Bank Run

[btq96r]

24 minutes ago, Erik88 said:

Can you expand on this for those of us(me) that don't understand. If a bank owns a mortgage and those customers are still paying their mortgage payment, why does this matter? 

My wife works for a title company and we've been seeing her pay checks shrink every month as they close fewer homes. I'm curious how much worse things will get. 

The key word is trading here.  The real number value of the mortgage payments are still what it was closed at.  But in 2020 and 2021, a lot of people buying homes did so under some very favorable interest rates, and more people were on their heels to refinance.  That's a lot of money locked in a the low end of the spectrum, the value of that money having gone for a roller-coaster ride in three years.

With inflation eating away the value of the dollar and interest rates going up, holding those assets is at best money in a tar pit, and at worst, seen as a loss when adjusted in real terms (ie: after inflation).  So, if a financial organization wants to get them off the books and free up capital for better use, they sell them at a discount to entice a buyer and move on.  After all, who would buy a mortgage no matter how secure returning 3% when you can buy a T-Bill that is the safest investment on the planet returning 5%, or a corporate bond above that even.  They're doing this because money isn't essentially free to borrow anymore, so they have to gin it up from their own assets and returns. 

Think of it as selling a gun you bought during a Republican administration that was cheap, but you're not using it anymore, to get money that partially funds your next purchase when a Democrat is in the White House, and guns are more expensive.  That's about as TGO friendly a parable I can use for this situation, but it's a bit imperfect.

Last year the big deal was inflation gut punching the consumer.  For at least now, the big deal is inflation gut punching the financial institutions.  Corporate bonds are probably on deck for valuation hits. 

Edited March 13, 2023 by btq96r

[eRay]

14 minutes ago, Erik88 said:

Can you expand on this for those of us(me) that don't understand. If a bank owns a mortgage and those customers are still paying their mortgage payment, why does this matter? 

The problem is: The bank borrowed money from depositors at 1% with a 2 year CD. They then loaned the money to you for 30 years at 3%. That gives them a 2% profit for two years. The catch is now they have to return the money from that two year CD and borrow the balance owed on your 30 year mortgage from a new CD investor that they will have to pay more than 3% for. Now they are in the hole and it will get deeper as rates rise.

[deerslayer]

1 hour ago, Grayfox54 said:

 

The only things I'm certain of is that the rich keep getting richer

Define the rich.  I know a couple people I consider rich who lost their asses in 2008-09.  

[ArmyBrat61]

3 hours ago, peejman said:

Being but a humble engineer, I don't pretend to understand all this financial stuff.  Largely I think it's just a bunch crap some bean counters made up to justify their existence and hide from doing any tangible work.  

Business leaders who suck at their jobs should be allowed to fail and it should be painful. Innocent people also get hurt along the way, which is unfortunate.  But people don't learn anything when they get bailed out. 

That snarky and cynical opinion aside, I'm always reminded of this scene from Sneakers when things like this happen....

 

 

Seatac Astronomy.......so true so true

[MacGyver]

2 hours ago, Erik88 said:

Can you expand on this for those of us(me) that don't understand. If a bank owns a mortgage and those customers are still paying their mortgage payment, why does this matter? 

My wife works for a title company and we've been seeing her pay checks shrink every month as they close fewer homes. I'm curious how much worse things will get. 

Think about it like this.  Let’s assume a borrower wants to buy a house with a traditional 30-year fixed mortgage and 20% down.  They’d like to keep their payment to $2000/month.

A year and a half ago before rates started rising, that couple could have gotten a mortgage at 2.25% and would have been shopping for a $520k house.  Today, at 7.09% that same buyer with the same fundamentals is looking for a $330k house to keep their payment at something they can afford.  So that couple’s budget has been cut to around 63% of what it was before rates started rising.

That same kind of math applies in a different way when banks bundle up big packages of mortgage and sell them as mortgage backed securities.  They’re suddenly holding something that was worth less than it was last year. Importantly for this story they have it on their books and this have to account for losses in value.

For the average homeowner, it really doesn’t matter so long as you’re not planning on moving anytime soon.  If you bought a house in late 2021 and then needed to sell it because your job got transferred or whatever - then you might well find yourself underwater. 

