Three failed US banks had one thing in common: KPMG
ft.com
ft.com
We know exactly why banks are failing. Federal rate increases pushed their long-term Holdings underwater and account holders made a run on the bank.
No, they failed because the banks didn’t hedge interest rate risk whatsoever. It isn’t the Fed’s fault for doing it’s job to tame inflation. It is the banks’ fault for not doing basic risk reduction at the expense of some profit. They optimized for profit and not resiliency.
The increases have been relentless and its unclear that it is stemming inflation driven by corporate greed at all
How many of your customers will flee is much more difficult to Gauge then if rates will go up.
This is why we see winners and losers. Most banks have the same exact Long-term securities and will continue to make money off of them.
It isn't as much about the investment as it is the investor.
I might make 5% putting money in a CD account. You might put money in the same account and lose 5% because you have to pull out early. The difference is our situation, not the account
I think you are confusing causality. The depositors fled because of the bad bet that rates would stay low. As a bank your entire existence depends on confidence. Make risky bets that rates will stay low forever, and you are eventually going to be proven wrong and then confidence in your institution will drop and depositors will flee.
If there is no run on your bank, the MBS will always add to your profit no matter what the Fed rate is.
No one is saying that and the tone of your comment is honestly wild.
Its' betting that they wouldn't raise faster than ever in history. ( yea we all know interest rates were higher and have been subjected to the same posts about interest rates in the 80s)
Source: https://www.weforum.org/agenda/2022/10/comparing-the-speed-o...
If you can’t find someone with short duration assets then you don’t lock into 10+ year fixed rate bonds. Maybe you don’t leverage up your balance sheet as much.
I think implicit in your comment is that this was unavoidable, and I am vehemently against this stance. Just like 2008’s financial crisis, this was entirely avoidable.
You can "fix" this with withdrawl limits, (In which case connected insiders can get their money out early and regular guys get screwed) full FDIC insurance, ("Unlimited bailouts for banks", moral hazard) or just end fractional-reserve banking entirely. (Say goodbye to 30 year mortgages, or any mortgages at all.)
Ending bank crises essentially requires ending the "business cycle" of credit expansion and credit contraction, which would take deleting quite a lot of the economy and turning everything into state owned enterprises.
However, this isn't really an all or nothing situation. There is are material reasons why some banks will make it through this just fine while others will fail, despite all running on the same fractional-reserve system and buying the same securities.
Some will be right about their customer flight risk estimates, and others will be wrong. How much of this is due to better models or just luck is anyone's guess.
Now where you could argue that the Fed made a mistake was in buying MBS (lowering net interest margin) during 2020 early in the pandemic. That drove mortgage rates down right when fiscal stimulus was increasing bank reserves and everyone who could refinanced.
So, if they don't convince traders they will stop runaway inflation 5-20y rates could go to 10% or higher (inflation rate + net interest margin), which would absolutely crush long duration bond values! If you think a 10% fall in value is big, it could easily be 50% down and that would be a big deal for all banks.
https://www.ustreasuryyieldcurve.com/
Go look and see how long rates at 10y have changed with expectations over the last year as short 6mo have consistently risen.
If you don't hold to maturity, you have to think about spot/resale prices. These fluctuate based on market demand, and what new securities are being offered at. If the fed is selling 5% bonds, nobody will want your smelly old 1% bonds.
If you are holding cash, you are probably stoked to buy some 5% bonds.
When you say:
>In that sense what the Fed is currently doing is actually keeping the value of the bonds/MBS higher than otherwise
Im matters which bonds you are talking about. Bonds issued last year, Bonds issued today, or 5 years in the future.
The Fed is cranking up bond rates today. This devalues bonds issued last year. I agree that it ALSO decreases the rate of bonds 5 years in the future (by driving inflation down as you say.
"...KPMG alumni have also gone on to play significant roles in the banking sector, including at former clients. The chief executives of Signature and First Republic were both former KPMG partners..."
"...The Fed’s report last week revealed the extent of weaknesses in SVB’s risk management and internal audit functions, both of which need to be assessed by a company’s external auditors.
Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas at Austin, said that could raise a question of whether KPMG should have highlighted these failings to investors as material weaknesses that could affect the financial results..."
https://truthout.org/articles/the-indisputable-role-of-credi....
Effectively the financial version of judge shopping.
I say this without judgement; if there's any industry where the revolving-door policy has utterly destroyed value, it's mine. The good' ol military industrial complex. Hell we practically invented the revolving door. So anything I say here is going to be next-level hypocrite, givn where my checks come from.
Regulators are humans too, and it's hogwash to think that they aren't susceptible to the same corrupting forces that the rest of us are. In fact, they are probably even more susceptible to corruption - seeing that they are generally underpaid and overworked. An underhanded in-passing comment like "hey, if you help us pass this audit, we'll make sure it's worth your efforts.... by the way there is an opening at our company that could be filled by someone with your skillset. Oh yeah it also pays 4x what you're making now. Think about it."
But "such conflicts" . . I feel like every year the industry gives me another shock to the testicles. There's entire floors filled with nothing but former Procurement Officers (CPOs). I realized it's the only trick BD even has: find the CPO, blow a couple grand on "dinner", invent a new VP role, then Avada Contracta, get the thirty year deal. BD lost the ability to sell anything except for the prospect of double dipping officer pay and a salary - the lazy uncreative man's path towards being a millionaire.
