7 ms·

US banks sitting on unrealized losses of $620B

60 points by halabarouma 4y ago

cwkoss 4y ago
Feels like a yellow journalism headline. It's only a loss if they have to liquidate before maturity. Kind of feels paradoxical: money can be accounted for in the future but not today. People tied up a bunch of money at worse terms than they can get today. Nobody is willing to buy those bonds at face value because the market is offering better. Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner is depending on liquidating them at par value at any time.
- 88913527 4y ago
  It would be yellow journalism if there wasn't a bank run and there wasn't forced liquidations of underwater assets. It is completely germaine to consider how these unrealized losses impact the financial system.
  - deleted 4y ago
    [deleted]
- swatcoder 4y ago
  “Okay everybody, just stand still and we’ll all be fine” It doesn’t take a panic for banks to need to sell upside down assets early. It can just take any sort of change to the wind. It’s not a crisis for there to be a lot of unrealized losses (you’d expect that when an economy turns), but it’s absolutely something to monitor and consider.
- danielmarkbruce 4y ago
  People who invest in banks don't think the $600 bill of losses is sensationalized or exaggerated. Economically, it's a loss. They had a net worth around $2.1 trill and now they are at $1.5 trill. Practically, it's problematic. They have locked in low returns in a world were depositors expect higher returns. Their business customers will pay attention. They'll report lower net interest margins, which means lower earnings. They have also opened themselves up to a run. Their business customers will pay attention to that too, making it more likely to happen. The only world in which it's not a loss is under certain accounting standards. Those standards can and do change.
- cperciva 4y ago
  It's a real loss, just not a realized loss. If your house burns down, you've lost the value of the building even if you haven't sold the land yet.
  - chii 4y ago
    but it hasn't been burnt down yet. A better analogy is that of a tree. You expect your planted tree (sapling) to be fully grown by 10 yrs time, and right now it's a sapling. Unfortunately, more recently planted saplings are growing up faster, and thus, result in more wood (presumably it's grown for wood) earlier than your sapling planted a few yrs ago. Therefore, a sapling from a few yrs ago is not worth as much future wood _right now_. But if you waited for the sapling to finish growing, you'd get back the amount of wood you originally expected. but if you chopped the sapling down today for the wood, you'd get far less.
    - amluto 4y ago
      And since you bought that tree by borrowing money at a variable and now higher rate, you need more wood to break even.
    - hattmall 4y ago
      But you have to balance the idea of should you cut your sapling down and use the space to plant the faster growing trees because you will ultimately get more wood. Those failing now are the groups that didn't cut the trees soon enough. It's a competitive environment and even faster growing trees may be coming. Waiting is not a viable option in many cases.
  - mym1990 4y ago
    But it isn't because the full value of the bonds will be received at maturity, so all they have to do is avoid a bank run for 8 or so years.
  - Arainach 4y ago
    How is it a real loss? Bonds have terms. If the bank sits on the bond until its term of maturity it gets a certain amount of money. Let's say the bond at maturity is worth X. The bank says the bond is worth Y. The market says the bond is worth Z. If Y > Z, that's only a problem if you sell. There is no loss - realized or unrealized - if you hold to maturity unless Y > X. However, how could this ever be the case? No one would pay more than X, so the bank could never claim the market value was higher.
- xuki 4y ago
  > unless the owner is depending on liquidating them at par value at any time. And when they do, they all do at once. We'll see how far creative accounting can take us this time.
- amluto 4y ago
  > Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner was depending on liquidating them at par value at any time. That is simply not true. The current value is the mark-to-market value, possibly plus half the spread depending on your perspective. The net present value is roughly the same number, because it’s the future value discounted by the discount/risk-free rate, and any credible estimate of the risk free rate has increased substantially. This may not be a liquidity problem because, if those assets don’t need to be liquidated, then they don’t need to be liquidated. And it may or may not be a solvency problem, because the banks in question may not need that money before maturity, and even if their portfolio currently has negative value, they may make it up with other investments before maturity. But yes, that money really is lost. Before you say “but the money will all be there at maturity”, keep in mind that, if you project the banks’ balance sheets out 30 years, the value, in 2053 dollars, of those long term bonds may be unchanged, but the cost of the liabilities (deposits) that offset them has gone way up. edit: it is possible and maybe even likely that some of these banks hedged this risk. In that case they may have a loss from the interest rate exposure and an offsetting gain from the hedge.
