Beginning of the End of the Everything Bubble (and 800K Hammers and EaaS and wild BaT car prices and and and....)

[Jlaa]

So as most people know Silicon Valley Bank was seized by the FDIC this past week.

While most people have never heard of SVB (it was a boutique bank whose customers were mainly tech *companies*) - we will feel the effects throughout the economy. Any high flying startup (or regular company, like Roku and Roblox, for example) banked with SVB. Now, with the collapse of SVB, these companies are going to have a hard time making payroll, especially if their uninsured cash is illiquid.

The effects will be felt throughout the local economy - people don't get paid, vendors don't get paid, accountants, food service companies, IT equipment companies, professional services companies, marketing companies, etc etc.... liquidity is drying up if the funds (or lack thereof) in the bank are stuck.

This is not 2009 style financial-system-contagion. I believe this more like 2000 style network-effect-contagion.

For a soundbite on ripple effect of the severity of SVB's failure:



BTW here is a great piece on the mechanics of the SVB implosion - Startup Bank Had a Startup Bank Run - Bloomberg (unpaywalled version from Bloomberg)

In essence, SVB's business model wasn't very durable. From my amateur brain, very generally speaking

• Regular banks
  • Liabilities - Take in customer deposits and have to give them back when customers want them
  • Assets - Make commercial loans which float with interest rate. Banks take a credit risk here and they make money
• SVB
  • Liabilities - Take in customer deposits and have to give them back when customers want them
    • But since Fed has raised rates over the past year, SVB's customers, who are startups funded by VCs, have largely stopped raising more money from VCs (funding winter) and therefore are furiously burning the cash they have in the bank (at SVB!)
  • Assets - SVB doesn't do commercial loans because startups don't do these kinds of loans (generally speaking) - so SVB swapped credit risk for interest rate risk (long dated Treasuries) and therefore when interest rates go up, SVB LOSES money (unlike normal banks).

 

[Jlaa]

BTW look at the difference in the way these banks make money. First Republic has 5:1 ratio of loans to securities (interest rate risk).
SVB, on the other hand, is like the INVERSE - 73:120, or about 1:1.64. No wonder!!!!!!!!!!!!!

 

[maw1124]

@Jlaa you know I agree... "when borrowed money starts to feel like borrowed money again"... it'll be felt but we don't know how much. SVB was, as you know, the SECOND bank failure this week. The other one was focused on crypto as opposed to startups. So the premier crypto and startup banks both failed this week for similar reasons -- herd mentality.

My personal view is there's still too much liquidity and with it a gambler's mentality in the market, simply because TINA -- there is no alternative. No one below 50 years of age in this country believes in patiently working hard and moving up the ladder anymore, and arguably for good reason. That ladder has been objectively deteriorating since the 80s. Those who yet believe in that way are believing against hope -- they see no way to actually make this happen. My daughter in law school watches classmates of hers spend thousands on plastic surgery so they can be instagram models, and is like "Dad, WTH??" I encourage her to keep doing what she's doing and it'll all pay off, as I'm obliged to say. But I know the truth is a bit more complicated.

So my guess is other "shadow financial institutions" will step in where SVB and Silvergate failed, and "the party" will keep going, just at different prices. But we shall see.

maw

 

[gerryvz]

Don't forget FTX, either.

Though a merchant bank, SVB's implosion is the beginning of a domino effect.

It will be interesting to see how long it takes to begin extending to "mainstream" institutions. All it takes is a simple run on the banks.

After the 2008 debacle, mainstream banks are not as strong as they think they are.

The FDIC "guarantee" of depositors being guaranteed up to $250K insurance is a joke drop in the bucket.

 

[Jlaa]

@Jlaa you know I agree... when borrowed money starts to feel like borrowed money again... itll be felt but we dont know how much. SVB was, as you know, the SECOND bank failure this week. The other one was focused on crypto as opposed to startups. So the premier crypto and startup banks both failed this week for similar reasons -- herd mentality.

Agreed that Silvergate and SVB failed because:

1. Flighty Customers (Herd mentality) - Startup Bros and Crypto Bros all go one way or the other way (Fire!! Pull all money out ASAP)
2. Non-durable business model <-- diversified banks make money off credit risk (loans) not interest rate risk (govt bonds).

