US banks sitting on unrealized losses of $620B
cnn.com
cnn.com
> is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature?
Yes, that's basically what happened. Just a few hours after this article came out, the Federal Reserve said "it will offer bank loans for up to a year in exchange for US Treasury bonds and mortgage-backed securities that lost value. The Fed will honor the debt’s original value for the banks that take the loans."
SVB had enough assets to cover all the deposits. Problem was that they couldn’t convert those assets (long maturity treasuries) back to cash fast enough.
Now there is a facility in place that lets you convert those treasury notes to cash as soon as needed.
It's only a loss if they have to liquidate before maturity. Kind of feels paradoxical: money can be accounted for in the future but not today.
People tied up a bunch of money at worse terms than they can get today. Nobody is willing to buy those bonds at face value because the market is offering better. Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner is depending on liquidating them at par value at any time.
It doesn’t take a panic for banks to need to sell upside down assets early. It can just take any sort of change to the wind.
It’s not a crisis for there to be a lot of unrealized losses (you’d expect that when an economy turns), but it’s absolutely something to monitor and consider.
If your house burns down, you've lost the value of the building even if you haven't sold the land yet.
A better analogy is that of a tree. You expect your planted tree (sapling) to be fully grown by 10 yrs time, and right now it's a sapling.
Unfortunately, more recently planted saplings are growing up faster, and thus, result in more wood (presumably it's grown for wood) earlier than your sapling planted a few yrs ago.
Therefore, a sapling from a few yrs ago is not worth as much future wood _right now_. But if you waited for the sapling to finish growing, you'd get back the amount of wood you originally expected.
but if you chopped the sapling down today for the wood, you'd get far less.
Those failing now are the groups that didn't cut the trees soon enough. It's a competitive environment and even faster growing trees may be coming. Waiting is not a viable option in many cases.
Bonds have terms. If the bank sits on the bond until its term of maturity it gets a certain amount of money.
Let's say the bond at maturity is worth X. The bank says the bond is worth Y. The market says the bond is worth Z.
If Y > Z, that's only a problem if you sell. There is no loss - realized or unrealized - if you hold to maturity unless Y > X. However, how could this ever be the case? No one would pay more than X, so the bank could never claim the market value was higher.
And, it repeats itself, realized losses, followed by customer uncertainty, followed by more withdrawals.
You're assuming that the banks bought the bonds for their face value. Banks buy bonds for their price, not face value. The Treasury, for example, auctions their bonds so their price might never have been their face value. People of course pay more than the face value for a bond (what you call X)! One reason is because bonds pay interest; although this can happen in other rare situations when you willingly get a negative interest.
But that's not even the main problem.
If you hold the bond to maturity you have an asset that pays back i% in interest. But now you can get an equally risk-free asset that pays back j% of interest. Where j is far larger than the i that your bond is giving you.
You are losing money by being forced to hold this bond. When you get into a situation where you are better off selling the asset and buying a new one because of the interest rate difference, well, there you go, that's a real loss. Literally there's a course of action where your bank's balance sheet would be much bigger than where it is heading now. It's just an unrealized loss at the moment because people aren't pulling the trigger.
Not making as much money as you could be is not the same as losing money.
It’s only really an issue if you’re forced to liquidate early, and the fed is allowing you to loan the assets out at par value - which will help a lot on that front.
On the other hand some banks have asserts that don’t count under that program - they could be in trouble if there’s enough pressure on them.
Effective interest rates dropped like a rock today, the most since 1983 on the two year treasury. And the fed is likely to be a lot more dovish next week. That will help.
I don’t have a crystal ball, but I think the worst of the danger has passed. I loaded up on regional banks today.
Sure, you get your principal back as well as the promised interest, but you lost out on the opportunity cost of being able to do something else with the money (ie. investing in current bonds that pay 2x-3x more). It's a loss by another name.
Economically, it's a loss. They had a net worth around $2.1 trill and now they are at $1.5 trill.
Practically, it's problematic. They have locked in low returns in a world were depositors expect higher returns. Their business customers will pay attention. They'll report lower net interest margins, which means lower earnings. They have also opened themselves up to a run. Their business customers will pay attention to that too, making it more likely to happen.
The only world in which it's not a loss is under certain accounting standards. Those standards can and do change.
And when they do, they all do at once. We'll see how far creative accounting can take us this time.
