I majored in English, so I'm doing my best to decipher all of this bank-related information. And I'm assuming that all of this means that it's too late to just switch to trading wampum, right?
But I love the bluebird update Matt. Such beauty in something seemingly so mundane. It's like a Richard Wilbur poem. Thanks.
You and JJ Proyer share the title of the funniest writers. I always get a laugh when either of you publishes. With JJ, it's peanut butter and tuna sandwiches, and with you, it's dropping a duce in the sandbox. Today you added Janet Yellen's bowl cut to your list of great humor.
On a more serious note, it is amazing that all of these "experts" like Yellen, Powell, etc., couldn't have seen this train wreck coming. It doesn't take an economic genius to see that investing long and lending short is a ticket to severe problems. Add to this the problems in Swiss banking, making you wonder what everyone is smoking.
Since the Sears catalog is gone, the only paper left is to print out your columns and hang them on the outhouse wall. Right under the sign - Please read before wiping. Makes me wonder how you handled this chore in the sandbox?
I sit on the Board of Directors of a small community bank here in Dallas (about $500 million in assets), so I had a bit of an inside view of what happened to SVB and how it might affect other banks (beyond Signature and now First Republic). Our Board was on conference calls and extended email threads all last weekend, when I was down in Mexico trying to enjoy Spring Break with my family, so my feelings for SVB and its depositors are a bit different than schadenfreude. My feelings are more in the line of FTATHTRIO.
So, in a nutshell, banks are crazy leveraged from an absolute basis, an amount of leverage we would never permit in an operating company. The fact is, there is no bank in the U.S. that could survive if, say, 50% of its depositors withdrew their money at once. Banks are required to maintain "tier 1 capital" (essentially shareholders' equity) of only 6% of total assets. Assets are loans on the books and the bank’s own investments (e.g., bonds and marketable securities).
The bank’s liabilities are its deposits. So, loans and cash/bonds/marketable securities less deposits equals the bank's tier 1 capital.
So a bank faces two sources of stress: it has to repay deposits (i.e., people withdraw their money) or the bank’s assets lose money (loans don’t repay or its bonds/marketable securities lose value).
What has happened to all banks with bonds in their portfolio is that rising interest rates have pummeled the value of their bonds. For whatever reason, wisely or unwisely, bank regulators are not requiring banks to take into account the unrealized losses on their bond portfolios in the calculation of their capital. Crazy, right? Total fiction. But when the bonds are sold, the losses are realized — and voila, the bank’s capital is impaired (or wiped out).
What happened at SVB is that it had a giant long-duration bond portfolio with billions in unrealized losses baked in, losses so large that if the true value of the bonds were marked to market, its entire capital, and then some, would be wiped out. (FYI, SVB is not the only bank facing this horror show.) When customers started withdrawing deposits (which was before the cascading run on the bank of last Thursday and Friday), SVB needed a source of cash to satisfy its obligations to depositors who were withdrawing. Well, its loans are obviously illiquid. So it had to sell a portion of its bond portfolio (plus it was fearing additional losses in the portfolio as interest rates threaten to continue to rise).
Hence, $1.8 billion of its unrealized losses were realized, its capital was impaired, and it was required to raise further capital to meet its tier 1 capital requirement. The news of the losses and need to raise capital spooked everyone, causing a run on the bank (all the VCs and private equity funds sent email or Slack messages to all their portfolio companies telling them to withdraw their cash), resulting in a death spiral and the FDIC having to step in and take over the bank. (As a point of reference to understand how that tight network of depositors affected SVB, when Washington Mutual failed in 2008, it took three months from when depositors started withdrawing deposits until the FDIC had to step in. With SVB, it happened in 48 hours.)
Note, EVERY BANK is in this situation, in varying degrees. My bank, whose bond portfolio, which is not large in relation to our other non-loan assets, and the average duration of which is less than three years, is still sitting on millions in unrealized losses (which would wipe out 75% of our earnings last year). But our capital ratio is about 12%, simply because we’re more conservative and it's actually hard to make good loans. Our loans to deposits ratio is only 70%. Other banks in our market have LTD ratios above 90% (and one at 105%). Higher loans to deposits ratios means more profits when times are good.
But in today’s market (where the rates being paid on deposits have increased faster than the interest being earned on fixed-rate loans), banks with high LTD ratios are in danger, especially when coupled with unrealized losses in their bond portfolios. (That bank with a LTD ratio of 105% is absolutely F**KED.)
Plus, all the shareholders in my bank know each other. We could pass the hat and raise equity capital over a weekend if we needed to bail out our bank.
It’s possible that the contagion will be limited to SVB, Signature, and First Republic. But we don’t know, because we don’t know how materially the capital ratios of all the other banks are with the fiction that unrealized losses in their bond portfolios don’t need to be netted against their capital. And by the way, banks how $8 trillion in uninsured deposits (i.e., deposits in excess of $250,000) versus $10 trillion in insured deposits. The FDIC only has $123 billion in cash. It can't even guarantee 15% of insured deposits, much less ALL deposits in the U.S. (Heck, the Treasury only collected $4.2 trillion in taxes last year, so even Uncle Sam couldn't bail us out.)
The next few weeks will be interesting. And I don't want to live in interesting times.
This was a good read, Ray. Confirms a couple of things I'd been speculating about. Not that I'm particularly happy to have them confirmed by someone who obviously knows what he's talking about, done in clear language and terms I can actually understand. Sometimes unconfirmed speculation (read *ignorance*) really is bliss.
