Comment by metacritic12 | Hacker News Reader

Comment by metacritic12 | Hacker News Reader

Counterpoint: This WSJ Article [1] and their latest 10Ks confirm that:

- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.

- This would wipe out all their equity, loans, and start hitting depositors.

- If there was a bank run, First Republic probably would not be able to meet all depositors.

- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.

- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.

[1] https://archive.is/QuOSD#selection-335.147-335.315

All true, but they have a $60b debt facility to draw down on before they'd consider liquidating their HTM bond portfolio. Given that they have $120b in uninsured deposits diversified across a disparate client portfolio, it seems like they're truly in a much stronger position than SVB.

I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.

SVB was only able to borrow $15B from their FHLB debt facility, before they got cut off. The FHLB total capacity is ~$60 billion. Is First Republic stating actual numbers they are guaranteed to have access to?

Their shareholders are already panic selling (FRC down 36%), their bonds appear to be sinking, and few private parties wants to throw good money after bad. When you have to put out an emergency statement to reassure everyone of your creditworthiness, it's already gone.

I do agree that First Republic is in a much better situation relatively to SVB, but illiquidity and insolvency risk is real. I don't really see a reason why any business or individual with more than $250K shouldn't be wiring funds out ASAP, unless you're feeling extra charitable and want to be the bail-in to those who run before you.

There is nothing to lose, other than setting up new accounts.

Off-topic but it really BAFFLES me why people don't pay more attention to FHLBs. It's like we don't learned anything from the last 10 crises...

Everybody got bailed and and essentially nobody went to jail. Of course no lessons were learned.

SVB though sounds like nobody should go to jail it was just really bad investment decisions.

The CEO of SVB sold $3.6 million of stock a couple of weeks ago.

I’m sure the SEC will have some questions about that.

https://fortune.com/2023/03/10/silicon-valley-bank-ceo-greg-...

Based purely on the amount and timing, it looks pretty typical for him compared to the last 20 years:

https://www.secform4.com/insider-trading/1259867.htm

Can't they claim the money back if you withdrew shortly before the insolvency anyways?

Sure but that takes time. Time that you have to spend that money as quickly as possible on valid business expenses in order to be indemnified from the claw back.

>I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.

Everyone saying "they will be made whole" is completely missing the fact that money has a time value. There's nothing "made whole" about getting access to your money weeks or months from now.

A likely outcome is everyone is going to be made whole on Monday. The feds will find a buyer to take on the deposit accounts and people are going to wake up consumers of Goldman or whomever instead of SVB.

Look at history and for example what happened to WaMu. It was literally one day.

I agree this seems very likely. A bunch of people will be having interesting phone calls this weekend, but it's the weekend and it's pretty useful.

Then again last time I thought this I had a contact text me joking he was preparing to learn Korean because his bank was probably going to get bought by Koreans. Seemed like it was just a matter of time to wait until Monday to see what the higher ups had decided.

You can guess where this contact was working. Until that Monday.

> missing the fact that money has a time value

You mean like Roku, who was keeping $500MM at a depository institution instead of in T-bills or a money market fund.

Unless I’ve misunderstood, the FHLB credit lines charge about the interest rates you would expect. For example:

https://www.fhlbboston.com/fhlbank-boston/rates#/long-term

If a bank’s portfolio of long-term fixed income instruments has a mark to market value that is $27bn less than their hold-to-maturity value, and the bank borrows $27bn at market rates to cover the shortfall, they will pay approximately, wait for it, $27bn (present value) in net interest while waiting for maturity to happen.

If the bank can manage to borrow the money in the form of non-interest-bearing deposits for the entire term of these instruments, then, sure, they’ll end up okay, because they will effectively make enough money on these deposits to cover their losses.

But the whole industry of non-interest-bearing deposits is a bit odd. When interest rates are around 2% and banks are offering maybe 0.75% interest, it may not be worth their clients’ time to try to earn interest. But when FDIC-insured banks are paying 3-4.5%, convincing a client to keep holding $2M in a non-interest-bearing account instead of spending an hour a week shuffling assets between checking and savings is a much harder sell, and much of those $27bn of required profits may well end up in the pockets of a bank’s customers. Which makes the effective value of the bank’s equity look bad, and maybe negative, and the bank may be toast.

Put another way, if you are actually insolvent, credit at market rates cannot make you solvent unless you have some other source of profit.

