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I think it's more mark to market vs "par" value trickery. SVB had plenty of assets at "par" value or held to maturity value. But it was insolvent if you marked
by collectedparts 4y ago
I think it's more mark to market vs "par" value trickery.
SVB had plenty of assets at "par" value or held to maturity value.
But it was insolvent if you marked those to market.
So FDIC is letting First-Citizens buy the assets at closer to their true market value. 20% loss.
That's my understanding but it is kind of a distressing conclusion. SVB had no enterprise value, and the outcome we're getting is financially the same for FDIC as if they just firesold the assets and did a pure winddown?
- bradleyjg 4y agoThe issue with a fire sale is that the seller doesn’t get the true market value. The market value is the value. Every time someone uses face amounts to claim asset value he or she is being entirely disingenuous.
- balderdash 4y agoI generally agree, but it’s not that cut and dry. If I have $100 in assets in 10yr zero coupon treasuries at par issued in a 0% interest rate environment, and funded with $100 of liabilities in the form of deposits paying 0%, and rates increase 1% and the rate I’m paying depositors increases to 0.1%. My bonds are now only worth $90, but I’m going to receive $100 at maturity, and so I’m really only out the the $1 on interest paid to depositors over 10 years, not the $10 mark to market loss. In this example I’d say your economic impairment is closer to $1 vs the $10 implied. judging at the asset side of the ledger in isolation doesn’t give you the whole picture.
- Workaccount2 4y agoYou're forgetting that you are stuck in that position to maturity though. So while you might not feel like you are not going to take a loss, you are also chained to a position that will not make money either. While everyone else is out making 1%, you are stuck with 0%. If you could wave a wand and get out of your bond with no loss, you would pick up a 1% and hold that instead. It would almost certainly be better to just eat the loss, and re-invest that money into something else, and come out ahead after 10 years. Dollars in, dollars out isn't the only factor here. Bonds give this illusion that loss isn't happening because you can wait to get your money back. But a little introspection reveals that the loss is actually just hidden in the waiting is a itself.
- balderdash 4y agoI’m not disagreeing with that - my point is that you’re assuming your liability/discount rate moves exactly in tandem with the move in your long dated asset. (In the example I gave above it only increases by 10%, if it moved 100% that you are absolutely impaired).
- nordsieck 4y ago> That's my understanding but it is kind of a distressing conclusion. SVB had no enterprise value, and the outcome we're getting is financially the same for FDIC as if they just firesold the assets and did a pure winddown? Could you explain why that's a distressing conclusion?
- collectedparts 4y agoPart of me wanted to believe that SVB's failure wouldn't lead to real financial losses for the FDIC. That there was a weird panic bank run, and then the steady hand of a regulator was needed, but there really were enough assets. Not saying I studied the data and concluded that; it's just what I wanted to believe. $20b loss to FDIC insurance fund feels high. It still meets the technical definition of "no losses borne by taxpayers" but it's a lot of money. I've gotta believe it's among the largest ever if not the largest ever losses borne by the FDIC for a single bank failure. Distressing – some combination of having been in denial about just how screwed up SVB was financially, paired with concern for what this will mean if the dominos keep falling.
- Lazare 4y agoIt is a weirdly high number. I can only assume it represents some sort of conservative "worst case" estimate, but so far I haven't seen any comprehensive breakdown. And yes, if it does cost $20b, it will be the most expensive single bank failure (exceeding IndyMac).