2023-3

The lesson here isn't to stay away from banks. It's to stay away from fly by night tech trolls and their products. Ex: cryptocurrency and NFTs.

[ResAlien]

The only way this ends up a widespread issue is panic by people seeing salacious headlines and freaking out themselves and even then it’s unlikely as most banks aren’t these types of operations. Two poorly run banks that made the most of the 2018 Dodd Frank neutering does not mean the banks are failing, YO. This is fearmongering and gullibility at its best

[PeteMoss]

Originally Posted by Paulie Walnuts

Canada has a pretty strong banking system I wouldn't worry about Canadian banks.

The US banking system is broke and this isn't new it's just on a larger scale. The feds continued rate hikes to combat inflation pretty much led to this.

The big difference in Canada in this situation is our banking is basically completely consolidated in 6 companies. The US has a lot more regional/specialized banks that are much less diversified in their risks if one industry goes in the tank.

[Fuzz]

Originally Posted by PeteMoss

The big difference in Canada in this situation is our banking is basically completely consolidated in 6 companies. The US has a lot more regional/specialized banks that are much less diversified in their risks if one industry goes in the tank.

We also have way stronger banking regulations. I feel like we've been here before...

[Yoho]

https://twitter.com/user/status/1635685999585144838

[The Yen Man]

Does that account for mortgages and other loans that are backed by assets? If so, then that's just another misleading stat meant to entice panic.

[Manhattanboy]

Hi question - so term deposits and CDs in Canadian banks are insured by CDIC to a maximum of $100,000 per account.

What about Canada treasury bills held in a bank-owned brokerage account?

If say TD (and its brokerage arm) was to go down, given that t-bills are debt obligations of the Government of Canada, I am assuming they are protected for full value?

[opendoor]

Originally Posted by The Yen Man

Does that account for mortgages and other loans that are backed by assets? If so, then that's just another misleading stat meant to entice panic.

That's the same grifter who was claiming that "real inflation" has been 5-10 percentage points higher than reported every year for the last 40 years (seemingly without realizing that that would mean prices back then would be 1/50th of what they are now), so I wouldn't take anything he says seriously.

[Looch City]

This is why I keep cash under my mattress. YO.

[opendoor]

Originally Posted by Manhattanboy

Hi question - so term deposits and CDs in Canadian banks are insured by CDIC to a maximum of $100,000 per account.

What about Canada treasury bills held in a bank-owned brokerage account?

If say TD (and its brokerage arm) was to go down, given that t-bills are debt obligations of the Government of Canada, I am assuming they are protected for full value?

Yeah, there are a few layers of protection. Much like with stocks, you own the asset and they're just the custodian. So if the brokerage becomes insolvent, you still own the bond/T-bill regardless of the value. It's possible that if there was significant fraud/irregularities that there might be an issue, but that is pretty unlikely, as customers' securities are normally segregated from the rest of a brokerage's assets.

And in the very unlikely event that there is a loss due to fraud or whatever, there is also the Canadian Investor Protection Fund which covers your losses up to $1M in cash/TFSA accounts and $1M in RRSP accounts.

[Yoho]

Originally Posted by The Yen Man

Does that account for mortgages and other loans that are backed by assets? If so, then that's just another misleading stat meant to entice panic.

What assets back the mortgages?

If it’s the over priced houses bought in a bubble that could be a problem.

[FlameOn]

Looks like banking problems are going global. Credit Suisse is apparently in distress. "Material weakness" based on their own internal controls.
https://www.theglobeandmail.com/busi...controls-over/

[Mr.Coffee]

Originally Posted by Yoho

What assets back the mortgages?

If it’s the over priced houses bought in a bubble that could be a problem.

Houses. Yes he means houses. Homes won’t be 100% overpriced either. Even in a meltdown it’s not likely home values will depress more than 25-30% I wouldn’t think.

[opendoor]

Originally Posted by FlameOn

Looks like banking problems are going global. Credit Suisse is apparently in distress. "Material weakness" based on their own internal controls.
https://www.theglobeandmail.com/busi...controls-over/

They've been a mess for years, so that's nothing really new. There's a reason their stock price has dropped by about 90% in the last 5 years.

[FlameOn]

Originally Posted by opendoor

They've been a mess for years, so that's nothing really new. There's a reason their stock price has dropped by about 90% in the last 5 years.

Yea not new, but will this push them over the edge is the issue and spark larger global panik?