[DJTC45]

Well I guess I better go get a truck load of Mason Jars, half for the Cash and Silver I have, and the other for some "Shine" so I have something to trade. Now to start digging a bunch of Gopher Holes in the back yard, and get some Copper Sheets and Tubing.

[A.J. Holst]

4 hours ago, Erik88 said:

Can you expand on this for those of us(me) that don't understand. If a bank owns a mortgage and those customers are still paying their mortgage payment, why does this matter? 

In the mortgage biz, over 30 years in financial services.

Cost of funds is the driver for your specific question.

If you have a mortgage at 2.5%, the lender borrowed at say, 1.5% 

Today, cost of funds is 4.5%(ish)

Mortgage rates are tied to the ten year Treasury, it was over 4 on Friday, under 3.5 this morning. It normally moves on .125 increments.

Edited March 14, 2023 by A.J. Holst

[Erik88]

Interest rates go up and down over time. How did these banks not see this coming? Greed? 

[MacGyver]

15 minutes ago, Erik88 said:

Interest rates go up and down over time. How did these banks not see this coming? Greed? 

There are some peculiarities to a bank where a lot of equity investors keep bringing in dump trucks of cash and they’re not lending a bunch out.

Matt Levine (whose newsletter you should probably read) put it really well:

Quote

But there is another, subtler, more dangerous exposure to interest rates: You are the Bank of Startups, and startups are a low-interest-rate phenomenon. When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off. Your clients who were “obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities” stop doing that. Your customers keep taking money out of the bank to pay rent and salaries, but they stop depositing new money. 

 

[Ski]

5 hours ago, Erik88 said:

Can you expand on this for those of us(me) that don't understand. If a bank owns a mortgage and those customers are still paying their mortgage payment, why does this matter? 

My wife works for a title company and we've been seeing her pay checks shrink every month as they close fewer homes. I'm curious how much worse things will get. 

I'll repeat what has been said and expand a little.

A lot of their capital was tied up in low interest rate mortgage backed securities.  Due to the nature of their clientele, they're going through a period of unusually high withdrawal activity.  That normally safe asset (while still producing the expected income) is worth less than face value because newer mortgage bundles are paying more interest.  That higher than normal withdrawal activity triggered a need to raise more capital.

They announced they were going to raise more capital by issuing more shares of stock, and that spooked the market--so no one wanted to buy those share--and their customers.  That show of weakness caused the run that "pushed them over the edge".

I think there are also some accounting rules that would have created a different problem if they started selling those mortgage backed securities.  Someone with a stronger accounting background than me would need to expound on that.

 

[Links2k]

It appears that unlike 2008 a lesson will be learned by the investors in these failed banks.  Apparently only depositors will be protected this time around. 
 

I’m not a financial advisor, but I understand investments come with risks. 
 

 

[Grayfox54]

6 hours ago, deerslayer said:

Define the rich.  I know a couple people I consider rich who lost their asses in 2008-09.  

I'm talking about the billionaires that actually own this country, Congress and the entire world. Your friends just weren't rich enough. 

[btq96r]

2 hours ago, Links2k said:

It appears that unlike 2008 a lesson will be learned by the investors in these failed banks.  Apparently only depositors will be protected this time around. 
 

I’m not a financial advisor, but I understand investments come with risks. 
 

 

This was the only real good part here.  The shareholders of SVB will be ran down to zero in their equity, and the management team is out of a job.  To be sure, it was only the size of SVB that let this consequence be applied.  JP Morgan or Bank of America would get the '08 treatment again if this was a problem they encountered.  So, it's easy to think of this as compared to 2008, but this is more like all the smaller banks that failed during that time, not the big institutions that were given large grants from the Treasury/Fed and paired up in arraigned marriages that made them even bigger.  SVB just got a lot of attention due to the VC money tied up in the accounts.  It was more a business to business bank than a community one in essence.

There is a lot of angst over how the CEO and others had stock sale transactions occur very recently, and while it seems a good bit of that was on a drawn out plan (it's how executives with performance based comp cash flow their lives, and it is tax season), it makes sense if they felt the winds blowing and took some money to their personal accounts on the way down.  While I'm only so sympathetic, that CEO, CFO, and likely a few others from the BOD aren't going to be done with the mess for a while, and will likely be in some legal muck along the way.  So, without a corporation to fob those expenses off onto, they need to pay for it out of pocket and have some cash to float themselves.

