Even collapsed banks have lots of assets that the FDIC sells to cover the costs to the Fund. Signature Bank collapse costs the Fund only $2.5 billion
By Wolf Richter for WOLF STREET.
The FDIC is a liquidation machine. And so it announced Sunday night that it has made a purchase and assumption deal with First-Citizens Bank in Raleigh, North Carolina: First-Citizens will buy a big portion of the assets of Silicon Valley Bridge Bank and assume all its deposits (a liability).
The FDIC had created the bridge bank to take on the assets and liabilities, including all deposits, of Silicon Valley Bank, which collapsed on March 10.
On Monday morning, March 27, the 17 branches of Silicon Valley Bridge Bank will open as First-Citizens Bank. Depositors of Silicon Valley Bridge Bank will automatically become depositors of First-Citizens Bank. All transferred deposits will be insured by the FDIC “up to the insurance limit,” the FDIC said.
Customers of Silicon Valley Bridge Bank should continue to use their current branch until First-Citizens Bank tells them that conversions of the banking systems have been completed to allow full-service banking at all of Citizen Bank’s other branch locations, the FDIC said.
Here’s what was included in the deal.
On the day that Silicon Valley Bank collapsed and the FDIC became its receiver – March 10, 2023 – it had $167 billion in assets and $119 billion in deposits, along with some other liabilities — which is what the FDIC took over.
Today’s deal between the FDIC and First-Citizens includes:
- First-Citizens assumes all deposits that are still at the bridge bank (a liability).
- First-Citizens gets $72 billion in assets at a discount of 23%, or $16.5 billion.
- First-Citizens will assume all loan-related financial contracts.
- First-Citizens issued a $35 billion note to the FDIC as additional payment (in addition to assuming the deposits).
- FDIC gets equity appreciation rights in First Citizens BancShares, Inc. common stock [FCNCA] “with a potential value of up to $500 million.” The base share price of the deal is $582.55 per share [update Monday morning: the rights are already in the money, shares spiked 47% to $860.51. In terms of the FDIC’s base: +62%].
- A loss-share transaction on the commercial loans that First-Citizens purchased from the bridge bank; both parties will share in the losses and potential recoveries of the loans in the deal.
A $20 billion loss to the FDIC’s Deposit Insurance Fund.
The FDIC will sell the remaining $90 billion in securities and other assets over time.
The FDIC estimated that the total cost of the SVB collapse to the Deposit Insurance Fund will be $20 billion, after selling the remaining $90 billion in securities and other assets. This includes the additional costs of having covered all deposits, even those that are above the FDIC limits.
What the haircut for uninsured depositors might have been without bailout:
On the day Silicon Valley Bank collapsed, there were still $119 billion in total deposits at the bank, according to the FDIC. The total shortage to cover all deposits would have been $20 billion, and if the FDIC had stuck to its insurance limits, that loss would have represented the maximum haircut for all uninsured depositors. It wouldn’t have been the end of the world.
Signature Bank’s cost to the Deposit Insurance Fund is only $2.5 billion.
On March 20, the FDIC announced that it had sold a big loan portfolio of the collapsed Signature Bank to New York Community Bancorp, which also assumed nearly all of the deposits – except $4 billion of deposits by crypto customers that the FDIC provided directly to those customers. The 40 branches of Signature Bank opened on Monday, March 20, as branches of New York Community Bancorp’s Flagstar Bank.
The FDIC said at the time that the total cost to the Deposit Insurance Fund will amount to only $2.5 billion.
When the FDIC takes over a bank, it gets all the assets.
Banks, even collapsed banks, have a lot of assets, such as loans and securities. At the most basic level, banks collapse and are taken over by the FDIC because those assets are no longer enough to cover the liabilities while at the same time, depositors are trying to yank their cash out, and a liquidity crisis (depositors yanking their cash out that the bank has trouble coming up with on the spot) is then followed by a solvency crisis (assets not enough to cover liabilities).
The cost to the FDIC’s Deposit Insurance Fund isn’t that total amount of deposits, but the shortage after all assets have been sold.
Total estimated cost of the collapses of Silicon Valley Bank and Signature Bank combined of $22.5 billion comes out of the Deposit Insurance Fund that had a balance of $128.7 billion on December 31, 2022. The Fund is funded by the banks that are insured by the FDIC.
And the Fed will get the money back that it advanced to the two bridge banks after the deals close and as the remaining assets are sold.
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FDIC website states” “The Deposit Insurance Fund (DIF) balance increased by $2.8 billion to $128.2 billion.” From this it looks like the FDIC can liquidate about 5 (five) more banks like Silicon Valley Bank’s (SVB) 20 billion dollar rescue.
Your calculus makes two big assumptions:
1. that the FDIC will cover 100% of all deposits as it did with SVB
2. That each bank resolution has the same loss ratio of SVB.
But the FDIC lost only $2.5 billion on Signature Bank, which in terms of deposits was just a little smaller than SVB.
In other words, it could cover about 51 Signature-type banks.
Beyond that, it can draw on its government backing, as it did during the financial crisis, and pay that back over the following years via higher assessments from FDIC insured banks.
Update from info that First Citizens released:
As additional payment for the assets, First Citizens also issued a $35 billion note to the FDIC. So that’s an additional $35 billion that the FDIC gets (I updated the list above with that).
This is in addition to assuming the deposits (a liability).
The squalls in the financial straights are manageable with the current safeguards. The risk, to me, that the full administration of the current law will not have been properly administered before a detrimental change will be ratified by a bought and paid for legislative and judicial branch and ….
