Comment by seanhunter | Hacker News Reader

Comment by seanhunter | Hacker News Reader

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Deciding that is exactly what the auction is and it will depend on market conditions, the quality of the assets etc. In the case I was familiar with the assets were "AAA but actually garbage" for the most part and there wasn't a liquid market price so we bid really where we were guestimating the true market price would be but it was a heavy discount to where the failed bank had been holding it.

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.

In 2008 mortgage bonds were toxic waste looking for a bottom, today they're not nearly so bad. I doubt SVB had a team reading the tape on mortgages, so whatever they were buying must have been sufficiently standard as to be fairly liquid. (Unless they were COMPLETE idiots, which, I grant, is certainly does not seem impossible right now.) So I expect the question for most of it is interest rate risk rather than credit and pricing that isn't super complicated.

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.

> It really looks like their model depended on cozy relations with the VC community.

Which the VCs shat on, so not sure how much of coziness remains.

There may be coalitions of smaller banks being formed, where they agree to submit a single bid, and then internally split up the carcass into the parts they each want should they win.

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.

What’s your perspective on the likelihood of a few more similar bank failures happening in the next couple of quarters?

I don’t have any inside scoop because I’m not in that world any more, so take this purely as my personal opinion, but I wouldn’t be at all surprised if that happens.

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...

Since you're on this thread..who normally runs the investment decisions inside of a bank, whether retail or investment. Is there a CIO office or is that the function of their Treasury department? Does it go by other names?

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

Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid.

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?

It sounds like they are selling the bank, not the assets. If they are selling the bank then I think the depositors will be made whole by the buyer. This will factor into the bid.

This is just my understanding, I am very open to being wrong.

> Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid.

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.

At the end of the day did everyone walk out of the deal knowing they made a boat load of money or were folks wondering if they would be able to offload and hedge the garbage they bought fast enough.

The most (in)famous example is Bank of America buying Countrywide in the early stages of the 2007 crash. They ended up losing like 40 billion on that deal.

We were not successful but the people who “won” lost a ton of money.

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