Ahh. You've definitely clarified that for me. And as you pointed raised more questions!😉 thank you for taking the time.
Yes the media's obsfucation re SVB and FN, made me think that it was more a case that someone wanted SVB devalued enough to enable a cheap purchase or a policy change re bailouts. BTJMO, I'm a suspicious sort these days😉
Ahh. You've definitely clarified that for me. And as you pointed raised more questions!😉 thank you for taking the time.
Yes the media's obsfucation re SVB and FN, made me think that it was more a case that someone wanted SVB devalued enough to enable a cheap purchase or a policy change re bailouts. BTJMO, I'm a suspicious sort these days😉
This is the thing that everyone failed to address--and which anyone with even basic understandings of finance and economics should have seen--is that the very moment that Treasury yields started going up (which, incidentally, started a good two months BEFORE the Fed raised the federal funds rate the first time in March 2022) all existing holdings of Treasuries were going to lose value. If current Treasuries are yielding 4% a portfolio of Treasuries yielding 3% has to lose value commensurate with the yield difference. Which means EVERY banker holding Treasuries KNEW at the start of 2022 that their securities portfolios were going to start declining in value.
For a bank, the easiest way to deal with this is to reclassify the securities as "hold to maturity". In that situation, you take whatever the coupon payments are until the security matures and then you take repayment of principal. There are no mark-to-market losses because the securities aren't actually "on" the market.
However, that means that bank capital is effectively tied up for the term of the securities. What SVB and First Republic and every other bank SHOULD have done is, starting in March, start unloading the value-losing Treasuries or moving them into "hold to maturity", but for all securities moved into the HTM category, the banks should have worked to replace that tied up capital. This could have been done via a stock offering (a preferred stock issue with a repurchase clause to be exercised once the securities matured and the tied-up capital was released would have done the trick) or a similar way to bolster both liquidity and Tier 1 Capital to allow the securities portfolios to be fully digested.
While HTM securities do not need to be marked to market, that becomes a double edged sword when you have deposit outflow, and you have to give the exiting depositors their money. This can force even the HTM securities back on to the market and all the losses the bank is trying to avoid recognizing then have to be recognized all at once. This was where SVB was at in early 2023. This was why they had to dump their securities portfolio at a huge loss, and raise capital all at once. When the losses were disclosed, depositors freaked, the run began, and everything else, as they say, is history.
First Republic is the one where the machinations are much more sketchy. When JPMorgan organized the $30 Billion of fresh deposits in First Republic by a slew of major banks, it was obvious (at least to me) at the time that First Republic was only playing for time. The core issues with the bank's financials remained and the $30 Billion was not nearly enough to reverse those problems.
In the end, in return for organizing that "rescue" of First Republic, JPMorgan got to cherry pick the best pieces from First Republic's carcass, leaving the Fed and the FDIC to deal with the money losing parts. So good was JPMorgan's deal that while the taxpayer cost of JPMorgan's takeover of First Republic assets was $13 Billion, JPMorgan showed a huge profit on the PURCHASE of those assets.
Mergers like that as a rule are not immediately accretive to earnings. Not in the same quarter as the deal is consummated. It was an insider deal all the way, and taxpayer dollars were used to benefit JPMorgan. When you read the news releases on the deal all the relevant facts are there to establish that's exactly what happened.
Wall Street has always known that when the Fed started raising the federal funds rate and otherwise jawboning rates upward, that their low-interest rate methods of doing business were going to end. Wall Street has repeatedly refused to adapt to a rising rate paradigm, basically choosing to ride the free-money train right up until the train ran off the rails.
Sadly, even that was pretty much telegraphed by Wall Street.
Wall Street got hooked on cheap money and refused to kick the habit until SVB collapsed, and we will find out in the next few weeks and months if Wall Street has really kicked that habit or if they've just been trying to hide it.
Ahh. You've definitely clarified that for me. And as you pointed raised more questions!😉 thank you for taking the time.