I dunno'...part of my take-away here is that maybe turnin' that mattress I mentioned at the end of my comment a couple of times a year to manage my 'investments' isn't quite as onerous chore as I made it out to be. :-D
Thanks, M. I teach an MBA class at the university here in Dallas, and I’ve found that students learn better if you present things clearly and without a lot of technical jargon that too many professors smother their students with in an attempt to look smart and make the material appear more complicated and daunting than it needs to be.
Funny...right when I read that long acronym at the beginning of your post, I knew exactly what it meant, and it seems to sum up your post well. Thanks for your insights.
Great explainer Ray! Do you think having to mark treasuries to market would improve the situation or just make things worse? I assume doing it right now would make things much worse, but if phased in I assume banks would be much less likely to buy long dated treasuries. Or perhaps the rule should change so that you don’t have to mark anything less than 2 or 3 years of duration to market?
It would make things much worse, as U.S. banks currently have about $620 billion in unrealized losses in their bond portfolios, and forcing them to recognize them immediately would result in probably hundreds of bank failures.
The problem was, we were in a decades-long period of ZIRP (zero interest rate policy), causing banks (and insurance companies, by the way) to stretch into longer duration bonds for yields, because (at the time) no one thought that interest rates would go up any time soon. Oops!
I think the short-term solution is to suspend capital requirements, thereby giving banks an amnesty period to sell their bonds and create liquidity without being forced into FDIC receivership.
Long-term, the FDIC should offer unlimited deposit insurance for banks willing to pay the premiums (which would eventually be all banks, because it would be such a competitive disadvantage not to offer unlimited deposit insurance to depositors).
Lastly, the regulators should prohibit banks from investing in bonds with longer durations than, say, two years. (But I'm just spitballing here; a more fact-intensive study would be required to know where to strike the right balance.)
SVB had $50B in bonds that exceeded 15 years in term. For all the well-educated people I’m assuming were in charge of their portfolio, how any of them thought locking in over such a long term in such a volatile rate environment was a good idea is a head scratcher.
Besides the obvious failure of the bank’s management, the state and federal regulators clearly failed to do their job. A community bank wouldn’t have made it through one exam cycle with these kind of concentrations. Unfortunately, if history provides a script, instead of any accountability for the watchdogs there will instead just be more watchdogs.
Dear Simple, yes, the average duration on our bond portfolio is three years, and we're STILL significantly in the red. But we're not public, though, so we don't have to stretch for yield -- but I agree, those directors were criminally negligent. (Heck, I'm kicking myself for buying a two-year CD ladder this past June, and I don't fancy myself generally as an idiot.)
Thanks, Ray. If I wasn't feeling pessimistic enough before, you fixed that!
When you boil it down to its component parts, it is always shocking how thin the veneer of stability is. Most times, it's a mutually agreed-upon fiction. Banks exist because enough people believe they are stable, secure places to keep money. Once enough people stop believing that and behave otherwise at the same time, nearly any bank is in trouble.
True, but ditto for the stock market (and housing market), if everyone is a seller, then there are no buyers, and our whole society breaks down (and I have been totally remiss in buying ammo and accumulating junk silver (https://sdbullion.com/silver/junk-silver)).
But just last night I bought a bunch of cognac and whiskey and frozen pizzas, so I think I can ride this sucker out.
Just wanted to note there's an entire ETF called "Inverse Cramer" which takes the _opposite_ position of Jim Cramer. It's done really well over the span of its existence.
Thanks for the tip. Am taking my savings out from under my mattress - the one with the My Pillow mattress topper on it for extra safe keeping - and putting it here:
"So what are you waiting for? For the news to get better?"
We're waiting for St Ralph to leave. St Ralph doesn't care that he's not named Pat or Nick. He'll show up for Christmas and St Paddy's Day all the same.
Not because we've been hitting the sauce. Best we can figure, because small kids are germ depots, and the depots are still backed up after COVID precautions had humanity off on germ holiday for about a year. Which isn't to complain about precautions. I think we'd be worse off, including economically, if we hadn't taken precautions. But everything comes at a price.
I almost thought, in the opening bars of Ryan Adams' wrenching song, that I'd be hearing Townes Van Zandt's spare, piercing "If I Needed You." There’s a similar vein running through both songs.
One line always kicks me in the gut: "You will miss sunrise if you close your eyes, and that would break my heart in two."
Mar 19, 2023·edited Mar 19, 2023Liked by Matt Labash
Well, Matt, I see that like any good capitalist you're ok with profiting off of other folks' misfortunes. Other folks being the now apparently not so down-and-out depositors at SVB, and your profit coming from hawking Slack Tide as a hedge against future financial fooldoodlery.
Barring a run of irrational exuberance on your offering, Alan Greenspan would no doubt approve, and maybe even dip in a toe himself. But the dude just turned like 97 or something, so he may not see hedging his financial bets for the long term as that much of a priority these days. Still, even as a short-term deal, he'd likely think the Tide not a half bad deal, with an acceptable ROI, in that although you only write weekly, you're not inclined to write weakly. And while I'm no economist, I'm pretty sure quality trumps quantitative easing most every time.
Of course, one must consider executive compensation in the deal, and whether the guy running the show is really worth the dough. But I've heard you're a pretty straight shooter, donating much to your favorite charities. I think they had something to do with education or some such, didn't they? So apparently, you're at least fairly responsible managing the loot... uh... funds, even with whatever portion of your gains that may be a bit ill-gotten through some wily pyramid scheme you could easily be running on the side with your investors' money. And while I can't seem to find any info on executive bonuses and whether they're exorbitant or not, you do consistently pay bonuses to your investors, often in multiples, at the end of your columns. So, there's that in your favor on the balance sheet.