 

[maw1124]

Agreed that Silvergate and SVB failed because:

1. Flighty Customers (Herd mentality) - Startup Bros and Crypto Bros all go one way or the other way (Fire!! Pull all money out ASAP)
2. Non-durable business model

Absolutely... SVB just looks like a piss poor chief investment officer to me (the market doubled from '17 to '21 and you're invested in TBills?!?!)... but it might also be piss poor bank policy.

maw

 

[Jlaa]

Dont forget FTX, either.

Though a merchant bank, SVBs implosion is the beginning of a domino effect.

It will be interesting to see how long it takes to begin extending to mainstream institutions. All it takes is a simple run on the banks.

After the 2008 debacle, mainstream banks are not as strong as they think they are.

The FDIC guarantee of depositors being guaranteed up to $250K insurance is a joke drop in the bucket.

I don't think this will spread to mainstream customers / run on big banks though. The reason is because regardless of the FDIC limits being set at 250K, I suspect that all the uninsured depositors @ SVB will be made whole by the FDIC. The reasons precisely is because the FDIC will want to avoid runs on bigger banks.

Kinda like that piece in Bloomberg stated:

If it turns out to be true that they lose their deposits, there could be more bank runs: Lots of businesses keep uninsured deposits at lots of banks, and if the moral of SVB is “your uninsured transaction-banking deposits can vanish overnight” then those businesses will do a lot more credit analysis, move their money out of weaker banks, and put it at, like, JPMorgan. This could be self-fulfillingly bad for a lot of weaker banks. My assumption is that the FDIC, the Federal Reserve, and the banks who are looking at buying SVB all really don’t want that. If you are a bank looking at buying SVB, and you do a detailed analysis of its assets and conclude that they are worth $180 billion, and you come to the FDIC and say “I will take over this bank and pay the uninsured depositors 95 cents on the dollar,” the FDIC is going to look at you and say “don’t you mean 100 cents on the dollar,” and you are going to say “oh right yes of course, silly me, 100 cents on the dollar.”

With previous bank failures like IndyMac and Washington Mutual, the FDIC made "arranged marriages" that kept depositors whole, even in excess of the (then) 100K FDIC limit:

After Silicon Valley Bank's shutdown, uninsured depositors face tense wait

Silicon Valley Bank's high level of uninsured deposits helped kick off the run that led to the bank's closing down, and now any of those depositors will need to hold their breath to see if bank regulators can recover enough to make them whole.

www.reuters.com

Absolutely... SVB just looks like a piss poor chief investment officer to me (the market doubled from 17 to 21 and youre invested in TBills?!?!)... but it might also be piss poor bank policy.

maw

@maw1124 I am not sure how they (SVB) would have made money though right? (BTW I thought they invested in long dated T Bonds and not short term treasuries but you are right, regardless the net effect is the same.) I mean the business model is too risky --- a bank is supposed to borrow short and lend long.

That is, banks are supposed to get funded by savers with maturities at the short end of the yield spectrum, and lend to companies and households at the long end.

SVB seems to have borrowed short and lended almost not at all. And when the did lend, they lended to VC firms for Capital Call Lines of Credit, which is lending even shorter!

 

[maw1124]

Yes, I read the article. And that is the conventional wisdom. But it's not gospel. If you're taking deposits from the part of the market that produces aberrant returns, it makes no sense to not benefit from those aberrant returns. Your clients are making money going public and you don't have a stake in any of it?! OK, well that's why you're no longer around.

Of course, I've done business with SVB for years so I know that they exactly did have an interest in the clients that made money, went public, etc. (they almost always took convertible preferred, warrants or both, all of which were triggered upon liquidity events). It simply wasn't enough to survive the herd mentality.

maw

 

[Jlaa]

Yes, I read the article. And that is the conventional wisdom. But its not gospel. If youre taking deposits from the part of the market that produces aberrant returns, it makes no sense to not benefit from those aberrant returns. Your clients are making money going public and you dont have a stake in any of it?! OK, well thats why youre no longer around.

Of course, Ive done business with SVB for years so I know that they exactly did have an interest in the clients that made money, went public, etc. (they almost always took convertible preferred, warrants or both, all of which were triggered upon liquidity events). It simply wasnt enough to survive the herd mentality.

maw

Ah gotcha. Maybe that business model then only makes sense if it is coupled with a more boring banking business of making money on residential / commercial loans --- ie. diversification.

