rigorousintuition.ca

SVB not only did some horrific risk management, but there was also a big moral hazard at play.

Let me explain.

As a result of LCR regulation, banks all over the world have flushed their balance sheets with trillions of bonds.
Such a large amount of bonds on the balance sheet also comes with risks though, right?

Interest rate risk comes to mind: if you purchase Treasuries and yields rise, you lose money.

That’s why banks hedge (!) the lion share of the interest rate risk coming from their HQLA investments.

The problems with SVB?

SVB had a gigantic investment portfolio as a % of total assets at 57% (average US bank: 24%) and 78% was in Mortgage-Backed Securities (Citi or JPM: around 30%) and most importantly they DID NOT hedge interest rate risk at all!

The duration of their huge portfolio before and after interest rate hedges was…the same?!

Effectively, there were NO hedges.

This means SVB was not applying basic risk management practices, and exposing its investors and depositors to a gigantic amount of risk.

Economically speaking, a $120 bn bond portfolio with a 5.6y non-hedged duration means that every 10 bps move higher in 5-year interest rate lost the bank almost $700 million.

100 bps? $7 billion economic loss.
200 bps? $14 billion economic loss.
Basically the entire bank’s capital wiped out.

Can this only be the result of ignorance and mismanagement?
Well, consider these 3 interconnected points:

1. The outrageous use of accounting tricks

Booking bonds in HTM instead prevents gains/losses from showing up at all – convenient, right?
But you don’t book $90 billion of bonds in HTM by mistake or incompetence – this is moral hazard considering you are aware these bonds are unhedged.

2. Not hedging: just ignorance, you say?

In December 2021, SVB had about $10 billion of interest rate swaps.
Probably way too little to hedge the entire interest rate risk, but that’s not my point.
In their financial statement, they show a clear understanding of what these swaps are for.

Fast forward to December 2022, and basically ALL these hedges are gone - voluntarely taken off!

This is not just ignorance: a vast use of accounting tricks and a voluntary reduction of hedges.

3. That urge to stay away from tighter regulatory scrutiny…

The reason why SVB could get around with this terribly risky business model was its size.
You see, banks with assets below $250 billion are not subject to the tighter regulatory scrutiny like big banks.

Well, what’s wrong about that?
SVB isn’t the only bank with assets <$250 billion benefitting from this, right?

Yes, but would it help to know that SVB’s management repeatedly lobbied to increase the cap for lax regulatory scrutiny and conveniently remained 20-30 billion below the $250 billion threshold?

It is hard to deny a decent amount of moral hazard was at play here.

And we should not reward moral hazard with blanket bailouts.

#svb #siliconvalleybank

Silicon Valley Banks Chief Administrative Officer was the CFO of Lehman Brothers' Global Investment Bank when it collapsed.

You can’t make this shit up.



Comment:
Sarah Morton
Chief Strategy Officer at MeetAmi Innovations Inc.

So far theyve got: former cfo of Lehman during collapse, ceo sold Bout 3.6m shares a few days ago, same ceo on board of fdic that took closure action, and no chief risk officer ..... ????

Before the collapse of Silicon Valley Bank, executives sold a lot of their shares.

Gregory Becker, CEO, sold 11% on Feb 27, 2023.

Michael Zucker, General Counsel, 19% on Feb 5.

Daniel Beck, CFO, sold 32% on Feb 27.

Michelle Draper, CMO, sold 25% on Feb 1.

Mar 12, 2023

On Friday, Silicon Valley Bank suspended withdrawals after a run on the bank. Californians queued on Saturday outside First Republic. There are fears for what Monday’s market open may herald.

Take a deep breath and pause. Remember the people who said Covid was a monetary event. The sternest warning came from professor Richard Werner, an economic expert on banks and intergovernmental institutions, and author of Princes of the Yen (2003).

Alt media types care very much who is a member of the World Economic Forum (WEF) — so Werner was a young global leader, until Klaus Schwab effectively expelled him. Like the late David Graeber, Werner holes the WEF below the waterline. He overturns all the assumptions behind which banks disguise their activities.

See Moneycircus – Not Enough Minerals For Green Energy: Colour Me Stunned. Dreams of electric everything hit reality; put the D in population (Sep 8, 2022)

No doubt the banks are in crisis. Although it seems improbable and counter intuitive, what if the Covid response was the second-worst option: to collapse society in order to save it from an even-worse collapse? For institutions and bureaucracies, remember, their own survival takes priority.


