SVB: Biggest bank failure since '08

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:D
 
bluesideup said:
Because they / know the rules and decided to ignore them. It's not brain surgery, if you assume the higher risk because someone sells you a bill of goods, promising things that they can't deliver, without you verifying first you will likely pay the piper.
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And that mentality will effectively kill most small/regional banks. And that will have a very negative effect on the economy, as small/regional banks are one of the primary economic drivers for small/medium businesses. The reality is the 250K limit is fairly recent, just 15 or so years ago it was 100K. Having run multiple small/medium consulting businesses since the lates 90s, I can tell you the major banks have changed over the years. In the late 90s, I was able to get and establish a line of credit with both BofA and JPM. By 2010, both of my LOCs were closed, after over a decade of paying for the LOCs and barely ever using them. Reason given, they were both existing LOC which were not secured by saleable fixed assets. We were forced to switch to local banks to get an LOC (typical security is against the AR).

The problem is that a 250K limit does not cover the operating cash for a lot of small / medium businesses. As part of loan structures, companies are often restricted to having all or at least the vast majority of cash at the bank providing the loan.

Since I work in FinTech, and what I have seen from the large banks, they have specific customer models they support. If you do not fit the model, they will not change to help you or provide any real underwriting. As the CEO of JPM recently stated, the big banks need the small/regional banks. The small/regional banks do a lot the big banks can no longer do. This is why the large banks deposited the case in First Republic; and why so many small/medium businesses depend on small/regional banks (just look at all the recently published numbers on commercial real estate for example).

Tim
 
TCABM said:
First Republic is still not out of the woods. They announced Friday they’ll suspend pay dividends on the preferred stock in addition to the already suspended dividends for common stock.

The stock’s value is down 90%; not sure they’ll make it to the end of the year.
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In this case First Republic has a few choices:
1. They can conserve cash, and hope they survive the liquidity crunch (considering the number of major banks putting cash in there, and the new Fed facilities, I think they have a pretty good chance at making it if customers do not run away).
2. They can spend cash, in the hope their balance sheet survives long enough to raise capital. I doubt this is a truly viable path.
3. They can hope some big banks and/or the Federal Reserve provide a life line.

I am willing to bet, considering all the public blow back about SVB giving out bonuses and dividends in the six months before the collapse. That there was some behind the scenes messaging to First Republic, you are on your own (which means fold), or you do number 1, and we will pretty much back stop you completely via number 3.

Tim
 
ArrowFlyer86 said:
And as of today...
Fuk03tVXwBsY7pu
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Off-topic, but I predict that's roughly how I'm going to go out. I'll be in the hospital on some kind of machine, the cleaning person will come in, unplug the machine, plug in the vacuum, and I'll flat-line. Probably have had that nightmare because I've had cleaning people unplug ups's for servers to plug in cleaning equipment.
 
Albany Tom said:
Off-topic, but I predict that's roughly how I'm going to go out. I'll be in the hospital on some kind of machine, the cleaning person will come in, unplug the machine, plug in the vacuum, and I'll flat-line. Probably have had that nightmare because I've had cleaning people unplug ups's for servers to plug in cleaning equipment.
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My dad's house flooded last year. The people the insurance company hired to clean up unplugged a freezer full of game meat in the garage....so they could charge a phone. We were in New Mexico when I had the thought to have my sister make sure the breaker or GFI didn't pop. Breaker was good. But they left the phone charger behind. Contents had thawed and started dripping.
 
TCABM said:
And now, after a month of hospice, FRC is gone.
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It is interesting to listening to some of the initial analysis today; and how they mismanaged interest rate risk. The spread between their cost of money, and what they lent at, was around 2%. And this was on roughly 100B USD they were losing roughly 2B USD a year. What I could not decipher from the article, how much of the $100B was due to depositors leaving the bank versus FRC purchasing treasuries (short version, FRC was purchasing short term treasuries with roughly a 1% yield then lent the cash out on long term fixed interest basis of 3%. Then the cost of the short term has treasuries has climbed to 5%, so now FRC is upside down).

Estimated FDIC cost is $13B to clean up FRC.

Tim
 
Big question is who's next, if anyone..
 
kaiser said:
Big question is who's next, if anyone..
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To answer that question I'd be looking heavily at the institutions that funded CRE developments or acquisitions in SF/NY/... Particularly offices and retail. There's pain under the surface there even if no one is willing to admit it yet.

There's good reason to believe that lot of the banks and PE funds are still marking-to-make-believe on those assets. For evidence I submit to the jury Exhibit A: the bidding of 350 California St in SF this week that was what... 75-80% below it's value a few years ago? IDK how many institutions can properly afford to absorb those markdowns. Exhibit B would be Blackstone's BREIT having to put up the exodus gate 6 months in a row (yet still somehow new money does find its way in there, I have no idea why).

EDIT: And I recall seeing a headline about Brookfield also choosing to default on some properties recently too. The wave there is still in its early innings.
 
ArrowFlyer86 said:
To answer that question I'd be looking heavily at the institutions that funded CRE developments or acquisitions in SF/NY/... Particularly offices and retail. There's pain under the surface there even if no one is willing to admit it yet.