I was gonna' check you out with those Arthur Andersen guys before issuing a personal 'buy' rating on the Tide, just to be sure. I try to be responsible when issuing financial advice. But those guys aren't answering their phone for some reason. Of course, it's a bit late for me, no matter what they might have said, since I already bought in. But I'm thinkin' my dough's probably safe with you. I mean if you can't trust a guy who feeds Bluebirds for a hobby, just who the hell can you trust, amirite?? That Madoff guy never even had a hobby as far as I can tell. At least not until he took up boxing with fellow inmates later in life.
Well, good luck with your latest gambit to attract new marks...er... investors. Gotta go tend to my other investments now, though it may not be long before I have to hire someone to do that for me. Seems the older I get, the harder it is for me to turn that damned mattress a couple of times a year.
"I was gonna' check you out with those Arthur Andersen guys before issuing a personal 'buy' rating on the Tide, just to be sure. I try to be responsible when issuing financial advice. But those guys aren't answering their phone for some reason."
I dimly recall having some Arthur Andersen guys run a seminar at some summer "engineering experience" I attended in high school. The Andersen guys put us into teams to take apart common gadgets, because... well, reasons! The gist of the seminar was that future engineers should know that engineers can Do Consulting, too! Finding out Andersen had gone bust before we graduated college might have had the opposite effect, though.
From Arthur Andersen's Wikipedia page:
"At the time of his death, Arthur Andersen was one of the largest accounting firms in the world. Arthur Andersen's mother had schooled him in a Scandinavian axiom – 'Think straight, talk straight'. His brand of stern independence carried on through Leonard Spacek, who succeeded Andersen after the founder's death in 1947."
I don't think Slack Tide's CEO will mind my sharing a bit more 'Arthur Andersen' humor with you here, at least he shouldn't, since it'll pretty much amount to blowing his own horn for him (just leave this one alone, Matt) and maybe even help a bit in his drumming up some more new investors. The following is from a piece he did while still at the Standard way back in '02 titled "Among the Bourbon Barons". Bill Samuels Jr. was the president of Maker's Mark distillery down in Kentucky at the time...
Samuels is nothing if un-serious when it comes to peddling his own product. His latest billboard, which he calls a "fiasco," played off the Arthur Andersen/Enron scandal. Appearing ever so briefly in Times Square, the billboard depicted an empty bottle of Maker's Mark, with the slugline: "Disappears faster than a Big Five accounting firm."
"The phone rang off the wall," Samuels says, wincing. "My hair's still singed. I got calls from three of the five CEOs of Big Five accounting firms. I wouldn't say they laughed. Each of them knew of my, well, lack of common sense would be a polite way to put it. But we have a lot of customers in these accounting firms, I didn't think about that."
(Note to Tide CEO: You've got my current address on file for the promotional gratuity / kick-back check, right? Or should I be on the lookout for that Michael Cohen fellow?)
Disclaimer: I'm not schooled in economics or finance, but I have a decent credit score.
Venture capitalists use THEIR OWN MONEY to assist individuals or budding businesses so that they might get in on the ground floor of a great idea, talent, or business model. It's easy to understand. They risk THEIR OWN MONEY on projects that may work, or slam headfirst into the ground. It's a bet that could earn them financial reward or a mighty setback. The key here is: They risk THEIR OWN MONEY.
Banks are places where you put YOUR MONEY to keep it safe from burglars or from your inclination to lose it on the ponies or some hot dice action in the alley. Putting money in a bank is not an investment. You don't earn loads of interest or dividends, but YOUR MONEY should be kept safe and sound from burglars or temptation. You should expect all YOUR MONEY to be in the bank whenever you need it, and your bank account should never dwindle down or vanish unless you make it so.
Sometimes bankers get confused. Maybe they get bored just guarding OTHER PEOPLE'S MONEY, being polite to customers, and doing easy math keeping accounts in order. Yet they also get to give responsible people loans at a fair rate of interest and they can have some jolly fun foreclosing on people who don't pay back loans properly. That's a fun day for bankers - pizzazz! The confusion comes when they see EVERYONE ELSE'S MONEY in a big pile and they think it's theirs to play with. They think they may want to have fun and be venture capitalists and have some ad-ventures with YOUR MONEY. So they get excited and buy bonds which have been atrocious investments for the last couple of years. They might even take YOUR MONEY because they're bored, and play like it's theirs and take big adventuresome risks. Hopefully the risks will make good, but sometimes their playtime makes YOUR MONEY slam headfirst into the ground. They forgot it wasn't their personal money they were risking. When bankers get confused about who they are, trouble soon follows. They lose YOUR MONEY and everyone FREAKS OUT. Or as some people think, the devil comes in through the back door. (Get your mind out of the gutter!)
Banks need to know their place and know the differnce between YOUR MONEY and "play around and take risks" money. If they don't, they may get to shake hands with Beelzebub.
I used to be able to identify many birds just by their songs or calls. Age and fear of being a lifelong geek has infected that part of my brain. But...
I have a Bluebird song for y'all, sung by a pretty red bird whose delicate hand I once shook. She also plays a mean, "bluesy" guitar.
You’re right about wokeness having nothing to do with SVB’s failure, whatever other misery it may inflict.
But about that “historical” limit on FDIC coverage, it once was a lot less, per Wiki:
The per-depositor insurance limit has increased over time to accommodate inflation.