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You may think that banking is an add-on, an optional extra bolted onto society, but it is the blood and arteries of a world geared to consumption fed by global supply chains — and any clot in the circulatory system can mean a stroke. At the same time, the banks have the power like a boa to constrict us.

In the autumn of 2019 banks stopped lending to each other due to a lack of trust. That froze the securities repurchase, or repo, market, by which banks lodge money with each other overnight. Financial web site Seeking Alpha in Nov 2019 wrote “how the repo crisis has multiplied like a virus through the financial system.” Its editors were unaware of their prescience.

The banks had appealed to governments for bailouts in 2008 but taxpayer money failed to plug the gap. The problem is that banks gamble with deposits, generating profits in good times but when the market plummets, they cannot return money on demand.

The asset manager BlackRock, which invests the wealth of the richest people on the planet, knew that a taxpayer bailout would not work again. It came up with a dual strategy, which it presented to the world’s leading central banks in August 2019: lock down the Main Street economy to minimise the demand for credit; and meanwhile funnel taxpayer money mostly to the biggest corporations.

This would constrict the economy, giving the banks breathing space — as the press now admits with politicians’ lockdown mea culpas — See Moneycircus: The Hancock Lockdown Limited Hangout (Mar 7, 2023)

Targeted assistance would save the big corporations, the owners, the investors, the oiler-bankers, however you define the richest and most powerful. If you doubt this was their intent, read what’s about to happen with the banks.

Depositors panic

SVB is not your average bank. It lends to tech start-ups, a market that’s been frozen for some months now as there's been less profit from share sales and initial public offerings.

It does have something in common with other banks, however, in that it’s been hit by a sharp fall in the value of bonds and U.S. Treasuries that it retains as capital to offset possible losses. Bond prices fall as interest rates rise. Just as SVB was preparing to raise funds to plug the $1.8 billion gap, depositors decided to withdraw their money: $42 billion of it.

That could happen to any bank.

The question is how banks react. In the recent past governments bailed out banks with taxpayer money. But the huge sums were not enough to stem bank losses so governments legislated bail-ins: where banks can use money from depositors and bondholders — who are unsecured creditors — to restructure their capital to stay afloat. Put simply, they can convert their debt into equity to increase their capital requirements.

Eleven countries have given customers a “haircut” including Cyprus, Ireland, Hungary and Argentina. The U.S. government could be tempted to tap $25 trillion in retirement funds. Customers from Nigeria to the U.S. have complained in the past year about money disappearing from their accounts — Bank of America, in particular.

Regulators are supposed to protect customers — the European Central Bank up to €100,000 and in the U.S. the Federal Deposit Insurance Corporation, up to $250,000.

There is, however, a class system, a caste. The rich will know of an impending collapse before the broader public.

An FDIC video leaked in January revealed what they don't want the public to know.

The recording of a November meeting of FDIC board members and bank representatives is scandalous: the bankers say only those with a “professional need to know” should be informed of the risk to the banks and deposits within them. “I almost think, you’d scare the public,” says one participant:

“If my insurance company does not tell me what they’re doing with my assets I just assume they are going to pay my claim. I think you’ve got to think of the unintended consequences of taking it public, [one] that has more faith and confidence in the banking system than maybe people in this room do [participants laugh]…

There is a select crowd of people on the institutional side and if they want to understand this they are going to find a way to understand this. There’s a bunch of law firms represented in this room and people who charge by the hour to explain this to people… I don’t have a problem with that but I would be careful about the unintended consequences of blasting this out to the general public.” [1]

Another FDIC representative spoke of waiting until Friday night to shutter banks. The response would be rather like BlackRock’s proposal: reduce Main Street’s use of money with “targeted guarantees to allay concerns about excess cash use” under Title II of the Dodd-Frank Act

The FDIC has only $125 billion in reserves, and a $100 billion line of credit, to cover $9 trillion of insured deposits. That’s 1.38 per cent of deposits covered. So although all deposits are protected, the money may not be available.

Under the FDICs proposals depositors are thus likely to be “bailed in” — as happened in Cyprus in 2018. That imposed a 70 per cent “haircut” on holders of Greek debt which wiped out a large chunk of life-savings, college funds, and pensions of thousands of Greek middle-class people.

