And again, look at the dates covered.Quote:
Originally Posted by MultiVerse
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And again, look at the dates covered.Quote:
Originally Posted by MultiVerse
Mark to market is not as simple as a last sale price. Last sale price is just that. It could have been for one share or one contract. Not 10 million. Oil is a good example. Big transactions are rarely made at the market price so mark to market does not represent market price
Ok, to your point, after the financial crisis of 2008, there were changes made to SFAS 157 that were intended to address concerns about the impact of mark-to-market accounting on market volatility. The changes allowed for more flexibility in the use of fair value measurements and provided more guidance on how to determine fair value. Fair enough.Quote:
Originally Posted by JimmyCarter
However, there is still some academic research that suggests that accounting rules, including updated SFAS 157, can contribute to increased market volatility. For example, one study published in the Journal of Accounting and Economics in 2018 examined the impact of mark-to-market accounting on the volatility of bank stocks. The study found that mark-to-market accounting was associated with increased volatility during the financial crisis and that this effect was particularly pronounced for banks with high levels of fair value assets.
And to 4matic's point, another study published in the Journal of Financial Economics in 2017 examined the impact of fair value accounting on the volatility of commodity prices. The study found that the use of fair value accounting by financial investors, such as hedge funds and commodity index funds, could lead to increased volatility in commodity prices.
These studies suggest that accounting rules, including updated SFAS 157, can have a significant impact on market volatility, particularly during times of market stress.
What paper? :D
I came to the same conclusion and deleted the post prior to seeing your response. Here are two better more recent, 2018 & 2019, studies referenced in the post above reaching similar conclusions:
https://www.sciencedirect.com/scienc...65410107000286
https://www.tandfonline.com/doi/abs/...aj.v62.n2.4083
“Telling investors how bad things currently are can influence their decision making” doesn’t really sound like a problem to me.Quote:
Originally Posted by MultiVerse
Noted, thanks.Quote:
Originally Posted by MultiVerse
Now we're just circling around the original point. It comes down to whether prices quoted in financial markets are always reflective of the true value of an asset, and whether market prices could be influenced by factors such as speculation or panic selling, despite accounting standards updates.Quote:
Originally Posted by JimmyCarter
Efficient markets require access to all relevant information, which tends to be in short supply during most crises, but that doesn’t change the fact that assets are changing hands at those prices so people are making real money decisions and not hypotheticals.Quote:
Originally Posted by MultiVerse
Right, the efficient markets hypothesis goes to heart of the matter. If a person believes markets are always efficient and there's never any behavioral factors during times of stress then ignore the history of banking crises and the academic research... it comes down to the point made here repeatably this past week: fixing financial market problems requires time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away during times of stress.
Impairment, sure, but if principal balances are guaranteed why should anybody have to write off all their capital just to recover it until maturity if they consider it HTM? That doesn’t represent reality at all, even if it’s some kind of ad hoc expression of liquidity through capital position (which feels dubious). It’s all just accounting, and given that unrealized gain/loss represents a very prominent home on the balance sheet I expect a discerning investor has no problem identifying that particular weakness without the morans of the world starting a bank run because they don’t understand what HTM means.Quote:
Originally Posted by JimmyCarter
It's not just accounting, these are real losses.Quote:
Originally Posted by Mustonen
If you invest in a bond that pays 2 percent, and inflation goes to 6 percent you are losing money holding it to maturity.
Sent from my moto g 5G using Tapatalk
Just here to say change over time is a thing, and it matters.Quote:
Originally Posted by rod9301
Time value of money. If you can wait that long, it’s worth X. If you need it now, it’s worth X-Quote:
Originally Posted by Mustonen
That’s why HTM is allowed, but also why SVB was fucked by dried up funding, because deposit outflows forced them out of HTM.
