Is the stock market going to tank?

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Originally Posted by Mustonen

I dare say this was almost 100% psychological, or at least due to some basic misunderstanding. No? There seems to be a false equivalency afoot between depositor and investor. They aren’t really the same thing….

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Totally agree its psychological. Totally agree its herd mentality. My bet is that FRC WAL ZION PACW etc revert somewhat back to the mean but with a valuation haircut now that investors at large recognize the new interest rate risk for assets held.

However, because the market can remain irrational longer then your positions can remain solvent yada yada it may take time for the herd to realize the risk is overblown, isn't systemic and that an '08 style contagion isn't pending. Therefore my gut tells me to scale in a position over time; perhaps 1 to 2 weeks at least

“The fundamentals of the economy are strong”

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Originally Posted by Mustonen

I dare say this was almost 100% psychological, or at least due to some basic misunderstanding. No? There seems to be a false equivalency afoot between depositor and investor. They aren’t really the same thing….

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But they can be. Which means a single party (or group) by being both can use the leverage of one to make money from the other.

I'm still trying to find out what's to stop short sellers from igniting bank runs by using their own deposits (risk free!) to push the bank into an untenable position?

The entire financial market is psychological. Why should stocks trade at a 20 multiple vs a 10? “Historical valuation?”

In the end we will all bank with J.P. Morgan...
There has been a loss of 10,000 local banks over the last 30 years. This trend shows no signs of changing. The consolidation is accelerating. 15b of deposits have moved from smaller banks to the "too big to fail" banks over the last 3 days.


Sent from my iPhone using TGR Forums

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Originally Posted by 4matic

“The fundamentals of the economy are strong”

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Right.

Rapid rise in rates has definitely stressed the system more than has been broadly appreciated. Pairing those rate increases with sources of liquidity makes a lot of sense, as does broadly reinforcing the stability of the financial system (and their deposits) to depositors.

Also when you move fast and take chances shit breaks, so that shouldn’t surprise anybody. But here we are.

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Originally Posted by jono

I'm still trying to find out what's to stop short sellers from igniting bank runs by using their own deposits (risk free!) to push the bank into an untenable position?

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By taking their money out?

We’re not that far from another “no short list”.

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Originally Posted by jono

But they can be. Which means a single party (or group) by being both can use the leverage of one to make money from the other.

I'm still trying to find out what's to stop short sellers from igniting bank runs by using their own deposits (risk free!) to push the bank into an untenable position?

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They aren’t the same thing, but you’re right that they can be both.

What stops it? Reasonable ALM that recognizes the instability of large and/or homogenous accounts and maintains ample liquidity to manage it. It’d be quite the long game, and a bunch of subterfuge, to deliver on that premise.

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Originally Posted by Mustonen

I dare say this was almost 100% psychological, or at least due to some basic misunderstanding. No? There seems to be a false equivalency afoot between depositor and investor. They aren’t really the same thing….

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From an investor standpoint shareholders, bondholders, and senior management all paid a price. There was no government rescue, no moral hazard, so the government or the system or the free market, whatever anyone wants to call it, worked.

From a depositor standpoint there was a lot of herd concentrated risk in tech demand deposits so the psychology here is somewhat unique. SVB tried to raise capital to fix their balance sheet and its depositors punished them for it. The risk SVB undertook wasn't just a bad bet on interest rates, they also bet on risky depositors.

So instead of letting banks like SVB fail we're punishing shareholders for systemic problems created in part by its depositors. What that means is more punitive regulation, more capital requirements, more short-term bond requirements, fewer risky borrowers and depositors — all of which will make banks less profitable making it harder for them to raise equity.

I don't know if that's a good thing, maybe it is, but it's also circular in the sense even though depositors and investors are not equivalent they are interdependent.

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Originally Posted by jono

I'm still trying to find out what's to stop short sellers from igniting bank runs by using their own deposits (risk free!) to push the bank into an untenable position?

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As a former buy-side short seller let me try to answer this question.

In theory - nothing. BUT that carries a lot of risk

1 - you'll need your funds to have enough size to trigger a bank run by asking for withdrawal
2 - if you have that much money in one bank then you have risk in being an uninsured deposit
3. - if you don't have that much money in one bank but are colluding with others to trigger a withdrawal then you'll almost certainly attract regulator scrutiny (SEC, banking etc) by the act of collusion. It's under a basket of anti "short and distort" laws.
4. If you're colluding there's too much risk that one of your gang of short and distort crew will backstab you and take a counterparty position to break your campaign.

TLDR - there's easier ways to make money. Either on the long or short side

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Originally Posted by MultiVerse

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So instead of letting banks like SVB fail we're punishing shareholders for systemic problem created by its depositors.

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Maybe that's a good thing, but it's also somewhat circular in the sense depositors and investors are not equivalent but they are interdependent .

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Oh interesting.

Where on the spectrum of sympathetic figures do bank investors rank, especially in relation to bankers themselves? I think it’s safe to say both are a ways further down the list than depositors, even VC depositors who need to make excessive payroll or bankroll crazy parties with exotic pets and shit.

