FDIC auction for SVB said to be underway, final bids due Sunday
bloomberg.com
bloomberg.com
EDIT: It's not only the assets that are being bid on, the curator could just sell those themselves. But SVB has (even now) some amount of intangible value in terms of relations with customers, built up expertise in serving startups, etc etc. A bank looking to diversify into providing banking services for startups might be willing to bid more for such expertise and customer lists than a bank which is happy with the customer base it has. So I'd expect it would be mostly the intangibles which drive the potential differences in bids, with the market price of the assets merely serving as floor.
Source: was part of a team doing this valuation analysis over a very fun weekend in 2008 for one of the famous bank failures
[1] For various reasons it's not just "the winning bidder holds all the stuff". There's a lot of horse trading where people buy chunks of it and the winning bidder gets the rest. This is important from a TBTF point of view because the bank had a problem (ldo that's why it failed) so the FDIC and regulators don't really want a single other bank to just inherit all the problems. They would prefer them to be spread about a bit so there isn't just one bank under massive stress.
[2] Yes yet another bank failure caused by mortgage backed securities although in this case it seems from the public information that it was actually the hedging strategy that caused SBV to go down, not the MBS. The reason MBS means it doesn't matter that much is all the information about individual MBS is public anyway and although you don't know who holds what on a line by line basis you know generally how much each bank on the street has and you know someone is holding all the pieces of a given bond.
I don't think I'm actually at liberty to say what our bid was but if you think about the gathering storm of the financial crisis in 2008 and "AAA but garbage" illiquid instruments were very hard to price and very expensive to fund so were trading in the 60s (cents in the dollar that is). So if you're on teh weekend and you get offered a massive parcel of that stuff marked in the 90s that you don't really want to hold in the first place you're going to bid significantly south of where the market closed given you know this news is going to really rock the market when it opens on Monday.
In this case I think the MBS they are holding is going to be more liquid and with a reasonably secure secondary market, and you're not going to be able to do a proper valuation on the SME loans they have in a single weekend and there isn't a liquid market given each loan is it's own special creature so you're going to have to put a bit of a finger in the air on those. So probably somewhat of a haircut but less extreme.
A lot of seemingly successful business models are hard to distinguish from the beneficial effect of ultra-low rates and a stable, growing economy[1] so the sudden raising of rates is going to hurt a lot. I also think the full effects are taking a while to filter through into the real economy so I personally don’t think we’ve seen the worst impacts yet. I see a lot of empty office and retail space and know that someone took out a loan to build or buy that building and now don’t have the rental income to pay back that loan. Like I say just one person’s opinion so take it with a pinch of salt.
[1] Hence the famous Buffett quote. https://www.goodreads.com/quotes/43237-it-s-only-when-the-ti...
And in your experiences in 2008, what sort of strategy planning/what if scenarios were being played out since it was unprecedented and no one knew what was going to happen the next day
Given all the uncertainty about the assets and other regional bank dominoes that are yet to fall, it seems like even the winner will be a low-ball offer.
Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?
This is just my understanding, I am very open to being wrong.
Maybe. Or maybe the winner's curse will apply.
> Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?
Maybe. Equally the longer depositors can't access their deposits, the worse things are. FDIC would rather get the depositors their 100% quickly than get maximum recovery for junior debt or equityholders. Now, if there's no offer coming in that covers 100% of deposits, then that gets more interesting; it's always possible that the FDIC will decide to keep running the bank and purse that kind of strategy.
I would think SVB's book of startup/venture capital/commercial loans would be harder for most banks to value. They were a big player in that space and I doubt many have the expertise to do a fast read on that book.
Also, SVB's size is a real problem. There are only a few banks large enough to do this, and the regulators won't love the resulting consolidation.
They may sell it in pieces to deal with all that.
One big question is, does SVB have any franchise value? It really looks like their model depended on cozy relations with the VC community. You have to figure their whole board and C-suite will be replaced after this, how much of those relations remain after that? Nor am I sure players like JP Morgan can or want to play that game.