[A.J. Holst]

11 hours ago, Erik88 said:

Interest rates go up and down over time. How did these banks not see this coming? Greed? 

Yep, however, banks and credit unions work with both long term and short term investments (and loams) for managing the balance sheet.

The other thing they look at is churn, how quickly consumer loans payoff and reset.

In credit union land, indirect auto loams sticks about 28 months, mortgages are about 7 years (across all terms and types)

I have a sub 2% mortgage at my credit union, I joke with our VP of Asset Liability Management he's gonna have me for the life of the mortgage.

[A.J. Holst]

7 hours ago, btq96r said:

The shareholders of SVB will be ran down to zero in their equity, and the management team is out of a job.  To be sure, it was only the size of SVB that let this consequence be applied. 

I saw good ole Barney Frank (of Dodd Frank fame) sits on the board. 

Allegedly, SVB was also favored by Chinese tech firms as a source of capital. Tax payer dollars soon to be at work for the greater good?

Edited March 14, 2023 by A.J. Holst

[btq96r]

34 minutes ago, A.J. Holst said:

I saw good ole Barney Frank (of Dodd Frank fame) sits on the board. 

Allegedly, SVB was also favored by Chinese tech firms as a source of capital. Tax payer dollars soon to be at work for the greater good?

Frank was on the board of the other bank that went under late last week, Signature Bank.  Not sure about any Chinese firms at either, but wouldn't shock me.  They have to bank somewhere for their interests in the US.

https://apnews.com/article/signature-bank-fdic-barney-frank-silicon-valley-6ad86262d9945675a42d735b66ace4f2

Frank said this was meant as a warning to crypto banks.  While I'm guessing the Fed and Treasury weren't sad to see a bank that changed its focus to crypto customers go under, this doesn't appear to be anything besides a normal bank run.  It seems Bitcoin does not "fix this" just yet.

The FDIC also guaranteed deposits in excess of $250k, once again changing that limit to infinity.  No tax dollars at work...yet.  The FDIC funding can still cover things since the assets of the bank aren't junk.

[monkeylizard]

[deerslayer]

12 hours ago, Grayfox54 said:

I'm talking about the billionaires that actually own this country, Congress and the entire world. Your friends just weren't rich enough. 

They actually owned quite a bit.  They didn't starve and recovered, but they sure didn't get richer.  

Nothing personal, but I just get tired of 'the rich" whoever that is, generically being the boogeyman.  There are people who would probably think you and I are rich.  

[Grayfox54]

1 minute ago, deerslayer said:

 There are people who would probably think you and I are rich.  

Quite possibly. I don't consider myself rich, but I am comfortable. Sadly, lots of folks can't manage that these days. 

We have the best government money can buy. Its just out of most of our price range. Those that can afford it make the most of it. And yes, they are the  boogeyman. 

[deerslayer]

3 minutes ago, Grayfox54 said:

We have the best government money can buy. Its just out of most of our price range. Those that can afford it make the most of it. And yes, they are the  boogeyman. 

It's certainly not perfect, but the alternative absolutely sucks.  

[gregintenn]

10 minutes ago, deerslayer said:

They actually owned quite a bit.  They didn't starve and recovered, but they sure didn't get richer.  

Nothing personal, but I just get tired of 'the rich" whoever that is, generically being the boogeyman.  There are people who would probably think you and I are rich.  

It is sad we have been conditioned to hate anyone who took risks, worked hard, made sound decisions, and became successful. Every political speech and every newscast now seem to lump us into separate groups and urge us to hate one another. I’m about ready for us all to become Americans again.

[deerslayer]

7 minutes ago, gregintenn said:

It is sad we have been conditioned to hate anyone who took risks, worked hard, made sound decisions, and became successful. 

It's a common theme on TGO.  

[krunchnik]

23 hours ago, Capbyrd said:

If you don’t have eggs, it doesn’t matter what happens to the basket!!!!

I hear that and am immensely qualified in this subject

[Daniel]

On 3/13/2023 at 1:13 PM, Capbyrd said:

If you don’t have eggs, it doesn’t matter what happens to the basket!!!!

This post brought to you by the no egg gang 

[krunchnik]

25 minutes ago, Daniel said:

This post brought to you by the no egg gang 

Yes Sir-Egg Lands Best