How likely would this still have happened had the Dod-Frank regulations applicable to banks this size had not been significantly loosened back around 2018 (if I recall correctly)? Thanks for the great analysis.
Excellent description. This is banking 101. But it is far from clear that it is politically feasible for the Fed to bailout some of the wealthiest people on the planet. It IS clear that monetary policy is in the frame as a proximate cause. It is also clear that policymakers started the year looking to starve crypto companies of liquidity. Had SVB followed basic ALM principles, it would not be in this position. So this must also be a story of regulatory failure.
Great overview! It's starting to become an interesting situation with banking - similar to what some people say happens in aviation. With all the automation in aviation, some have argued that pilots are now worse and this puts planes in danger (whether that's true is up for debate). With these banking decisions, it fees like just because the regulations allowed for something, SVB management made a decision to do it, by holding a large amount of assets, bought at peak prices without any interest rate hedges. It feels like just because they weren't told not to do that, they didn't. It might not be easy to come up with regulations for every eventuality. It makes me wonder if the decision makers (CFOs, operational finance etc) should be required to get certifications so that we're sure that they actually understand the risks of their business. Especially since the banking sector is treated very differently from all other sectors.
Another sad and detailed expose of our banking system's foibles. How do seemingly professionals make such stupid and fool-hearty mistakes? Not encouraging but appreciate the insight into the follies of these mega-institutions. Once again, who is watching the store??
“As of the end of 2023, the fair market value of the bank’s total held-to-maturity securities portfolio was more than $15B smaller than the assets’ amortized value, a number that had only grown larger and larger as interest rates increased.”
Today, he says, “we are in the golden age of fraud”.
Chanos describes the current environment as “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.”
All in all, it’s “a heady witch’s brew for trouble”.
Is there a specific link to the data that you used for the Uninsured and Insured Deposits graph? i tried searching for a while but couldn't get anywhere
> As of the end of 2023
Guessing this should say 2022?
Excellent analysis
AFS is a “Banking Book” classification and does not require MTM treatment. Otherwise solid recap!
How likely would this still have happened had the Dod-Frank regulations applicable to banks this size had not been significantly loosened back around 2018 (if I recall correctly)? Thanks for the great analysis.
Amateur here- Treasury bonds yields were low when they bought them.
Why would a bank buy this much low yield treasury bonds (in 2021) ?
Were they trying to be safe ? But didn’t diversify?
Just want to understand the initial rationale.
Excellent description. This is banking 101. But it is far from clear that it is politically feasible for the Fed to bailout some of the wealthiest people on the planet. It IS clear that monetary policy is in the frame as a proximate cause. It is also clear that policymakers started the year looking to starve crypto companies of liquidity. Had SVB followed basic ALM principles, it would not be in this position. So this must also be a story of regulatory failure.
Great overview! It's starting to become an interesting situation with banking - similar to what some people say happens in aviation. With all the automation in aviation, some have argued that pilots are now worse and this puts planes in danger (whether that's true is up for debate). With these banking decisions, it fees like just because the regulations allowed for something, SVB management made a decision to do it, by holding a large amount of assets, bought at peak prices without any interest rate hedges. It feels like just because they weren't told not to do that, they didn't. It might not be easy to come up with regulations for every eventuality. It makes me wonder if the decision makers (CFOs, operational finance etc) should be required to get certifications so that we're sure that they actually understand the risks of their business. Especially since the banking sector is treated very differently from all other sectors.
Another sad and detailed expose of our banking system's foibles. How do seemingly professionals make such stupid and fool-hearty mistakes? Not encouraging but appreciate the insight into the follies of these mega-institutions. Once again, who is watching the store??
You mean at the end of 2022 right?
“As of the end of 2023, the fair market value of the bank’s total held-to-maturity securities portfolio was more than $15B smaller than the assets’ amortized value, a number that had only grown larger and larger as interest rates increased.”
Today, he says, “we are in the golden age of fraud”.
Chanos describes the current environment as “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.”
All in all, it’s “a heady witch’s brew for trouble”.
--Jim Chanos...Enuf Said!
Bubbles do tend to burst.
Thank you for this insightful explainer, Joey! I may be an economist, but finance is undecipherable to me. Not anymore!
Is there a specific link to the data that you used for the Uninsured and Insured Deposits graph? i tried searching for a while but couldn't get anywhere