 

[gerryvz]

I dont think this will spread to mainstream customers / run on big banks though. The reason is because regardless of the FDIC limits being set at 250K, I suspect that all the uninsured depositors @ SVB will be made whole by the FDIC. The reasons precisely is because the FDIC will want to avoid runs on bigger banks.

As noted, the FDIC issued receivership certificates yesterday to SVB depositors who exceed the $250K cap. This means they're not getting their money back ANYTIME SOON. (Perhaps if 100% of it, ever?)

I wish firms who had a lot of money in SVB good luck making payroll, paying their creditors, and so forth. At least for the short to mid term.

 

[Jlaa]

The FDIC issued receivership certificates yesterday to SVB depositors who exceed the $250K cap. This means theyre not getting their money back ANYTIME SOON. (Perhaps if 100% of it, ever?)

Agreed, yeah. I think the money won't be coming back soon at all. However, in order to avoid runs on larger banks, I suspect the uninsured depositors will be made whole. Just not soon.

 

[gerryvz]

Dont forget FTX, either.

Though a merchant bank, SVBs implosion is the beginning of a domino effect.

The next domino that is falling is First Republic Bank. At $176+B in deposits, they're not too far behind SVB, and their brewing issues are similar (although their debt securities portfolio is different than SVB's).

 

[Jlaa]

The next domino that is falling is First Republic Bank. At $176+B in deposits, theyre not too far behind SVB, and their brewing issues are similar (although their debt securities portfolio is different than SVBs).

Really wondering not arguing --- do you really think FRC has trouble under the hood (even though the press is making hay about FRC)? I suspect FRC stock is oversold --- FRC and SVB have very different business models, and as I pointed out in post #2. FRC makes a their money on loans, and lots of it is residential loans. FRC's debt securities portfolio being residential loans (credit risk) as opposed to SVB's debt securities portfolio being treasuries (interest rate risk) is completely the reason why the two banks are different.

I feel like the press likes to whip up fear and imply "2009-style-financial-system-contagion" when there's little of that happening?

 

[gerryvz]

Make sure you look into what's happening with PacWest Bancorp, as well.

The reckoning (i.e. the price being paid) for the Fed's easy-money mistakes is just now beginning. That is certainly very clear.

I also don't think we're going to have the likes of JPMorgan and BofA bailing out banks this time around, unlike what they did in 2008. You think anyone's gonna take on Silvergate at this point and bail them out? Crypto = toxic.

 

[maw1124]

This is an interesting discussion. I'm wondering to what extent any of this (residential lending, crypto, startups) is ACTUALLY different from interest rate risk. I think people make all kinds of decisions everywhere when borrowed money doesn't feel like borrowed money, which they would wouldn't make with that hurdle rate involved.

For us, my guess is we'll see cheaper homes and used cars in the near future (fine), probably more retirements (fine) and a lower stock market (still fine). But the rest of the economy will hum along just fine. We still need to spend on infrastructure and innovation, so the young folks should have plenty of upward mobility chances. And with that, less degenerate gambling.

In short, the froth will burn off but the coffee is still there.

maw

 

[duuder]

 

[maw1124]

After the 2008 debacle, mainstream banks are not as strong as they think they are.

I actually think the mainstream banks are a lot stronger than they were in 2008 because they haven't taken any risk since then -- they only lend to people who don't need it. No risk there, which is part of why SVB did so well, and also why we have "shadow banks". There's a ton of blue sky where traditional banks used to operate. Yes, I said "used to operate." They don't operate there anymore.

SVB were the only bank to smartly think their way into actually taking some risk. What a concept. Working with them, I admired their business model. Take some risk in the startup + get paid for it in terms of convertible instruments and warrants. Others followed. Silvergate went a step to far -- crypto. But that blue sky is still there and smart financiers will occupy it, be clear.

Traditional banks are insurance companies at this point -- the money goes one way. But that's appropriate in some sense for the country's aging and near retirement demographic.

maw

 

[Jlaa]

This is an interesting discussion. Im wondering to what extent any of this (residential lending, crypto, startups) is ACTUALLY different from interest rate risk.

Thanks - great insight. I suppose the answer depends on how many of these loans on the balance sheet are fixed rate and how many are floating rate.



But even then, if a lot of those residential loans are fixed rate, aren’t they guaranteed by Fannie and Freddie? Meaning the govt will promise to buy those loans at a not-horrible price to allow banks to free up capital? So then only kinda-sorta exposed to interest rate risk …. Kind of? (Apologies as I am not well educated in how this part of the system works).

