This is not a contagion event, this is a "lots of banks were exposed to the same macro economic risk" event. It'll play out how it plays out, but a bailout of SVB's depositors (what he and others are explicitly arguing for with hysterics like this) will not have any effect. SVB's collapse is correlated, not causal.
FYI these are links to an interview with Ackman from March 2020 when covid was starting. He claimed "hell is coming" amid the initial 20 - 30% decline, right before the sharp bounce up. So essentially, maybe don't over-index on this guy's claims since he has his own position. (Thought it'd be helpful to add some context so these links aren't just dangling)
JP Morgan's report addresses this (assuming it's comprehensive)
>SIVB was in a league of its own: a high level of loans plus securities as
a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits.
There's only one way to fix this folks. We need to abolish the FDIC and use the money saved to give a tax cut to the rich. The rich then trickle down onto the failing banks and their depositors to resolve this problem.
Woah, that would absolutely increase my confidence in banking and would gladly put all my money in banks in such a situation! No way that’s gonna go wrong, nosireebob.
Let's say you're a company with well over the 250k limit on a bank account. How would you even withdraw that? Get it deposited on some other account (why trust the other bank more?), get the money in cash?
open additional bank accounts at other institutions until it is under 250k per account, or simply one account at a big 4 bank
the transfer should occur by wire transfer
go to the institution to accomplish the higher value wire transfer, there is no shortcut if you aren't using a bank that specifically made this easy (like SVB or First Republic Bank)
In a way that's kind of shitty, I mean... it's basically turning the world into Potter's ville from it's a wonderful life.
I mean, we're already mostly there, personally I think FDIC should insure 1mill+ for smaller/regional banks and 0 for "too big to fail" banks that will likely just get a handout if they ever were to "be close to failing".
It’s still capitalism if you add guard rails and insurance. There is no reason to promote or allow bank runs. It doesn’t benefit anyone. The FDIC insurance cap should be increased and pegged to inflation and cover 90% of deposits. Then there should be additional voluntary insurance that could be purchased above that limit.
He is (likely self-interestedly) angling for a system-wide guarantee on uninsured deposits.
He's pretending something like this is true: SVB's failing will have a contagion effect on other banks (though some mechanism that he doesn't explain or have evidence for, although guys like him menacingly gesture towards MBS or something to remind us of 2008, even though it's completely different). By stopping the SVB run, we'll nip this contagion in the bud. There's some merit to this argument.
However, there's really no reason whatsoever to think that SVB's failing will have some causal impact on other banks' liquidity/solvency. To the extent that other banks are in trouble, it's because they have long duration assets that lost value when rates rose. Whether SVB survives or not has no impact on that. So the only mechanism through which an SVB bailout has any effect is through sending the implicit signal that the government will bail out all uninsured depositors.
Even if it doesn’t create contagion it may wipe out a generation of start ups and destroy trillions of dollars of value that will be created in 10 years, destroying the most valuable ecosystem the world has ever seen and all just at the time AI is about to lead to the next revolution and economic transformation.
Given these implications, the policy choices are easy. Why allow these long term consequences in the name od stiffing depositors?
Calm down. No it won't. We have financial markets. Good startups/innovations will get funding elsewhere. This is already happening. The current equity holders will lose a bit. No big deal.
Urgency is warranted when indecision is an accelerant to a fire. Capital markets in the US are dysfunctional and getting worse. Banks don’t lend to small business in any meaningful amount. Going public takes forever. And if you think there is any financial institution except the Fed that could move fast enough to prevent every SVB client company from missing payroll, I would love to know who and how you know they could and would act.
I believe the mechanism he's talking about is that large, uninsured depositors will wire funds out of regional banks that are "small enough to fail" to more diversified national banks that are designated "systemically important banks", which means they're too big to fail.
That's the rumor and I imagine they got to pull the same tricks as SVB as regards to buying risky MBS without alerting the FED. But is there any evidence to support this?
Long-duration fixed income assets go down in value when interest rates rise. This is true whether they're long-dated treasuries or agency MBS. Banks that finance with short term liabilities and own long-term assets are risky because of this: when rates rise the value of their assets declines while the value of their liabilities remains mostly the same.
This is a very different phenomenon than what happened in 2008. In 2008, banks owned a different kind of MBS that was poorly-underwritten, poorly documented, and truanched in a way that made their value extremely sensitive to various model assumptions. This made them extremely illiquid, meaning that if you tried to sell them in volume you would have to sell at a large discount relative to the value of the expected discounted cashflow of the security. (This is not true of 2023 MBS. These MBS are a totally different species. In 2023 rates rose, the value decreased, but we can be extremely certain of the value and they are extremely easy to sell at little discount to this value).
