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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: Fiz in 6TH POPE | Recommend this post (0)
Tue, 14 Mar 23 5:01 AM | 23 view(s)
Boardmark this board | 6th Edition Pope Board 		Msg. 40975 of 58622
(This msg. is a reply to 40973 by Decomposed)
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De: " Zimbler asked if he's right in thinking that there's only a loss if one sells, and he's correct. But SVB was FORCED to sell so the losses became real and the bank consequently failed."

I'm not trying to be picky, but this thinking is NOT correct in a financial sense. Yes, there IS a difference between bankrupt and insolvent, and sometimes you need to go through a period when liabilities exceed assets before a venture takes off. But it doesn't change the fact that you lost first...and then (by luck or skill) recovered. That is all implicit in time value of money calculations.

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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: Decomposed in 6TH POPE
Tue, 14 Mar 23 4:51 AM 		Msg. 40973 of 58622

fizzy:

Re: “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!” No. There are none. The reason banking is so popular is due to the [non] miracle of fractional reserve banking. Banks can lend out the vast majority of their deposits, taking IOUs in their stead. If depositors request their money back, the banks don't have it. They MIGHT have the option of calling in the loans, but the main reason depositors request their money en masse is because of poor economic conditions that could cause such loans to be BAD. In other words, if SVB called in its loans, it might reveal how underwater the bank actually is and make matters worse. It's actually much more complicated than that. Today's banks can make loans to just about anyone or any thing... foreign countries like Ukraine, for instance... and use it as a means of collecting interest. Lent money might find its way back into the banks and get lent AGAIN. How sound are such loans? Maybe not very sound at all. But through this process of lending and re-lending, banks could have just one or two percent of the funds their customers deposited.

In the case of SVB, the bank had purchased a large number of low interest bonds. When interest rates rose, the value of those bonds plummeted. When millionaire customers who were aware of this got nervous and started asking for their money back, money at which the bank was leveraged beyond nine to one, the bank had no choice but to sell those underwater bonds. Zimbler asked if he's right in thinking that there's only a loss if one sells. Yes, that's true. But SVB was FORCED to sell in order to get the cash its customers demanded, so the losses became real and the bank consequently failed.

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