1934: $2,500
1935: $5,000
1950: $10,000
1966: $15,000
1969: $20,000
1974: $40,000
1980: $100,000
2008: $250,000
Congress approved a temporary increase in the deposit insurance limit from $100,000 to $250,000, which was effective from October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd–Frank Wall Street Reform and Consumer Protection Act (P.L.111-203), which was signed into law on July 21, 2010, made the $250,000 insurance limit permanent,[39] and extended the guarantee retroactively to January 1, 2008, meaning it covered uninsured deposits banks like IndyMac. In addition, the Federal Deposit Insurance Reform Act of 2005 (P.L.109-171) allows for the boards of the FDIC and the National Credit Union Administration (NCUA) to consider inflation and other factors every five years beginning in 2010 and, if warranted, to adjust the amounts under a specified formula.
The problem I have with ignoring the policy limits is that many of SVB’s big depositors were sophisticated investors who, even if the regional Fed was asleep at the wheel, should have noticed that the value of the bank’s reserves was being rapidly depleted by inflation. But plenty of blame to go around for ignoring inflation risk when telling banks what they should invest in (I’m looking at you, Barney Frank).
Woke has not bothered me at all, being a more than passingly interested observer of the struggle of Black Americans from 1619 to the present day. Those who are offended can not be educated and no one should waste time trying. I am grateful to Trump for absolutely nothing save one item - he thoroughly dispelled my Pollyannaish notion of Americans and America. January 6th cemented that clarity and I will take it to the grave with me. The banking industry is as Matt describes it and worse if that is possible. Worldwide in fact. It survives because, we, the depositors are fools. And we are fools again and again. I am one, having my money in an off shoot of Zion Bank. Yes, the very bank that Moody is considering downgrading. This, after we got a drippingly assuring letter from the President of said Bank, that all was well and to fear not. I'm too old to fear and I have a stash of silver coins just in case.
Your bluebird stories are why I subscribed Matt...I say yes to more of them as spring unfolds. Your bluebird stories are like cowbell...there's always room for more.
Read this not long ago and think FdB did a good job with it. Although I'm not on board with a lot of his political stuff, one thing I like about Freddie is that even though he's a dyed-in-the-wool left fielder, he seems to have absolutely no problem at all calling a timeout to take other lefties to task for saying and doing stupid stuff. As a center fielder, I wish there were more like him in this respect playing on both my flanks.
Yeah Matt, sometimes the "Woke" crowd gives wokeness a bad name. Me? I try every day to be a little more woke than the day before, to look at the world and my place in it with honesty and compassion through a lens untainted by my privileges, which are many. It isn't easy. I have considerable empathy for those who try and sometimes fall short but only contempt for those who never try. And I admit to disgust for those who wield their own imagined wokeness as a cudgel because wokeness is a work in progress for everyone, the cudgel wielders included, sometimes especially.
The Christians here can find a message of wokeness in many of Christ's teachings. The non-Christians too. But living Christianity, like living wokeness, is different from and harder than talking about being either. For most people it seems that talking about either is close enough.
When it comes down to it wokeness is nothing but the celebration of rights. The only rights that really exist are those rights that we insist on for everyone; for ourselves and also for those we neither like nor respect. Rights that aren't universal aren't rights, they are privileges. When I claim a right to free speech but deny it to the person arguing a point I find vile, I am claiming a privilege to judge what other people should be allowed to say and to hear, what thoughts they should be allowed to entertain.
But with rights come responsibilities. When I claim the right to speak freely I also bear the responsibility to speak truthfully. Rights without concomitant responsiblities are also privileges. Understanding the difference is what wokeness is all about.
Woke, schmoke. When George tried to stanch the run on Bailey Bros. Building & Loan, he explained that customers' deposits weren't actually in the vault but had been invested in the mortgages of their neighbors. And the neighbors were good for it, he said, so the money would be repaid and available to the depositors -- just not right away. Well, there you have it: the fundamental flaw in the banking business model is the mismatch between the tenor of assets (loans and investments, mostly long) and liabilities (deposits, short: literally on "demand"). [Historical aside: In mortgage land, the efforts to solve George Bailey's specific problem led to Fannie and Freddie and Lewie Ranieri and RMBS. Then the problem was that the increasing number of snouts in those troughs couldn't skim enough fat from a mortgage market that grew organically only at a rate in the low single digits. So, new products, greater risks. We all know how that story ended.] In the ultra low interest rate environment of the last decade, deposits grew and opportunities to invest that money profitably shrank, and it's not surprising that banks went heavily into longer term bonds. What I can't fathom is why they stayed there so long. While inflation has been a tangible factor only for the last 18 months or so and interest rates began spiking more recently than that, the buzz about the inevitability of inflation started much earlier. Trends are easy to spot; timing is difficult. When the developing trend factors are clear, it's foolish to wait for the actual inflection point to act on them. So, wokeness had nothing to do with anything.
And, yes, SVB's business was way too concentrated in the start-up tech "ecosystem" (blech!), and Signature's plunge into crypto was stupid. But they should've started at least two year ago to rotate out of long tenor investments. That failure was gross incompetence.
I majored in English, so I'm doing my best to decipher all of this bank-related information. And I'm assuming that all of this means that it's too late to just switch to trading wampum, right?
But I love the bluebird update Matt. Such beauty in something seemingly so mundane. It's like a Richard Wilbur poem. Thanks.
“Reproving our disgust and our ennui
With humble insatiety”
There it is! That's a good choice Ray.
When we lost him a few years ago, we lost one of the best ever (at least to me).
Billy Collins still lives.
You and JJ Proyer share the title of the funniest writers. I always get a laugh when either of you publishes. With JJ, it's peanut butter and tuna sandwiches, and with you, it's dropping a duce in the sandbox. Today you added Janet Yellen's bowl cut to your list of great humor.
