JPMorgan advising First Republic on alternatives, including a capital raise

See SVB's stock price in the last few years. The signal is clear to banking execs: take on risk, show growth metrics, and the stock market will reward you.

If your salary is tied to stock price, and whatever risky behavior you adopt won't show up for years, you have no real incentive to play nice.

Banking execs are not going to stick around at the same bank forever. Do a 3 year tenure, pump up the stock, get paid, and gtfo with someone else left holding the bag.

Now with that knowledge there is little incentive for banks to play it safe and a bailout every couple of years is to the benefit of everyone except the taxpayer and a few unlucky scapegoats.

Of course this is not sustainable either and maybe this time or next time what we learned 2008 will prove untrue...

Selling begets fear which begets selling, which can also make it harder for poorly capitalized banks to raise money via equity/bonds. Self fulfilling in a way. Moving quickly can short-circuit this cycle.

Unfortunately the ability to predict this situation was lacking. Apparently the Fed was monitoring SIVB for a year before this happened, but why they didn't force asset sales or equity issuance is beyond me. The fact that the bank stress test only looked at credit quality issues and not duration risk was surprising to me. These issues would have been quite obvious months ago if the HTM system that allowed pegging asset values at par instead of market values didn't exist.

I think it's conceivable that things stabilize beyond this week. Lots of scary headlines, but the fundamentals of the economy are still strong... for now.

One of the lessons learned from 2008, especially after the collapse of Lehman, is that acting too late or sending mixed messages can make the problem worse.

The SVB run started on a Thursday, and the government announced a plan to stabilize the banking system the next Sunday before the markets were about to open. It was a pretty fast reaction all things considered.

What we didn't learn well enough from 2008 was the extent to which small bank failures can create systemic risk for the entire system. It's not like SVB was the only bank with long-term investments that lost market value after rates rose. When people realized that, they freaked out.

The other thing people realized too late was that we have had a two-layer system of deposit insurance since 2008: the too-big-to-fail banks effectively have infinite insurance (because they can't fail) and smaller banks didn't. That creates an incentive for depositors to run on the small banks and move all their money to the ones that cannot fail. It seems like nobody understood that until a few weeks ago, including the regulators.

Another problem, which is older than 2008 but needs to be fixed, is that our current system of deposit insurance doesn't make sense for the way businesses use banks. If it did, we wouldn't be in a situation where only 60% of deposits are insured nationwide. That blunts the effectiveness of deposit insurance for preventing bank runs. The solution may not be more insurance, but perhaps caps on account balances or limits to the percent of uninsured deposits at a given bank.

If First Republic bleeds depositors (especially HNW depositors where they're concentrated) then it is going to go out of business. It doesn't matter if the bank run is "justified" or not -- the perception of fear is enough to scare depositors away, which would make it a self fulfilling prophecy.

That said, there are good fundamental reasons to be bullish, which is why (full disclosure) I am still long $FRC. But I'm feeling increasingly unhappy about it.

FWIW, banks are priced on Book Value (that's literally what the stock in a bank represents, whether it's public or private - banks aren't like normal operating companies), since earnings are volatile and dependent on outside factors. FRB's book value is anyone's guess ATM, but it's probably quickly becoming negative given the bank run blah blah

Also, for companies that are priced on earnings, they're priced on forward earnings, which is assumed to be extremely negative for FRC.

Bank equity is weird because it directly feeds into the funding cost for the bank’s massively-levered balance sheet. That said, I agree something is off here. First Republic (and Credit Suisse) may be (and have been) better off as private companies.

Large banks have different portfolios and may have funds available to assign to these (now riskier) investments.