Which the VCs shat on, so not sure how much of coziness remains.
I haven't seen the terms of the FDIC auction but I suspect it's winner take all, so any coalition will also need a plan how to split up or share the undesirable pieces.
Right now there are 10 year bonds at 4% that will pay 148$ at maturity.
To be able to sell your 1.5% bonds right now you need to discount them sufficiently so they have the same value as the new 4% 10 year bonds. (otherwise why would anyone buy them)
I'd guess you'd need to discount 148$ - 116$ = 32$.
This means selling your 100$ bonds at 68$ right now to have buyers... Otherwise money is stuck for 10 years which is unfortunate if you ran out of available cash.
Is this wrong?
So if rates are up 250 bp and there are 9 years remaining to maturity, that would be a 2.5 * 9% = 22.5% reduction in market value.
But I believe current yields on 10-year MBS are greater than 4%, the numbers I've seen put them at about 110 bp over 10-year Treasurys, which would make the reduction in market value even deeper.
Presumably they were yielding more than treasuries when they bought them as well. The relevant thing is whether the spread has narrowed or widened (too lazy to check and too coward to guess...).
I am not 100% sure what the accounting rules for htm vs afs are anymore. I believe htm allows you to amortize losses over the term of the loan (which is, of course, still as controversial as it was in 2008). But SVB has already taken fairly substantial markdowns already on securities that were transferred into htm after they dropped significantly.
And the purpose of receivership is to preserve value for depositors. So the problem is that the losses have absorbed the firm's capital, not that other sources of funding have taken losses. A book of MBS is not going to be trading at a 30% discount to the mark a few weeks ago when their financial period ended. All of this stuff is liquid, unless their corporate lending was awful (unlikely) then there won't be a massive discount.
Btw, this did happen last year in the UK. The BoE essentially left the market to sort out problems caused by higher rates/falling bond prices, and hedge funds absolutely rinsed pension funds. Some made hundreds of millions in a few hours. This won't happen in this case because FDIC has stepped in and is running a proper auction.
> Right now there are 10 year bonds at 4% that will pay 148$ at maturity.
How are you calculating that? My impression is:
> Notes and bonds are issued to pay a fixed rate of interest called the coupon rate. A $10,000 treasury note with a seven percent coupon rate pays an investor $700 per year interest in two semi-annual payments of $350 each. The interest from notes and bonds paid out to investors is simple and does not compound
Over a 10-year duration, I think that 4% bond would pay $140 on $100. 6-year to maturity notes at 3.9% would pay, I believe, $123 on $100 today; and at 1.56%, $109.
I think you'd value the 1.56% notes by something like the ratio of the two values at maturity? About 89% of what you'd pay for a 3.9% note. ($100 / 0.886 => $112.87; $112.87 * 1.0936 => about $123.)
(I don't work in this sector and I might be mathing it wrong.)
It’s pretty nuts that they didn’t have a hedge in place, given the pretty clear policy of the Fed.
Hedging could have been a way to reduce the duration without selling - i.e. without realizing losses as the bonds could still be classified as hold-to-maturity - and avoid further losses.
They chose not to.
Long answer: Hedging rate risk in general is a very deep topic. Investment banks have massive swaps desks that are built on the back of this and there are numerous examples of people losing a ton on hedges and in certain cases the dealer banks have been fined for miss-selling etc. Not saying that's the case here but it is at least possible. For example in the UK there was this[1] and in the US from memory there were numerous munis who settled and received payouts after losing a ton on rates hedges.
On top of that, hedging rate risk on an MBS is slightly more complex than for a regular bond because it amortizes and as the underlying loans prepay or default this affects future cashflows from the bond. So you can only hedge the forward rate risk given certain assumptions about prepayment/default and if those assumptions turn out to be off you will be imperfectly hedged. Normally that isn't that big of a deal if you have a big portfolio as you can roll swaps on or off to fix the problem [2] but the cost of that adjustment is going to be a factor of how "wrong" you are about the default profile of the collateral and how much rates have moved.