Fannie Mae and Freddie Mac Make the 30-Year Mortgage Possible - Bloom…

archived 25 Sep 2022 19:37:22 UTC

archive.ph

Treasury rates of course, mostly do not float.

 

[maw1124]

Thanks - great insight. I suppose the answer depends on how many of these loans on the balance sheet are fixed rate and how many are floating rate.

View attachment 162685

But even then, if a lot of those residential loans are fixed rate, aren’t they guaranteed by Fannie and Freddie? Meaning the govt will promise to buy those loans at a not-horrible price to allow banks to free up capital? So then only kinda-sorta exposed to interest rate risk …. Kind of? (Apologies as I am not well educated in how this part of the system works).

Fannie Mae and Freddie Mac Make the 30-Year Mortgage Possible - Bloom…

archived 25 Sep 2022 19:37:22 UTC

archive.ph

Treasury rates of course, mostly do not float.

It exactly depends upon the mix of fixed v variable. But think about the liquidity side of it.

Even if your $2M residential mortgage is fixed 2.5%, how's its value (and your equity) doing under 7.5% rates? So you likely cannot access any cash from it and if you do that HELOC won't be cheap.

And how much economic activity has been fueled by low rate HELOCs and inflated housing valuations due to [drum roll] low rates? Not zero.

These are a sample of the ripple effects you eluded to in your first post.

If your 2.5% rate was variable, all of the above gets worse and you might actually just default. In foreclosure under a 7.5% regime, that house will not fetch $2M. Fannie covers the banks losses.

And all of this is worse when you consider, for example, that a lot of those $2M homes were built for investment purposes (AirBnB, etc), in the first place. I know some very prestigious neighborhoods across the country where the "real" homeowners are quaking in their boots right now because of these dynamics. When the new high value house next door is an AirBnB investment property, the long term prospects for the neighborhood don't look good.

maw

 

[Jlaa]

It exactly depends upon the mix of fixed v variable. But think about the liquidity side of it.

Even if your $2M residential mortgage is fixed 2.5%, hows its value (and your equity) doing under 7.5% rates?

If your 2.5% rate was variable, all of the above gets worse and you might actually just default. In foreclosure under a 7.5% regime, that house will not fetch $2M. Fannie covers the banks losses.

Agreed yes, if you are the borrower with. 2.5% fixed rate mortgage and rates go to 7.5% then yes agreed, you have no liquidity as you are probably under water.

Also you probably aren’t buying 800K Hammers at this point.

However if you are the bank, you probably don’t hold that fixed rate 30 year loan on your books (if you had a functioning chief risk officer) because you sold that fixed rate loan to Fannie / Freddie because that’s what they do - they buy these loans to take the risk away from the banks so as to make homes “affordable” (quotes intentional) for the people…right?

 

[maw1124]

Yes. No action in fixed low rates so banks dump those as quickly as they can and the buyer community isn't exactly robust.

maw

 

[gerryvz]

I actually think the mainstream banks are a lot stronger than they were in 2008 because they havent taken any risk since then

No question that they are stronger. Capitalization requirements are significantly higher.

I just don't think they are as strong as they (and the Fed) think they are.

Especially when the shit hits the fan, like I believe we're just now starting to see the beginning of.

The Fed is facing some REAL challenges in the coming few years -- they will have to thread a serious needle. And I, for one, do not feel they are up to it. The fact that they are being politically/woke/ESG-prioritized (from above) (as here, and here as examples), rather than making sound policy for sound policy's sake, is in my opinion the factor that is going to finally be the last Jenga piece removed before everything really goes to shit.

Powell and Yellen are certainly no Greenspan nor Volcker, that's for damned sure.

 

[nocfn]

I like the budget that taxes unrealized capital gains. WTF are in those hairplugs he has? We are certain to run out of other people's money with that crap. Yikes is right.

 

[maw1124]

Funny how all the small government, free market types suddenly want big government and safe hands… queue big safe government hands (attached, courtesy of @Jlaa).

maw

 

[Jlaa]

Funny how all the small government, free market types suddenly want big government and safe hands… queue big safe government hands (attached, courtesy of @Jlaa).

maw

Yep I think the seizure of Signature Bank of NY and the gov reaction is a good thing to promote calmness. GREAT move (to stave off bank runs). Yellen and powell are trying to prevent bank runs by making all depositors whole …. W no mention of fdic limits.