The UK central bank even has a handy-dandy guide for stealing customers’ deposits, “Executing bail-in: an operational guide from the Bank of England.” [2]

The mechanism the FDIC would prefer is convertible long-term debt (TLAC) to seize the assets of pensioners and bondholders, to be repaid with a coupon over time. Critics say this does not offset a bail-out because governments would be under political pressure to compensate pensioners and bondholders. In other words, the banks are still bailed out, just via a more circuitous route.

There is no substitute for capital requirements, including for material subsidiaries from which banks profit. The culture of privatising profits and socialising losses has to end. Unfortunately we are where we are.

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Covid as climate as monetary crisis

In March 2021 the U.S. Defense Department held a climate and environmental security tabletop exercise, Elliptic Thunder. As with pandemics this called for a whole-of-government approach (the fusion doctrine that fuses, for example, the response to mental health between police, social workers and educators).

It predicted rising competition between regional powers, and the need to build capacity and resilience, and to counter misinformation in the face of “compounding and cascading events” — the same prescription as for Covid.

See Moneycircus – Globalism, Socialism, Fascism, Feudalism (Part 1), Sep 19, 2022

The losers and beneficiaries from the Covid response, from monetary reset, and from climate lockdown are one and the same: the wealthiest owner-investors, the oiler-bankers.

If that’s the case, why do more people not seem to be aware?

Willful blindness

The alt media should not attack its own but there is a kind of morbid obsession with the plandemic itself; a curiosity akin to Munchausen syndrome that wallows in the symptoms but ignores the context, taking care not to entertain allegations of bioweapons, or even the shot very much, let alone the involvement of the Western military.

Identity theft, or stolen consciousness, you might call it.

Event Covid was impossibly complex — even with the benefit of hindsight — and, like the constantly changing rules and regulations, it was intended to confuse. Even if the coronavirus-as-common-flu soon became obvious, there were many other layers, and these were distracting and time-consuming. It was meant to be the opposite of science: impenetrable, dark (occult), ritualistic, fearful and spooky, oppressive and driving submission, of the individual to the group, of the group to the government.

Whereas Covid and its lockdown were meant to be temporary; climate restrictions and lockdown are intended to be permanent. Think about the path. We went from:

civil liberties are the bedrock of society, to
give up your liberty temporarily, to
surrender your liberty permanently to save the Earth.
Climate has additional layers:

15 minute city
personal carbon allowance
digital ID with a universal basic income
CBDC
Each sequential step works with the previous one: for example the 15 minute city gets us used to never moving more than 5km from our home. Surprise, surprise it is the same policy as the Covid quarantine.

Credit for this observation to Chris Sky, who is running for mayor of Toronto. [Some may critcise him but — worse than the incumbent politicians? — come on.] [3]

Under the UN programme each person’s yearly carbon allowance will be 2,000 kg. The current estimate for an American is 20,000 kg. A long-distance flight would use 500 kg, or a quarter of your allowance.

Each person will also pay a carbon tax on everything they buy. It will be calculated at $170 per tonne in Canada. Living at today’s lifestyle that would be an extra $3,500 a year for one person. A family of four would pay four times that, says Mr Sky.

Not surprisingly the reader can see that the super rich and their “it girls” will be able to purchase their way around these rules. For the masses a central bank digital currency, tied to one’s identity, will let bankers trace, limit and tax every single transaction.

The exempt

Someone has to implement the climate lockdown however, and the billionaires have purchased the compliance of bureaucrats.

These are the intergovernmental servants of the banking super class who already have widespread immunity from the law, including border controls, and who can travel freely all over the globe. See Corey Lynn (Corey's Diggs) and the abuse of diplomatic immunity by banks, beginning with the BIS. [4]

It is a very important piece of research. It is not wholly new information but she has detailed it down to the sub-organisations and contractors concerned.

Why do bankers (primarily) have immunity which exceeds that of diplomats (the author’s father was a British diplomat so the limits in government service are known)?

This proves, near-as-darn-it, that the Klaus Schwab Great Reset is a cover story… and that what is going on is not a philosophical mulling of quo vadis the Earth but a banal banker heist.

It would explain why governments are printing and spending money as if it is water, with no transparency on where it is going, with the expectation that they will just launch Central Bank Digital Currencies and wipe the slate clean.