The main point is not who is more sympathetic or whatever, rather how do banks raise equity and find shareholders in this environment? We don't want depositors or banks to take risks but we do want investors and shareholders to take risks?

The crypto crowd likes to argue banks can create credit "out of thin air" only we've seen first hand that's not true. As intermediaries, they need credit markets too.

That was mostly tongue in cheek.

They might have to raise equity the old fashioned way, through retaining earnings….

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Originally Posted by MultiVerse

The main point is not who is more sympathetic or whatever, rather how do banks raise equity and find shareholders in this environment? We don't want depositors or banks to take risks but we do want investors and shareholders to take risks?

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This is why there are too many public banks. Not enough risk opportunity to go around to satisfy stakeholders

That's Matthew Yglesias' solution, "regional banks like Silicon Valley Bank are bad and we should encourage more consolidation among them to try to have eight or nine huge megabanks instead of just four." Meanwhile, megabank Credit Suisse is in trouble too...

CS been in trouble for many years. Plenty of time to exit for all stakeholders

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Originally Posted by Mustonen

They aren’t the same thing, but you’re right that they can be both.

What stops it? Reasonable ALM that recognizes the instability of large and/or homogenous accounts and maintains ample liquidity to manage it. It’d be quite the long game, and a bunch of subterfuge, to deliver on that premise.

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I think this cycle argues for a pretty short timeframe, assuming someone could identify an opportune target. Not unlike short squeezing on GME.

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Originally Posted by LeeLau

As a former buy-side short seller let me try to answer this question.

In theory - nothing. BUT that carries a lot of risk

1 - you'll need your funds to have enough size to trigger a bank run by asking for withdrawal
2 - if you have that much money in one bank then you have risk in being an uninsured deposit
3. - if you don't have that much money in one bank but are colluding with others to trigger a withdrawal then you'll almost certainly attract regulator scrutiny (SEC, banking etc) by the act of collusion. It's under a basket of anti "short and distort" laws.
4. If you're colluding there's too much risk that one of your gang of short and distort crew will backstab you and take a counterparty position to break your campaign.

TLDR - there's easier ways to make money. Either on the long or short side

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Thanks, #3 was particularly helpful. It kind of seems like #2 is put in doubt by backstopping uninsured deposits, though, which is what prompted the question.

In the post-Elon Twitter Era it seems like there's a non-zero risk that not all capital is in hands that only use it to make more.

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Originally Posted by jono

I think this cycle argues for a pretty short timeframe, assuming someone could identify an opportune target. Not unlike short squeezing on GME.

Thanks, #3 was particularly helpful. It kind of seems like #2 is put in doubt by backstopping uninsured deposits, though, which is what prompted the question.

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Because a bank won’t notice you parking a few billion, invest it immediately in long term assets, and then be shocked when you yank the cash a few days/weeks/months later? Even SVB’s ALCO would have caught that.

Nobody guaranteed backstopping deposits. You can just hope. Big risk small reward.

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Originally Posted by Mustonen

Because a bank won’t notice you parking a few billion, invest it immediately in long term assets, and then be shocked when you yank the cash a few days/weeks/months later? Even SVB’s ALCO would have caught that.

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The same ALCO that saw Thiel coming?

I’m going to put all my cash, tens or hundreds of billions of dollars, in a bank, just to take it all out at once in the hopes I make money shorting the bank? Back when there was no guarantee on all of those tens or hundreds of billions (aside from my first 250k)?

No.

EDIT: …and collude…with the federal reserve…to quickly raise interest rates so they are forced sellers at a loss to their balance sheet, so there’s questions into the ability of the bank to meet other depositors withdrawals. Need that point too.

No.

Green shoots

To be clear, I'm not saying it already happened. I'm saying there may be a downside to normalizing the infinite backstop.

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Originally Posted by jono

To be clear, I'm not saying it already happened. I'm saying there may be a downside to normalizing the infinite backstop.

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Seems to me like regulators going forward need to acknowledge that implicit guarantee and make it explicit, which is going to require more strict regulations of smaller banks, and increased fees being paid into the FDIC bailout fund.

The reality is, banks should be regulated and run like utilities.

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Originally Posted by JimmyCarter

The reality is, banks should be regulated and run like utilities.

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Maybe so. Canada seems to have figured it out. One thing that is known with pretty good certainty, and please don't shoot the messenger on this (as he ducks and covers), deposit insurance gives bank executives an incentive to take socially excessive risks resulting in more, not fewer, bank failures. It's well established in the literature.

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Originally Posted by jono

To be clear, I'm not saying it already happened.

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The argument makes more sense if instead of suggesting a preconceived plan the planets aligned and somebody took their shot. I'm not arguing that's what happened either, only that it seems at least possible in some reality.

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Originally Posted by Mustonen

I dare say this was almost 100% psychological, or at least due to some basic misunderstanding. No? There seems to be a false equivalency afoot between depositor and investor. They aren’t really the same thing….