 

[maw1124]

Just buy a little disinflation when a crisis presents the opportunity. As you state, great move IMO.

maw

 

[duuder]

and will raise .25 point under a ruse of .50 instead as the excuse

 

[maw1124]

and will raise .25 point under a ruse of .50 instead as the excuse

Of course, markets will roar which will put .50 back on the table for the next meeting… but round and round we go… they have to do this… cannot have a run on banks right now.

There’s an unknown question of how far this spreads (excess crypto and startup money and losses) and right now the world cannot afford to learn the answer to these questions.

maw

 

[gerryvz]

Funny how all the small government, free market types suddenly want big government and safe hands… queue big safe government hands

Not me. The Feds should have let them fail.

The incompetence (as you said earlier) of their risk management officers is pretty staggering.

I also fault depositor executives (startups, VCs and others) who put all of their $$$ eggs in the SVB basket instead of diversifying.

Gonna be interesting to see if investors inject new capital into SVB to shore it up. In any case, taxpayers should not be on the hook for the SVB bankers’ and depositors’ incompetence.

I don’t think this is over, not by a long shot. Despite the actions the Fed et al are taking.

Separately, amazing to see government moving this fast. The involved Fed, Treasury & FDIC public servants certainly earned their paychecks over the past few days.

Which is nice to see when it comes to “public servants” in the bureaucracy machine.

 

[Jlaa]

Not me. The Feds should have let them fail.

The incompetence (as you said earlier) of their risk management officers is pretty staggering.

Are we talking about SVB's seizure which happened on 3/10, or Signature Bank of NY's seizure which happened today 3/12?

I think (just my opinion) that both SVB and SBNY both did fail, in the sense that the owners of these two banks are the shareholders, and that the govt is making sure all their liabilities (depositors) are paid off (at least in SBNY's case) but then implicitly wiping out all the shareholders (share price goes to zero).

That said I agree that the depositors should have spread their risk ... but these two institutions did fail.
Just my take.

 

[maw1124]

@Jlaa and I were discussing this earlier. The SVB docs require the companies (whose deposits are "collateral" and otherwise tied up in convertible instruments, warrants and what have you) to hold all their deposits at SVB. Standard sort of provision but its utility at some point overran itself. This was why I threw in "piss poor bank policy" next to "piss poor CIO". A new buyer could change just that provision and with it the course of history. I'm disappointed no such buyer emerged.

But I feel where you're coming from. None of these moves in a vacuum were poor. That's why I'm careful not to over-politicize shit. A run on the bank is a run on the bank. Pure and simple.

But... make no mistake (to @Jlaa point), the shareholders AND management have failed and will continue to feel the consequences of their failure. The SVB CEO is no longer a Fed governor, effective this weekend. But he'll rebound -- anyone remember what Neil Kashkari was doing in 2008?

maw

 

[gerryvz]

SVB. I would say they partially failed, but the rescue today prevented total failure.

Did you know that only 11% of SVB’s deposits were insured? A far cry from “regular” banks.

A total fail in my book would not have had the bailout, but rather let the (@nocfn-like) vultures in to pick at and buy the assets they wanted to.

 

[gerryvz]

But... make no mistake (to @Jlaa point), the shareholders AND management have failed and will continue to feel the consequences of their failure. The SVB CEO is no longer a Fed governor, effective this weekend. But hell rebound -- anyone remember what Neil Kashkari was doing in 2008?

maw

Well, Michael Milken certainly has done well enough for himself since his Drexel Burnham Lambert days and then prison. Heck, he’s back up to $6B in wealth and on the Fortune 500.

 

[maw1124]

SVB. I would say they partially failed, but the rescue today prevented total failure.

Did you know that only 11% of SVB’s deposits were insured? A far cry from “regular” banks.

A total fail in my book would not have had the bailout, but rather let the (@nocfn-like) vultures in to pick at and buy the assets they wanted to.

They tried that. Prices were at 60%-70% on the dollar. This avoids that 30%-40% loss, the related unquantifiable fear effect, and buys disinflation when the world needs it most. I call that "better policy."

maw

 

[Jlaa]

SVB. I would say they partially failed, but the rescue today prevented total failure.

Did you know that only 11% of SVB’s deposits were insured? A far cry from “regular” banks.

A total fail in my book would not have had the bailout, but rather let the (@nocfn-like) vultures in to pick at and buy the assets they wanted to.