> - If there was a bank run, First Republic probably would not be able to meet all depositors.

That's true for all banks, even JP Morgan Chase. Every single one of them has some withdrawal limit, past which they are screwed. And that limit is definitely lower than 100% of deposits.

Institutions deemed relatively safer (e.g. JPM Chase) are the banks that people withdraw to. Nobody is taking out $20M in cash, they're moving it to the "too big to fail" banks.

That got me wondering why anyone leaves amounts over 250k anywhere else.

If you have 5m are you going to open 20 bank accounts? If there's a wobble you'll need to dig out a lot of credentials to move your money, and you'd end up moving it to a TBTF anyway.

If you have that kind of money in cash you pay someone to do that for you. If you want access to your money you don't juggle credentials, you call your banker and ask.

Actually even if you don't have millions you can use sweep accounts that automatically spread money across multiple bank accounts. Fidelity has one that anyone can use.

If you have $5 million why do you need it in demand accounts?

Treasuries (notes, etc) are backed by the full faith and credit of the USG and are available in effectively unlimited amounts.

About that 'full faith and credit' thing ... you have to have full faith in congress to give that credit.

https://www.cnbc.com/2023/01/13/us-will-hit-its-debt-limit-t...

Thankfully, worshipping at the altar of the US Dollar is the only unshakably bipartisan activity in US politics.

The value of your treasuries will tank if interest rates rise. If you held cash, you could take advantage of that situation.

Of course it is lower than 100%. Our whole modern banking system is built on this fact.

https://en.wikipedia.org/wiki/Fractional-reserve_banking

FYI, all major banks switched off of fractional reserve banking more than a decade ago and have moved to another system that uses a multitude of different variables.

What is this other system called?

No reserve banking, like fractional reserve but the fraction is zero. Instead the banks have to be able to pass stress tests which requires that they have reserves which in effect will be a fraction of deposits. It’s more complicated, less transparent, open to gaming, and there is huge incentive not to fail a bank. Also they often allow the use of cash-like instruments which are often riskier and less liquid and probably misrated by compromised rating agencies. The standards were lowered so that the banks would inflate the economy.

> If there was a bank run, First Republic probably would not be able to meet all depositors.

If everyone knows this, why keep your money there? Tech exposure has nothing to do with it. "In a bank run, he who runs first, runs best".

Exactly, they're basically changing the subject to distract from the elephant in the room.

Tech businesses tend to have more direct access to information (e.g. Twitter, emails), and listen to VCs and investors.

Regular people and businesses don't hear about these things. Today, only 1 other person in my friend group of 6 heard about SVB.

I have to imagine that if you have enough money in First Republic for your withdrawal to actually be a problem for them… you at least have a dim awareness of, say, the WSJ front page.

That's not why there's a tech bank run. The reason there's a tech bank run is because VCs, and the companies they own are like geese. They fly in a triangle.

Thiel tells his startups to bank-run SVB, and they bank-run SVB, and all the other VC start telling their firms to follow suit. It's all herd mentality among an undiversified group of customers (startups all of which are hit hard by raising interest rates), which is perfect for a bank run.

> Today, only 1 other person in my friend group of 6 heard about SVB.

Really? My mom knew about it, and she's a retired teacher who doesn't live in the Bay Area.

There are three articles about this on the front page of the New York Times right now. It’s going to be widespread knowledge very soon.

It's currently the top article on CNN, Fox News, NYT, WSJ, and Twitter Trending. Your friends must live under a rock.

Not really the money can and will be clawed back if a bank is placed into bankruptcy or receivership. The legal system disincentivizes runs on the bank by enforcing a 90 day look back period where withdrawals have to be repaid so that funds can be distributed more broadly and fairly.

Which legal system has a claw back period on withdrawals? Can you imagine rolling back wire payments 90 days old!

It’s not always 90 days, but the American federal bankruptcy system does allow for clawbacks on payments made immediately leading up to a filing.

Meaning, the bankruptcy administrator will absolutely file and get a judgment on your assets, which will be forcibly collected, if you received a payment from a bankrupt entity within the window established by the court.

This is mainly but not limited to trying to prevent a bankrupt entity from “getting rid” of all its assets.

I don’t know if it would apply to a bank wire transfer of “your own money” unless it was a literal fraud situation (pyramid scheme).

