Precious. I had to share
If you read much about âwhat causedâ the collapse of Silicon Valley Bank (SVB) collapse you will read that it had long term mortgage bonds (MBS) and it had to sell them.
You will read that SBV had hoped to hold them long term (âHeld to Maturityâ or HTM)
but needed to sell them,
IOW the bank stopped marking them HTM and started marking them âAvailable for Saleâ or (AFS.)
Because of recent Fed policy changing those categories meant the bank had to realize a heretofore paper loss.
That is a skin-deep analysis and in a skin deep sense it is indeed correct.
That is (superficially) what happened at the moment of the collapse.
So, in a lazy manâs way of thinking that is what caused the collapse.
The more important question would be âWhy did the bank have to change those bonds from HTM to AFS?â
No bailoutâŚ
What they are talking about now is not bailing out the banks.
They are talking about back-stopping the payrolls of the start-up firms (bank depositers) whose payroll accounts have been frozen.
EG Etsy has over 2,700 employees
Only $250,000 of their deposits are insured.
So for now, Etsy can pay its employees only about $90 a person.
could take weeks or months to recover the rest
Same with Air BnB, Roku and hundreds of other firms.
So the concept is:
Back-stop the payrolls donât bail-out the banks.
Okay
Not a bad idea. Not a bad concept. . . . . but
But . . .
Okay, so the payrolls will be âback-stoppedâ (at tax payer expense) but the bank will not be bailed out. Sounds good right?
Why not just have the tax-payers back-stop the payrolls at tax payer expense,
let the bank die and that should be the end of it, right?
NO.
Several questions remain including
1.) Should the tax-payer really foot the bill or should someone else?
and
2.) How did this happen? IOW how can we prevent it from happening again?
Unfortunately the govât will ignore question #1, and regarding question #2, will not look for real answers but will instead simply attempt to demonize their opponents.
- Some on the left are already blaming President Trump alleging this happened because he repealed parts of Dodd-Frank.
- They are wrong, but I donât expect anything better from the right.
I now see that feds are lifting the $250,000 FDIC insurance limit. Must protect democrat donors at all cost.
And than Janet Yellen announced that it wasnât going to cost tax payers a dime.
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Right, well technically since the Fed is âunderwriting itâ (printing money to pay for it) there is no tax bill for this âback-stopping.â
Printing money is so easyâŚspecially to cover/protect your donors.
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The âguiltyâ parties here are the VCs, possibly incl. SVB- Securities, who did not keep and armâs length with SVB-Bank, but instead steered their clients to use that bank.
(The term âguiltyâ is in quotes because I am not sure any laws were broken.)
From what I read the money is coming from a FDIC fund that all banks and financial institutions pay into via charges.
No idea if that is true or the fund has enough liquidity to cover all deposits of these two banks but if thats true then the taxpayer is not on the hook for this.
That would be the FDIC fund, the insurance fund. So they are going to use the insurance fund, which is only supposed to cover deposits up to $250,000 to cover much more.
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It wouldnât matter.
It would still be increasing the money supply in exchange for a balance sheet entry,
but no it is not coming from an existing fund.
.
.
BTW, before anybody posts any video, NO the Simpsons did NOT predict the SVB collapse.
There is a manipulated video circulating. 
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Fed to banking sector
âGo ahead and be a bad bank.
You need do only the slickly-defined legal minimum.
We will cover all your deposits and protect you from the consequencesâ
What could possibly go wrong?
Exactly right. And even if the fund is large enough this is not the reason why it exists.
I agree anything outside the covered limit should not get bailed out.
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Canât believe itâs already bank collapse season.
I still have my train derailment decorations up.
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LOL
Just so there is no doubt about how abnormal that price action is.
Here is Silicon Valley Bank stock (red and green candlesticks) compared to
- the QQQ index and
- the S&P Financials index
Not really surprised where a single stock chart shows significantly more volatility than its index.
The real issue with this bank seems to be that its portfolio department was asleep. It doesnât take a master bond trader to recognize interest rate risk and over exposure. They should have started transitioning that portfolio from mid-long term to ultra short term and rode the wave of rising rates.
Itâs a pretty big divergence.
Would we expect Ford to rise 20x faster than GM?
Can we name many other stocks that rose 70,000% in three decades?
I for one, cannot thnk of too many stock that do either
- rise 70,000% in three decades
- rise 10-20 times faster than their underlying index
SBV did both.
I take it as a sign something was not right all along and I am not surprised it crashed.
