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What's the basis for that insolvent since September claim? Looking at the end of 2022 financial data shows a bank that's been hurt by interest rates rising, but

by yuliyp 4y ago

What's the basis for that insolvent since September claim? Looking at the end of 2022 financial data shows a bank that's been hurt by interest rates rising, but definitely not insolvent. Is the an alternative definition of insolvent you're using for that statement (beyond liabilities > assets)?

kragen 4y ago
as i understand it, they hadn't marked-to-market their hold-to-maturity securities (because that's why you classify securities as htm, so you don't have to mark them to market) but their market value had fallen sharply (because of interest rates rising), so that their liabilities did exceed the actual market value of their assets in that sense their solvency after about september was just an accounting fiction i'm not even an accountant though, so please take this with a grain of salt, and let me know if i'm wrong
- lordnacho 4y ago
  I feel this is the crucial missing bit of information. The rules allow Wiley E Coyote to run over the cliff without looking down. When I was running a fund we'd always think about the current mark to market. People would get in trouble for marking their books away from the market. How is it that is allowable to pretend things are worth more than they are?
  - whatshisface 4y ago
    Nobody was pretending, all of the information was public. You are allowed to read about a bank's investments and then decide to join their fund i.e. deposit above the FDIC threshold - unfortunately, a lot of small business owners did not see it that way.
    - kragen 4y ago
      well, as it turned out, they were hedged with a 'fed put'
  - kragen 4y ago
    i don't really know the history of the regulation, but it makes some sense to me that, if you buy a 5-year t-bill which will pay out some fixed amount 5 years from now, and you hold it until that maturity date, you shouldn't have to care what kind of crazy irrational things the bond markets are doing during those 5 years because you don't engage with those markets at all; they don't affect you in any way the t-bills they sold off the other day were not from the 'hold to maturity' bucket but from the other one, 'available for sale', so i'm not clear why the sale (as opposed to the presumably previous marking to market of those bonds) counted as a loss of 1.8 billion dollars
    - lordnacho 4y ago
      But in that situation your only risk is the thing that actually happened: you have to sell before you want at a bad price. Shouldn't the reporting rules be written so that people have to consider this?
- yuliyp 4y ago
  So yeah their balance sheet calculation did not show it as marked to market, but even accounting for that, they were still solvent at the end of 2022 according to their annual report: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d7-9459-41d7-9e3d-2c468971b386.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d... page 95 (there were $15B of unrecognized losses mentioned, but even then they were solvent: $211,793M of assets -> $196,641M of assets assuming all Hold-to-maturity marked down to market, which is still more than the $195,498 of liabilities they had.
  - kragen 4y ago
    hey thanks, i wonder where the conflicting calculations (e.g., https://archive.is/IMgxM https://archive.is/IMgxM, posted by 'ignoramous' elsewhere in this thread) came from byrne hobart (quoted there) cites https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/4Q22-SIVB-Earnings-Release-Final.pdf https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... the quarterly report, which only mentions unrealized losses on afs securities, not htm securities i see the total assets and liabilities numbers you mention on p. 95 of the 10-k you linked, but i don't see 15 billion dollars of unrealized losses anywhere, though i do see (for example on p. 124) 15724 million dollars of afs securities that had unrealized losses on them; but the unrealized losses themselves were only 1109 million dollars i don't see anything in either report about unrealized losses on htm (non-afs) securities. in the 10-k (again p. 95) their htm securities are 91321 million dollars, almost 4× the size of their afs securities, and maybe they had about 20 billion dollars of loss of market value on those htm securities?
    - yuliyp 4y ago
      Re $15b: the line on the balance sheet about HtM notes that they're counting it as $91,321M for purposes of the balance sheet, but in a paranthetical note that it has $76,169M of fair market value (which is a difference of $15,152M). But yeah that loss almost certainly continued going up in early 2023 as rates kept climbing.
      - kragen 4y ago
ignoramous 4y ago
> What's the basis for that insolvent since September claim? See: https://archive.is/IMgxM https://archive.is/IMgxM / https://twitter.com/ByrneHobart/status/1628779894183272452 https://twitter.com/ByrneHobart/status/1628779894183272452
7speter 4y ago
My understanding is that a commercial bank can be solvent as long as too many clients don’t suddenly demand too much of their assets all at once.
- kragen 4y ago
  i think you're talking about liquidity rather than solvency solvency is when your assets (including illiquid ones) exceed your liabilities