On a more serious note, it is amazing that all of these "experts" like Yellen, Powell, etc., couldn't have seen this train wreck coming. It doesn't take an economic genius to see that investing long and lending short is a ticket to severe problems. Add to this the problems in Swiss banking, making you wonder what everyone is smoking.
Since the Sears catalog is gone, the only paper left is to print out your columns and hang them on the outhouse wall. Right under the sign - Please read before wiping. Makes me wonder how you handled this chore in the sandbox?
I sit on the Board of Directors of a small community bank here in Dallas (about $500 million in assets), so I had a bit of an inside view of what happened to SVB and how it might affect other banks (beyond Signature and now First Republic). Our Board was on conference calls and extended email threads all last weekend, when I was down in Mexico trying to enjoy Spring Break with my family, so my feelings for SVB and its depositors are a bit different than schadenfreude. My feelings are more in the line of FTATHTRIO.
So, in a nutshell, banks are crazy leveraged from an absolute basis, an amount of leverage we would never permit in an operating company. The fact is, there is no bank in the U.S. that could survive if, say, 50% of its depositors withdrew their money at once. Banks are required to maintain "tier 1 capital" (essentially shareholders' equity) of only 6% of total assets. Assets are loans on the books and the bank’s own investments (e.g., bonds and marketable securities).
The bank’s liabilities are its deposits. So, loans and cash/bonds/marketable securities less deposits equals the bank's tier 1 capital.
So a bank faces two sources of stress: it has to repay deposits (i.e., people withdraw their money) or the bank’s assets lose money (loans don’t repay or its bonds/marketable securities lose value).
What has happened to all banks with bonds in their portfolio is that rising interest rates have pummeled the value of their bonds. For whatever reason, wisely or unwisely, bank regulators are not requiring banks to take into account the unrealized losses on their bond portfolios in the calculation of their capital. Crazy, right? Total fiction. But when the bonds are sold, the losses are realized — and voila, the bank’s capital is impaired (or wiped out).
What happened at SVB is that it had a giant long-duration bond portfolio with billions in unrealized losses baked in, losses so large that if the true value of the bonds were marked to market, its entire capital, and then some, would be wiped out. (FYI, SVB is not the only bank facing this horror show.) When customers started withdrawing deposits (which was before the cascading run on the bank of last Thursday and Friday), SVB needed a source of cash to satisfy its obligations to depositors who were withdrawing. Well, its loans are obviously illiquid. So it had to sell a portion of its bond portfolio (plus it was fearing additional losses in the portfolio as interest rates threaten to continue to rise).
Hence, $1.8 billion of its unrealized losses were realized, its capital was impaired, and it was required to raise further capital to meet its tier 1 capital requirement. The news of the losses and need to raise capital spooked everyone, causing a run on the bank (all the VCs and private equity funds sent email or Slack messages to all their portfolio companies telling them to withdraw their cash), resulting in a death spiral and the FDIC having to step in and take over the bank. (As a point of reference to understand how that tight network of depositors affected SVB, when Washington Mutual failed in 2008, it took three months from when depositors started withdrawing deposits until the FDIC had to step in. With SVB, it happened in 48 hours.)
Note, EVERY BANK is in this situation, in varying degrees. My bank, whose bond portfolio, which is not large in relation to our other non-loan assets, and the average duration of which is less than three years, is still sitting on millions in unrealized losses (which would wipe out 75% of our earnings last year). But our capital ratio is about 12%, simply because we’re more conservative and it's actually hard to make good loans. Our loans to deposits ratio is only 70%. Other banks in our market have LTD ratios above 90% (and one at 105%). Higher loans to deposits ratios means more profits when times are good.
But in today’s market (where the rates being paid on deposits have increased faster than the interest being earned on fixed-rate loans), banks with high LTD ratios are in danger, especially when coupled with unrealized losses in their bond portfolios. (That bank with a LTD ratio of 105% is absolutely F**KED.)
Plus, all the shareholders in my bank know each other. We could pass the hat and raise equity capital over a weekend if we needed to bail out our bank.
It’s possible that the contagion will be limited to SVB, Signature, and First Republic. But we don’t know, because we don’t know how materially the capital ratios of all the other banks are with the fiction that unrealized losses in their bond portfolios don’t need to be netted against their capital. And by the way, banks how $8 trillion in uninsured deposits (i.e., deposits in excess of $250,000) versus $10 trillion in insured deposits. The FDIC only has $123 billion in cash. It can't even guarantee 15% of insured deposits, much less ALL deposits in the U.S. (Heck, the Treasury only collected $4.2 trillion in taxes last year, so even Uncle Sam couldn't bail us out.)
The next few weeks will be interesting. And I don't want to live in interesting times.
This was a good read, Ray. Confirms a couple of things I'd been speculating about. Not that I'm particularly happy to have them confirmed by someone who obviously knows what he's talking about, done in clear language and terms I can actually understand. Sometimes unconfirmed speculation (read *ignorance*) really is bliss.
I dunno'...part of my take-away here is that maybe turnin' that mattress I mentioned at the end of my comment a couple of times a year to manage my 'investments' isn't quite as onerous chore as I made it out to be. :-D
Thanks, M. I teach an MBA class at the university here in Dallas, and I’ve found that students learn better if you present things clearly and without a lot of technical jargon that too many professors smother their students with in an attempt to look smart and make the material appear more complicated and daunting than it needs to be.
Funny...right when I read that long acronym at the beginning of your post, I knew exactly what it meant, and it seems to sum up your post well. Thanks for your insights.
