Discussion: Mechanics of SVB and similar bank collapse

[ggelitetrader000]

I am trying to wrap my head around how SVB and several other banks and steer myself (my option portfolio) during this uncertain time. I posted here although it is not quite appropriate topic, i just decided here because option traders tend to be much smarter and knowledgeable (no B.S.) than other primitives ones who deal with stocks and bonds.
There seems lot of confusing stories and I understand new reporters are often ignorant. This seems make sense: Story says SVB had significant exposure to bonds that dropped in value when itnerest rate increased.
I also read this: Once bonds started paying higher yield once interest rate increase, but it makes sense given the facts:
- bonds are issued by gov, corps to raise money and buyers are loaners and paid periodically interest payment by issuers. So when SVB buys a bond, it is already issued by someone else or some other entity, so if yield inceased, arent SVB the issuers of loan (buyers of loan)? Unless SVB issued their own bond to raise capital.

 

[Real Money]

Banks make loans and accept deposits (assets and liabilities, respectively).

In the modern banking system, and under the Fed QE infinity and reckless fiscal policies, money is created through the expansion of credit (via mortgage for example), the principle and interest payments are guaranteed/insured, and then the mortgages are sold off to agency and/or private entities in a process called securitization. The final product is rated by Moody's and S&P and then sold off to passive investors (who are yield starved bank clients under a ZIRP/QE regime).

So, under an interest rate suppression regime (ZIRP, QE, MBS purchases) the Fed is printing money to pump up the traded prices of rate sensitive fixed income. This whole thing got completely out of control. You have to remember, when a bank creates money via originations, the cash ultimately ends up on other banks' balance sheets as a deposit, thus inflating reserves, which have near zero yield, so are therefore diversified into duration assets (risk on).

The whole thing is inflationary, because it debases the currency in nominal terms. It also causes financial institutions to go further out on the risk curve for yields, because the QE is crushing rates on the short end. Also, corporate America piled into the trade, issuing fuckloads of corporate debt, in order to finance share buybacks, which only served to pump the markets even fucking higher. Silicon valley paid the employee base in warrants (stock options) so they could do more share repurchases.

Wall St. was well aware that this would be the outcome of Fed policies.

Think about it. All of these policies are designed to inflate the monetary base, create cash deposits in the banking system, maximize the rate of loan origination, and artificially create more demand for rate sensitive, high risk, and high yield investment vehicles (which further drives down yields).

When the Fed pulls all the excess reserves (banks have a fractional reserve system) out of the markets, and starts paying competitive rates on deposits, this whole thing reverses, and the opposite occurs.

The cash in the banking system stops growing so (artificially) fast, and the rate sensitive (duration assets) mark down.

Anyone holding MBS, ABS, CDO, CLO, PE, low dividend/high beta, are getting marked down.

Silicon Valley Bank bought a ton of MBS or whatever, and now they are underwater on a mark-to-market basis. Fed to the rescue with some kind of "liquidity" solution (paying par for MBS) and guaranteeing the depositors in order to stem a contagion effect.

 

[SunTrader]

SVB mostly was in long-dated Treasuries - not MBS. But they didn't carry enough short-dated to keep enough cash on demand to satisfy daily/weekly/monthly needs. As well as keep up, to a certain extent, and benefit from said rising rates.

 

[mervyn]

Banks mark their holdings HTM and AFS, Hod To Maturity is at cost, Available for Sales marks to market, and 7-8% cash on hand. You will have a bank run if the cash withdrawal is greater than cash and AFS.

 

[ktm]

I am trying to wrap my head around how SVB and several other banks and steer myself (my option portfolio) during this uncertain time. I posted here although it is not quite appropriate topic, i just decided here because option traders tend to be much smarter and knowledgeable (no B.S.) than other primitives ones who deal with stocks and bonds.
There seems lot of confusing stories and I understand new reporters are often ignorant. This seems make sense: Story says SVB had significant exposure to bonds that dropped in value when itnerest rate increased.
I also read this: Once bonds started paying higher yield once interest rate increase, but it makes sense given the facts:
- bonds are issued by gov, corps to raise money and buyers are loaners and paid periodically interest payment by issuers. So when SVB buys a bond, it is already issued by someone else or some other entity, so if yield inceased, arent SVB the issuers of loan (buyers of loan)? Unless SVB issued their own bond to raise capital.

You can do an amazing job analyzing the metrics and depositor base and everything else about the institutions...and it will do you no good in terms of owning the equity or options. Customers withdrew $42B in one day from SVB. The only issue with gov't bonds is illiquidity. The Fed is solving that problem by trading cash for Treasuries (at par) in one year tranches for any bank that needs liquidity. It's super easy for the stock folks to say after the fact "well of course they had issues because of blah blah blah" but they had the same insight as Cramer just days before it imploded.

 

[BMK]

Matt Levine at Bloomberg has a good discussion of what happened in this opinion piece:

https://www.bloomberg.com/opinion/a...9.uuTLKcsIPxngwrSqGiZygo6wPOh7lPxIP0-__DUAbVY

This is a gift article that does not require a subscription. The link expires on March 25, 2023.

 

[ground zero]

SVB 's CFO last job before joining SVB was CFO at Lehman before they went down the toilet. Wonder who he'll work for next. Probably get a government job.

 

[TheDawn]

I am trying to wrap my head around how SVB and several other banks and steer myself (my option portfolio) during this uncertain time. I posted here although it is not quite appropriate topic, i just decided here because option traders tend to be much smarter and knowledgeable (no B.S.) than other primitives ones who deal with stocks and bonds.

Correction: People who deal with stocks and bonds are NOT primitive. LOL These securities are just as, if not even more, complicated and sophisticated as options. In order to trade stocks and bonds well, you need to be very knowledgeable and intelligent.

There seems lot of confusing stories and I understand new reporters are often ignorant. This seems make sense: Story says SVB had significant exposure to bonds that dropped in value when itnerest rate increased.
I also read this: Once bonds started paying higher yield once interest rate increase, but it makes sense given the facts:
- bonds are issued by gov, corps to raise money and buyers are loaners and paid periodically interest payment by issuers. So when SVB buys a bond, it is already issued by someone else or some other entity, so if yield inceased, arent SVB the issuers of loan (buyers of loan)? Unless SVB issued their own bond to raise capital.

Is there a question somewhere? If there is, what is your question? When SVB buys a bond, when the yield increases, would SVB become the issuer of the bonds that it bought?? Unless SVB issues its own bond??

I don't know where to begin to answer your question if that's really your question except to suggest that you pick up a book or go to investopedia.com and start to do some reading on Bonds. You need to be "primitive" first to understand how bonds work before you invest in options.