6 ms·

How much of a haircut do the assets take during the process. I’m assuming nobody is paying market rate so how much under is the bid? Like 80% or like 30-40%

twoodfin 4y ago
Given the constraints, the result of this auction is likely to be the closest measurement of “market rate” we’re going to get.
- hd95489 4y ago
  Only a few chosen players get to bid so it’s going to come with some haircut off market
seanhunter 4y ago
Deciding that is exactly what the auction is and it will depend on market conditions, the quality of the assets etc. In the case I was familiar with the assets were "AAA but actually garbage" for the most part and there wasn't a liquid market price so we bid really where we were guestimating the true market price would be but it was a heavy discount to where the failed bank had been holding it. I don't think I'm actually at liberty to say what our bid was but if you think about the gathering storm of the financial crisis in 2008 and "AAA but garbage" illiquid instruments were very hard to price and very expensive to fund so were trading in the 60s (cents in the dollar that is). So if you're on teh weekend and you get offered a massive parcel of that stuff marked in the 90s that you don't really want to hold in the first place you're going to bid significantly south of where the market closed given you know this news is going to really rock the market when it opens on Monday. In this case I think the MBS they are holding is going to be more liquid and with a reasonably secure secondary market, and you're not going to be able to do a proper valuation on the SME loans they have in a single weekend and there isn't a liquid market given each loan is it's own special creature so you're going to have to put a bit of a finger in the air on those. So probably somewhat of a haircut but less extreme.
- colechristensen 4y ago
  What’s your perspective on the likelihood of a few more similar bank failures happening in the next couple of quarters?
  - seanhunter 4y ago
    I don’t have any inside scoop because I’m not in that world any more, so take this purely as my personal opinion, but I wouldn’t be at all surprised if that happens. A lot of seemingly successful business models are hard to distinguish from the beneficial effect of ultra-low rates and a stable, growing economy[1] so the sudden raising of rates is going to hurt a lot. I also think the full effects are taking a while to filter through into the real economy so I personally don’t think we’ve seen the worst impacts yet. I see a lot of empty office and retail space and know that someone took out a loan to build or buy that building and now don’t have the rental income to pay back that loan. Like I say just one person’s opinion so take it with a pinch of salt. [1] Hence the famous Buffett quote. https://www.goodreads.com/quotes/43237-it-s-only-when-the-tide-goes-out-that-you-learn https://www.goodreads.com/quotes/43237-it-s-only-when-the-ti...
    - Maven911 4y ago
      Since you're on this thread..who normally runs the investment decisions inside of a bank, whether retail or investment. Is there a CIO office or is that the function of their Treasury department? Does it go by other names? And in your experiences in 2008, what sort of strategy planning/what if scenarios were being played out since it was unprecedented and no one knew what was going to happen the next day
    - panarky 4y ago
      Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid. Given all the uncertainty about the assets and other regional bank dominoes that are yet to fall, it seems like even the winner will be a low-ball offer. Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?
Bluecobra 4y ago
On Friday’s thread someone posted that the average return SVB bought was ~1.5%. If the average 30 year rate today is ~7.0%, an ~80% discount sounds correct.
- fdasflkjvalkjlk 4y ago
  You're off by around a factor of 10 because you're valuing MBS as if they're annuities without a terminal value. MBS are backed by the USG and you get the full principal back at by maturity.
  - hd95489 4y ago
    So you would expect 8% cuts? Or 2%. I could see 8%-10 being about right.
  - adriancr 4y ago
    They bought 10 year bonds at 1.5% yearly. For every 100$ they will get 116$ at maturity. Right now there are 10 year bonds at 4% that will pay 148$ at maturity. To be able to sell your 1.5% bonds right now you need to discount them sufficiently so they have the same value as the new 4% 10 year bonds. (otherwise why would anyone buy them) I'd guess you'd need to discount 148$ - 116$ = 32$. This means selling your 100$ bonds at 68$ right now to have buyers... Otherwise money is stuck for 10 years which is unfortunate if you ran out of available cash. Is this wrong?
    - panarky 4y ago
      The rule of thumb is every 100 bp increase in rates means a reduction in the market value of the security equal its years to maturity as a percentage. So if rates are up 250 bp and there are 9 years remaining to maturity, that would be a 2.5 * 9% = 22.5% reduction in market value. But I believe current yields on 10-year MBS are greater than 4%, the numbers I've seen put them at about 110 bp over 10-year Treasurys, which would make the reduction in market value even deeper.
      - 4y ago

twoodfin 4y ago

Given the constraints, the result of this auction is likely to be the closest measurement of “market rate” we’re going to get.