And everyone brags about it. That's the kick in the nuts. It's totally normal. You go to a conference, everyone in uniform is chatting up how much they're dishing out for Miracle Product X and how pretty Product X secretaries are. HAR HAR HAR HAR. All hands meetings, CEOs brag about it, to their own minions. People dialed in. "Welcome our new VP of Pointless Wankery, Captain Hoser from the C-17 Product X program, who just signed a thirty year . ." Even FCPA's a frickin joke now, given the sheer quantity of "Saudi Nephew NPOs" everyone keeps on the rolodex. I thought, circa 2020, that at least - at least - FCPA was solid, and now, shit. The nonprofit scene made a complete mockery of that.
Sorry, thanks for listening to me vent.
Pah, I say. Double Pah!
The products rated AAA by and large performed as such. (I have never seen contraevidence. Though the massive intervention introduces unremovable endogeneity.) They weren’t necessarily liquid the entire time. In that way they bear fun-house mirror similarity to this crisis, where the creditworthiness of Treasuries wasn’t ever in question. But their value in the interim, and thus liquidity, was.
The problem of 2008, with the benefit of hindsight, wasn’t rating agencies being funny. Those senior tranches were creditworthy. But we weren’t sure, and they sure as hell weren’t liquid.
However, some estimate that over half of U.S. banks are insolvent. That's like half the population dying after drinking water. At what point do you start worrying about the water?
Some people don't understand fractional reserve banking, and consequentially make inaccurate estimates that make for clickable headlines but not useful analysis:
https://www.investopedia.com/terms/f/fractionalreservebankin...
The problems that've been happening recently - duration mismatches on ultra-safe assets like treasuries together with record rates of interest rate rises from record low levels - do actually make banks insolvent. The actual present-day market value of their assets is less than their liabilities to depositors because the fact that investors can get higher interest rates elsewhere means they'll only buy those assets at a discount that reflects the lower interest rate. Alternatively, the banks would have to pay more in interest to convince depositors to keep their money there until the assets reach maturity than they'd receive in interest themselves. Either way they're in deep trouble.
If banks cannot match their liabilities at any time that makes them insolvent (granted, some reasonable period might be useful. But we're talking days/a week, no more). The fact that they may be able to match those liabilities in the future does not matter.
In more concrete terms, the Fed has a funding scheme in place right now that lends banks money to smooth over any liquidity problems they're having and ensure they can process withdrawals. That funding scheme lets them borrow against assets based on their face value ignoring losses due to interest rates, but it still charges current market interest rates, which means they're bleeding out money that way. It didn't save First Republic Bank and neither would any other solution that didn't involve either depositors taking a loss or the FDIC making up that loss using its own funds, because they were insolvent, not just lacking liquidity. The very real gap between assets and liabilities to depositors had to be filled from somewhere.
Plus the depositors may need that money for reasons. Pushing the loans to make up for it on depositors is eventually the same as taking a haircut on the deposit.
I mean, I get that this plays into the FED's hand. They want to take money out of the economy, that's what high interest rates are for, and this certainly does that. But ...
What we're seeing now is that the banks are actually insolvent, which means they did everything I listed above, but now the value of those loans has dropped enough where they may have serious issues meeting their obligations to depositors. You can't just waive your hands in the air and say "this is all fine because of fractional reserve banking."
The only way to fix the insolvency crisis would be to invent a time machine to go back and stop QE/ARP/IRA.
If you print a trillion dollars, inflation goes up. To stop it, you have to take a trillion dollars out of the economy. When you do that, it's painful and unpleasant and businesses go bankrupt. This should not be a surprise.
They've been fined by the PCAOB for this several times and have lost several major clients (Skechers, Herbalife) in the Los Angeles area alone due to severe audit practice issues.
If you don’t, then clearly you’re irrational and everyone who did get out first was of course a terrible person (per the discussion).
Like a classic ponzi scheme I guess?
They failed because they over invested in near 0% interest US treasuries, and then the Fed rapidly hiked rates to 5%, quickly collapsing the value of those low interest treasuries on the market.
The investments themselves, and the promised return, were always "risk free", but the house of cards collapses when everyone demands their money now. And when people are looking at their savings interest rate of 0.1%, and seeing other banks offering 4%, it becomes very easy for a bank run to start as people simply move their money chasing yield.
The problem seems multi-faceted and complex, and like most complex problems, true blame is likely diffuse and shared amongst everyone, the customers, the banks, and the Fed. This is usually the kind of situation where societies elect a scapegoat to murder so they can all go about their business pretending to solved the problem and purged the evil from amongst their ranks.
Shouldn't they have been ready for that scenario and hedged against it though?
A big lesson there, beyond don't fight the Fed, is don't trust the Fed.
These banks were not hedging their duration risk, which means that they were in fact making risky investments. Their failures lie solely on the bank management and fund managers.
Long terms bonds are risky and they knew it.
You make it sound like they were funding Musk's purchase of Twitter, when in fact they simply had too much of their money locked in treasury bills (typically considered the safest possible investment) to face off a sudden and massive run on their bank.
Same thing happened for other items like flour. Suddenly everyone was baking at home and restaurants weren't buying 50lb sacks of flour anymore. Plenty of flour, improperly packaged.
In retrospect, I'd say that the first wave of people overstocking TP weren't totally irrational.
The bank's only moral imperative (a misnomer for a bank, I'm aware), per their agreement with you, is to have your money safe when you come for it (even if "you" is everyone).
The TP company, they want to use just-in-time inventory, and that works 90%+ of the years, fine, but don't go blaming the consumer because they did too much of a good thing for you, and your workflows were too fragile to scale up.
I laughed. I know you weren’t talking about customers shitting, but that’s where I went.
They fired them and got Deloitte to do the dirty work instead.