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Re: If SVB is insolvent, so is everyone else - US Treasuries, far from being safe, are the NEW Toxic Security! 

By: Zimbler0 in 6TH POPE | Recommend this post (1)
Tue, 14 Mar 23 4:34 AM | 40 view(s)
Boardmark this board | 6th Edition Pope Board 		Msg. 40971 of 60008
(This msg. is a reply to 40968 by Fiz)
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Fiz > I don't think that is how things work in accounting - nor in rational investing. HIDING losses for any of these PUBLIC institutions is, I'm sure, a felony


I'll agree that hiding losses by public institutions ought to be a felony (if it isn't).

But, I have some stock in a power company ticker BKH. My BKH is currently worth about 12% less than what I paid for it. Is it really a loss?

If it was in a 'margin account' and the brokerage called me on it and I had to sell it at current prices it would be a loss. Realized on the sale.

But it is not. I plan on keeping it and continuing to collect the dividend checks.

If I had bought a bond at 3% . . . and interest rates went up to 6% . . . My bond would be worth less than I paid for it. If I hold the bond to maturity, won't I get my money back plus the 3% dividend? I'm pretty sure that is how things work. Unless the bond issuer defaults on the bonds . . .

If the bond issuer defaults on the bond then the bond is worthless paper. (And the holder screwed.)

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A problem for SVB was that when companies began withdrawing large amounts of money to fund their businesses, it had to sell its longer-term Treasuries and securities at a loss to cover
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Why SVB failed: The bank ignored one of the fundamentals of finance

http://www.fastcompany.com/90864027/why-svb-failed-silicon-valley-bank-collapse

All of the recent bank failures at SVB, Silvergate, and Signature Bank, have one glaring thing in common.

If you’re looking for reasons for the failure of Silicon Valley Bank, which was taken over by the FDIC last Friday after one of the biggest bank runs in U.S. history, one obvious culprit is the fact that the bank violated one of the elementary rules of finance: Always diversify. SVB became the 16th-largest bank in the country by turning itself into the financial institution of choice for Silicon Valley venture capitalists and the companies they funded. But in doing so, it also made itself exceptionally dependent on the health of the tech industry and on the choices of a relatively small number of VCs and company founders. That dependence is what made the bank so successful. It’s also what helped destroy it.

It’s hard to overstate what an unusual bank SVB was. At its peak, it had more than $200 billion in assets, but it had few individual customers and fewer than 38,000 corporate accounts. And its customer base was highly undiversified: Most of its deposits came from VC funds and tech and life-science companies, and most of its loans went to those companies too. This was a conscious choice by SVB: In fact, it often required companies to bank with it exclusively as a condition of getting funding.

This was great for SVB during the boom years of 2020 and 2021: Its total deposits more than tripled in two years. But when the tech boom turned to bust at the end of 2022, SVB’s customers—many of whom were startups that were not making money but spending it—started to withdraw money rather than deposit it, burning cash in order to stay afloat.

This would not have been a problem, except for one thing: SVB had taken a lot of those deposits in 2020 and 2021 and bought long-term treasuries and mortgage-backed securities that carried very low interest rates. This wasn’t a totally reckless decision: None of the assets it bought were at risk of defaulting. But it did expose SVB to a lot of risk if interest rates spiked because when interest rates rise, bond prices fall.
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Zim: Article does continue.

SVB was NOT in trouble because the bonds were worth less than they paid for them . . . They were in trouble because folks started pulling their money out and they HAD to sell those bonds (long term treasury notes?) . . . at losses and then more depositors got worried they might not get their money out and they ALL tried to get their money out . . .




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The above is a reply to the following message:
Re: If SVB is insolvent, so is everyone else - US Treasuries, far from being safe, are the NEW Toxic Security!
By: Fiz in 6TH POPE
Tue, 14 Mar 23 3:54 AM 		Msg. 40968 of 60008

Zim: "Am I right in thinking that that is only if one sells?"

I don't think that is how things work in accounting - nor in rational investing. HIDING losses for any of these PUBLIC institutions is, I'm sure, a felony (albeit in a country which no longer prosecutes felonies if you are politically connected enough...like Biden, Clinton, Bush, etc).

You LOSE the value of your investments when their mark to market price goes down — not when you sell. In ALL cases smart money would have not invested before the crash, but waited until after, if at all. A 50% paper loss requires a 100% paper gain...just to get you back to even, and 100% gains are not that easy to come by in conservative circles.

The banks which lent money long term when interest rates were at historic lows (and WAY below real rates which factored in inflation) SCREWED UP MASSIVELY. They GAMBLED that trees grow to the sky...and that
the Fed would never do what it did.

The really spooky thing to ask is what banks, pensions, insurance companies, etc. did NOT make long term loans when mortgages were at 2-4% and Treasuries were below 0.5%? If you lent fixed-rate, long-term on RE you are screwed. If you lent on 10 year Treasuries or blue-chip corporate bonds, you are also screwed.

I'm trying to think how I would find out the amount of such long-term paper losses held at various banks vs. their liquid assets. Maybe there is something I am not properly considering but, at the moment, I'm wondering if there are ANY commercial institutions which are still solvent on a mark to market basis. How could there be? Only if they didn't loan anything long term or didn't use any leverage (margin). But that doesn't fit ANY public institution I can think of!

If you have much money in any smaller banks (which are less likely to be politically connected enough) you might want to rethink that...quickly...before other people start rethinking it! Even below the FDIC insured level, there is massive risk as the FDIC didn't have even 1% of the money it would need to bail out the deposits it has supposedly insured ... and it is a quasi private institution. All this based on the last time I checked. (I actually took the time to call them once, a long time ago, to find out if this was all true...it was...but they told me not to worry because...well, just because!;!)

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