I was looking at the interest rate inversion curves where the inversion of the interest rate curve between the longer rated interest rate and the short term rate. I don’t think that the normal interpretation of the inversion of the interest rate curve is appropriate given the structure of the financial framework created during the QE era.
The Fed can only increase short to mid term interest rates. The long rates are what they are from the point of view of the general consensus, a shamefully inaccurate prediction of the path of interest rates over the next 30 years. That’s a statistical joke.
The short term rate is what the Fed has agreed to pay the bank mob to hold the hot potato, a 10 trillion dollar blank check to engage in “consensual hallucination” in which the cost of borrowing was not an issue. Which is only relevant upon further inspection.
The obvious conclusion is the my working hypothesis that the artificial bulge in the short term rates vis a vis the 30 year rate carries zero or less information about the short term let alone the long term rate structure.
The monetary system is fat and it will take 10 years or so before the Fed stops subsidizing zero percent interest rates.
Disclaimer, I feel that one of the best, good turns I can do for the upcoming generations is to preserve and improve social security and medicare.
Banks buy and sell themselves multiple times. Nothing for them to pay 6% of your deposit in the final agreement while paying you .1%. Get the heck out of the the banks.
First Citizen banks are the ones that look like the Greek royalty lives at. Pillars, Lattice, Plants.
Hello from Raleigh. Not real excited about this acquisition…
Lol to sufferincash. I live just south of you in Sanford and I have reduced the cash held in FCB by a lot also. They are one of those banks refusing to pay anything decent even in CDs, so most has gone to my Vanguard MM fund.
I did the same thing: moved uninsured deposits to Vanguard and then will disperse into various insured brokered CDs.
As for FCB…it shares fund source similarities with a handful of other regional banks: heavy reliance on money market accounts. The FDIC considers these “core” deposits, strangely enough. When you learn how much more you can get on those MMDAs elsewhere, why wouldn’t you move them?
Good start. Now, only if the $390 billion bump on Fed balance sheet reverts, will I sleep better.
For now, the chart seems like it’s going WTF again as new banks come under scrutiny.
This article tells you that the Fed’s loans to the two bridge banks ($179 billion) will revert rather quickly.
The $60 billion in repos with another central bank (SNB?) will revert quickly as well.
The “Discount Window” borrowing already started to revert:
Honestly, the lavish life style is a hell unto itself. I prefer the son of blue collar American who fought in the WW2, environment.
Which is not to dismiss the requirement of capitalist thought that insists more is better. Call it what you want, the genesis of the path between the two opposing philosophies of western thought, derived from the guiding principles of the two students of Socrates, Aristotle and Plato.
Which has been distilled into any number of justifications for the deeds we do.
Wolf, from your original RIP article on March 10, you stated “As of December 31, [SVB] had $209 billion in assets and $175 billion in deposits.” That is $1.19 in assets for each $1 in deposits. Now per the FDIC press released on March 26, they say that as of “March 10, 2023 – it had $167 billion in assets and $119 billion in deposits.” That is $1.40 is assets for each $1 in deposits. Even when selling the assets at a loss, wouldn’t they have had enough to cover the deposits? Something doesn’t seem to add up. Your post does mention “other liabilities” but I’m unclear how that impacts the asset to deposit ratio.
I’m sure I am misunderstanding this part as well but why would First-Citizens agree to take on the $119 billion in deposits if they only get $ 72 billion of the assets? Will they get a part of the $90 billion of the remaining assets when the FDIC ultimately sells them?
Correct, taking on $72 billion in assets and $119 billion in liabilities (deposits), how does this work?
It’s a book entry. As long as the FDIC believes First Citizens will remain adequately capitalized, the transaction will go through. The bank now has some likely percentage of those deposits to deploy into earning assets. First Citizens has a very high level of loans already so this transaction will bring them closer to peer group levels.
My concern is that FCB has been growing like gangbusters since 2018. They are reliant on interest sensitive deposits. This might be a play by FCB to grow in size so that the FDIC wouldn’t close FCB down if it ever came to that. The equity option all but ensures this won’t happen.
How about 32 trillion in debt ,and only 129 billion in fdic seem like penny per dollar ,so they bought for 80 cents on the dollar.and taxpayers lost 20 billion. Great deal = not
The $72 billion in assets (loans) that were part of the deal were sold at a discount of 23%. They were effectively sold for $55 billion.
The FDIC will sell the remaining $90 billion in securities and other assets at a discount from book value as well. If they’re sold at a discount of 25%, they will bring $68 billion.
That the assets weren’t worth at market value what SVB carried them at was part of what brought SVB down.
So with these assumptions, the FDIC would get $55 billion plus $68 billion = $123 billion.
The bridge bank may have also taken on other liabilities, such as the senior bonds.
The final math — after everything is sold and the FDIC ends the receivership — will be interesting.
A separate post (with stepped through, line item math for bank liquidations) might be worthwhile (we’re going to see a lot more financial intermediary failures with unZIRP).
Basically intermediaries pool others’ lent funds (“deposits”), underwrite commercial loans (heh), and re-lend on into secured commercial loans or mostly secured/G-guaranteed securities (much more liquid traditionally than commercial loans).
(I’m ignoring residential loans since banks mostly bundle them up and sell them off nowadays. They might come back to bank as residential MBS but that is a separate kettle of rotting fish)
The problems crop up in the valuations assigned to those secured commercial loans (the bank held securities, due to liquidity and G bias, used to be considered safer!!).
