Normal
hopefully, this subject is closed. Bookending with part of Jarad Dillian's newsletter Not So Good at FinanceWe’re about a week into this, and already, I am sick of talking about Silicon Valley Bank (SVB). Soon, it will just be a footnote in market history, like Orange County and Procter & Gamble.But as it turns out, the bankers at SVB were pretty good at tech but not so good at banking. They waved in billions of the lowest possible coupon mortgage-backed securities and Treasuries and forgot to hedge with interest rate swaps. I’m not entirely sure they even knew what interest rate swaps were. I’m being serious. They were that dumb. They had no business running a bank. It was basically just a grandiose Jiffy Lube for venture capital funds.Problem is, SVB was the 16th-largest bank in the US in assets, and while you probably don’t remember who came in 16th in the race for the batting title last year, 16th-largest is big enough to be systemically important. If the Federales didn’t stop the run, it could have spread to several other banks. Hence, the unlimited deposit insurance. I disagree with it on libertarian principles, but we’ve abandoned free market principles to save the free market. I wonder where we’ve heard that before.The politicians are framing this as “saving innocent depositors,” but the majority of SVB’s deposits were placed there by about 35,000 depositors with $4 million in deposits each, on average. These people were not innocent. They were big boys and girls and supposedly sophisticated enough to understand the risks. As it turns out, they were as dumb as SVB management. Dumb people losing money is supposed to be a feature of capitalism. It has a cleansing effect. But we never let it happen...... ... Do I think we will see more bank failures? Not likely. Although one interesting wrinkle is that Dodd-Frank incentivized banks to hold Treasuries and mortgages instead of commercial loans, whereas commercial loans are typically floating rate and would have been fine in a rising interest rate environment. The unintended consequences of regulation strike again.I think this was an isolated case of financially unsophisticated people being responsible for billions of dollars. If I were a depositor, I wouldn’t be worried about rising rates as a threat to banks — I would be worried about competency. Is the guy running my bank a donut?I am fond of saying that nothing is safe. If you want to avoid all of this, just buy a money market fund or invest in T-bills directly. You could do a lot worse.
hopefully, this subject is closed. Bookending with part of Jarad Dillian's newsletter
We’re about a week into this, and already, I am sick of talking about Silicon Valley Bank (SVB). Soon, it will just be a footnote in market history, like Orange County and Procter & Gamble.
But as it turns out, the bankers at SVB were pretty good at tech but not so good at banking. They waved in billions of the lowest possible coupon mortgage-backed securities and Treasuries and forgot to hedge with interest rate swaps. I’m not entirely sure they even knew what interest rate swaps were. I’m being serious. They were that dumb. They had no business running a bank. It was basically just a grandiose Jiffy Lube for venture capital funds.
Problem is, SVB was the 16th-largest bank in the US in assets, and while you probably don’t remember who came in 16th in the race for the batting title last year, 16th-largest is big enough to be systemically important. If the Federales didn’t stop the run, it could have spread to several other banks. Hence, the unlimited deposit insurance. I disagree with it on libertarian principles, but we’ve abandoned free market principles to save the free market. I wonder where we’ve heard that before.
The politicians are framing this as “saving innocent depositors,” but the majority of SVB’s deposits were placed there by about 35,000 depositors with $4 million in deposits each, on average. These people were not innocent. They were big boys and girls and supposedly sophisticated enough to understand the risks. As it turns out, they were as dumb as SVB management. Dumb people losing money is supposed to be a feature of capitalism. It has a cleansing effect. But we never let it happen...
... ... Do I think we will see more bank failures? Not likely. Although one interesting wrinkle is that Dodd-Frank incentivized banks to hold Treasuries and mortgages instead of commercial loans, whereas commercial loans are typically floating rate and would have been fine in a rising interest rate environment. The unintended consequences of regulation strike again.
I think this was an isolated case of financially unsophisticated people being responsible for billions of dollars. If I were a depositor, I wouldn’t be worried about rising rates as a threat to banks — I would be worried about competency. Is the guy running my bank a donut?
I am fond of saying that nothing is safe. If you want to avoid all of this, just buy a money market fund or invest in T-bills directly. You could do a lot worse.
Hello and welcome to Aussie Stock Forums!
To gain full access you must register. Registration is free and takes only a few seconds to complete.
Already a member? Log in here.