[1] https://www.theguardian.com/business/2013/oct/23/interest-ra... [2] There is also the problem of default correlation skew here meaning you have so called "wrong way risk" where if your assumptions are wrong on one bond they're highly likely to be wrong across your portfolio. This is as opposed to normal portfolio thinking where a diversified portfolio helps.
nobody is going to pay 100% for them, right?
so it's basically who will pay the most between 50-95% for them?
why wouldn't somebody want assets 5% off (full 95% bid?)
> “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again,” Yellen told CBS’ “Face the Nation.” “But we are concerned about depositors and are focused on trying to meet their needs.”
Senator Mark Warren said:
> “The shareholders in the bank are going to lose their money, let’s be clear about that. But the depositors can be taken care of,” he told ABC’s “This Week.”
These statements tend to indicate that the government is not going to bail out the bank owners (shareholders of the bank). But they are concerned about the depositors, presumably because they realize that there's a risk that if a fairly large (top 20) bank is allowed to go under, many smaller banks could be at risk of a run.
Source: https://www.cnbc.com/2023/03/12/treasury-secretary-janet-yel...
Whatever assets are left beyond the first n_accounts * 250k$ will be distributed among the account holders with extra balance. Some of _that_ money will also be distributed tomorrow morning. So in fact all depositors with more than 250k$ balance will be "looked after, but not made whole" TOMORROW. The question remains ,IF there aren't enough funds to make everyone completely whole, what happens then. There is _zero_ indication in those statements, that there would be money added to the pile that will be generated by the auction of SVB's assets.
[1] not sure if there's a fee for that, but it would be negligible anyhow
Does that include the reforms that were removed a few years ago after SVB and other "regional" banks lobbied to have them removed from banks <$250B?
https://www.federalreserve.gov/publications/dodd-frank-act-s...
The SVB name is worth something. If FDIC can liquidate assets and pay 90 cents on the dollar for deposits, a bank who will acquire and give 95-100 cents on the dollar is better for everyone.
Brand awareness has definitely increased a lot this week.
It would be more accurate to say, the expertise and relationships that come with SVB, and the access to the market that SVB served... are worth something. Even if all of these are damaged.
I’d watch it just for the ads. Crypto startups? Top shelf whiskey?
Yes, its boring emails... but emails that involve billions of dollars. Also the timely aspect of it would be a bit entertaining...
The angry call from a boss about an unclear footnote.
The suspense!
Scene: Erlich Bachman's house in Palo Alto.
The team is sitting in the den around their computers.
We see Jin-yang on the TV with a chyron saying he's the new owner of SVB, now DINB, and that depositors now own equivalent to their deposits in PiperCoin.
If I wanted to buy back my house's mortgage from the bank, they'd ask me to pay the full principal.
But if JP Morgan buys it off SVB, they'd discount the mortgage and pay either 80 cents to the dollar or 50 cents (!), while they get to collect the whole principal & interest back from me as I repay.
What if I could buy it off SVB at fire sale prices, instead of some other financial firm?
This is probably most relevant when you think of medical debt, for example John Oliver's medical debt give away where he bought 14.9 millon dollars in debt for 60k & just forgave it through a non-profit (because debt forgiveness is a taxable event, which is just a tax loophole otherwise).
If you owe a hospital a million dollars and they are willing to sell it for 100k, why should you keep owing a million after its been sold for that price?
If you no longer need the debt, i.e. you have the cash to pay it back, you could _theoretically_ loan out that cash to someone else at the higher current market interest rate. Loaning money involves credit risk of course, so practically this would mean buying something like higher interest paying Treasuries or AAA bonds. Effectively, the spread between your borrowed fixed rate debt and the bonds you bought are the _profit_ you make, the NetPresentValue of which is roughly what you would get if you could "buy back" the debt.