And those valuation issues crystalize when there is a run/the FDIC has to intervene…acquiring banks ain’t going to trust the prior loan valuations (the running depositors surely didn’t…) so that is why the FDIC developed the loss-share structure…to reassure acquiring banks that their losses on acquired loans/securities (securities!) will be capped/lessened (because the FDIC will eat the excess…)
It would be interesting to see,
1) exactly which loans/securities the NC bank is getting/taking/accepting,
2) how much the NC bank’s losses are capped at via the FDIC loss share,
3) more details of the whole loss/share (including what the NC refused to take and left with the FDIC),
4) I’m not sure but the FDIC’s potential upside cut of the NC bank’s gains may be unusual…I don’t *think* most FDIC loss share agreement include this. Might be a good sign/sign of delusion by bk and FDIC that things are going to work out better than they are likely to, acquired loan, true value wise (yeah, loans to money-losing, hugely overfunded startups with underwear gnome, unit economic business models are likely to be real reliable…)
Where does it say they’ll sell those securities at a loss? During the great recession – at least with credit unions and several corporate credit union collapses – NCUA deployed the hold-to-maturity long-game and didn’t sell (and issued things like NGN notes). If they don’t have to sell, why would they sell? Swallowing a >20% loss seems unreasonable in today’s rate environment. Why not just HTM and wait for those unrealized losses to simply go away?
Well, as with SVB, if a bank holds a high percentage of uninsured or hot money/brokered loans chasing yield, then a mini run can *force* said banks to sell loans/securities at a loss…triggering a solvency crisis/major run.
You can only hold to maturity if your depositors allow it.
That is what I mean about depositors not really understanding how banks work (re-lending).
It is like in the bk run in Its a Wonderful Life…
“But, Joe, you don’t understand…your money isn’t here…it’s in Bill’s house and Henry’s house and…”
(Or the Saturday Night Live rejoinder…
Joe: “What the hell is my money doing at Henry’s house!!!”)
Cas127 — I know what a bank run is, but if the FDIC has already backstopped the losses and now First Citizen’s has bought at least a portion of the assets/liabilities, then it makes no sense whatsoever to double down on the losses and sell AFS securities at a massive loss today instead of just holding everything to maturity. That compounds the losses and doesn’t help. FDIC/whomever has already stepped in. Selling investments on top of what SVB sold that triggered the run just seems … lost on me. They’re already putting an assessment on banks to pay for the loss tot he insurance fund, so why double down on the losses and force more on the banks -> consumers?
If the apparent facts prove reliable then the final math will not be interesting it will be tragic.
Tragic in the sense that it was completely avoidable from the perspective of a basic competence examination, assuming that such a procedure exists.
No clawbacks of big salaries and bonuses?
This should be a part of every collapse
Yeah, and the sale proceeds the CEO took when he sold two weeks prior to the collapse. What surprises me most about this post is not so much that this cost the FDIC fund $20 bil, but that the FDIC fund is only $129 bil. But I guess the Fed and Treasury can just point and click to back up any amount that it actually needs when the sh*t really hits the fan?
Members of Congress caught heck from voters the last time they approved the bailouts for banks. They are more than happy that the Fed is finding ways to bypass Congressional approval to keep the money rolling.
So, now we have, as seen a few weeks ago, unlimited FDIC insurance. Everyone can sleep like a baby with the Fed in charge of the printer.
Fear not, for if we run dry of regular printing supplies, we can guarantee that all shall be covered by the coming Electro Banana Scrip fully backed to the value of the stacks of paper made from recycled peels we keep in the refrigerated vault. For those who feel more comfortable with an alternate coinage system, feel free to visit our lobby where there will be bowls full of dried banana chips completely redeemable for goods and services at any participating store that is a registered member of the Federal Monkey Business Administration’s “Good Chimps” program. Don’t forget to sign up now for the golden tails program with bananas back platinum privileges. People will go ape shit on this, so hurry up and give us your swinging profile soon.
“the FDIC fund is only $129 bil.”
You’re inventing problems and then complaining about what hasn’t happened. This is why I stopped reading ZH comments years ago.
The FDIC fund is just for emergencies. The fund is funded by the member banks. When the fund is not sufficient enough, the member banks have to pitch in. That said, that is how it should work. Not how it will work.
Now there is a big risk of contagion. Because at the moment all banks are sailing the same sea, and are vulnerable to customers transferring their deposits to bigger (too big to fail) banks. The question is: if too many small banks topple, will it be possible for the remaining banks to keep the system working? Pitching in does stop at some point. At which they will be looking at the taxpayer to make a donation.
Congress can always NET WORTH TAX the shit out of the super wealthy, but then there goes most all of their political and post political careers.
Maybe they can form a “Politician’s Union” to stand up to these guys?…..somehow…..?
They’d then for SURE have to “work across the aisle”….as they sometimes say……
Quite a pickle.
Well, the hazy wealth tax is certainly the failsafe that DC likes to play vague footsie with in order to reassure the public with about DC’s horrific debt and hopeless entitlement crisis.
But you very rarely see specific numbers…which raises the distinct possibility that so much US wealth has been exported (for hundreds of millions of $800 iPhones and other annually “obsolescent” crapola) that any effective wealth tax might fall far short or have to reach much, much further down than DC wants to talk about in advance.
Americans think they live in a much wealthier country than they actually do.
And DC cultivates this illusion for political gain.
Actually, the US has become the $11 an hour rent-a-cop for the truly wealthy countries of the world.
“But you very rarely see specific numbers…”
Here you go:
I think you LIKE things “hazy”….or maybe just well spun with some vague “look over here’s” thrown in….. to make a “point”….. that baffles ME, anyway. You strike me as paranoid, and about what I have no idea.
PS, I like my entitlements, because except for a small savings, it keeps me sheltered and fed.
A very pathetic lifestyle when measured against your own, I’m certain…..but I sure like it.