That is simply not true. The current value is the mark-to-market value, possibly plus half the spread depending on your perspective. The net present value is roughly the same number, because it’s the future value discounted by the discount/risk-free rate, and any credible estimate of the risk free rate has increased substantially.
This may not be a liquidity problem because, if those assets don’t need to be liquidated, then they don’t need to be liquidated. And it may or may not be a solvency problem, because the banks in question may not need that money before maturity, and even if their portfolio currently has negative value, they may make it up with other investments before maturity. But yes, that money really is lost.
Before you say “but the money will all be there at maturity”, keep in mind that, if you project the banks’ balance sheets out 30 years, the value, in 2053 dollars, of those long term bonds may be unchanged, but the cost of the liabilities (deposits) that offset them has gone way up.
edit: it is possible and maybe even likely that some of these banks hedged this risk. In that case they may have a loss from the interest rate exposure and an offsetting gain from the hedge.
I swear HN is the dumbest smart place there is.
These “unrealized losses” don’t include “unrealized hedges” either. Of course, SPV let those go. Oops.
And banks can absolutely make money without taking on interest rate risk. They can hedge, or they can invest in things that produce earnings at a rate that varies with interest rate (short term bonds, adjustable rate mortgages, etc). Or both. Or take on a limited amount of interest rate risk such that they are okay if they bet wrong.
That assumes the bank is paying a higher interest rate to depositors in the interim. Banks don’t care about inflation directly only competition between each other.
There’s upsides to having someone deposit 100 million at 4% rather than 10k people depositing 10k each @ 0.1%, but also risk. Major accounts have vastly less overhead per dollar deposited, but such accounts are also highly motivated to get the highest returns possible even if they need to move to another bank.
Of course they are. I just looked at a Bank of America 10K [0], in which they reported more interest-bearing deposits than non-interest-bearing deposits. They pay embarrassingly low average interest rates (of course), but those rates still go up as interest rates go up, and I also expect that more customers will demand interest when rates are higher.
I do expect that average deposit interest rates do not increase as much as market interest rates, so a high-interest environment is generally better for banks.
[0] https://investor.bankofamerica.com/regulatory-and-other-fili... - see table 8
Which is my point, for banks to get in trouble the actual interest paid needs to change before it matters and looking at Bank of America’s current rates they aren’t changing. https://media.bac-assets.com/DigitalDeposit_VA_VA_Northern.p...
This might in theory shift over time if people start swapping to higher interest rate accounts at different banks, but until then they are, pardon the pun, making bank.
6 months CD’s are typically a different story, but nope BoA is again paying well under 0.1% Aka crap. https://www.bankofamerica.com/deposits/bank-cds/standard-ter...
Which makes sense as BoA isn’t losing customers or capital starved.
I always thought one the fundaments of "yellow journalism" was that it had no basis in fact. Exaggeration alone doesn't seem enough to earn the association, I think.
> unless the owner is depending on liquidating them at par value at any time.
Well.. exactly. Shouldn't we have an accounting mechanism that actually accounts for this eventuality? In particular because this is a bank, it doesn't seem isolated, interest rates have changed significantly recently, and the NYSE halts list today appears pretty foreboding to an outsider.
so the solution was/is Basel III, capital requirements, leverage ratios, and actual stress tests.
Close, yellow journalism is about eye catching headlines with ”little or no legitimate, well-researched news.” It wasn’t that they need to make stuff up, they just ran with whatever would capture people’s attention even if the source was dubious or the interpretation superficial. Aka “Techniques may include exaggerations of news events, scandal-mongering, or sensationalism.”
This works fine when their source of funds is checking and savings accounts that pay zero interest. When t-bills are paying 4%, fewer customers will be willing to accept this and will pull their funds or demand higher interest. The problem is that some banks may not be able to afford this.
https://twitter.com/search?q=%09%20US%20banks%20sitting%20on...
(Again, the headline is wildly out of date because a few hours later the federal reserve said they would honor all these bonds at their original value, eliminating much of the risk in these unrealized losses.)
It’s still better than to force banks into a liquidity crisis and have to bail them out…
The Fed must have calculated the exposure of financial institutions to US government bonds when it planned its interest hikes and it should’ve made contingencies otherwise there is a pretty big regulatory failure here.
Yes institutions should hedge interest risk like any other risk however there is still a limit to hedging.