There's good reason to believe that lot of the banks and PE funds are still marking-to-make-believe on those assets. For evidence I submit to the jury Exhibit A: the bidding of 350 California St in SF this week that was what... 75-80% below it's value a few years ago? IDK how many institutions can properly afford to absorb those markdowns. Exhibit B would be Blackstone's BREIT having to put up the exodus gate 6 months in a row (yet still somehow new money does find its way in there, I have no idea why).

EDIT: And I recall seeing a headline about Brookfield also choosing to default on some properties recently too. The wave there is still in its early innings.
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I guess I should dig around my co's 10K and see what's what...
 
ArrowFlyer86 said:
… institutions that funded CRE developments or acquisitions in SF/NY/....
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One of the conversations we’re hearing in the HR space is no backfill for attrition and new job offers contingent on in-office work.

Seems like tail wagging the dog honestly…WeWork was absorbing excess Class A space at a discount and that venture failed spectacularly. If there’s any segment that needs cheap growth, it’s multi-family housing. I’m not in the commercial to residential conversion industry, but I see that as a potential opportunity that’s likely to be missed and CRE and REITs are next to fail if we some specific markets don’t step up to the plate and take a swing.
 
TCABM said:
One of the conversations we’re hearing in the HR space is no backfill for attrition and new job offers contingent on in-office work.
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That's interesting. Is that at the banks? Or just broadly across sectors?

TCABM said:
I’m not in the commercial to residential conversion industry, but I see that as a potential opportunity
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I'm not a real estate expert by any means, so I was surprised to hear what it costs to do one of those conversions (for office towers -> residential at least). It sounds like many of these buildings would have to sell for 0$ (or less) in order to make that even remotely economical. And even with a conversion many of the buildings would not be attractive living spaces (e.g., lack balconies, insufficient sunlight, etc). Though I'd be curious to hear from an authoritative source on what the likelihood of that is.

TCABM said:
WeWork was absorbing excess Class A space at a discount and that venture failed spectacularly.
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WeWork... Another disaster brought to you by... *doesn't even need to check notes* ... Softbank! :D. When I first heard of WeWork in 2014 I actually thought it was a cool idea. It wasn't until late 2015 when I visited our company's office in London that I stopped by the WeWork office next door at Moorgate (a friend was working out of there). I remember being like "wow, this building is insanely nice, and this neighborhood is insanely nice, and how the hell can you afford to offer this space to customers with free beer, gourmet coffee, pizza, WeWork sponsored parties, and other amenities for 99$/month?". Oh that's right, you can't. At least not once Softbank's money cannon runs out. And that's why WeWork is trading at 40 cents on the dollar. EDIT ADDITION: and last I heard they have something like >40$ billion in lease liabilities. Good luck to landlords for collecting on that once they go tango uniform.
 
If you guys ever seen the HBO show Silicon Valley, It's a wonderful caricature of how inane that space can be
 
Tantalum said:
If you guys ever seen the HBO show Silicon Valley, It's a wonderful caricature of how inane that space can be
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That was a fantastic show and I binge watched it years ago. I just never considered that it could accurately portray real life. But that whole perspective changed when Softbank came along and gave hundreds of millions (or more) to anyone with anything resembling an idea.

If I was an investor in Softbank's vision fund and I saw them handing out money to companies like WeWork (who used the money for things like buying a pool wavemaking company) I would have fought to get my money back more aggressively than in Silicon Valley when Erlich attacked the kid on Richard's behalf for taking his money and not delivering his Aderall. Quite possibly my favorite (and unexpected) scene from that series.
 
ArrowFlyer86 said:
That was a fantastic show and I binge watched it years ago. I just never considered that it could accurately portray real life. But that whole perspective changed when Softbank came along and gave hundreds of millions (or more) to anyone with anything resembling an idea.

If I was an investor in Softbank's vision fund and I saw them handing out money to companies like WeWork (who used the money for things like buying a pool wavemaking company) I would have fought to get my money back more aggressively than in Silicon Valley when Erlich attacked the kid on Richard's behalf for taking his money and not delivering his Aderall. Quite possibly my favorite (and unexpected) scene from that series.
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Each episode was a gem indeed. Mike Judge has a talent for this
 
Daleandee said:
You just gained some points on the respect-o-meter ... :)
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There's both good and bad on Facebook, just like any site that relies on user-provided content. My main beef with it is the clunky user interface.
 
ArrowFlyer86 said:
I'm not a real estate expert by any means, so I was surprised to hear what it costs to do one of those conversions (for office towers -> residential at least). It sounds like many of these buildings would have to sell for 0$ (or less) in order to make that even remotely economical. And even with a conversion many of the buildings would not be attractive living spaces (e.g., lack balconies, insufficient sunlight, etc). Though I'd be curious to hear from an authoritative source on what the likelihood of that is.
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My first job out of college back in the dark ages was doing marketing for a developer specializing in renovation of historic and commercial properties into housing. When the 25% investment tax credit went away under the Reagan admin, so did the business. Without a serious Federal tax incentive, the numbers will never work.
 
I do not recall the number, but I believe it was over 50% of all commercial real estate loans are with banks with less than 50B in assets. (les than 50B is considered small).
Jamie D. of JPM has even commented on this. It does not make sense for JPM to play in this space very much because JPM will not be cost effective. You need the small banks to meet certain industry demands.

Tim
 
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