AND, I didn’t eat the memberberries.
“No clawbacks of big salaries and bonuses?
This should be a part of every collapse”
Hahahahahhahahahahahahahahah surely you’re joking, right?
This the USA . Land of the Rich
Yes, this is how it would work in a fair and non-corrupt society.
Right on. Plus what came out of manipulated stock prices when insiders sold out (including gains on options granted, exercized and turned into more stock) in a stream of transactions over at least the last year. But the public eye simply can’t stay on this end of the topic for long enough to generate governmental movement and prosecutions. Besides, just look at how much public good the bank was doing (ESG funding) before its unfortunate demise — and in the end it is loss of this, not the thieving, that has captured the imagination of too many of our fellow citizens.
Most Federal jobs provide sufficient resources for the career regulators to be fully competent to discern the likelihood of the financial vulnerability of the banks in their district.
It is becoming increasingly obvious to me that the regulators were delegated to stand down and allow the free wheeling hedge fund billionaire to gut the SVB bank. Or not, maybe.
This is America. Clawbacks will not happen. Even if they did, it would probably be a fine of 10%. LOL
Just Google JP Morgan fines. Here a few that popped up that have occurred since 2020.
PMorgan Chase & Co (JPM.N) agreed to pay $60 million to settle class-action litigation by investors who accused the largest U.S. bank of intentionally manipulating prices of precious metals futures and options.
J.P.Morgan Securities to pay $200 mln to settle U.S. regulatory charges on record-keeping lapses
JPMorgan Chase pays $250 million penalty over weak controls in its wealth management division
JPMorgan Chase & Co. Agrees To Pay $920 Million in Connection with Schemes to Defraud Precious Metals and U.S. Treasuries Markets. JPMorgan is reportedly set to pay nearly $1 billion to settle a government probe into allegedly illegal fake trades. three JPMorgan traders were charged by the DOJ for allegedly running an eight-year conspiracy that involved placing thousands of fraudulent orders on precious metals in order to confuse the market and force rival traders to act accordingly.
No perp walks or clawbacks, which is why the entire system has to, and ultimately will, collapse. You can’t have a functioning, sustainable society without the rule of law, especially when the grifters are the ones at the helm.
When it was “discovered” that the FED was day-trading – frontrunning – their own policies, we got all the evidence we needed to prove that the US is wholly corrupt from the top on down. CONgress, the FED, unelected bureaucrats – they’re all in on it.
When you start to peel back the layers, you realize the sniffles were just the excuse for the graft, that it was already in queue waiting for an opportunity to plunder.
1) CNCA, a $8.8B bank buy $72B in assets, about half of total assets, at a $16.5B discount and pay $119B deposits along with some other liabilities.
2) CNCA market cap plunge might cont along with US10Y.
3) FDIC gets equities appreciation rights up to 500M.
4) Commercial loan losses/ gains will be share (?) by both parties.
5) CNCA debt will explode at higher interest rates.
6) CNCA share price might plunge from 950 to 350, by 2/3.
It wasn’t that long ago bankers went to jail for stuff like this.
Now they just give themselves huge bonuses and loans on the way out the door.
Now we just get trite little soundbites from the Grand Wizard Powell, orchestrator of it all – “what happened, happened.”
The really unique thing about FDIC is its speed and decisiveness. Ordinary bankruptcy of a large company can take decades to reach a final settlement, with many lawsuits and countersuits. Often the creditors are dead by the time they would get anything back.
FDIC decides RIGHT NOW and pays the creditors RIGHT NOW.
When the law is like a Hatori Hanzo blade. It cuts you! No hesitation.
These sorts of “sales” are done for the optics to reassure the masses that: “see, we have banks even strong enough to buy this failed bank.”
Who knows what might have gone on behind the scenes to make this sale happen.
No, they are done to protect the crooks. Can’t stand it much longer.
There were two banks (at least) bidding for SVB. First Citizens still got a good deal, it seems, from the reaction of the stock price today: +47%, which more than reversed the plunge that the stock took over the last few weeks.
“Time and Time Again, the losses or subsidies of the politically correct groups are socialized across the people.”
Lol. Stop being naive. It’s rich people and greed.
There is no greater scheme to erode values. It’s $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
It is not over yet. Keep in mind that the last step of the FDIC is to to institute a US District Court legal action against any officers and directors the FDIC thinks it can prove negligence. This is always a huge risk of being employed in a bank’s senior management. Hindsight is a perfect science.
Maybe…but the uninsured depositors were also fairly major slobs…and holding them 100 pct harmless is considered a religious obligation (Gotta stop the panic!!! Stop panicking!!!).
So again, by completely insulating the reckless, DC guarantees that the recklessness will continue…by preserving a perverted incentive structure.
A small haircut on uninsured depositors would cause all depositors to spend 5 minutes running due diligence on the “depository institution” that they trust their financial life with.
Stonks are soaring, and bond yields are tanking further. Exactly what we don’t need. 10 year down another 10 bps this morning. This is ridiculous.
If yields keep dropping like this, that will put support under the housing market, something we don’t need.
That’s exactly what the Fed wants, regardless of what it says. If inflation can be brought back down to 2% while keeping asset prices where they are, they would be thrilled.
Inflation cannot be brought down while keeping asset prices up. Not to 2 anyway. That’s a pipe dream
Minutes: That’s what I was thinking, but I keep reminding myself of what JPow said the other day about credit drying up. I hope he’s not lying about that.
I agree, simply because in my opinion, asset prices are driving inflation.
There are many upper middle class professionals that had $3-7 million in assets back in 2015 or 2016 while heading into retirement. Now that $3-7 million is $6-$14 million and the people have more than they ever anticipated needing in retirement, and they’re spending with abandon.