  - paulddraper 4y ago
    All these people comparing 2023 dollars to 2053 dollars.... I swear HN is the dumbest smart place there is.
  - sroussey 4y ago
    If people followed this reasoning, then they would keep everything in cash or money market mutual funds. The mark to market will always be 1=1 and have no liquidity problems. Of course, all banks would fail. These “unrealized losses” don’t include “unrealized hedges” either. Of course, SPV let those go. Oops.
    - amluto 4y ago
      I don’t really know what you’re trying to say. There are many things one can invest in. And indeed cash and money market funds are not strongly exposed to interest rate risk, and a rate change does not affect their present value to any substantial extent. And banks can absolutely make money without taking on interest rate risk. They can hedge, or they can invest in things that produce earnings at a rate that varies with interest rate (short term bonds, adjustable rate mortgages, etc). Or both. Or take on a limited amount of interest rate risk such that they are okay if they bet wrong.
- akira2501 4y ago
  > yellow journalism > It's only a loss if... I always thought one the fundaments of "yellow journalism" was that it had no basis in fact. Exaggeration alone doesn't seem enough to earn the association, I think. > unless the owner is depending on liquidating them at par value at any time. Well.. exactly. Shouldn't we have an accounting mechanism that actually accounts for this eventuality? In particular because this is a bank, it doesn't seem isolated, interest rates have changed significantly recently, and the NYSE halts list today appears pretty foreboding to an outsider.
  - pas 4y ago
    mark-to-market accounting. but that usually overestimates in up cycles and underestimates in down cycles. so the solution was/is Basel III, capital requirements, leverage ratios, and actual stress tests.
  - Retric 4y ago
    > no basis in fact Close, yellow journalism is about eye catching headlines with ”little or no legitimate, well-researched news.” It wasn’t that they need to make stuff up, they just ran with whatever would capture people’s attention even if the source was dubious or the interpretation superficial. Aka “Techniques may include exaggerations of news events, scandal-mongering, or sensationalism.” https://en.wikipedia.org/wiki/Yellow_journalism https://en.wikipedia.org/wiki/Yellow_journalism
- cameldrv 4y ago
  Regardless of how it's marked on their books, the loans and bonds pay very little interest. This works fine when their source of funds is checking and savings accounts that pay zero interest. When t-bills are paying 4%, fewer customers will be willing to accept this and will pull their funds or demand higher interest. The problem is that some banks may not be able to afford this.
q1w2 4y ago
CNN is not a good source for financial news.
- kyleblarson 4y ago
  Fixed that for you: "CNN is not a good source for news"
  - markdown 4y ago
    Yup. Only Tucker Carlson has the facts.
    - 29athrowaway 4y ago
      Both CNN and Fox News are equally shitty and have zero journalistic integrity. Journalism is about going to the fucking place, narrating exactly what happened in the most unbiased way possible, talking to witnesses and then shutting the fuck up. No opinions. If you do deliver an opinion, it stops being journalism.
    - deleted 4y ago
      [deleted]
    - kyleblarson 4y ago
      Can you point to where I said Fox is a reliable news source?
    - antibasilisk 4y ago
      can you imagine being dumb enough to write this comment.
    - lamp987 4y ago
      If you attack A, you must love B. Kindergarten tier logic.
  - greenhorn360 4y ago
    What's wrong with CNN?
kart23 4y ago
seems like a decent way to unprint some money.
29athrowaway 4y ago
[flagged]
dogma1138 4y ago
For government securities is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature?
- 2OEH8eoCRo0 4y ago
  I wondered this as well. Are they worried about setting a precedent that the govt can liquidate your bonds to help you meaning banks will now keep less cash on hand. What price would they be sold at?
  - dogma1138 4y ago
