Is the stock market going to tank?

[Mustonen]

Time value of money. If you can wait that long, it’s worth X. If you need it now, it’s worth X-

That’s why HTM is allowed, but also why SVB was fucked by dried up funding, because deposit outflows forced them out of HTM.

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?

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.

[JimmyCarter]

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?

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.

[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?

[JimmyCarter]

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

[JimmyCarter]

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?

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.

[JimmyCarter]

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?

HTM requires that you have both the ability and the intent to hold the asset to maturity.

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.

[MultiVerse]

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?

[JimmyCarter]

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, 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.

[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.

[JimmyCarter]

I would argue it's all conditional. SVB had the advantage of sticky deposits. Its VC depositors had something like $2.5 million on average earning around or less then 1%.

Sure, but how much was in checking vs something like CDs that were maturing and resetting much higher?
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.

[MultiVerse]

Good point. I mentioned California's ZIRP earlier.

[Mustonen]

HTM requires that you have both the ability and the intent to hold the asset to maturity.

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.

I’d argue they had both, until they made a decision to liquidate.

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.

[Mustonen]

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.

[LeeLau]

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

[summit]

^Markets sure dumped at the end of the session despite the 25bp

[Cono Este]

Historically, mkt does not tank until the fed pivots. were getting closer.

[Hott Butt Mud]

Sell today, buy tomorrow. That's the play.

Market goes BOOM tomorrow.

[dschane]

For Mustonen and other finance reg dorks

https://www.economist.com/finance-an...ons-of-dollars

Good article. Reads like something written by the Fed Guy.

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

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.

I Googled and couldn't fact check, but everything you hear on a podcast is always true.

[Mustonen]

Good article. Reads like something written by the Fed Guy.

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.

There’s a lot of weird shit going on generally in what is supposed to be a pretty boring industry.

[LeeLau]

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.

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.

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

[Mustonen]

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.

But the asset was there, and the value of the asset was adjusted on the balance sheet accordingly. Why should it wipe out capital?

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.

Its fascinating watching the interplay of psychology and macro play out. Like you said typically financial regulation is deadly boring.

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

Oh come on now, give us time.

[JimmyCarter]

But the asset was there, and the value of the asset was adjusted on the balance sheet accordingly. Why should it wipe out capital?

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,” but the intent generally really is to have a stable balance sheet, particularly with investment assets, and focus your risk on your loan assets.

.

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.

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.

[Mustonen]

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.

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.

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?

[JimmyCarter]

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.

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. Except 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.

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.

[Mustonen]

Loan portfolios are marked to fair value and loan loss provisions are run through the income statement.

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.

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)