I personally know several older couples in that category.
Powell has two choices, either crash asset prices or crash the currency. There is no door #3.
I wouldnot bet on it not beeing possible to bring down consumer price index “inflation” and keep asset prices up.
It is all about managing purchasing power and supply. Reduce supply of assets enough and prices will stay up. Reduce purchasing power enough an prices of consumer goods will stick.
Some side effects, like slow and few sales of real estate. Some bad side effects, like goods becoming unobtainable as they are no longer possible to make and sell with a profit. People out of work/with low income will be starving as they can not afford food.
And the economy will maybe shrink as consumers get poorer.
Commodities keep crashing. If I look at commodity indices, we are getting close to pre-covid levels. Nat Gas is at prices we paid 30 years ago
I am still wondering why the big banks CDs rates peak around 3% at 12 months and then start dropping. A couple of weeks ago Chase CDs longer than 3 years were at 0.05%. They are now at 1.5% when I checked today. But that is still 50% lower than the 3% 12 month CD.
Either they think rates will drop or they just do not want to be flooded with long term deposits? They could make a killing if they could only had to pay 1.5% in 4 years from now and the FED Funds rate is still close to 5%.
Yep. I know stories like that too. I know some people who retired in their late 50s when they planned on working to mid-60s because their retirement accounts grew so much the past 6 to 8 years. Thus probably part of the gap between jobs and not enough employees. It has been good to be living in the U.S. the past year and invested in U.S. stocks or own a home. If you lived in China and had to invest in the Chinese stock market, you saw zero wealth appreciation for your retirement over the past 10 years. We should not complain too much.
In your scenario, these wealthy people are causing some assets prices to go up. But these people can only eat 3 meals a day and only wear 1 shirt, 1 pair of pants, socks and shoes a day.
In theory, they should not cause food or clothing prices to go up? Just things like houses, land, travel. I am just guessing.
I’d suggest shopping around more for CDs. I just laddered 6, 9, & 12 month CDs, all paying 5+%.
ru82, I think it’s all interconnected. For example, Joe Retiree with $15 million in stocks decides he’s going to buy the Porsche 911 he always wanted, and his wife buys a new piece of jewelry.
Trucking companies transport this fancy stuff instead of food, as it makes them more money.
If people are spending more money on fancy vacations, people who were previously hair stylists become travel agents instead. That makes the cost of haircuts go up. It’s all potentially related.
That’s why ultimately if you print money, you have to be prepared for price increases across the board, even if they don’t all manifest themselves at the same time (as is happening now, with services up and goods down).
I bought a Bianchi Oltre XR4.
I should add that I bought a turntable too.
Retirement is enjoyable for me. And I have a great deal of respect and gratitude for Wolf, who could retire, but by choice, works very hard at his craft.
Along those lines, I sent out a donation to Wolf Street Corp two days ago via snail mail. Thank you Wolf, and thanks also to the commenters. Cheers …
Asset prices will keep increasing with this action in yields, if they keep tanking, that is. Unless credit slows, like Powell said the other day. Keeping a floor on unrealistic asset prices is not helpful. The past two years of price increases never should have happened. We need a reset. I’m so disgusted with this country anymore.
I agree. There are too many people out there that thing high asset prices are good, but they are not good for the young families who cant’ buy houses.
Keep your powder dry, and CYA. If enough of us did this (you know, actually plan ahead), the problem would eventually solve itself. Resets are for dreamers.
Einhal: I have no problem with normal price appreciation but not the absurdity of the past few years.
The Fed can’t reach 2% PCE without a recession. But, you make a good point about what the Fed wants which is to run the economy based on MMT.
2020, 2022, 2023
first two 14.75 inflation
last year circa 6%.
Thats 20% in three years
2% per year would be 6% (compounding omitted)
So we need a rollback of prices (14.%) to get get back on the 2% trajectory
Why doesnt the Fed mention this?
Mohammad El Erian had a good interview about this.
He called it something like the “mismatch” or the “difference” between what the FED is saying and the market believes.
Wolf calls it a “consensual delusion.”
Honestly, I can’t blame them tho. 10 years of free money. FED rides to the rescue everytime.
Even J Powell was spouting some BS in his press conference. He said,
“You can have very, very long
expansions without high inflation and we had several of those and they’re very good for people.
You see late in an expansion, you see low unemployment, you see the benefits of wages going to
people at the lower end of the wage spectrum, it’s just a place that we should try to get back to.”
J Powell conveniently forgets how the Great Recession screwed a ton of people over pretty hard.
True, supposedly yields are coming down because they think rate cuts are coming. Its’s disgusting. The country is so corrupt, I can hardly stand it anymore. I do blame them though and think they all should be tarred and feathered and exiled. Sick to death of it.
Tar costs double man and chicken feathers are thru the roof. We’re going to have to whittle down your list. ;)
You just have to play the game or be left behind. Buy stocks and housing. The reason why is because a lot of politicians who want open borders. What happens.
Tens of Millions of people want to move to the U.S. Millions a year sneak across the border to have a better life. There are little or no consequences. The U.S., contrary to what many think, support the low income better than most 3rd world countries. If you come here as an illegal, you have a 85% chance of being allowed to stay and eventually become a citizen. You can then get a lot of free things like food stamps, housing, almost free health care, free college education (once the student loans are forgiven), and eventually a decent social security payment when you retire. Many countries offer none of these things.
What is not to like?
There will come a point where we can’t pay for this stuff anymore, because the currency won’t support this for everyone.
Ru82: It will end badly for this country and probably sooner rather than later. At that point, it won’t matter what you own.