Yes the media's obsfucation re SVB and FN, made me think that it was more a case that someone wanted SVB devalued enough to enable a cheap purchase or a policy change re bailouts. BTJMO, I'm a suspicious sort these days😉
Thank you for doing what you do🙏
SVB reads like a straight up case of incompetence--by both the regulators and bank management--along with some very complacent big-money depositors.
https://newsletter.allfactsmatter.us/p/reality-check-svbs-collapse-was-a
This is the thing that everyone failed to address--and which anyone with even basic understandings of finance and economics should have seen--is that the very moment that Treasury yields started going up (which, incidentally, started a good two months BEFORE the Fed raised the federal funds rate the first time in March 2022) all existing holdings of Treasuries were going to lose value. If current Treasuries are yielding 4% a portfolio of Treasuries yielding 3% has to lose value commensurate with the yield difference. Which means EVERY banker holding Treasuries KNEW at the start of 2022 that their securities portfolios were going to start declining in value.
For a bank, the easiest way to deal with this is to reclassify the securities as "hold to maturity". In that situation, you take whatever the coupon payments are until the security matures and then you take repayment of principal. There are no mark-to-market losses because the securities aren't actually "on" the market.
However, that means that bank capital is effectively tied up for the term of the securities. What SVB and First Republic and every other bank SHOULD have done is, starting in March, start unloading the value-losing Treasuries or moving them into "hold to maturity", but for all securities moved into the HTM category, the banks should have worked to replace that tied up capital. This could have been done via a stock offering (a preferred stock issue with a repurchase clause to be exercised once the securities matured and the tied-up capital was released would have done the trick) or a similar way to bolster both liquidity and Tier 1 Capital to allow the securities portfolios to be fully digested.
While HTM securities do not need to be marked to market, that becomes a double edged sword when you have deposit outflow, and you have to give the exiting depositors their money. This can force even the HTM securities back on to the market and all the losses the bank is trying to avoid recognizing then have to be recognized all at once. This was where SVB was at in early 2023. This was why they had to dump their securities portfolio at a huge loss, and raise capital all at once. When the losses were disclosed, depositors freaked, the run began, and everything else, as they say, is history.
First Republic is the one where the machinations are much more sketchy. When JPMorgan organized the $30 Billion of fresh deposits in First Republic by a slew of major banks, it was obvious (at least to me) at the time that First Republic was only playing for time. The core issues with the bank's financials remained and the $30 Billion was not nearly enough to reverse those problems.
https://newsletter.allfactsmatter.us/p/the-big-bank-bailout-of-first-republic
In the end, in return for organizing that "rescue" of First Republic, JPMorgan got to cherry pick the best pieces from First Republic's carcass, leaving the Fed and the FDIC to deal with the money losing parts. So good was JPMorgan's deal that while the taxpayer cost of JPMorgan's takeover of First Republic assets was $13 Billion, JPMorgan showed a huge profit on the PURCHASE of those assets.
https://newsletter.allfactsmatter.us/p/big-bank-boom-or-bust
Mergers like that as a rule are not immediately accretive to earnings. Not in the same quarter as the deal is consummated. It was an insider deal all the way, and taxpayer dollars were used to benefit JPMorgan. When you read the news releases on the deal all the relevant facts are there to establish that's exactly what happened.
Wall Street has always known that when the Fed started raising the federal funds rate and otherwise jawboning rates upward, that their low-interest rate methods of doing business were going to end. Wall Street has repeatedly refused to adapt to a rising rate paradigm, basically choosing to ride the free-money train right up until the train ran off the rails.
Sadly, even that was pretty much telegraphed by Wall Street.
https://newsletter.allfactsmatter.us/p/wall-street-knows-the-crash-is-coming
Wall Street got hooked on cheap money and refused to kick the habit until SVB collapsed, and we will find out in the next few weeks and months if Wall Street has really kicked that habit or if they've just been trying to hide it.