Contagion happened in 2008 because when there was a run on bank A, bank A had to sell its illiquid MBS at a large discount. This reduced/made uncertain the value of bank B's similar MBS, which triggers a run at bank B. In that sense, the bank A run causes the bank B run. There's no spillover mechanism in this 2023 scenario: SVB's selling its treasury or MBS portfolio doesn't meaningfully impair some unrelated bank's assets. To the extent that some unrelated bank is in trouble, it's because they face correlated macro shocks, not because there's a causal spillover.
Of the information available right now, most of it says that First Republic is in a completely different position. At least based on their disclosure on Friday (https://ir.firstrepublic.com/static-files/295faa27-f208-4936...), their risk of a run due to un-insured deposits and sector exposure is much lower:
> Consumer deposits have an average account size of less than $200,000 and business deposits have an average account size of less than $500,000
… and far less of their assets are likely to share SVB's duration exposure:
> The investment portfolio is less than 15% of total bank assets.
They didn’t buy risky MBS. They bought standard vanilla MBS and Treasury Bonds. The problem is the speed of interest rates rising which cause 2 unrelated circumstances to hit at the same time. 1. The net present value of the long term MBS/treasury’s went down. 2. Start ups had trouble raising capital so their normal business activities shifted from net inflows to SVB to net outflows.
So instead of being able to hold to maturity, SVB had to sell assets they bought for $100 for $80. Perhaps they could have hedged against interest rates rising better than they did or had a more short term securities or capped account balances. But the fed could have been faster to act in raising rates to allow for more gradual in raising rates as that would have been less disruptive.
Now the Fed should set up a program to take these long term assets off of member banks balance sheets. Do so at a discount, make the members pay for their bad investments but prevent failures.
*> ... make the members pay for their bad investments ...
SVB was a $209 billion dollar balance sheet with only $16 billion of shareholder equity. That means an 8% decline in the value of their assets makes them insolvent.
That also means that 8% is the maximum shareholders will have to "pay" for the bank's bad investments.
But that’s a very standard ratio in banking. And to be blunt treasuries don’t decrease that much. In fact that’s not really what happened here. Instead, SVB had significant deposit inflows over the last 10 years as their VC back clients raised massive rounds. Their deposit base went from something like $60b to $180b. Then all in unison, as interest rates increased, the same inflows reversed and nearly 100% of their depositors started withdrawing. so SVB had to come up with massive amounts of cash and had to sell things at a loss. That would have been fine if panic hadn’t set in and a Run initiated.
To play devils advocate, what would you have done as the CEO of SVB? Imagine over the last 10 years your clients are successful in raising large rounds and deposit the money in your account, you are required to keep those deposits safe and have to buy something. Would buying US treasuries and investment grade MBS be an unacceptable risk? They could have and should have hedged interest rate risk more perhaps but this isnt some irrational exuberance at work.
To your point about skin in the game, a shareholders skin in the game isn’t the percentage of equity in the firm, it’s what that equity represents in their portfolio. If a shareholders entire net worth is worth
Yes, thank you. I feel like people are throwing around "MBS" because it's vaguely menacing and reminds people of 2008. 2023 MBS are a completely different animal; any comparison to 2008 is a total red herring from people angling for free money from the taxpayers.
They didn't buy MBS, but they have very similar assets/liabilities. They have $17B more "assets" than liabilities, but $166B are in loans and only $4B in cash, meanwhile they have $176B in deposits that are about to be withdrawn heavily. They are going to need to liquidate those loans and you want to guess how much of a % haircut they're going to take on a liquidation of that scale, for similar assets to the MBS SVB purchased last year?
None of the mortgage backed securities are particularly risky. This is purely interest rate risk from what I understand, the mortgage debt assets have not meaningfully deviated from their predicted earnings. They just have low interest rates.
Starting to think this was a manufactured bank run and whoever is manufacturing it wants it to spread. The first social media induced bank run. Kind of like what wallstbets did to pump worthless stocks like AMC and GME only in reverse.
When it's revealed that one bank has a bad balance sheet, it suggests that other banks do too, because they all went through similar circumstances and had access to similar markets and probably came to similar decisions about what securities to buy (and when to buy them).
Kind of like how when you learn that one major application has vulnerabilities due to misuse of log4j, it suggests other major applications will have similar vulnerabilities, because programmers working with the same flawed tools are liable to make similar mistakes.
Not every Java application is vulnerable and not every bank is insolvent (presumably very few of them are) but a bad apple spoils the bunch.
That’s right in general but not in the case of SVB. It was a bank that had a highly narrow client mix that all stopped raising money at the exact same time after a decade of raising tons of money. So SVBs depositors all started withdrawing money at the exact same time. No other bank in the world has that same client mix. If there is another Run it’s because of heard mentality not because of a real problem
People feel smart when they predict bad things. Fear is an animating force for the human brain both when felt personally and when triggered in others. Some people get off in triggering fear in others.