> 10 years of free money. FED rides to the rescue everytime.
100% for those of us with a lot of cash, it’s a lot of fun to start to watch all the capital misallocations generated in that decade.
Know a banker says rich buy bonds on svb,for 5 cents on the dollar,then when fdic bail out rich . They sell bonds making 50-60% Wonderful game create a crisis ,play the game make a fortune ,on taxpayer. I believe we’re in 7 th inning of this game
10-year Treasury yield jumps 14 basis points this morning.
Good, made my morning.
“Stonks are soaring, and bond yields are tanking further.”
Which just goes to show that inflation is nowhere near over with. Soaring asset prices due to ridiculous money-printing are what is feeding inflation. “Higher for longer” is what’s baked in the cake for interest rates.
hi Wolf, i made a follow up post to the Fed Regional Bank quiz over the weekend, but it didnt see the light of day, however there was an interesting stat in that post that pointed to North Carolina. So im glad you forwarded it along. Enjoy your forum. Team Defense.
There is no record of you ever having posted a comment with this login. No comment with this login was deleted. Your comment now is the first comment ever with this login.
Sounds like it could be an instantaneous change of programming on my end to protect ‘provenance’ of my on line work, or problem solving.
LOL, yes, email typo. Happens a lot.
So I checked with the correct email. I did delete your comment about Biden and hockey or whatever. Not exactly sure what the comment was trying to say but it didn’t belong there.
How long until First Citizens gets bailed out? Not to worry. These are once-in-a-hundred-year events, right?
I just do not get why they have to be HUGE monster mega banks. Why can’t they just have every small bank they own in a separate corporation. That way, if they fail, just that small corporation fails. The FDIC can sack it and everyone else at all the other corps can continue banking with happiness. And not pull our hair out.
CEO’s of small banks and top management of small banks don’t get paid hundreds of millions (sometimes billions) of dollars. They don’t get to dictate policy to the US government or fly to Davos for coke and hookers. They can’t buy countries and states.
Size matters. And when money is free, being bigger allows you to get mega-richer.
Finally, if you are a small, regional bank and you fuck up, you go bankrupt and lose everything (except all your own money). When you are the CEO of a giant bank, you are too big to fail (with a few notable exceptions).
The Dow is high on drugs. Bad news on top of bad news, a pyramid of bad news might take the Dow down.
The DOW is high on the FED’s money printing binge. All that money isn’t suddenly gone. It has legs. It has staying power. It is carving a wide swath through the entire economy, distorting all sorts of pricing.
How exactly was the cost to the FDIC so high? Something doesn’t add up here.
Secured bondholders? They come before depositors.
Yes. Depositors are unsecured creditors. That’s why deposit insurance even exists and is needed.
If we as a society decide to change the capital structure of banks and put deposits at the very top senior secured, ahead of everything else, including executive bonus plans and pension plans, and all other secured and unsecured debts, we wouldn’t even need much deposit insurance. Depositors would almost always be made whole from asset sales. Banks would probably not even collapse because depositors wouldn’t pull their money out. But Wall Street would never allow that.
There would be no need for “deposit insurance” if “deposits” were actually deposits, instead of loans to banks. No one who makes a loan should have a guarantee at someone else’s risk and expense.
Additionally, unsecured creditors should never be placed ahead of those holding secured debt. That’s what “unsecured” means.
Instead, virtually everyone wants to find some reason to favor their favored constituency under some rationalization, frequently if not usually by regulating moral hazard.
As for bank executives, it’s not a stretch to claw back their compensation under common law precedent. I’m sure someone can find it. Conflict of interest and putting their own interests first ahead of their duty to act in the interests of shareholders come to mind. It’s ridiculous that so many seem to believe it’s necessary to pass a law or have a regulation for everything.
re”…[if] put deposits at the very top senior secured…
Well, then the banking system could not be gamed …. “ahead of everything else, including executive bonus plans and pension plans, and all other secured and unsecured debts,…”.
In theory, all systems can be [are] gamed , given time, intent, cleverness and reasonableness…the latter being necessary to justify screwing thy neighbor.
The bypassing of FDIC insuring deposits up to $250 M comes under the rubric “reasonableness” and is an example of gaming the system; most likely a deliberate loophole.
It all depends on the actual value of $90 billion in securities and other assets. I am sure it’s nothing TOXIC.
Those other assets are mostly government-backed MBS and Treasury securities. They’re pristine, but due to higher market yields, their market value has dropped. But market value will revert to face value as the securities approach maturity. And with MBS, the pass-through principal payments are at face value and involve no loss. There is also some real estate and other stuff.
Good analysis. Thank You.
OK to start with the “Whose on First” comments now.
See: Eric Basmajian
In the week ending March 15th, other deposits at all domestically chartered banks declined by $60 billion.
Other deposit liabilities “ODL” strips out large-time deposits and money market funds.
Other deposits at large banks increased by $65 billion, while other deposits at small banks declined by $125 billion.
Over the last 12 weeks, other deposits at small banks contracted at an unprecedented 16.4% annualized pace.
As deposits flow out of smaller and regional banks, the funds are absorbed by larger banks or money market funds, which drive much less credit creation in the post-2008 period.
Do you realize how minuscule these numbers are amid $17 trillion with a T in deposits?
“with a potential value of up to $500 million”
I confess I laughed at that – window-dressing for the mugs.
That bet is already in the money today. If the price of First-Citizens’ shares rises above $582.55, the FDIC makes money.
Today, the shares spiked 47% to $860.51. In terms of the FDIC’s base in the deal, the FDIC is up by 62%, in just one day.