    I don’t know about the specifics of these securities, having a call provision on a bond isn’t particularly unusual tho. It’s still better than to force banks into a liquidity crisis and have to bail them out… The Fed must have calculated the exposure of financial institutions to US government bonds when it planned its interest hikes and it should’ve made contingencies otherwise there is a pretty big regulatory failure here. Yes institutions should hedge interest risk like any other risk however there is still a limit to hedging. This isn’t banks betting the house on black jack and hookers these bonds were supposed to be the safest place to park your money under any other circumstances. As for what price would the fed or who ever buy them back? Well if they can exercise a call provision it would just paying the value of the bonds + the coupon before maturity. Many bonds come with this provision so companies can repay their debt earlier if market conditions change and allow them to borrow money under better terms. From my understanding it was too late to do this with SVB as they had already realized substantial losses however not stepping in now and having more banks default would be quite silly.
- readthenotes1 4y ago
  Move QE to 11? The financial world is flooded with US dollars as a result of previous QE which is why they are (were) trying for QT now.
  - dogma1138 4y ago
jsemrau 4y ago
Somehow that feels like an entirely avoidable problem. "Do we need to increase unemployment to bring inflation down" What kind of inflammatory nonsense is this? We could clearly observe that the largest driver for inflation in the US is Energy/Oil generating record revenues for Oil/Gas companies around the globe. I just 48 hours ago read this headline: Saudi oil giant Aramco posts record $161 billion profit for 2022
- bequanna 4y ago
  Unfortunately, inflation is more complicated than that. Think of it more like a system of reactions that feed off each other: wage increases, pro-active price increases by retailers, etc. It doesn’t necessarily matter what started accelerating inflation, but it is important to stop the system from gaining too much momentum and slow it down if it does. Lowering employment and slowing spending with monetary policy are the best tools we currently have to do this. Of course, the Federal Government could also rein in the outrageous deficit spending, which would help greatly but this is too politically difficult.
  - rsaesha 4y ago
    Inflation is not caused by wage increases. Very much the opposite: wage increases are caused by inflation, but it tends to lag 1 or 2 years behind because that's usually how long it takes to the average worker to realize his purchasing power has been depreciated and decides to negotiate inflation reparation.
    - bequanna 4y ago
      This is incorrect. It is commonly accepted that wage increases tied to inflation (many of which were union contracts) prolonged the stagflation of the late 70s.
      - danaris 4y ago
        A lot of negative things about unions are "commonly accepted;" that doesn't make them true. It's possible that those wage increases did have a negative effect, but especially in this time of massively increased anti-union propaganda, I think that anything negative about them being claimed as "commonly accepted" deserves a [Citation Needed].
rsaesha 4y ago
Unrealized losses of $620B yet.
MilnerRoute 4y ago
This article is from Sunday. It's wildly out of date. > is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature? Yes, that's basically what happened. Just a few hours after this article came out, the Federal Reserve said "it will offer bank loans for up to a year in exchange for US Treasury bonds and mortgage-backed securities that lost value. The Fed will honor the debt’s original value for the banks that take the loans."
- everybodyknows 4y ago
  Nicely ambiguous what is to happen at the end of the year. Rollover on the same terms? Demand for full repayment? Might have to wait a year to find out.
  - coolspot 4y ago
    Banks don’t need that much liquidity unless some exceptional thing happens, like a bank run. SVB had enough assets to cover all the deposits. Problem was that they couldn’t convert those assets (long maturity treasuries) back to cash fast enough. Now there is a facility in place that lets you convert those treasury notes to cash as soon as needed.
georgeplusplus 4y ago
Under Bidens plan to tax unrealized gains, will the banks be able to claim unrealized losses as well?
MilnerRoute 4y ago
There appears to be a coordinated attempt to promote upvoting of this article on Twitter. https://twitter.com/search?q=%09%20US%20banks%20sitting%20on%20unrealized%20losses%20of%20%24620B&src=typed_query https://twitter.com/search?q=%09%20US%20banks%20sitting%20on... (Again, the headline is wildly out of date because a few hours later the federal reserve said they would honor all these bonds at their original value, eliminating much of the risk in these unrealized losses.)