I can't imagine that going well.

"No we're taking your $50k life savings back so we can give it all to a client that had $5mil and deserves your $50k life savings more than you do"

Well up to $250k wouldn’t be touched, but yeah, doing a clawback for a bank could cause a run on all banks.

Not sure if this type of cynicism is more Reddit than HN, but somehow I suspect the rules are more likely to be written by the guy with the 5M deposits and his even richer friends.

Check out the Madoff documentary on Netflix, there are interviews with people who had exactly that happen as they clawed back funds to try to make everyone whole.

Madoff was an actual pyramid scheme; once criminal fraud enters the picture it’s a different story.

It's up to a year for high-up individuals and their families as I suspect Alex Mashinsky is going to be able to tell us all about.

Bank insolvency is not handled by courts. FDIC has sole and complete control of bank insolvencies. FDIC is the receiver or conservator for handling bank insolvencies by law.

FDIC doesn't claw back bank transactions that have "settled". So if you wire cleared, you are good for the money.

Search for "FDIC Discretion Without Ongoing Judicial Oversight" in the document below

No ongoing judicial oversight Pursuant to Section 11(d)(13)(D) of the FDI Act, except as otherwise provided, no court has primary jurisdiction over any claims or action for payment from, or actions seeking a determination with regards to, an institution for which the FDIC has become a receiver. Further this provision also limits courts’ ability to engage in a review of any claims relating to acts or omissions of the institution or the FDIC as receiver. Under Section 11(d)(13)(C) of the FDI Act, no court may issue an attachment or execution over the assets that are in the possession of the FDIC as receiver.

https://corpgov.law.harvard.edu/wp-content/uploads/2008/10/0...

A bit of a technical point - in the US banks cannot go into bankruptcy.

The correct term is receivership but that is confusing for most people and the general principle is the same. When you go bust, the court/trustee/receiver combs through transactions and claws back assets as part of gathering/selling all assets to pay creditors

Is there any evidence at all this is true for people who are not insiders withdrawing their own money from an account at a federally regulated bank?

I’ve never heard of anything even remotely like this happening. Can you provide even one example?

It really isn't your money is it. I used to think these "get your money out of banks" folks were kooky we-didn't-land-on-the-moon conspiracy nuts. The more I read this thread, the more I think they are right.

Maybe don't be so dismissive of people who think differently

>If everyone knows this, why keep your money there?

Because that applies to literally every single operative bank, and given FDIC insurance and other refulation, the risk of deposit losses for average joe is so small that they do not need to care.

Why would they sell the mortgages now? Why not just hold them. When they originated and funded the loan they did it with deposits or fed funds, why not just hold and collect the payments?

If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.

I assume they sell these loans if the amount withdrawn outpaces what they have cash on hand. Since their mortgages are mostly mortages from the low interest era, they're less valuable to buyers.

> Why not just hold them

> If there is a run

If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.

Can’t they just not honor the run, so that they can honor it in the long term, rather than selling at a loss and not being able to honor 20% of them?

No. That's theft. That's not how deposits work.

You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed.

It's statistical multiplexing as applied to piles of other people's money.

Are there some legal terms preventing limiting withdrawls? If not it seems like there should be, exactly to cope with the risk of runs!

[EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]

[simplified explanationfollows]

No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business.

But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.

Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.

IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.

Normally contract law. You select an account offering with different procedures for liquidation.

A demand deposit or checking accound has little or no notice. A money market may take a day or so for underlying assets to be exited. CoD's and such typically don't even have the option for withdrawal. You just have to wait for maturation.

Point is, you know this when you open the account. They should take great pains to ensure you understand the instrument... And to manage things appropriately, which apparently, SVB did not.

If there is a run, it's a question of whether they have enough liquid cash. If they run out they have to start selling things unless they can somehow get some other kind of cash injection.

As rates go up, those mortgages will become less valuable (because they pay a lower interest rate than new loans will). At the same time, rates going up means the bank is going to have to pay more in interest to depositors, meaning they will need to offload assets to maintain their margin requirements.

This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.

> If there is a run, then selling is actually the worst thing to do

The “demand” in “demand deposit” accounts means that selling isn't optional as the cash runs out in a run.

A bank is not an unregulated crypto exhange that can just impose arbitrary withdrawal limits to protect the absence of liquidity.

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