I might agree with that, except how? SVB was well capitalized and their balance sheet was extremely conservative. The FDIC put their seal of approval at every location and on every page of their website that discussed deposits. Risky loans? Hell no… we just put it in these nice safe treasuries to keep your money safe because so safe. Unrealized losses went through the roof….as it did for every FI with investments on the balance sheet. ROA was getting pinched by a weakening net interest margin…as it was for every FI, and earnings are still positive with a strong capital position so just wait a year or two and we’ll get back on track. Except that’s where they made a mistake; they wanted to tune up earnings by taking a loss now to reinvest at higher yields. And that put a slight damper on their capital position that they didn’t like a lot, so they tried to raise capital and ran into an illiquid market, and then they told everybody to not panic.

Very smart people in this thread don’t really understand ALM at a financial institution; shit, very smart people who are members of ALCO at financial institutions don’t really understand ALM at financial institutions. I fail to see how it makes sense or is reasonable for an unrelated business to have to worry about understanding it.

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If this bank run started as a genuine worry that the back would be insolvent and impact business it’s clear that a) counterparty risk was a thing b) they had ways to know even if they outsourced reading of public? Information to other partys. If you don’t care about insolvency- why move your money?

infinite balance guarantee might have been a mostly practicality happening thing, but it’s clear they didn’t believe that, and that’s a change worth money (and regulation if it’s going to stay a thing)

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Originally Posted by jono

The same ALCO that saw Thiel coming?

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Yes, as I actually said. Even that one.

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Originally Posted by JimmyCarter

The reality is, banks should be regulated and run like utilities.

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Postal Banking?

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Originally Posted by JimmyCarter

The reality is, banks should be regulated and run like utilities.

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Nationalize banks, utilities, health care, and while we’re at it defense!

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Originally Posted by dunfree

If this bank run started as a genuine worry that the back would be insolvent and impact business it’s clear that a) counterparty risk was a thing b) they had ways to know even if they outsourced reading of public? Information to other partys. If you don’t care about insolvency- why move your money?

infinite balance guarantee might have been a mostly practicality happening thing, but it’s clear they didn’t believe that, and that’s a change worth money (and regulation if it’s going to stay a thing)

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You raise a fair point, which is that the information needed to perform an independent ALM analysis isn’t publicly available. I’m not sure if model validation is something that is typically made available to anybody outside of regulators either….

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Originally Posted by Mustonen

Yes, as I actually said. Even that one.

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Why didn't that one protect the shareholders?

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Originally Posted by jono

Why didn't that one protect the shareholders?

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Because this wasn’t a short term play by a single depositor/investor? I’m not sure what we’re talking about at this point.

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Originally Posted by MultiVerse

The argument makes more sense if instead of suggesting a preconceived plan the planets aligned and somebody took their shot. I'm not arguing that's what happened either, only that it seems at least possible in some reality.

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True. Although the risk still isn't that it already happened but that the possibility has been demonstrated and now we're talking about inventivizing a repeat. Possibly by simple capitalists/rope salesmen, possibly not.

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Originally Posted by Mustonen

Because this wasn’t a short term play by a single depositor/investor? I’m not sure what we’re talking about at this point.

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I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced vs. the Beverly Hillbillies' ability to disguise their intentions or whatever.

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Originally Posted by jono

I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced.

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Ah.

I’m not sure I truly believe in unlimited FDIC insurance, but I think the idea might have legs and make sense just because faith and trust in the banking system is so critical to the rest of the economy. If I put $100 in, I expect to take $100 out down the road sometime. The calculus doesn’t change much at $1M, except it does and perhaps it shouldn’t.

But I believe I also said that costs and regulation would also increase at least proportionally, and that’s something that would become very real and very onerous for me, personally. I don’t relish the thought.

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Originally Posted by jono

I'm trying to understand what's to stop someone from repeating Thiel's moves (against which the shareholders were not protected) but actually making money from it. I certainly agree that no one would have risked a huge deposit to do that. But you've been arguing for an unlimited backstop going forward, which removes any such risk. At which point the risk is just getting caught, right? IOW, how well the rules get written and enforced.

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Gated withdrawals for amounts greater than FDIC insured balances?

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Originally Posted by JimmyCarter

Gated withdrawals for amounts greater than FDIC insured balances?

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That feels like same crisis, different losers.

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Originally Posted by JimmyCarter

Gated withdrawals for amounts greater than FDIC insured balances?

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Or just don't accept massive deposits in checking without some in CD's, etc. It sure seems like there are plenty of ways.

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Originally Posted by Mustonen

You raise a fair point, which is that the information needed to perform an independent ALM analysis isn’t publicly available. I’m not sure if model validation is something that is typically made available to anybody outside of regulators either….

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Just spitballing here, let's all agree hardly anyone can independently determine the safety and soundness of a complex bank. I think that makes sense. You're right, Yglesias is right, everyone making this point is right. Does that even matter?

On average, most people can't independently asses most things. And yet people figured out Yale and and Stanford are better than Utah state. Most people can't wrench on their own cars but they know a Toyota is more reliable than a Fiat. Few people can evaluate individual doctors but they know the Mayo Clinic is better than a small community hospital.

Unlike schools, cars and medical care, nobody pays attention to bank safety because they don't have to. They used to. But now, as a result of people not worrying about it any more banks can be more reckless because the average person isn't paying attention.