There was no bailout - I believe "bailout" is the incorrect term here. Article on Bloomberg

 

[gerryvz]

If depositors get access to their funds tomorrow, backstopped by assets made available by the government (that the bank can’t provide), then what would you call it?

You should know that whenever something is explicitly called out as NOT being something, it usually is exactly that.

This is a case of semantics. But then, so much of what the government says … IS.

 

[Jlaa]

If depositors get access to their funds tomorrow, backstopped by assets made available by the government (that the bank can’t provide), then what would you call it?

You should know that whenever something is explicitly called out as NOT being something, it usually is exactly that.

Assets = Liabilities (Deposits) + Shareholder's Equity

I understand what you are saying, but imagine you are a shareholder and all your shares went to zero.
Imagine you held bonds issued by the bank and your bond value went to zero and all your coupons went to zero.

Would you feel bailed out?

 

[gerryvz]

If you’re a SVB shareholder, you’ve accepted risk by investing in a bank. Probably more risk than someone investing in JPMorgan or Citibank.

But you can lose that investment. Just like I’ve lost 60% of my investment in DocuSign this year (though I will continue to hold it as I believe in the company/market).

The depositors have been bailed out. The shareholders lost their investment bets.

BUT, you tell me — is shareholder equity enough to make the depositors whole?

 

[Jlaa]

If you’re a SVB shareholder, you’ve accepted risk by investing in a bank. Probably more risk than someone investing in JPMorgan or Citibank.

But you can lose that investment. Just like I’ve lost 60% of my investment in DocuSign this year (though I will continue to hold it as I believe in the company/market).

The depositors have been bailed out. The shareholders lost their investment bets.

BUT, you tell me — is shareholder equity enough to make the depositors whole?

Exactly, shareholders and bondholders were not bailed out. Remember: Assets = Liabilities (Deposits) + Shareholder's Equity
When there's a bank run, what happens is that the bank is forced to sell assets super quickly to cover its liabilities.
What the government is doing is slowing that down, and, *forcing* shareholder's equity to zero.

The government is dictating the pace of the unwinding so that Assets = Liabilities + 0.

It's a good thing to not want to see the world burn. The world burning just causes unnecessary suffering.

 

[gerryvz]

I just now happened to look at the lead editorial for tomorrow’s WSJ, which was just posted a few minutes ago (after I made the posts above).

 

[maw1124]

Good thing the WSJ calling it a bailout doesn't actually affect the economics or policy implications of what actually happened, in case some were wondering.

maw

 

[AMG5PT4]

SVB failed because of the actions of the Fed over the last 12 months. Pure and simple. SVB has about $80B of asset investments on their Balance Sheet in Mortgage Backed Securities (MBS) that had average coupon/interest rates between 2 and 3%. When the Fed has raised interest rates from 0% to 6% in the span of less than a year, SVB was losing money - their interest income was between 2-3% and their bank borrowing rate was well over that. In addition, the carrying (mark to market) value of that $80B in MBS assets was around 70% of what they originally invested when SVB bought those MBS!

The short sellers didn't need to be a bunch of Einsteins to figure out SVB was in deep trouble, so they shorted the stock like crazy and that was that. Yes, the owners of SVB and all the creditors SVB owed money to are getting 0. All of the depositors will get their cash from the FDIC no matter the size of the deposit.

But the real villain in this sad story is the Fed. Powell wanted to keep inflation in check (that was exacerbated by the current administration) by raising interest rates, which is what KO'd SVB.

If Fed Chief Powell doesn't spew out a mea culpa this week and lower interest rates, there will be other banks that follow SVB. Negative impact on car values - IMO not so much.

 

[gerryvz]

Not saying my mind is great, but it is interesting to see (after the fact) that the WSJ editorial staff (not news staff) thinks similarly to me and is also not believing the government's "this is not a bail-out" hype.

 

[maw1124]

Yeah, the Fed will take its share of criticism (because, you know, Fed critics), but there will be enough people debating that, so I don't have to.

Kids want candy all day every day but that doesn't mean it's good for them, nor does it make the tantrum they throw when their parents take it away their parents' fault.

