Second Largest Bank Failure in US History

Yesterday, as always, FDIC put out a press release on subject.

I’m pretty sure that due to the reactions to the Wuhan flu, for nearly three years, the bank was not subjected to an on-site CA/FDIC bank examination. Just saying.

Mac, I love Stephanie Pomboy. She’s loaded with data. And she’s brilliant. And she sings that song every week on Maria Bartoromo Fox Business for the past 15 years. That being said, she’s always worth a listen.

This was a boutique/niche [a very large one] lender that got caught in the necessary Fed reactions to the boom caused by Biden’s insane spending and the Fed’s money printing. On that level, this may be symptomatic of a systemic ‘issue.’ The next ‘shoes to drop’ likely would be insolvencies of fin. institutions concentrated in commercial real estate and consumer loans. It’s something to watch.

Per my much-smarter brother, Cramer’s stock advice is almost as bad as NYT/Princeton Paul Krugman’s economic analysis/predictions.

A few weeks back, the Insiders/rats were deserting [selling shares] a sinking ship.

I was in this business for a while during the 1980’s Ag/oil financial crisis and S&L crisis. Some pundits are saying it failed because it couldn’t sell $2.25 billion in new stock – they try that befier every bank bankruptcy. That’s only the tip of the viceberg [pun intended].

The root cause seems too many defaulted loans among the tech start-ups – the vast majority of the bank’s borrowers.

Of the $175 billion in deposits, about $150 billion were over the $250,000 FDIC insured amount. Ergo, [on Fox Business yesterday] a tech company with over $10 billion in deposits [payroll, etc.] will get access to $250,000 and an FDIC receiver’s certificate for the rest. The FDIC will pay some ,money in the form of an advance dividend to the certificate holders in a week or two, It won’t be much. It has to come out of the SVB receivership assets.

One of the basic tenets of financial management is diversification of risk. Bank supervisors used to track bank’s concentrations of risk [any holding or sector – here tech start ups – concentration of more than say 50% of capital]. This bank had a huge red flag and it seems no one even saw it.

I bet that cured your iunsomnia.

Home prices are elevated (they are about 45% higher than you’d expect given the change in personal income per household since 2000). However, outstanding household mortgage debt has not increased in real terms over the last 10 years. There’s been an increase in the number of underwater mortgages of late, but the total number still accounts for < 1% of the households in owner-occupied housing.

Household debt service ratios and financial obligation ratios are somewhat below the median of the years since 1979.

P/E ratios in the stock market are mildly elevated – about 14% north of the median of the years since 1971.

Loan delinquency rates at commercial banks are not elevated. There’s been some recent increase in credit card delinquecies, but nothing out of the ordinary.

I’ve never heard of this bank. It has offices in 17 states other than California (three offices in Texas and one in each of the other states). They have four branches in California and a number of other offices therein. As far as I can tell, they do little deposits-and-loans banking. They have ‘private banking’ services and some business banking, but for the most part it seems their clients are established corporations of some size.

As far as I can tell, they do little deposits-and-loans banking. They have ‘private banking’ services and some business banking, but for the most part it seems their clients are established corporations of some size.

I mean little deposits-and-loan banking for households and small businesses.

About 26% of the assets of commercial banks in this country are in the form of securities. I’m looking at some sites on bond prices and it appears that trading 5-10% below par value is common right now.

We likely will never learn what really happened. You can’t handle the TRUTH.

See the 4Q2022 FFIEC Call Report: Securities – $117.3B, 56% [very high] of Total Assets; Loans – $73.6B, 35% [very low] of TA; Cash and equivalents – $12.5B – 6% [a bit high] of TA but not enough to meet $42B of withdrawals.

Seems SVB had to sell deeply [market price] depreciated [rates rise securities market prices fall] securities to cover withdrawal demands. The Fed kept rates near zero way too long. Then [better late than never], since March 2022 the FF effective rate is up from 0.09% year ago to 4.58%, the 30-year mortgage rate from about 3% to around 6.6%.

See Fed FOMC rate increases and Fed balance sheet shrinkage.

Fed kept market interest rates at near-zero far too long – Is there systemic disaster from a possible huge overhang of deeply depreciated bonds on banks’ books?

Former Comptroller of the Currency under Trump, Keith Noreika, had an interesting observation yesterday (3/11/23) @ Semafor . com: “The FDIC and the Fed had the chance to save the bank by allowing it to merge or by finding a buyer for it, as they’re allowed to do so by law. Had they done so, no depositor would be at risk. Instead due to strong merger approval opposition from the far left, they hesitated. Now they are faced with the possibility of a full bailout.”

The acting Comptroller of the Currency is a Biden appointee, Michael Hsu, since May, 2021: if you go to the Comptroller/Currency website, one of Hsu’s most recent focuses was, on March 1st, an address celebrating the Carter Admin-era 1977 Community Reinvestment Act, an early and rightly controversial forerunner of ESG and DEI, which has often resulted in pouring money into loser (and sometimes fraudulent) political entity “communities of color” boondoggle investments. Obviously, Hsu was not watching the inversion of community bank securities (earning about 1.5%), leading to capital flight to safer Fed T-bills earning now about 5%-5.5% (due to Jerome Powell’s full gonzo attack on inflation to try to save the Biden admin in 2024).

The Epoch Times is reporting today (Sunday) that Janet Yellin has come out of hiding in the hall bathroom and announced the Fed will not do a full bailout of SVB—but it sounded as if perhaps they (Fed Reserve Chairs) will allow another bank to buy out SVB—a little late—but if so that would be for 60-80 cents on the dollar for uninsured deposit amounts, according to some sources.

Billionaire hedge fund investor Bill Ackman is out warning that the Fed must move quickly, because the next two days (Monday & Tuesday), when markets open, could be crucial, and the Fed may not be able to reverse bank runs on other community banks which also have large uninsured deposit balances. SVB’s uninsured deposits ranged from about 89% as T. Shaw points out, to as high as 95%. There are at least 11 other mid-size banks that are in this category of highly exposed institutions.

@T Shaw.

Thank you. Interesting times we live in.

Also: for most of the past year, SVB, did not have a risk, a risk assessment chief risk officer. The new CRO was just appointed sometime in January, 2023. Only having about 4–6 weeks to fix things is an impossible task. To me, it all comes back to the fact that, as Larry Kudlow, Arthur Laffer, Steve Forbes, and Rand Paul have warned, Jerome Powell’s monomaniacal focus on rapidly raising the Fed prime interest rate to “battle inflation” will have unintended potentially catastrophic outcomes.

Billionaire hedge fund investor Bill Ackman is out warning that the Fed must move quickly,

Bet he’s talking book.

Jerome Powell’s monomaniacal focus on rapidly raising the Fed prime interest rate to “battle inflation” will have unintended potentially catastrophic outcomes.

I hope Powell stays the course.