If you have a 2% loan, and interest rates skyrocket to 10%, you absolutely do not sell your 2% loan to reup to 10%. That's just stupid. You keep the 2% loan and even try to slow down payments (if you were double-paying or otherwise cutting down principal before, you stop doing that).
It's equivalent to buying the bond that represents the debt you owe.
Larger debt ends up in negotiations over the amount owed. War debt after WW1 resulted in greatly reduced repayments based on the original lending.
If you are a default risk on debt that has weak collateral, you could probably come to some agreement that pays back some fraction of the principal.
All you gotta do is put a dollar value on it, which is actually relatively easy. Just calculate the approximate worth of 2033 dollars vs 2023 dollars, and adjust the prices today to match your expectations.
There "is no risk" in US Treasuries because we're screwed if there are risks. (Aka, everyone ignores things like the Debt Ceiling debate).
I am ignorant of current and previous Danish mortgage interest rates. Assuming a 2% mortgage from a few years back, and current interest rates at say 6%, I would expect to buy back at less than 85% value.
Then the new owners of this bank, can decide whether to liquidate long-maturity treasuries at a loss, or raise new capital, or just wait it out.
The reason SVB collapsed is because there's not enough treasuries to possibly even pay depositors, let alone bondholders or shareholders. If there were enough treasuries to pay shareholders, then the bank run wouldn't have happened in the first place. (The bank run on Thursday was caused by the sudden realization that there might not be enough money at the bank).
A buyout / successful auction is the best case scenario. If some bank out there is willing to buy SVB and make all their depositors whole again, then win/win for everybody.
This essentially means, that if interest rates raise, then temporarily (the time of the duration of the bond) the bond may be worth less because there are new bonds which are more attractive to the investor.
Once the bond matures, then the full sum is returned to the holder of the bond.
The bank run already happened, so the bank has to sell those bonds for a loss to meet its obligations to their depositors. Because of the interest rate changes, they are forced to sell those 10Y and 30Y bonds for a 20% loss (or greater).
As such, the bank is underwater. FDIC is looking for a buyer who is willing to lose a little bit of money in the short term, but maybe gain some customers in the long term.
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There's no time to wait 10 Years. The bank needed the money 3 days ago.
Sure, banking has a fair amount of inertia, but eventually people realize that they are leaving FDIC insured money on the table.
Chase is still offering 0.01% on savings accounts, and somehow has deposits. 1.5% is generous compared to that, even though it's much less than you can get with a little shopping around.
Aside from not making large unmatched unhedged yield curve bets, not marking portfolio prices to market was a problem for SVB.
You can't make whole the current depositors by saying that they'll get the same quantity of 203x-dollars (because you owe them 2023-dollars which are worth more), you can't make whole the current depositors by trading the future claims on these 203x dollars (i.e. bonds) to someone else because the price you can get is not enough to make them whole; and you can't make whole the current depositors by paying them back in year 203x their dollars with market-rate interest because you don't have enough assets to cover that market-rate interest, only the low, low interest that SVB fixed last year or before.
And I think I read that SVB's losses this week exceeded their cumulative profits since inception so it seems likely that even 100% ownership of the company wouldn't be valuable enough to make their customers whole.
Another way could also be to apply when you are withdrawing the money:
1st yr: 10% withdraw fee
2nd yr: 9% withdraw fee
3rd yr: 8% withdraw fee
etc
with the rate adjusting down every year.
Now the people who missed the memo are crying about it. Guys like Sacks have taken to Twitter to cry and whine about how they are like poor farmers or whatever.
The reality is the FDIC is good at what it does, and it’s probably best to wait until tomorrow before getting hot and bothered about it. If you want to get angry, ponder how the people who coordinated the bank run got the information used to trigger it.
He probably gains reputation by advising people to get out of a bank that fails. Although he probably advised them to use it in the first place.
It's not like the valuations of any other tech stock are based on fundamentals either.