60 points by halabarouma 4y ago

Feels like a yellow journalism headline. It's only a loss if they have to liquidate before maturity. Kind of feels paradoxical: money can be accounted for in the future but not today. People tied up a bunch of money at worse terms than they can get today. Nobody is willing to buy those bonds at face value because the market is offering better. Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner is depending on liquidating them at par value at any time.

88913527 4y ago
It would be yellow journalism if there wasn't a bank run and there wasn't forced liquidations of underwater assets. It is completely germaine to consider how these unrealized losses impact the financial system.
- deleted 4y ago
  [deleted]
swatcoder 4y ago
“Okay everybody, just stand still and we’ll all be fine” It doesn’t take a panic for banks to need to sell upside down assets early. It can just take any sort of change to the wind. It’s not a crisis for there to be a lot of unrealized losses (you’d expect that when an economy turns), but it’s absolutely something to monitor and consider.
danielmarkbruce 4y ago
People who invest in banks don't think the $600 bill of losses is sensationalized or exaggerated. Economically, it's a loss. They had a net worth around $2.1 trill and now they are at $1.5 trill. Practically, it's problematic. They have locked in low returns in a world were depositors expect higher returns. Their business customers will pay attention. They'll report lower net interest margins, which means lower earnings. They have also opened themselves up to a run. Their business customers will pay attention to that too, making it more likely to happen. The only world in which it's not a loss is under certain accounting standards. Those standards can and do change.
cperciva 4y ago
It's a real loss, just not a realized loss. If your house burns down, you've lost the value of the building even if you haven't sold the land yet.
- chii 4y ago
  but it hasn't been burnt down yet. A better analogy is that of a tree. You expect your planted tree (sapling) to be fully grown by 10 yrs time, and right now it's a sapling. Unfortunately, more recently planted saplings are growing up faster, and thus, result in more wood (presumably it's grown for wood) earlier than your sapling planted a few yrs ago. Therefore, a sapling from a few yrs ago is not worth as much future wood _right now_. But if you waited for the sapling to finish growing, you'd get back the amount of wood you originally expected. but if you chopped the sapling down today for the wood, you'd get far less.
  - amluto 4y ago
    And since you bought that tree by borrowing money at a variable and now higher rate, you need more wood to break even.
  - hattmall 4y ago
    But you have to balance the idea of should you cut your sapling down and use the space to plant the faster growing trees because you will ultimately get more wood. Those failing now are the groups that didn't cut the trees soon enough. It's a competitive environment and even faster growing trees may be coming. Waiting is not a viable option in many cases.
- mym1990 4y ago
  But it isn't because the full value of the bonds will be received at maturity, so all they have to do is avoid a bank run for 8 or so years.
- Arainach 4y ago
  How is it a real loss? Bonds have terms. If the bank sits on the bond until its term of maturity it gets a certain amount of money. Let's say the bond at maturity is worth X. The bank says the bond is worth Y. The market says the bond is worth Z. If Y > Z, that's only a problem if you sell. There is no loss - realized or unrealized - if you hold to maturity unless Y > X. However, how could this ever be the case? No one would pay more than X, so the bank could never claim the market value was higher.
xuki 4y ago
> unless the owner is depending on liquidating them at par value at any time. And when they do, they all do at once. We'll see how far creative accounting can take us this time.
amluto 4y ago
