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The parallels with today's banking problems are eerie. Instead of "savings and loan" community banks that loaded up on risky high-yield bonds that could not be

by cs702 4y ago

The parallels with today's banking problems are eerie. Instead of "savings and loan" community banks that loaded up on risky high-yield bonds that could not be repaid in full, today we have local and regional banks that have loaded up on (a) loans to office buildings that cannot be repaid in full, and (b) long-term treasury and agency bonds whose present value has declined well below par due to rising long-term interest rates. The clock is ticking.

baggy_trough 4y ago
Yes it's hard to see how the office mortgage market can escape a catastrophic outcome.
- latchkey 4y ago
  https://www.bloomberg.com/news/articles/2023-04-30/munger-warns-banks-stuck-with-commercial-property-debt-ft-says https://www.bloomberg.com/news/articles/2023-04-30/munger-wa...
mjevans 4y ago
B] The bonds themselves aren't risky, they're just long term securities that don't fully appreciate in value for a long time. A very quick change in environment, much higher interest rates, result in immediate liquidation only at far less desired prices. A buyer can still hold them to term and get their full value; it's just there are better investments. A] I can't really speak to real-estate, but generally as a consumer I find the market incentives are misaligned to what should be socially desired results. There's too much darn rent seeking.
- dragontamer 4y ago
  B was also true in the Savings and Loan Crisis of 1980. The mark-to-market decline of long-term loans wiped out an entire category of financial services (the Savings and Loans service). Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans". Gone, the entirety of the entire sector was wiped out, despite the 30+ year bonds still being "good on their money".
  - dllthomas 4y ago
    > Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans". Bailey ran a savings and loan. The run in the film was not a reference to the S&L crisis, seeing as the film predates it by decades. I assume you meant the right thing, but there's enough ambiguity that I could see a reader being confused.
- skybrian 4y ago
  While it’s true that the future cash flow from the bond hasn’t changed, it is quite literally worth less money now, because better investments are available. For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting. So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
- onlyrealcuzzo 4y ago
  > There's too much darn rent seeking. It's kind of hard for the American Dream to be a rent seeker, and for their not to be a lot of rent seeking...
- thefounder 4y ago
  Well..imagine if you as a trader would never get the "margin-call" and you would be able to defer the currebt payments until you cash in your future bets. Here we have the banks simply bailed out by the gov(i.e the tax payer gets the short stick while JP Morgan gets the long stick).
lamontcg 4y ago
> (b) long-term treasury and agency bonds whose present value has declined well below par due to rising long-term interest rates. Apparently 10y US T-bills are now financial weapons of mass destruction according to the HN hivemind. > (a) loans to office buildings that cannot be repaid in full, This is a big problem with CMBS but I'm not aware of those being significantly involved in any of the recent blow ups. AFAIK this is still next-year's financial crisis that is only just starting to simmer.
jmyeet 4y ago
> The parallels with today's banking problems are eerie. No, no they're not. Not even close. Please read up about this before propagating outright falsehoods. The S&L industry in the 1980s was doing FTX type nonsense: using depositor funds for very risky investments. This worked great when the markets were going up. Not so much when the market crashed in 1987. Banks now are holding excess liquidity and funds they otherwise can't lend out (within their risk limits) in US government bonds. The problem is they took long term bonds for slightly higher yield at a time when interest rates were near-zero. And then interest rates went up and created a loss if it were realized. Many companies have been undone by this kind of penny-pinching. It's bad risk management. Even in the case of SVB, it had more assets than depositor funds and despite the vast majority of deposits (by value) being uninsured, every depositor got their money back and it cost the taxpayer nothing.

by cs702 4y ago

baggy_trough 4y ago

Yes it's hard to see how the office mortgage market can escape a catastrophic outcome.

latchkey 4y ago
https://www.bloomberg.com/news/articles/2023-04-30/munger-warns-banks-stuck-with-commercial-property-debt-ft-says https://www.bloomberg.com/news/articles/2023-04-30/munger-wa...

mjevans 4y ago

B] The bonds themselves aren't risky, they're just long term securities that don't fully appreciate in value for a long time. A very quick change in environment, much higher interest rates, result in immediate liquidation only at far less desired prices. A buyer can still hold them to term and get their full value; it's just there are better investments. A] I can't really speak to real-estate, but generally as a consumer I find the market incentives are misaligned to what should be socially desired results. There's too much darn rent seeking.

dragontamer 4y ago
B was also true in the Savings and Loan Crisis of 1980. The mark-to-market decline of long-term loans wiped out an entire category of financial services (the Savings and Loans service). Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans". Gone, the entirety of the entire sector was wiped out, despite the 30+ year bonds still being "good on their money".
- dllthomas 4y ago
  > Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans". Bailey ran a savings and loan. The run in the film was not a reference to the S&L crisis, seeing as the film predates it by decades. I assume you meant the right thing, but there's enough ambiguity that I could see a reader being confused.
skybrian 4y ago
While it’s true that the future cash flow from the bond hasn’t changed, it is quite literally worth less money now, because better investments are available. For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting. So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
onlyrealcuzzo 4y ago
> There's too much darn rent seeking. It's kind of hard for the American Dream to be a rent seeker, and for their not to be a lot of rent seeking...
thefounder 4y ago
Well..imagine if you as a trader would never get the "margin-call" and you would be able to defer the currebt payments until you cash in your future bets. Here we have the banks simply bailed out by the gov(i.e the tax payer gets the short stick while JP Morgan gets the long stick).

lamontcg 4y ago

> (b) long-term treasury and agency bonds whose present value has declined well below par due to rising long-term interest rates. Apparently 10y US T-bills are now financial weapons of mass destruction according to the HN hivemind. > (a) loans to office buildings that cannot be repaid in full, This is a big problem with CMBS but I'm not aware of those being significantly involved in any of the recent blow ups. AFAIK this is still next-year's financial crisis that is only just starting to simmer.

jmyeet 4y ago

> The parallels with today's banking problems are eerie. No, no they're not. Not even close. Please read up about this before propagating outright falsehoods. The S&L industry in the 1980s was doing FTX type nonsense: using depositor funds for very risky investments. This worked great when the markets were going up. Not so much when the market crashed in 1987. Banks now are holding excess liquidity and funds they otherwise can't lend out (within their risk limits) in US government bonds. The problem is they took long term bonds for slightly higher yield at a time when interest rates were near-zero. And then interest rates went up and created a loss if it were realized. Many companies have been undone by this kind of penny-pinching. It's bad risk management. Even in the case of SVB, it had more assets than depositor funds and despite the vast majority of deposits (by value) being uninsured, every depositor got their money back and it cost the taxpayer nothing.