Great explainer Ray! Do you think having to mark treasuries to market would improve the situation or just make things worse? I assume doing it right now would make things much worse, but if phased in I assume banks would be much less likely to buy long dated treasuries. Or perhaps the rule should change so that you don’t have to mark anything less than 2 or 3 years of duration to market?
Counterpoint:
It would make things much worse, as U.S. banks currently have about $620 billion in unrealized losses in their bond portfolios, and forcing them to recognize them immediately would result in probably hundreds of bank failures.
The problem was, we were in a decades-long period of ZIRP (zero interest rate policy), causing banks (and insurance companies, by the way) to stretch into longer duration bonds for yields, because (at the time) no one thought that interest rates would go up any time soon. Oops!
I think the short-term solution is to suspend capital requirements, thereby giving banks an amnesty period to sell their bonds and create liquidity without being forced into FDIC receivership.
Long-term, the FDIC should offer unlimited deposit insurance for banks willing to pay the premiums (which would eventually be all banks, because it would be such a competitive disadvantage not to offer unlimited deposit insurance to depositors).
Lastly, the regulators should prohibit banks from investing in bonds with longer durations than, say, two years. (But I'm just spitballing here; a more fact-intensive study would be required to know where to strike the right balance.)
SVB had $50B in bonds that exceeded 15 years in term. For all the well-educated people I’m assuming were in charge of their portfolio, how any of them thought locking in over such a long term in such a volatile rate environment was a good idea is a head scratcher.
Besides the obvious failure of the bank’s management, the state and federal regulators clearly failed to do their job. A community bank wouldn’t have made it through one exam cycle with these kind of concentrations. Unfortunately, if history provides a script, instead of any accountability for the watchdogs there will instead just be more watchdogs.
Dear Simple, yes, the average duration on our bond portfolio is three years, and we're STILL significantly in the red. But we're not public, though, so we don't have to stretch for yield -- but I agree, those directors were criminally negligent. (Heck, I'm kicking myself for buying a two-year CD ladder this past June, and I don't fancy myself generally as an idiot.)
Thanks, Ray. If I wasn't feeling pessimistic enough before, you fixed that!
When you boil it down to its component parts, it is always shocking how thin the veneer of stability is. Most times, it's a mutually agreed-upon fiction. Banks exist because enough people believe they are stable, secure places to keep money. Once enough people stop believing that and behave otherwise at the same time, nearly any bank is in trouble.
True, but ditto for the stock market (and housing market), if everyone is a seller, then there are no buyers, and our whole society breaks down (and I have been totally remiss in buying ammo and accumulating junk silver (https://sdbullion.com/silver/junk-silver)).
But just last night I bought a bunch of cognac and whiskey and frozen pizzas, so I think I can ride this sucker out.
Just wanted to note there's an entire ETF called "Inverse Cramer" which takes the _opposite_ position of Jim Cramer. It's done really well over the span of its existence.
Thanks for the tip. Am taking my savings out from under my mattress - the one with the My Pillow mattress topper on it for extra safe keeping - and putting it here:
https://www.crameretfs.com/sjim
You could invest in worse things like Bitcoin, for example 😬
"So what are you waiting for? For the news to get better?"
We're waiting for St Ralph to leave. St Ralph doesn't care that he's not named Pat or Nick. He'll show up for Christmas and St Paddy's Day all the same.
Not because we've been hitting the sauce. Best we can figure, because small kids are germ depots, and the depots are still backed up after COVID precautions had humanity off on germ holiday for about a year. Which isn't to complain about precautions. I think we'd be worse off, including economically, if we hadn't taken precautions. But everything comes at a price.
I almost thought, in the opening bars of Ryan Adams' wrenching song, that I'd be hearing Townes Van Zandt's spare, piercing "If I Needed You." There’s a similar vein running through both songs.
One line always kicks me in the gut: "You will miss sunrise if you close your eyes, and that would break my heart in two."
https://youtu.be/wQx0Pb6ZPXQ
SOYLENT GREEN IS PEOPLE!
Well, Matt, I see that like any good capitalist you're ok with profiting off of other folks' misfortunes. Other folks being the now apparently not so down-and-out depositors at SVB, and your profit coming from hawking Slack Tide as a hedge against future financial fooldoodlery.
Barring a run of irrational exuberance on your offering, Alan Greenspan would no doubt approve, and maybe even dip in a toe himself. But the dude just turned like 97 or something, so he may not see hedging his financial bets for the long term as that much of a priority these days. Still, even as a short-term deal, he'd likely think the Tide not a half bad deal, with an acceptable ROI, in that although you only write weekly, you're not inclined to write weakly. And while I'm no economist, I'm pretty sure quality trumps quantitative easing most every time.
Of course, one must consider executive compensation in the deal, and whether the guy running the show is really worth the dough. But I've heard you're a pretty straight shooter, donating much to your favorite charities. I think they had something to do with education or some such, didn't they? So apparently, you're at least fairly responsible managing the loot... uh... funds, even with whatever portion of your gains that may be a bit ill-gotten through some wily pyramid scheme you could easily be running on the side with your investors' money. And while I can't seem to find any info on executive bonuses and whether they're exorbitant or not, you do consistently pay bonuses to your investors, often in multiples, at the end of your columns. So, there's that in your favor on the balance sheet.