> Current market value of assets may be below what was paid for them, but that doesn't matter unless the owner was depending on liquidating them at par value at any time. That is simply not true. The current value is the mark-to-market value, possibly plus half the spread depending on your perspective. The net present value is roughly the same number, because it’s the future value discounted by the discount/risk-free rate, and any credible estimate of the risk free rate has increased substantially. This may not be a liquidity problem because, if those assets don’t need to be liquidated, then they don’t need to be liquidated. And it may or may not be a solvency problem, because the banks in question may not need that money before maturity, and even if their portfolio currently has negative value, they may make it up with other investments before maturity. But yes, that money really is lost. Before you say “but the money will all be there at maturity”, keep in mind that, if you project the banks’ balance sheets out 30 years, the value, in 2053 dollars, of those long term bonds may be unchanged, but the cost of the liabilities (deposits) that offset them has gone way up. edit: it is possible and maybe even likely that some of these banks hedged this risk. In that case they may have a loss from the interest rate exposure and an offsetting gain from the hedge.
- paulddraper 4y ago
  All these people comparing 2023 dollars to 2053 dollars.... I swear HN is the dumbest smart place there is.
- sroussey 4y ago
  If people followed this reasoning, then they would keep everything in cash or money market mutual funds. The mark to market will always be 1=1 and have no liquidity problems. Of course, all banks would fail. These “unrealized losses” don’t include “unrealized hedges” either. Of course, SPV let those go. Oops.
  - amluto 4y ago
    I don’t really know what you’re trying to say. There are many things one can invest in. And indeed cash and money market funds are not strongly exposed to interest rate risk, and a rate change does not affect their present value to any substantial extent. And banks can absolutely make money without taking on interest rate risk. They can hedge, or they can invest in things that produce earnings at a rate that varies with interest rate (short term bonds, adjustable rate mortgages, etc). Or both. Or take on a limited amount of interest rate risk such that they are okay if they bet wrong.
akira2501 4y ago
> yellow journalism > It's only a loss if... I always thought one the fundaments of "yellow journalism" was that it had no basis in fact. Exaggeration alone doesn't seem enough to earn the association, I think. > unless the owner is depending on liquidating them at par value at any time. Well.. exactly. Shouldn't we have an accounting mechanism that actually accounts for this eventuality? In particular because this is a bank, it doesn't seem isolated, interest rates have changed significantly recently, and the NYSE halts list today appears pretty foreboding to an outsider.
- pas 4y ago
  mark-to-market accounting. but that usually overestimates in up cycles and underestimates in down cycles. so the solution was/is Basel III, capital requirements, leverage ratios, and actual stress tests.
- Retric 4y ago
  > no basis in fact Close, yellow journalism is about eye catching headlines with ”little or no legitimate, well-researched news.” It wasn’t that they need to make stuff up, they just ran with whatever would capture people’s attention even if the source was dubious or the interpretation superficial. Aka “Techniques may include exaggerations of news events, scandal-mongering, or sensationalism.” https://en.wikipedia.org/wiki/Yellow_journalism https://en.wikipedia.org/wiki/Yellow_journalism
cameldrv 4y ago
Regardless of how it's marked on their books, the loans and bonds pay very little interest. This works fine when their source of funds is checking and savings accounts that pay zero interest. When t-bills are paying 4%, fewer customers will be willing to accept this and will pull their funds or demand higher interest. The problem is that some banks may not be able to afford this.