No, I’m losing value. I don’t lose any dollars. It’s just a balance sheet entry either way. Not blowing away my capital doesn’t mean I’m not paying attention to NEV, either.Quote:
Originally Posted by rod9301
How would MTM have helped them, though? Because they had plenty of capital and strong enough earnings to be just fine. Do you really think they should have gone into conservatorship the second their capital ratio, net of unrealized losses, went below capitalization thresholds? If a Peter Thiel tweet sparks a bank run, what do you suppose THAT would do? You think it would’ve been orderly?Quote:
Originally Posted by JimmyCarter
ETA: They also had access to plenty of liquidity, it was just expensive. They realized their balance sheet sucked and they were ripping off the bandaid to shore up future earnings. Not a terrible move. Ended terribly, though. And buying $80B in 15 year treasuries was certainly a terrible move, even at the time. But it happened on the heels of almost 15 years of near zero rates.
MTM isn’t there for the banks or depositors, it’s for the investors. The investors see that their equity is in a much worse position, they act accordingly. You act like it’s unfair to the banks, but they knew what they were doing marking those assets under HTM and it came back to bite them in the ass.Quote:
Originally Posted by Mustonen
The whole point of all of it is to fairly and accurately represent the financial position of said company. For a bank, with a large and stable investment portfolio, MTM on HTM investments (treasuries, no less) would not represent reality in any good way. If your investor is so simplistic that they can’t evaluate that for what it is I don’t really know what to say, but representing to the world that the money isn’t there when it certainly is isn’t the best representation of reality.
I ask again, do you think SVB should have been put into conservatorship in January? And if so, do you think that would have been a good thing for anybody?
And I agree with the ETA piece, but if I’m an equity investor I’m pulling my money without even thinking about the prisoners dilemma
Again, the money wasn’t quite “there”, it would be there in a few years if you wait. But I don’t think you’d give me $100 today in exchange for me giving you the $100 back in 5 years.Quote:
Originally Posted by Mustonen
HTM requires that you have both the ability and the intent to hold the asset to maturity.Quote:
Originally Posted by Mustonen
I haven’t dug too deep into what exactly they knew then and how much changed over the next few months, but given the state of the VC market at that point I think they should have known they were not going to maintain the same ability to hold.
Why not? A lot of this is conditional on whether banks are forced to liquidate. If not, banks should be more profitable in a higher interest rate environment. Don't they make more money on the spread or float in addition to their day-to-day banking business? All things being equal higher rates should be better for banks and for investors, right?
Banks make money on the spread and there is some elasticity on interest rates, but when your asset returns are long term and fixed, your liabilities get hit with the higher rates first so you actually don’t do as well.Quote:
Originally Posted by MultiVerse
A person could argue it's all conditional. SVB had the advantage of sticky deposits. Its depositors had something like $2.5 million on average earning around or less than 1%. Most were perfectly happy with that arrangement until the panic. Big banks like JP Morgan have $Trillions in total deposits now earning money on the spread.
Sure, but how much was in checking vs something like CDs that were maturing and resetting much higher?Quote:
Originally Posted by MultiVerse
Coupled with the fact that the VCs deposit money after funding rounds, and those were slowing dramatically at that point, which meant more companies in pure cash burn mode, leading to a rapidly declining deposit base.
Good point. I mentioned California's ZIRP earlier.
I’d argue they had both, until they made a decision to liquidate.Quote:
Originally Posted by JimmyCarter
They knew exactly what they had in re: unrealized losses and liquidity, and they likely also knew about the homogeneity of their depositors. Your most basic ALM analysis will unearth that. I believe the primary criticism is that they shrugged over the second. Not a lot they could do about the first, except what they did.
Long term investments definitely slow down repricing. It’s less about a higher interest rate environment allowing for greater NIM, and more about being pinched by that zero on the lower bound. Hard to pay less than zero. Nice to have a little bit of breathing room.
These guys had a super low loan/deposit ratio, which likely didn’t help even though it served as a faux endorsement of their liquidity. Commercial loans are more likely to be priced to an index than long term fixed. As opposed to, say, treasuries and bonds. As rates increase you follow them more slowly with deposit rates than you do with loan rates, especially when liquidity isn’t tightening like we are seeing right now. Lots and lots of opportunity, traditionally, to juice up your income statement, which is what was generally seen in the lead-up to COVID when rates were FINALLY and slowly creeping upward. Commercial deposits are fairly stable and often cheaper than consumer deposits, especially when you worked them into your loan arrangements like these guys did.
https://finance.yahoo.com/news/fdic-...190305152.html
"U.S. Treasury Secretary Janet Yellen said on Wednesday that the Federal Deposit Insurance Corporation (FDIC) was not considering providing "blanket insurance" for banking deposits following the collapse of two U.S. banks this month."
cough cough bS
^Markets sure dumped at the end of the session despite the 25bp
Historically, mkt does not tank until the fed pivots. were getting closer.