Schwab might turn out to be less the Nazi scion and more of a marionette to disguise the bankers of his Swiss hideout.

Washington, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe.

The Silicon Valley Bank Bailout

The Treasury and Federal Reserve stepped in late Sunday to contain the financial damage from Friday’s closure of Silicon Valley Bank, guaranteeing even uninsured deposits and offering loans to other banks so they don’t have to take losses on their fixed-income assets.

This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.
***

Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. It’s revealing to see who can keep a cool head in a crisis—and it wasn’t billionaire hedge-fund operator Bill Ackman or venture investor David Sacks, both frantic panic spreaders.

The Federal Deposit Insurance Corp. closed SVB, and the cleanest solution would be for the agency to find a private buyer for the bank. This has been the first resort in most previous financial panics, and the FDIC was holding an auction that closed Sunday afternoon.

But Rohit Chopra, the Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, and the purchase terms could be too onerous for some potential buyers. The biggest banks are now the safest, and deposits are flooding into them. J.P. Morgan can park that money at the Federal Reserve and earn interest on its reserves. Why take on a new political headache?


SVB executives made mistakes, and they will pay for them, but they were encouraged by easy money and misguided regulation. As the Fed flooded the world with dollar liquidity, money flowed into venture startups that were SVB’s customer base. The bank’s deposits soared—far beyond what it could safely lend.

In a world of near-zero interest rates, SVB put the money in long duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital. If regulators say they’re risk-free, banks and depositors may be less careful.

But those securities declined in value as the Fed took interest rates up quickly to break the inflation it helped to cause. SVB had enormous capital losses if it were forced to liquidate those assets before maturity. That’s exactly what happened as SVB customers withdrew their deposits. The San Francisco Fed regulates SVB and somehow missed this rising vulnerability. The Fed and Treasury will try to blame the bankers, but they are as much if not more culpable. The idea of elevating San Francisco Fed president Mary Daly to the Board of Governors seems preposterous after SVB.
***

All the more so because the duration risk at banks may not be limited to SVB, as last week’s selloff in regional bank stocks shows. The FDIC created an entity to protect SVB’s insured depositors up to the legal limit of $250,000. But something like 85% to 90% of SVB’s deposits are uninsured. The worry is that depositors in other banks will now flee.

Thus the cries for federal intervention. Treasury Secretary Janet Yellen said Sunday there will be no “bailout” for SVB, but she is indulging in semantics. The feds said they will guarantee even uninsured deposits at SVB as well as at Signature Bank in New York. Typically in a bank failure those depositors would get their money back with a 15% to 20% haircut. This would no doubt be a hardship for many customers, but the $250,000 limit was known.

Will a universal uninsured deposit guarantee be next? This would be a monumental policy surrender, essentially admitting that the regulatory machinery established in 2010 by Dodd-Frank failed. We may be the only people in the world who still worry about “moral hazard.” But a nationwide guarantee for uninsured deposits, even for a limited time, means this will become the default policy any time there is a financial panic.

There’s also a question of the legality of such a guarantee. The FDIC created a “transaction account guarantee” program amid the 2008 panic, but Congress explicitly let it expire in Dodd-Frank. Congress set the $250,000 insured limit to protect average Americans, not venture investors in Silicon Valley.

The FDIC may have resorted to its “systemic risk exception” for SVB and Signature, but this is a stretch considering their size. The joint statement by regulators said it received the required two-thirds vote of both the FDIC and Fed boards, and we’d like to see the creative legal work by the Office of Legal Counsel at the Justice Department.

The Fed is acting as it should as a provider of liquidity to all comers. But it’s going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets. The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss. The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. This too is a bailout.
***

Perhaps this will contain any Monday market mayhem, but if it doesn’t our guess is that the Treasury, FDIC and Fed will look to guarantee uninsured deposits across the banking system. The Fed will want to avoid institutional blame for financial damage, and President Biden will do anything to avoid letting a financial panic affect the overall economy as he prepares to run for a second term next year.

But there is political risk from a bailout too. If the Administration acts to guarantee deposits without Congressional approval, it will face legitimate legal questions. The White House may choose to jam House Speaker Kevin McCarthy if markets aren’t mollified. But Mr. McCarthy has a restive GOP caucus as it is, and a bailout for rich depositors will feed populist anger against Washington.