I was gonna' check you out with those Arthur Andersen guys before issuing a personal 'buy' rating on the Tide, just to be sure. I try to be responsible when issuing financial advice. But those guys aren't answering their phone for some reason. Of course, it's a bit late for me, no matter what they might have said, since I already bought in. But I'm thinkin' my dough's probably safe with you. I mean if you can't trust a guy who feeds Bluebirds for a hobby, just who the hell can you trust, amirite?? That Madoff guy never even had a hobby as far as I can tell. At least not until he took up boxing with fellow inmates later in life.
Well, good luck with your latest gambit to attract new marks...er... investors. Gotta go tend to my other investments now, though it may not be long before I have to hire someone to do that for me. Seems the older I get, the harder it is for me to turn that damned mattress a couple of times a year.
"I was gonna' check you out with those Arthur Andersen guys before issuing a personal 'buy' rating on the Tide, just to be sure. I try to be responsible when issuing financial advice. But those guys aren't answering their phone for some reason."
I dimly recall having some Arthur Andersen guys run a seminar at some summer "engineering experience" I attended in high school. The Andersen guys put us into teams to take apart common gadgets, because... well, reasons! The gist of the seminar was that future engineers should know that engineers can Do Consulting, too! Finding out Andersen had gone bust before we graduated college might have had the opposite effect, though.
From Arthur Andersen's Wikipedia page:
"At the time of his death, Arthur Andersen was one of the largest accounting firms in the world. Arthur Andersen's mother had schooled him in a Scandinavian axiom – 'Think straight, talk straight'. His brand of stern independence carried on through Leonard Spacek, who succeeded Andersen after the founder's death in 1947."
I don't think Slack Tide's CEO will mind my sharing a bit more 'Arthur Andersen' humor with you here, at least he shouldn't, since it'll pretty much amount to blowing his own horn for him (just leave this one alone, Matt) and maybe even help a bit in his drumming up some more new investors. The following is from a piece he did while still at the Standard way back in '02 titled "Among the Bourbon Barons". Bill Samuels Jr. was the president of Maker's Mark distillery down in Kentucky at the time...
Samuels is nothing if un-serious when it comes to peddling his own product. His latest billboard, which he calls a "fiasco," played off the Arthur Andersen/Enron scandal. Appearing ever so briefly in Times Square, the billboard depicted an empty bottle of Maker's Mark, with the slugline: "Disappears faster than a Big Five accounting firm."
"The phone rang off the wall," Samuels says, wincing. "My hair's still singed. I got calls from three of the five CEOs of Big Five accounting firms. I wouldn't say they laughed. Each of them knew of my, well, lack of common sense would be a polite way to put it. But we have a lot of customers in these accounting firms, I didn't think about that."
(Note to Tide CEO: You've got my current address on file for the promotional gratuity / kick-back check, right? Or should I be on the lookout for that Michael Cohen fellow?)
Disclaimer: I'm not schooled in economics or finance, but I have a decent credit score.
Venture capitalists use THEIR OWN MONEY to assist individuals or budding businesses so that they might get in on the ground floor of a great idea, talent, or business model. It's easy to understand. They risk THEIR OWN MONEY on projects that may work, or slam headfirst into the ground. It's a bet that could earn them financial reward or a mighty setback. The key here is: They risk THEIR OWN MONEY.
Banks are places where you put YOUR MONEY to keep it safe from burglars or from your inclination to lose it on the ponies or some hot dice action in the alley. Putting money in a bank is not an investment. You don't earn loads of interest or dividends, but YOUR MONEY should be kept safe and sound from burglars or temptation. You should expect all YOUR MONEY to be in the bank whenever you need it, and your bank account should never dwindle down or vanish unless you make it so.
Sometimes bankers get confused. Maybe they get bored just guarding OTHER PEOPLE'S MONEY, being polite to customers, and doing easy math keeping accounts in order. Yet they also get to give responsible people loans at a fair rate of interest and they can have some jolly fun foreclosing on people who don't pay back loans properly. That's a fun day for bankers - pizzazz! The confusion comes when they see EVERYONE ELSE'S MONEY in a big pile and they think it's theirs to play with. They think they may want to have fun and be venture capitalists and have some ad-ventures with YOUR MONEY. So they get excited and buy bonds which have been atrocious investments for the last couple of years. They might even take YOUR MONEY because they're bored, and play like it's theirs and take big adventuresome risks. Hopefully the risks will make good, but sometimes their playtime makes YOUR MONEY slam headfirst into the ground. They forgot it wasn't their personal money they were risking. When bankers get confused about who they are, trouble soon follows. They lose YOUR MONEY and everyone FREAKS OUT. Or as some people think, the devil comes in through the back door. (Get your mind out of the gutter!)
Banks need to know their place and know the differnce between YOUR MONEY and "play around and take risks" money. If they don't, they may get to shake hands with Beelzebub.
I used to be able to identify many birds just by their songs or calls. Age and fear of being a lifelong geek has infected that part of my brain. But...
I have a Bluebird song for y'all, sung by a pretty red bird whose delicate hand I once shook. She also plays a mean, "bluesy" guitar.
https://music.youtube.com/watch?v=NGTyNA0nI90&feature=share
And another Bluebird song, though I've never heard of it's author/performer... ; -)
https://music.youtube.com/watch?v=crV239HtBiY&feature=share
Love that woman.
You’re right about wokeness having nothing to do with SVB’s failure, whatever other misery it may inflict.
But about that “historical” limit on FDIC coverage, it once was a lot less, per Wiki:
The per-depositor insurance limit has increased over time to accommodate inflation.