Sell today, buy tomorrow. That's the play.
Market goes BOOM tomorrow.
Good article. Reads like something written by the Fed Guy.Quote:
Originally Posted by LeeLau
Right, total crap. Even if not the official U.S. policy, according to one economist chatting on a podcast: "I think there have been something like 500 banks that have failed since 2008. And I think, to my knowledge, every single depositor, uninsured or insured, got every cent out of those bank failures every time." They're apparently not considering blanket insurance because they already provide it.Quote:
Originally Posted by LeeLau
I Googled and couldn't fact check, but everything you hear on a podcast is always true.
Oh right. Thanks LeeLau, I wasn’t up to speed on that but yeah you can feel how tight things are. Almost visceral for small to medium.Quote:
Originally Posted by dschane
There’s a lot of weird shit going on generally in what is supposed to be a pretty boring industry.
Its fascinating watching the interplay of psychology and macro play out. Like you said typically financial regulation is deadly boring.Quote:
Originally Posted by Mustonen
And props to everyone so far for a solid (yet not bickering) discussion about mark to market! I dove deep into that when buying mREITS but learning both points of view for banks is also interesting
But the asset was there, and the value of the asset was adjusted on the balance sheet accordingly. Why should it wipe out capital?Quote:
Originally Posted by JimmyCarter
Flip that, if unrealized gains boosted capital, would you actually feel better about an entity whose strong capital position was predicated solely upon the interest rate environment? If it’s actually HTM all those gains and losses just get recovered to the same place through to maturity - and there’s that time component that you wanted to bring up. Over time all of that washes out and it really is only about liquidity in the interim and capital position over time.
Sure, it’s a bit of a wink wink nudge nudge when you cherry pick some gains for “reasons” (which generally truly are good faith efforts to reposition the balance sheet) but the intent really is to have a stable balance sheet, particularly with investment assets, and focus your risk on your loan assets.
Oh come on now, give us time.Quote:
Originally Posted by LeeLau
Investments are marked up and down all the time. The same principal is applied to every PE/mutual/hedge fund out there with illiquid holdings.Quote:
Originally Posted by Mustonen
The premise is “what is the asset worth if you had to sell it”?
Bob wants to take his money out, is it there and can you pay him?
A: Yes, right away
B: Yes, as long as he doesn’t try to cash that check for 5 years.
If the answer is B, then you are currently insolvent and you get seized to preserve that capital and protect everyone.
Outside of liquidation, it will depend on how big a check Bob is trying to cash for literally every bank. That’s just not how they’re built. “Hey, we’re gonna call your car loan payable and due because Bob wants his money. Cool?” Granted, you can sell loans the same way you can buy deposits, and both provide liquidity, but that implies loan portfolio market valuations also should be run through capital and that’s chaos.Quote:
Originally Posted by JimmyCarter
I see what you’re saying. I just don’t know why running it through the income statement and/or net worth is necessary to accomplish your goals. Capital impairment is a bit of a nightmare if it fluctuates on the whims of the market and I fail to see how anybody benefits, including investors.
Does a bank get to mark up its capital based on NMD retained at below market rates, taking decay rates into account?
Loan portfolios are marked to fair value and loan loss provisions are run through the income statement.Quote:
Originally Posted by Mustonen
NMDs at below market rates don’t matter because it’s a liability and the bank’s max liability is return of deposit capital at any point.
ALLL recognizes impairment, not market value. Analogous to OTTI on HTM investments.Quote:
Originally Posted by JimmyCarter
NMDs have clear market value, written up or down, in an acquisition though. Why not mark them to market? (I know that’s an absurd argument on its face, but…. I think it’s all more a continuum than the black/white you’re arguing)