The critics have a point. For the second time in 15 years (excluding the brief Covid-caused panic), regulators will have encouraged a credit mania, and then failed to foresee the financial panic when the easy money stopped. Democrats and the press corps may try to pin the problem on bankers or the Trump Administration, but these are political diversions.

You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.

Bank Term Funding Program
Program: To provide liquidity to U.S. depository institutions, each Federal Reserve Bank would make
advances to eligible borrowers, taking as collateral certain types of securities.
Borrower Eligibility: Any U.S. federally insured depository institution (including a bank, savings
association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit
(see 12 CFR 201.4(a)) is eligible to borrow under the Program.
Eligible Collateral: Eligible collateral includes any collateral eligible for purchase by the Federal Reserve
Banks in open market operations (see 12 CFR 201.108(b)), provided that such collateral was owned by
the borrower as of March 12, 2023.
Advance Size: Advances will be limited to the value of eligible collateral pledged by the eligible
borrower.
Rate: The rate for term advances will be the one-year overnight index swap rate plus 10 basis points;
the rate will be fixed for the term of the advance on the day the advance is made.
Collateral Valuation: The collateral valuation will be par value. Margin will be 100% of par value.
Prepayment: Borrowers may prepay advances (including for purposes of refinancing) at any time
without penalty.
Advance Term: Advances will be made available to eligible borrowers for a term of up to one year.
Fees: There are no fees associated with the Program.
Credit Protection by the Department of the Treasury: The Department of the Treasury, using the
Exchange Stabilization Fund, would provide $25 billion as credit protection to the Federal Reserve Banks
in connection with the Program.
Recourse: Advances made under the Program are made with recourse beyond the pledged collateral to
the eligible borrower.
Program Duration: Advances can be requested under the Program until at least March 11, 2024.

Credit Suisse shares fall 20% to record low as top shareholder rules out investing more – business live

Credit Suisse shares are sliding as its largest investor said it cannot provide the Swiss bank with more financial assistance.

The banking rout has taken on “another ominous twist” today, says Susannah Streeter, head of money and markets at Hargreaves Lansdown:

The worry is that banks sitting on large unrealised losses in their bond portfolios might not have sufficient buffers if there is a fast withdrawal of deposits. Although the biggest players are judged not to be at risk, thanks to the chunky layer of capital they are sitting on and the stable nature of their deposits, the nervousness is palpable.

A game of whack a mole seems to be emerging, and problems are popping up elsewhere in the world. Investors seem to be waiting on words and action from the ECB, as so far policymakers have been quiet about what support there may be if the situation deteriorates further.’’

https://www.msn.com/en-gb/money/other/c ... r-AA18DPP1

Daniel Oliver Jr.
@Myrmikan

From 1:30:47 to 1:34:33 -- stunning:

LIVE: Treasury Secretary Yellen testifies before the Senate on Biden's 2024 budget — 3/16/23

...

@Josh_Young_1
Replying to @Myrmikan

Wild preferential treatment. Bank runs are problematic. Selective protection of politically connected banks is even more problematic.

-
@TradeSmartMoney
Replying to @Myrmikan

WOW! Unbelievable! She is bascially saying "we in the administration and the FED discretionary decided that SVB was SO important that we had to guarantee all deposits". "But hey, good luck to all small banks in rural Oklahoma, we have NO plan and we do not care!!"
-


@MomLook123
Replying to @TradeSmartMoney and @Myrmikan

So large, uninsured depositors likely will continue to leave all small regional banks for bigger ones. It’s like a bank trot, not a bank run. And government fails to anticipate the side effects of their own policy. How is this leadership.
-

@lunatic_farmer
Replying to @Myrmikan

They've got zero plan to stop large depositors leaving community banks. It's either intentional or they are hoping it blows over. FDIC is also anti-merger. They held up merger of Flagstar and NYCB for close to two years. So good luck to the regionals that want to merge.


@Kit86421
Replying to @alexandrosM

This is how you consolidate the banking industry to make it easier to implement FedNow… Aka CBDC’s!

@alexandrosM

If you value my recommendations at all, stop what you're doing and watch this ASAP.

No matter how incompetent the "experts" seem, things can always be much worse.

https://twitter.com/SeidlerCorp/status/ ... 51584?s=20