1934: $2,500
1935: $5,000
1950: $10,000
1966: $15,000
1969: $20,000
1974: $40,000
1980: $100,000
2008: $250,000
Congress approved a temporary increase in the deposit insurance limit from $100,000 to $250,000, which was effective from October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd–Frank Wall Street Reform and Consumer Protection Act (P.L.111-203), which was signed into law on July 21, 2010, made the $250,000 insurance limit permanent,[39] and extended the guarantee retroactively to January 1, 2008, meaning it covered uninsured deposits banks like IndyMac. In addition, the Federal Deposit Insurance Reform Act of 2005 (P.L.109-171) allows for the boards of the FDIC and the National Credit Union Administration (NCUA) to consider inflation and other factors every five years beginning in 2010 and, if warranted, to adjust the amounts under a specified formula.
The problem I have with ignoring the policy limits is that many of SVB’s big depositors were sophisticated investors who, even if the regional Fed was asleep at the wheel, should have noticed that the value of the bank’s reserves was being rapidly depleted by inflation. But plenty of blame to go around for ignoring inflation risk when telling banks what they should invest in (I’m looking at you, Barney Frank).
So you're trying to tell me that history began before 2008? Not sure I believe you, Dennis.
Woke has not bothered me at all, being a more than passingly interested observer of the struggle of Black Americans from 1619 to the present day. Those who are offended can not be educated and no one should waste time trying. I am grateful to Trump for absolutely nothing save one item - he thoroughly dispelled my Pollyannaish notion of Americans and America. January 6th cemented that clarity and I will take it to the grave with me. The banking industry is as Matt describes it and worse if that is possible. Worldwide in fact. It survives because, we, the depositors are fools. And we are fools again and again. I am one, having my money in an off shoot of Zion Bank. Yes, the very bank that Moody is considering downgrading. This, after we got a drippingly assuring letter from the President of said Bank, that all was well and to fear not. I'm too old to fear and I have a stash of silver coins just in case.
Your bluebird stories are why I subscribed Matt...I say yes to more of them as spring unfolds. Your bluebird stories are like cowbell...there's always room for more.
Like a dope, I forgot to put the photo of the nest in the email version. But it's sitting there at the bottom of the site, now, Karen.
https://mattlabash.substack.com/p/woke-banks-financial-calamity-and
Love it!
Freddie DeBoer offers a pretty good definition... just a thought. https://freddiedeboer.substack.com/p/of-course-you-know-what-woke-means?utm_source=ActiveCampaign&utm_medium=email&utm_content=Hitting+Rewind+on++Woke&utm_campaign=Hitting+Rewind+on++Woke
Read this not long ago and think FdB did a good job with it. Although I'm not on board with a lot of his political stuff, one thing I like about Freddie is that even though he's a dyed-in-the-wool left fielder, he seems to have absolutely no problem at all calling a timeout to take other lefties to task for saying and doing stupid stuff. As a center fielder, I wish there were more like him in this respect playing on both my flanks.
I would join you in centerfield...
Yeah Matt, sometimes the "Woke" crowd gives wokeness a bad name. Me? I try every day to be a little more woke than the day before, to look at the world and my place in it with honesty and compassion through a lens untainted by my privileges, which are many. It isn't easy. I have considerable empathy for those who try and sometimes fall short but only contempt for those who never try. And I admit to disgust for those who wield their own imagined wokeness as a cudgel because wokeness is a work in progress for everyone, the cudgel wielders included, sometimes especially.
The Christians here can find a message of wokeness in many of Christ's teachings. The non-Christians too. But living Christianity, like living wokeness, is different from and harder than talking about being either. For most people it seems that talking about either is close enough.
When it comes down to it wokeness is nothing but the celebration of rights. The only rights that really exist are those rights that we insist on for everyone; for ourselves and also for those we neither like nor respect. Rights that aren't universal aren't rights, they are privileges. When I claim a right to free speech but deny it to the person arguing a point I find vile, I am claiming a privilege to judge what other people should be allowed to say and to hear, what thoughts they should be allowed to entertain.
But with rights come responsibilities. When I claim the right to speak freely I also bear the responsibility to speak truthfully. Rights without concomitant responsiblities are also privileges. Understanding the difference is what wokeness is all about.
Woke, schmoke. When George tried to stanch the run on Bailey Bros. Building & Loan, he explained that customers' deposits weren't actually in the vault but had been invested in the mortgages of their neighbors. And the neighbors were good for it, he said, so the money would be repaid and available to the depositors -- just not right away. Well, there you have it: the fundamental flaw in the banking business model is the mismatch between the tenor of assets (loans and investments, mostly long) and liabilities (deposits, short: literally on "demand"). [Historical aside: In mortgage land, the efforts to solve George Bailey's specific problem led to Fannie and Freddie and Lewie Ranieri and RMBS. Then the problem was that the increasing number of snouts in those troughs couldn't skim enough fat from a mortgage market that grew organically only at a rate in the low single digits. So, new products, greater risks. We all know how that story ended.] In the ultra low interest rate environment of the last decade, deposits grew and opportunities to invest that money profitably shrank, and it's not surprising that banks went heavily into longer term bonds. What I can't fathom is why they stayed there so long. While inflation has been a tangible factor only for the last 18 months or so and interest rates began spiking more recently than that, the buzz about the inevitability of inflation started much earlier. Trends are easy to spot; timing is difficult. When the developing trend factors are clear, it's foolish to wait for the actual inflection point to act on them. So, wokeness had nothing to do with anything.
And, yes, SVB's business was way too concentrated in the start-up tech "ecosystem" (blech!), and Signature's plunge into crypto was stupid. But they should've started at least two year ago to rotate out of long tenor investments. That failure was gross incompetence.
Emmylou....her voice on this recording is like a shadowy whisper. Wonderfully produced; thanks for sharing.