Posted on 03/14/2023 7:30:28 PM PDT by TTFX
Last week Federal Reserve Chairman Jerome Powell spent two days on Capitol Hill, fielding countless questions from members of Congress about monetary policy. Nowhere in that exercise in happy-talk and obfuscation did anyone mention the possibility of a banking collapse that in less than one week would delegitimize the entire exercise. There are some calamities that arise without warning, like tsunamis or World War I, but the sudden collapse of Silicon Valley Bank, and the government’s over-the-top reaction to it, should have been as predictable as February snow in Buffalo.
While many are arguing that the collapse of SVB is a unique occurrence based on the bank’s particular client base and business model, this is wishful thinking. SVB was not unique, it was just first. But it has already proven not to be the last.
Fifteen years ago the banking system was pushed to the brink by its overindulgence in collateralized subprime mortgage bonds. Risky assets were also the undoing at SVB. But this time the risk was found in plain vanilla, general obligation US Treasury bonds (ironically considered the world’s safest asset). All banks, insurance companies, and pension funds hold them, they just didn’t need to sell them as urgently as SVB. But if the Fed persists in raising rates to combat the highest inflation in two generations, it would only have been a matter of time before all financial institutions heavily invested in Treasury bonds would drop like flies.
(Excerpt) Read more at bostonglobe.com ...
Very good article, a must read
If store inflation is 8% a year, what should the average new bond interest rate be?
The banks chose to buy the low rate instruments.
Why would any sane person buy a 2.5% 30-year mortgage obligation?
Bond interest rates could (and probably should) be tied to prices of habitually sought goods.
I took the opportunity to add a bit of silver to my stack today.
It’s in shorter supply than usual...
Britannias and Maples are what I grabbed.
If rates fall, the dollar will fall, and price of stuff (often made in China) will rise.
SVB should have been investing in businesses, not in ~1.65% instruments.
Interest rates are far less than in-store inflation.
The Fed puts on an act of acting tough, but savers have been cheated ever since the Moslem educated guy became president.
If house prices are artificially high due to artificially low interest rates, there is a risk of large price drops, therefore mortgagor debt ethics matter greatly.
Would you if a mortgage loan officer lend to a student loan deferment abuser?
Tough to do when the global economy is shut down by tyrants.
The interest rate depends on a number of things. Risk is the primary item. Treasuries are still low risk. The problem with banks right now isn’t the bond’s interest rate.
Banks and businesses in general need to declare securities on their balance sheet in three ways, Available For Sale (ASF), Held to Maturity (HTM) and Held for Trade (HFT). You can sell/trade bonds and make money from the delta of the purchase and sell price (or lose money). If you hold a bond to maturity you don’t lose, you get the terms of the bond.
The Fed has years of near zero/zero interest rates. That probably caused some complacency at SVB and other banks. They purchased treasuries to make a little interest and knowing that they could sell any time they needed cash at a relatively stable price. That’s for AFS bonds and better than keeping cash with no return. The problem is when the Fed raises interest rates, a bonds value decreases in trading. SVB’s AFS bonds lost so much value that they even got to the point of selling HTM bonds because the loss was less with some of the HTM bonds. They were upside down in their AFS bonds by 60%.
SVB should have known better. Interest rates were not going to stay zero forever. When inflation goes up, the Fed raises interest rates. The writing was on the wall. SVB should have dumped their AFS bonds at the first sight of increasing interest rates even if it was for a minor loss. That’s better than taking a huge loss when they had to sell HTM bonds.
There are other liquid assets that SVB could have put their cash in from an early sale of AFS bonds. But apparently they were not into cutting their loses early and staying in business. Imagine being billions of dollars upside down on a car. That’s where they were Friday.
SVB should have known better. Interest rates were not going to stay zero forever. When inflation goes up, the Fed raises interest rates.
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But now, the author claims the Fed won’t raise interest rates. So SVB’s bet maybe was that they wouldn’t be the first to fail. If they thought interest rates wouldn’t rise except for a short amount of time, that is correct.
SVB was down 2% on the outset. They never hedged it.
Catfish bait.
They held 1 1/2% bonds despite the Federal Reserve making it as obvious as possible that they were aggressively going to be raising rates.
Same bonds are now at 4% or something-
they bet on complacency and lost.
the big banks moved into bonds more suitable in a rising rate environment-fr all appearances SVB nothing. A little surprising given all the tech layoffs and tech stock meltdowns. In essence it is a tech bank maybe implying some foreknowledge and still didn’t act.
Exactly. Obama and his crew with 0 interest rates virtually eliminated the saver class of people. People like my parents who put money into savings accounts and earned about 3% a year when inflation was under say 1%. They did not get rich but the power of compounding allowed them to take a nice vacation when they were in their late 60s.
With quantative easing of the money supply interest rates dropped to close of 0%. Banks started to pay 0.1% or 0.001 interest rates on savings accounts. However, when inflation goes to 6% rates on saving accounts (and government bonds) need to go up.
As for banks, they are stuck with those previously purchased bonds. Their price’s won’t increase until interest rates go down. I’m betting that those bonds will reach maturity before that happens.
The Fed had a vacillating monetary policy back in the 70’s. Inflation yo-yoed from ‘73 until the ‘80’s. It wasn’t until interest rates were raised to close to 20% that inflation was stomped out.
The Fed needs to get their act together or this economy is going to suck for a long time. Alternatively, drop the interest rate changes and massively cut government spending. Hell will freeze over first tho. Money has to leave the economy to get rid of inflation. I prefer government not spending/putting money into the economy. That removes the need for the Fed to print money to make up for spending the government doesn’t have revenue (taxes) or other countries to buy our treasuries.
Things would be much better for the economy and us little guys if there wasn’t a bailout for accounts greater than $250k. By the way, businesses can insure their cash for greater than $250k, and it isn’t expensive. Like SVB, those businesses were asleep at the wheel. That’s a nice to say they are greedy. SVB was trying to squeeze every last nickel of profit and did not have a risk manager for the last 9 months. Their previous risk manager came from Lehman Brothers- kiss of death on that one. Basically, they are woke, partying and mismanaging everything. They are not focused on banking.
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