I'm not smart enough to second guess the Fed, but I am smart enough to make sure kids don't get too much candy.

maw

 

[Jlaa]

SVB failed because of the actions of the Fed over the last 12 months. Pure and simple. SVB has about $80B of asset investments on their Balance Sheet in Mortgage Backed Securities (MBS) that had average coupon/interest rates between 2 and 3%. When the Fed has raised interest rates from 0% to 6% in the span of less than a year, SVB was losing money - their interest income was between 2-3% and their bank borrowing rate was well over that. In addition, the carrying (mark to market) value of that $80B in MBS assets was around 70% of what they originally invested when SVB bought those MBS!

I am intrigued about your perception. Why is it that you believe the Fed caused SVB to fail (through increased interest rates) rather than SVB leadership caused SVB to fail by assembling a business model that is incompatible with higher (and historically more normal) rates? I'm honestly asking, not arguing.

The short sellers didnt need to be a bunch of Einsteins to figure out SVB was in deep trouble, so they shorted the stock like crazy and that was that. Yes, the owners of SVB and all the creditors SVB owed money to are getting 0. All of the depositors will get their cash from the FDIC no matter the size of the deposit.

But the real villain in this sad story is the Fed. Powell wanted to keep inflation in check (that was exacerbated by the current administration) by raising interest rates, which is what KOd SVB.

If Fed Chief Powell doesnt spew out a mea culpa this week and lower interest rates, there will be other banks that follow SVB. Negative impact on car values - IMO not so much.

I am doubly intrigued about the argument that the Fed is the villain - why? Again, seeking to understand the argument.
From my perspective, the Fed has a dual mandate:

• Price stability (it like to keep inflation around 2%)
• Maximum employment

For price stability, obviously inflation is high.
For employment, right now the issue is that the economy is sending mixed signals:

• Information, Real Estate, and Construction industries are losing jobs fast
• Leisure, Hospitality, and Retail can't get enough workers

So the Fed is trying to thread the need to slow down some industries which are too hot while not killing other industries which are already in a recession. At the same time, prices are too high. I would think that the Fed is just trying to do it's job?

 

[gerryvz]

The Fed has a relatively new additional mandate of creating equity, mitigating climate change and all the rest of the DEI, ESG and other currently progressive stuff out there.

Just sayin’

 

[Jlaa]

The Fed has a relatively new additional mandate of creating equity, mitigating climate change and all the rest of the DEI, ESG and other currently progressive stuff out there.

Just sayin’

Heh, certainly that’s what someone like Elizabeth Warren wants, but I do not think anyone at the Fed takes Warren seriously.

Anyways for more information on the dual mandate, one can read about it from the Fed itself- The Fed and the Dual Mandate: In Plain English

 

[gerryvz]

Heh, certainly that’s what someone like Elizabeth Warren wants, but I do not think anyone at the Fed takes Warren seriously.

Anyways for more information on the dual mandate, one can read about it from the Fed itself- The Fed and the Dual Mandate: In Plain English

Just look at public statements and speeches over the past two years from Powell and Yellen (for the entities they control) and it's pretty darn clearly stated. "Heh" is a good dismissal, but actually take a look at their speeches.

Yellen sees key role for Treasury's racial equity council despite Republican criticism

U.S. Treasury Secretary Janet Yellen on Monday said a new racial equity advisory committee, which has drawn the ire of Republican lawmakers, would play a big role in helping the department address acute economic disparities faced by communities of color.

www.reuters.com

Here's (attached PDF) the full WSJ lead editorial from Monday, by the way.

It's an editorial (i.e. opinion), but I'd love to see it refuted and/or any incorrectly stated facts, or conclusions made.

 

[maw1124]

For now I'll pretend that "creating equity" is unrelated to full employment, and that "mitigating climate change" is unrelated to price stability.

I'll do that just long enough to point out that the quoted phrases are not part of the Fed's dual mandate. And to point out that the Fed cannot change its mandate -- no matter what Elizabeth Warren or Rupert Murdoch's WSJ say or want -- only Congress can do that.

Finally, if the concepts by some amazing and criminal chance work their way into Fed speeches it's because the pretense of the first paragraph is probably plain wrong -- or at very least the Fed members disagree with that pretense.

maw

 

[Jlaa]

Ill do that just long enough to point out that the quoted phrases are not part of the Feds dual mandate. And to point out that the Fed cannot change its mandate -- no matter what Elizabeth Warren or Rupert Murdochs WSJ say or want -- only Congress can do that.

Exactly! The Fed’s dual mandate (not triple mandate or quadruple mandate) is stated right at the Fed websites, regardless of newspaper editorials or speeches by the Treasury Secretary or whatever.