This isn’t banks betting the house on black jack and hookers these bonds were supposed to be the safest place to park your money under any other circumstances.
As for what price would the fed or who ever buy them back? Well if they can exercise a call provision it would just paying the value of the bonds + the coupon before maturity.
Many bonds come with this provision so companies can repay their debt earlier if market conditions change and allow them to borrow money under better terms.
From my understanding it was too late to do this with SVB as they had already realized substantial losses however not stepping in now and having more banks default would be quite silly.
The financial world is flooded with US dollars as a result of previous QE which is why they are (were) trying for QT now.
The only thing that changed is the market value of these securities since people have other safe places to put their money in for even better returns due to the interest rate hike.
So this would be the government either repaying the loan early or issuing a new loan as a bridge which when repaid would bring the balance back to zero there is no need to create new money here.
It's literally QE. Like, it's the textbook definition of quantitative easing. Where the government buys back bonds it gave out without taking into account the current interest rate. The government is giving banks more money than the bonds are worth, raising their prices. That's QE.
Think of it more like a system of reactions that feed off each other: wage increases, pro-active price increases by retailers, etc.
It doesn’t necessarily matter what started accelerating inflation, but it is important to stop the system from gaining too much momentum and slow it down if it does.
Lowering employment and slowing spending with monetary policy are the best tools we currently have to do this.
Of course, the Federal Government could also rein in the outrageous deficit spending, which would help greatly but this is too politically difficult.
It is commonly accepted that wage increases tied to inflation (many of which were union contracts) prolonged the stagflation of the late 70s.
It's possible that those wage increases did have a negative effect, but especially in this time of massively increased anti-union propaganda, I think that anything negative about them being claimed as "commonly accepted" deserves a [Citation Needed].
In a high inflation economy, salaries lags behind prices increases.
This is because revenue of companies typically follow inflation indexes with a much shorter delay.
First the workers need to feel they are getting shafted and this takes time. Like, first they burn through savings, then they see news 'inflation double digits', then they see pay increase in single digits and this takes 1~2 years. Then they feel a reduction in quality of life. Then they negotiate adjustment and if companies refuses sometimes they strike, sometimes they leave for another job, sometimes they take the shaft.
On a wide scale, the reduction of purchasing power causes the demand for non essential goods to drop massively, while the demand for essential goods remains stable. The reason for this is simple: people cut the luxury if they have been shafted at their job. But they can't cut essential goods.
So it's better to be a company that sells essentials goods in a high inflation scenario eg: oil and gas, meaning people can't cut you from their budget.
Criticism The Socialist Worker argues that it is a myth used to prevent wage increases.[6] Tribune magazine also sees the concept as rhetoric intended to hold down worker wages.[7]
Milton Friedman criticised the concept of wage-price spirals, arguing "It's the external manifestation of inflation, but not its source... the inflation arises from one and only one reason: an increase in a quantity of money."[8] Wage-price spirals will break naturally if the quantity of money is not increased, albeit in the meanwhile "there will for a time be a continuation of inflation" as well as "some measure of recession and unemployment".[8]
record credit card debt - https://www.lendingtree.com/content/uploads/2023/02/ccs-char...
record auto loan debt - https://ycharts.com/indicators/us_auto_loan_debt
record mortgage debt - https://ycharts.com/indicators/us_mortgage_debt
will not end well
And now The Fed final jams on the brakes and a few bodies are gonna go through the front window. Why is anyone surprised?
Funny, I was under the impression we elected The Fed to mitigate such things.
of course the problem is that there is a logical gap between that and what people will actually have in their wallets in the future
but, considering that profits are distributed as dividends, invested and/or simply spent in other ways it means there's going to be more aggregate demand, which will push up prices even more.
hence the usual decision to raise rates. which then pushes up unemployment, because it's what empirically almost always happens.
Journalism is about going to the fucking place, narrating exactly what happened in the most unbiased way possible, talking to witnesses and then shutting the fuck up. No opinions.
If you do deliver an opinion, it stops being journalism.
(The changes came as part of the discovery merger with hbo, etc., which also led to mass show cancellations.)
My favourite is when the Clinton emails were leaked, they straight up told the viewers on TV that the viewers will go to jail if they read the emails and that only they (CNN) could legally read the emails and tell the viewers the content. That was a funny episode of political damage control.
https://www.washingtonpost.com/news/volokh-conspiracy/wp/201...