by yuliyp 4y ago

kragen 4y ago

as i understand it, they hadn't marked-to-market their hold-to-maturity securities (because that's why you classify securities as htm, so you don't have to mark them to market) but their market value had fallen sharply (because of interest rates rising), so that their liabilities did exceed the actual market value of their assets in that sense their solvency after about september was just an accounting fiction i'm not even an accountant though, so please take this with a grain of salt, and let me know if i'm wrong

lordnacho 4y ago
I feel this is the crucial missing bit of information. The rules allow Wiley E Coyote to run over the cliff without looking down. When I was running a fund we'd always think about the current mark to market. People would get in trouble for marking their books away from the market. How is it that is allowable to pretend things are worth more than they are?
- whatshisface 4y ago
  Nobody was pretending, all of the information was public. You are allowed to read about a bank's investments and then decide to join their fund i.e. deposit above the FDIC threshold - unfortunately, a lot of small business owners did not see it that way.
  - kragen 4y ago
    well, as it turned out, they were hedged with a 'fed put'
- kragen 4y ago
  i don't really know the history of the regulation, but it makes some sense to me that, if you buy a 5-year t-bill which will pay out some fixed amount 5 years from now, and you hold it until that maturity date, you shouldn't have to care what kind of crazy irrational things the bond markets are doing during those 5 years because you don't engage with those markets at all; they don't affect you in any way the t-bills they sold off the other day were not from the 'hold to maturity' bucket but from the other one, 'available for sale', so i'm not clear why the sale (as opposed to the presumably previous marking to market of those bonds) counted as a loss of 1.8 billion dollars
  - lordnacho 4y ago
    But in that situation your only risk is the thing that actually happened: you have to sell before you want at a bad price. Shouldn't the reporting rules be written so that people have to consider this?
yuliyp 4y ago
So yeah their balance sheet calculation did not show it as marked to market, but even accounting for that, they were still solvent at the end of 2022 according to their annual report: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d7-9459-41d7-9e3d-2c468971b386.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d... page 95 (there were $15B of unrecognized losses mentioned, but even then they were solvent: $211,793M of assets -> $196,641M of assets assuming all Hold-to-maturity marked down to market, which is still more than the $195,498 of liabilities they had.
- kragen 4y ago
  hey thanks, i wonder where the conflicting calculations (e.g., https://archive.is/IMgxM https://archive.is/IMgxM, posted by 'ignoramous' elsewhere in this thread) came from byrne hobart (quoted there) cites https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/4Q22-SIVB-Earnings-Release-Final.pdf https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... the quarterly report, which only mentions unrealized losses on afs securities, not htm securities i see the total assets and liabilities numbers you mention on p. 95 of the 10-k you linked, but i don't see 15 billion dollars of unrealized losses anywhere, though i do see (for example on p. 124) 15724 million dollars of afs securities that had unrealized losses on them; but the unrealized losses themselves were only 1109 million dollars i don't see anything in either report about unrealized losses on htm (non-afs) securities. in the 10-k (again p. 95) their htm securities are 91321 million dollars, almost 4× the size of their afs securities, and maybe they had about 20 billion dollars of loss of market value on those htm securities?
  - yuliyp 4y ago
    Re $15b: the line on the balance sheet about HtM notes that they're counting it as $91,321M for purposes of the balance sheet, but in a paranthetical note that it has $76,169M of fair market value (which is a difference of $15,152M). But yeah that loss almost certainly continued going up in early 2023 as rates kept climbing.
    - kragen 4y ago

ignoramous 4y ago

> What's the basis for that insolvent since September claim? See: https://archive.is/IMgxM https://archive.is/IMgxM / https://twitter.com/ByrneHobart/status/1628779894183272452 https://twitter.com/ByrneHobart/status/1628779894183272452

7speter 4y ago

My understanding is that a commercial bank can be solvent as long as too many clients don’t suddenly demand too much of their assets all at once.

kragen 4y ago
i think you're talking about liquidity rather than solvency solvency is when your assets (including illiquid ones) exceed your liabilities