My prediction is that the result of the auction will be a merger whereby SVB stockholders will be compensated in stock of the acquiring bank valued at a few dollars per share down from ~$300 a month ago. Depositors made whole, stockholders lose 90-99%, creditors get paid. The purchase likely sweetened by a sizable cheap Fed loan or guarantee, or maybe the Fed buying some of the distressed assets at nominal value.
The software and customers would have some value. If they can provide digital capabilities to a traditional bank it will certainly be a plus against the negative in financial products.
Although these are all startup founders and VCs, so maybe the strategy will actually work.
If SVB distributes shares of itself in prorata of the liabilities that they have toward their customers, then customers would essentially have majority of voting rights, and they can decide on what to do.
They can vote a resolution to get physical delivery of the underlying bonds, and individually decide to wait it out and/or sell portions of bonds on the market progressively (when they need cash).
(the cramer curse.)
They cannot afford to wait. Depositors have higher priority than shareholders, so any shareholder equity is obviously wiped out and $0. Such is the curse of seniority: the depositors have a stronger legal priority on those bonds than the shareholders, so the depositors get paid first... and the share holders are paid whatever is remaining (probably $0)
You don't need SVB to be an ongoing concern to do this. If SVB is liquidated and its depositors are paid from that sale, they can just buy back those same bonds on the open market for the same price if they want to wait them out.
This is what happened during the Kerviel scandal in France, when Societe Generale tried to unwind the risky positions of a trader.
Unless the government steps in and decides to purchase these bonds that SVB is selling and add them on its balance sheet... Which essentially would put the burden on the random non-Silicon Valley guys who didn't ask for anything (and it's not fair).
The other thing, is that many companies don't need 100% of their cash. They may just use SVB as storage, and waiting for the bonds to mature may be totally fine rather than take a loss.
Also, during this interval that they have to wait. If capital is needed, VCs may have better capabilities to raise capital at good conditions, rather than a failed bank.
Strategically, a consumer or cloud co w/ a banking arm might make a great strategic position. And the new relationships with the customer base of SVB could accelerate the acquirer
Not to mention all the bundling..
From a quick look at a random sample, it seems most end up with about ~70% paid out, but there is quite some variance.
Insured deposits are paid on first day the bank opens. More than 50% of uninsured deposits are paid within a week. Another 20% or so gets paid within a year or sooner in quarterly installments. Remaining amount gets paid in yearly installments and in all cases was paid within 3 years.
Haircut is guaranteed in this political climate since there is no appetite for a bailout. At least not for SVB. The later ones could be bailed out but SVB is a goner.
The data does not support these statements. E.g. for a random bank I selected on the FDIC site [1], "American National Bank", uninsured depositors got paid 77.8% in three installments: the first 57% two weeks after bank closure, 7.4% after three years and the last 13.3% after five-and-a-half years.
American national had its deposits transferred. The dividend payments were to other creditors.
SVB stock and bond holders will lose everything but it is far from guaranteed that depositors will take a haircut.
Not if someone buys it. Unless a haircut is part of the bid, which seems unlikely. No point having 97% of your new customers pissed off at you.
If it’s not acquired depositors will take a haircut (get paid less) in the unwinding process so that the amount paid out doesn’t exceed the assets available.
Washington Mutual was a bigger failure, but there was another lender who had already attempted to take it over, and had done due diligence, and Washington Mutual had a large amount of unsecured debt which allowed those lenders to take the hit and left depositors completely unscathed.
IndyMac was a smaller bank but it was over $10B in assets and the FDIC had to setup a Bridge Bank because the attempt to auction it off failed, so the FDIC had to impose a loss of 14% of total deposits on the depositors.
> Since 2007, the FDIC has served as receiver for over 525 banks. Only 9 of these failed banks had assets over $10 billion. Thus, the overwhelming majority, over 98 percent, had assets under $10 billion.
The FDIC routinely liquidates banks under $10B. What we have here is not routine, and is Washington Mutual-sized. The smoothness of Washington Mutual being taken over though was probably not something you can expect to rely on.
(https://www.bankofengland.co.uk/news/2023/march/boe-statemen...)
https://techcrunch.com/2023/03/11/svb-contagion-uk-arm-shuts...