So a $109 Billion east coast bank with $70 Billion in traditional loans and no experience in Silicon Valley is buying $72 Billion in assets (mostly loans) from a failed west coast bank that specializes in Silicon Valley startup loans and deposits. And the stock price is up 62%. What could go wrong?
Shares are now roughly back where they had been in January.
To their credit they have a large business banking background. They are really loving their Wealth Management plays and their banks look like palaces.
So it sorta fits. Guess they will learn on the fly the Venture Capital game. I hear there’s a CEO that was just freed up with experience. a strong COO candidate ;) lol
Since 2018 about $2 trillion has moved to money market funds (total assets = $5 trillion). Not safe you say? Take a quarter point haircut and put your money in Treasury-only money market funds. Fractional reserve banks have been unsound forever, and they prove it now every time the Fed raises interest rates (1980’s, S&L fiasco; 2000’s, the Great Financial Crisis; 2020’s the Regional Bank Crisis). We may finally be putting a fork in the commercial bank business model.
So it cost FDIC $20B to save the rich un insured depositors. These $20B would be tacked on to other banks as fees which would be tacked on to end consumers.
Basically, common people are paying for this I guess.
That defacto is the policy of the US government.
If a bank’s assets can be sold off for only 80% of FMV in an FDIC fire sale, then the assets should be valued at only 70% for purposes of setting capital requirements, so that taxpayers aren’t required to absorb losses.
The FDIC insurance fund is a red herring. It doesn’t have enough to cover more than a few bank failures. It is there to give people the mistaken impression that taxpayers are safe, so banks can pursue higher risk venture.
The banking system should be stable, not a growth sector where bank executives try to be the highest paid players in the economy by shifting downside risks to taxpayers.
I think the way to make bankers adverse to risk is to have claw-backs on all executive pay/bonuses for failed banks. That would really cause bankers to change their approach to lending.
And hard time at max security prison.
Clawbacks are too difficult to apply in practice and enforce. The money will be spent or put in trusts before any clawbacks occur.
Stiffer capital requirements are like clawbacks. If things go bad, the stock plummets, and executives and shareholders suffer huge wealth declines.
the really big issue is what happens with commercial real estate loans. those are the real problem. way too many REITs and commercial real estate owners with properties that will need to be refinanced over the coming 5 years and with higher interest rates and property values that have plunged, there is no way to refinance them.
i just hope that the government does not get involved in bailing out commercial real estate owners. allow them to go under and investors to lose EVERYTHING. the properties will be bought out of foreclosure at prices that actually make sense. that will result in massive asset price deflation, back to some normalcy. it will teach the next generation of real estate investors and bankers that the government will not bail them out.
if cash flows dont support an investment, then the investment should tank. allow the markets to function properly for once.
Countless firms have invested heavily both in commercial and residential. If commercial is not bailed out, residential will see the same fate as 08, but at unprecedented rate.
Or be like china,tear them down
That comment made me think when was the last time the FED did not bail out an industry.
I have to go back to the 1980s and the S&L crisis when they let the majority fail. Now all they do is to pick one or two businesses to fail as scapegoats and then save the other 98%?
Same thing will probably will happen with Commercial Real estate. They will let one or two REITS fail and save the rest.
I remember during HB1 I saw 4 strip malls near me that were built between 2006 to 2009. All 4 sat 90% empty from 2009 or earlier until 2014. At least 6 years I never saw a for sale sign or an auction sign. Eventually over time they did fill up. But they never reached 100% until 2019. I was thinking how were those loans paid for the 1st 6 years while they sat near empty.
Some REIT had deep pockets or were using them as a write off for other profitable properties?
Write offs are not a smart option when compared to revenue.
I’m also seeing some stories from financial writers about “shadow banks”. They are supposed to have up $1.4 Trillion in loans. I did some research and shadow banks are funded by private equity, hedge funds, and others. For example, Rocket Mortgage (considered to be a shadow bank) was created by Quicken Mortgage. Also, the investment banks, Goldman Sachs and Mortgage Stanley are also considered investors in “shadow banks”. And where do they get their funding. Well, from investors, and also from (drum roll) commercial bank loans! Since this area is so opaque, who knows how many loans to dodgy operations are included in the shadow bank totals financed by commercial banks. So these banks aren’t so shadow after all.
A client was notified they would be going from 4% to 9%.
They have the money to pay off the loan.
Looks like SVB’s loan book has some problems. The assets of a bank are its loans and its securities portfolio. SVB went into crisis when its securities portfolio (mostly long maturity treasury and agency bonds) lost value in a rising interest rate environment. According to Barrons:
“These bonds were showing big losses at the end of 2022, with some $91 billion of the bond portfolio, classified as “held-to-maturity” securities for accounting purposes, worth just $76 billion.”
That implied a $15 billion unrealized loss in its securities portfolio that was much larger than SVB’s $11.5 billion in total equity at the time. First-Citizens Bank is now buying $72 billion in Silicon Valley Bank loans at a 23% or $16.5 billion discount, which is even larger than the unrealized loss in its securities portfolio. And the FDIC agreed to an eight-year loss-sharing deal on these discounted commercial loans that First Citizens is buying.
I took a quick look at home sales in Mountain View, CA, in the middle of the silicon valley. A 1400 square foot home sells for 2.7 million. An 1800 square foot home sells for 3.2 million.
Crazy season doesnt end in Silicon Valley.
Still 50-70% overvalued and even then expensive relative to the rest of the country.
We shouldn’t have bailed out the deposits at svb. Some were so scared of putting money in any bank, they just started buying up real estates.