hd95489 4y ago
Only a few chosen players get to bid so it’s going to come with some haircut off market

seanhunter 4y ago

Deciding that is exactly what the auction is and it will depend on market conditions, the quality of the assets etc. In the case I was familiar with the assets were "AAA but actually garbage" for the most part and there wasn't a liquid market price so we bid really where we were guestimating the true market price would be but it was a heavy discount to where the failed bank had been holding it. I don't think I'm actually at liberty to say what our bid was but if you think about the gathering storm of the financial crisis in 2008 and "AAA but garbage" illiquid instruments were very hard to price and very expensive to fund so were trading in the 60s (cents in the dollar that is). So if you're on teh weekend and you get offered a massive parcel of that stuff marked in the 90s that you don't really want to hold in the first place you're going to bid significantly south of where the market closed given you know this news is going to really rock the market when it opens on Monday. In this case I think the MBS they are holding is going to be more liquid and with a reasonably secure secondary market, and you're not going to be able to do a proper valuation on the SME loans they have in a single weekend and there isn't a liquid market given each loan is it's own special creature so you're going to have to put a bit of a finger in the air on those. So probably somewhat of a haircut but less extreme.

colechristensen 4y ago
What’s your perspective on the likelihood of a few more similar bank failures happening in the next couple of quarters?
- seanhunter 4y ago
  I don’t have any inside scoop because I’m not in that world any more, so take this purely as my personal opinion, but I wouldn’t be at all surprised if that happens. A lot of seemingly successful business models are hard to distinguish from the beneficial effect of ultra-low rates and a stable, growing economy[1] so the sudden raising of rates is going to hurt a lot. I also think the full effects are taking a while to filter through into the real economy so I personally don’t think we’ve seen the worst impacts yet. I see a lot of empty office and retail space and know that someone took out a loan to build or buy that building and now don’t have the rental income to pay back that loan. Like I say just one person’s opinion so take it with a pinch of salt. [1] Hence the famous Buffett quote. https://www.goodreads.com/quotes/43237-it-s-only-when-the-tide-goes-out-that-you-learn https://www.goodreads.com/quotes/43237-it-s-only-when-the-ti...
  - Maven911 4y ago
    Since you're on this thread..who normally runs the investment decisions inside of a bank, whether retail or investment. Is there a CIO office or is that the function of their Treasury department? Does it go by other names? And in your experiences in 2008, what sort of strategy planning/what if scenarios were being played out since it was unprecedented and no one knew what was going to happen the next day
  - panarky 4y ago
    Intuitively, a hundred billion dollar auction with only a few hours to research, analyze and horsetrade must necessarily result in a lower winning bid. Given all the uncertainty about the assets and other regional bank dominoes that are yet to fall, it seems like even the winner will be a low-ball offer. Doesn't that mean a bigger haircut for uninsured depositors than would be the case if assets were methodically liquidated over a few weeks or months instead of a fire sale on one Sunday?

Bluecobra 4y ago

On Friday’s thread someone posted that the average return SVB bought was ~1.5%. If the average 30 year rate today is ~7.0%, an ~80% discount sounds correct.

fdasflkjvalkjlk 4y ago
You're off by around a factor of 10 because you're valuing MBS as if they're annuities without a terminal value. MBS are backed by the USG and you get the full principal back at by maturity.
- hd95489 4y ago
  So you would expect 8% cuts? Or 2%. I could see 8%-10 being about right.
- adriancr 4y ago
  They bought 10 year bonds at 1.5% yearly. For every 100$ they will get 116$ at maturity. Right now there are 10 year bonds at 4% that will pay 148$ at maturity. To be able to sell your 1.5% bonds right now you need to discount them sufficiently so they have the same value as the new 4% 10 year bonds. (otherwise why would anyone buy them) I'd guess you'd need to discount 148$ - 116$ = 32$. This means selling your 100$ bonds at 68$ right now to have buyers... Otherwise money is stuck for 10 years which is unfortunate if you ran out of available cash. Is this wrong?
  - panarky 4y ago
    The rule of thumb is every 100 bp increase in rates means a reduction in the market value of the security equal its years to maturity as a percentage. So if rates are up 250 bp and there are 9 years remaining to maturity, that would be a 2.5 * 9% = 22.5% reduction in market value. But I believe current yields on 10-year MBS are greater than 4%, the numbers I've seen put them at about 110 bp over 10-year Treasurys, which would make the reduction in market value even deeper.
    - 4y ago