Nothing about that is a “license to print money,” which when we’re talking about banking, sounds like making fiat currency.
If Visa and Mastercard manage to run their entire business on less than 1% from every transaction then I would expect Stripe to have at least 1% of pure profit from what they charge. I assume that's what JPM gets if they're the stockholder.
I mean printing money in the colloquial way of making tons of cash without any effort (which this frankly ought to be if the system is set up right), not with JPow's xerox.
Googling around it seems Visa/MC are more in the 1-2% range, but there are lots of additional fees and money grabbers on top of this. Im finding it difficult to get a total breakdown of parties and percentages - this is likely by design.
Stripe isn’t public yet, so we don’t actually know how much they’re making.
I guess when you say “they have a license to print money” in the context of no reason to buy a bank, that’s confusing.
Real banks have real controls and want to know where every fractional cent (blast, my Superman 3 scheme is foiled in the crib) is at any moment.
Edit: minor English goof
Every big bank[x] has to submit daily risk reports. If those reports are late by more than (IIRC) 48h, they feel the consequences. Then there are end-of-week, end-of-month, and end-of-quarter reports too.
The daily reports may take a couple of hours to run. Spread across a compute grid of few thousand cores. I work for a company that provides a quant analysis and computation platform for financial institutions. We tend to skip our weekly client-facing code promotion at the end of quarter, to make it absolutely sure that there are no unexpected changes that could mess up their gargantuan report runs.
[x]: Let's omit the nuance for once, ok?
Where depositors get up to $250k the next business day and, possibly, up to 50% of the rest within a week?
Money Market accounts are allowed to have limits (and haircuts) applied. Etc. etc. As a bank, they'd have different accounts with different rules on each kind of account. But Money Markets aren't allowed to be mixed with the long-term treasuries that SVB were holding.
So it really depends on the mix of accounts, various regulations and such.
Hasn't been a thing for three years.
According JPM: “At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
Calling out the 2021 number is disingenuous because the fed funds rate in 2021 was essentially 0%. Its's 4.57% right now. You're comparing kumquats and grapefruit.
Now there is risk of contagion where better managed regional banks are also at risk of suffering runs on the bank.
See "Savings and Loan Crisis" for how that ended.[1]
The only case I see of not having a run on the remaining balances is if someone like Chase buys them.
And to prevent contagion, I'd guess? Or do you not see it that way?
If Treasury comes in and says "we will make all depositors whole", that pretty much ends the contagion right there.
Not a bank or in the financial sector, but this makes no sense to me. It is likely fairly easy to get the list of VCs who used SVB. If nothing else, startup businesses which SVB catered to are significantly less appealing than they were one to two years ago. What fraction of those clients required low interest rates to keep the business viable?
Why would they not?
Bank CEO: "We want to get more tech biz customers, but we don't want to start from scratch with high risk startups."
FDIC: "We have this bank with a lot of established companies"
AFAIK that number was based on the book value (ie. how much it cost for the bank to buy the bonds/MBS), not the current fair market value. Other sources say that SVB is in the hole when using current fair market value for their assets.
>So big was this drawdown that on a marked-to-market basis, Silicon Valley Bank was technically insolvent at the end of September. Its $15.9 billion of HTM mark-to-market losses completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet.
https://www.netinterest.co/p/the-demise-of-silicon-valley-ba...
But buying long-term assets at some small discount (e.g. 10%) and holding them to maturity would not make a profit - the nominal value of these assets + the interest on the (low!) fixed interest rate is far lower than the interest rate you can get elsewhere; if the difference between the interest rate that SVB had fixed and the current market rate is ~2% (which seems roughly in the ballbark) then a crude estimate is that the discount has to be 20%-ish if there's 10 years remaining until maturity and 40%-ish if there's 20 years remaining... so that's appropriately reflected in the (lowered) price those assets can fetch. The nominal value is irrelevant as future money is worth much less than current money.