That was money that should have gone “poof.” It would have aided in the fight against inflation. Instead, the FED and .gov wanted to add fuel to inflation by making all of those reckless depositors whole because it was people like Gavin Newsom and Oprah.
I am more OK with bailing out depositors at banks than I am with cancelling student loan debt. In the case of the depositors, there is a presumption that bank accounts are safe, which seems like a fair assumption to make, whereas with student loan bailouts it is debt the borrowers took on for the benefits of the education.
The core issue here is that the regulation of these banks before the problems hit is the real concern. Our government has absolutely attempted to create big bubbles, because in the short term it creates a wealth effect that propels the economy forward…until the bubble becomes unsustainable and pops.
The residential real estate bubble that is still raging should simply not be funded with either Fannie/Freddie money and any bank that funds these mortgages should be required to give a maximum 70% against the current appraisal of the home, or maybe it should even be 60%. Bankers need to be held accountable for creating financing behind bubble prices.
An 1800 square foot house for $3.2 million is stupid beyond words. You could buy innumerable businesses for a fraction of that which provide guaranteed income.
fake interest rates promote malinvestments
and those who make malinvestments should not be saved
efficiency and wise decisions must be rewarded
Curious if you know if any bondholders were bailed in? I know US banks don’t have CoCo bonds like European ones, but they do have preferred shares and other capital instruments that could be bailed in. Of course, SVB wasn’t considered systemically important so I don’t know how much of those regulations applied to them.
But it seems that a 20% loss (assuming the FDIC’s loss of $20bil is on about $100bil fair market value of SVB’s assets) could easily be crammed down shareholders and lower tier unsecured creditors before needing to tap into FDIC funds? And wouldn’t this be a rare case of the rest of the [solvent] banks actually wanting the FDIC to do that, so they wouldn’t face surcharges from FDIC to makeup the shortfalls?
SVB Financial, the holding company, filed for chapter 11 bankruptcy, after the FDIC took Silicon Valley Bank into receivership.
SVB Financial shares [SIVB] are still not trading. Last trade was on March 9. They may be worth close to zero if they ever start trading again, and they’d be trading over the counter with other assorted worthless stuff, not on the Nasdaq.
The ca. $3.8 billion in preferred shares (a kind of unsecured bond, similar to the European CoCos) of the holding company are trading at around 8 cents on the dollar today. PE firms are buying them in the hopes of having some say in the bankruptcy and maybe pry out some remaining assets. This is just a low-cost gamble, at 3-8 cents on the dollar (last two weeks trading range). They may get nothing.
Investors in the shares and unsecured bonds got creamed by the FDIC takeover.
A google search and a google news search turned up nothing definite regarding the fate of SVB shareholders and bondholders. Is the FDIC subsidizing them in addition to the uninsured depositors?
SVB Financial, the holding company, filed for chapter 11 bankruptcy.
SVB Financial shares [SIVB] are still not trading. Last trade was on March 9. They may be worth close to zero if they ever start trading again, and they’d be trading over the counter with other assorted worthless stuff, not on the Nasdaq.
The ca. $3.8 billion in preferred shares (a kind of unsecured bond) of the holding company are trading at around 8 cents on the dollar.
Investors in the shares and unsecured bonds got creamed by the FDIC takeover. This spells it out:
I keep hearing everyone talk about the irresponsibility of the management of these two banks. Fair enough. But isnt the core problem really the irresponsibility of the jerks at the Federal Reserve and their counterparts in countries like Japan, Switzerland and the ECB??? I still dont hear very much talk on the news media about the fact that those zero percent interest rates were the reason behind every single bad economic thing that is going to happen over the coming years.
I would actually say that the Fed has been MORE wreckless than the management of those two banks. The problems caused by the Fed were completely predictable and the scale of the problems they have created is unprecedented.
Don’t worry, central banks (including the FRB) have plenty of blame coming their way later, once the asset mania is confirmed as over. A lot of people who are going to be poorer or a lot poorer will be really angry and will be looking for someone to blame.
I think we went down the path of “economic theory” that low rates were the answer. Bernanke won the Nobel prize last year for his contributions to the theory. Before all of it went sideways. This theory will be shelved and onto new ones or old tested ones.
The thing that gets me about all these comments, is the total lack of trust in the US financial system, the regulators, the market participants, bank managers, government officials, etc…How long can a system predicated on trust, the Banking System, sustain itself when no one trusts anyone or any institution within it?
Bank shot left corner pocket off the carom.
If the FFR is the interest rate banks charge each other for loans, based on reserves required to cover withdrawal requests, then why the Frik is required reserves of banks now ZERO? What sort of ‘under what shell is my deposit under’ game are these con-artists playing? Why is the FFR higher than all the treasuries? Wow, wonder why they can’t cover withdrawals with treasuries as collateral? It’s almost like the Treasury and Fed have some sort of schedule (plan). All bankers should just work from home, it’s blindingly evident where this is heading.
The Fed is allowing SVB to treat their long term treasuries as if they have matured, even though they are far from it, to use for collateral. So who is paying for the difference between the unmatured treasuries held by SVB and the matured treasuries that the Fed is treating them as? Inquiring minds want to know.
The FDIC will sell those securities at market price, and that is included in the projected $20 billion loss to Deposit Insurance Fund.
Before the crash, SVB failed to raise $2B. That triggered the panic. After the dust has settled the hole is now $20B. Am I correct to say the bank run made the problem 10x worse?
Fire sales have that special effect.
It’s been reported that the 10 largest accounts at SVB held $13 billion out of $18 billion in total uninsured deposits.
This was 100% a political favor from the current administration to its top donors.
vs. $18 billion in losses to the FDIC from bailing out uninsured deposits*