q1w2 4y ago

CNN is not a good source for financial news.

kyleblarson 4y ago
Fixed that for you: "CNN is not a good source for news"
- markdown 4y ago
  Yup. Only Tucker Carlson has the facts.
  - 29athrowaway 4y ago
    Both CNN and Fox News are equally shitty and have zero journalistic integrity. Journalism is about going to the fucking place, narrating exactly what happened in the most unbiased way possible, talking to witnesses and then shutting the fuck up. No opinions. If you do deliver an opinion, it stops being journalism.
  - deleted 4y ago
    [deleted]
  - kyleblarson 4y ago
    Can you point to where I said Fox is a reliable news source?
  - antibasilisk 4y ago
    can you imagine being dumb enough to write this comment.
  - lamp987 4y ago
    If you attack A, you must love B. Kindergarten tier logic.
- greenhorn360 4y ago
  What's wrong with CNN?

kart23 4y ago

seems like a decent way to unprint some money.

29athrowaway 4y ago

[flagged]

dogma1138 4y ago

For government securities is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature?

2OEH8eoCRo0 4y ago
I wondered this as well. Are they worried about setting a precedent that the govt can liquidate your bonds to help you meaning banks will now keep less cash on hand. What price would they be sold at?
- dogma1138 4y ago
  I don’t know about the specifics of these securities, having a call provision on a bond isn’t particularly unusual tho. It’s still better than to force banks into a liquidity crisis and have to bail them out… The Fed must have calculated the exposure of financial institutions to US government bonds when it planned its interest hikes and it should’ve made contingencies otherwise there is a pretty big regulatory failure here. Yes institutions should hedge interest risk like any other risk however there is still a limit to hedging. This isn’t banks betting the house on black jack and hookers these bonds were supposed to be the safest place to park your money under any other circumstances. As for what price would the fed or who ever buy them back? Well if they can exercise a call provision it would just paying the value of the bonds + the coupon before maturity. Many bonds come with this provision so companies can repay their debt earlier if market conditions change and allow them to borrow money under better terms. From my understanding it was too late to do this with SVB as they had already realized substantial losses however not stepping in now and having more banks default would be quite silly.
readthenotes1 4y ago
Move QE to 11? The financial world is flooded with US dollars as a result of previous QE which is why they are (were) trying for QT now.
- dogma1138 4y ago

jsemrau 4y ago

Somehow that feels like an entirely avoidable problem. "Do we need to increase unemployment to bring inflation down" What kind of inflammatory nonsense is this? We could clearly observe that the largest driver for inflation in the US is Energy/Oil generating record revenues for Oil/Gas companies around the globe. I just 48 hours ago read this headline: Saudi oil giant Aramco posts record $161 billion profit for 2022

bequanna 4y ago
Unfortunately, inflation is more complicated than that. Think of it more like a system of reactions that feed off each other: wage increases, pro-active price increases by retailers, etc. It doesn’t necessarily matter what started accelerating inflation, but it is important to stop the system from gaining too much momentum and slow it down if it does. Lowering employment and slowing spending with monetary policy are the best tools we currently have to do this. Of course, the Federal Government could also rein in the outrageous deficit spending, which would help greatly but this is too politically difficult.
- rsaesha 4y ago
  Inflation is not caused by wage increases. Very much the opposite: wage increases are caused by inflation, but it tends to lag 1 or 2 years behind because that's usually how long it takes to the average worker to realize his purchasing power has been depreciated and decides to negotiate inflation reparation.
  - bequanna 4y ago
    This is incorrect. It is commonly accepted that wage increases tied to inflation (many of which were union contracts) prolonged the stagflation of the late 70s.
    - danaris 4y ago
      A lot of negative things about unions are "commonly accepted;" that doesn't make them true. It's possible that those wage increases did have a negative effect, but especially in this time of massively increased anti-union propaganda, I think that anything negative about them being claimed as "commonly accepted" deserves a [Citation Needed].

rsaesha 4y ago

Unrealized losses of $620B yet.

MilnerRoute 4y ago

This article is from Sunday. It's wildly out of date. > is there a reason why the US government / fed can’t just buy them off the banks at the “denominated price” or issue a bridge loan that would be repaid when they mature? Yes, that's basically what happened. Just a few hours after this article came out, the Federal Reserve said "it will offer bank loans for up to a year in exchange for US Treasury bonds and mortgage-backed securities that lost value. The Fed will honor the debt’s original value for the banks that take the loans."

everybodyknows 4y ago
Nicely ambiguous what is to happen at the end of the year. Rollover on the same terms? Demand for full repayment? Might have to wait a year to find out.
- coolspot 4y ago
  Banks don’t need that much liquidity unless some exceptional thing happens, like a bank run. SVB had enough assets to cover all the deposits. Problem was that they couldn’t convert those assets (long maturity treasuries) back to cash fast enough. Now there is a facility in place that lets you convert those treasury notes to cash as soon as needed.

georgeplusplus 4y ago

Under Bidens plan to tax unrealized gains, will the banks be able to claim unrealized losses as well?

MilnerRoute 4y ago

There appears to be a coordinated attempt to promote upvoting of this article on Twitter. https://twitter.com/search?q=%09%20US%20banks%20sitting%20on%20unrealized%20losses%20of%20%24620B&src=typed_query https://twitter.com/search?q=%09%20US%20banks%20sitting%20on... (Again, the headline is wildly out of date because a few hours later the federal reserve said they would honor all these bonds at their original value, eliminating much of the risk in these unrealized losses.)