DEREGULATION PRECIPATATED BANK COLLAPSES

[nctarheel]

The deregulation of banks between 2016 and 2020 has caused a financial catastrophe that may equal or exceed the financial crisis of 2008.

While depositors may be, for the most part, protected from losses up to $250,000; investors which includes huge swathes of older retirees are not afforded that protection.

Those responsible for the deregulation should be held culpable and justice should be meted out to those individuals.

[EricC28201]

There is an old adage, "It's not whether you win or lose, it's how you play the game,".

A sure Measure of a person with an antisocial personality disorder is the degree to which they hold this adage in contempt with EITHER their behavior OR their words. In principle, holding not only those responsible for the deregulation, but also those who tried to irresponsibly take advantage of decreased scrutiny regarding their conduct, culpable for the outcome is appropriate. The odd things are: There is absolutely nothing new about this scenario...it has happened dozens of times in the past. Our supposed leaders are quarreling over whether or not to have regulation rather than discussing the usefulness of oversight.

The real issue here seems to be the prevalence of antisocial dog-eat-dog competitive values that are not only tolerated, but often venerated in U.S. culture.

Part of the answer could, possibly, be the kind of justice that is meted out.  We've been using the existing system of trying to pass off vengeance as an attempt to reform individuals for centuries and things just keep getting worse.  The U.K. is trying to pass a law that would make homelessness criminal antisocial behavior in an age when if you don't have debt you're considered a credit risk...is that where we want to go?

In short, broaden the scope of those @nctarheel would hold responsible, but also accept that the real problem has far deeper roots and, at the very least, start planning to address the real problem.

. 

[EricC28201]

By way of concrete suggestions:

- Change the 'How You Play The Game' adage to "More important than whether you win or lose is how you play the game"

- In addition to possible fines, but instead of possible jail time, sentence the top 2 - 3 levels of bank management to anywhere from 5 - 20 years of teaching a Finance or Economics class at the College or High School level specifically reviewing what led to the bank's failure and their personal role (watch how fast lawyers start screaming cruel & inhumane treatment).

- Just as a general rule...Term Limits for politicians...when Public Service becomes a carreer path it changes 'Public' to 'Self' (same holds true if it's called 'Civil Service').

- Add another adage: "One definition of insanity is doing the same thing over and over again, and expecting different results,".

[GailL1]

@nctarheel 

This will answer many of your questions -

VOX - Explaining the News -03e/15/2023 - 9 Questions about SVB’s Collapse answered 

[Therapist4u]

💸

[GailL1]

@nctarheel wrote

Those responsible for the deregulation should be held culpable and justice should be meted out to those individuals.

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You do realize that this bank isn’t exactly broke - they just invested in LONG TERM government bonds when they were the best yield at the time when they bought them.

Now things have turned - so when they sell them, instead of making them a profit - they are having a loss.

So it is not that they were buying risky investments in mass ( may have had some crypto - but that wasn’t the problem). It is because they had so many of these long term bond - they should have diversified to other areas but where?

[nctarheel]

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@GailL1 wrote:

So it is not that they were buying risky investments in mass ( may have had some crypto - but that wasn’t the problem).

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@GailL1,

First of all, I have never heard of this bank and it was the 16th largest in the country. Why hadn't I heard of them.....because they were a niche bank.

Their area of "expertise" was providing financial services and funding for IPO's, especially in the tech arena. Inherently, this area is fraught with risk.

Their management made many more mistakes besides the investment in long term government bonds.

Additional investigation into exactly what they did and how changes to law enacted during the years 2016 through 2020 enabled them to do what they have done will be forthcoming.

[GailL1]

SVB was a tech oriented bank.  Their partial list of customers (not investors) was wide - and where else would they be then Silicon Valley.   I believe I read or heard that they had a few other branches throughout the USA - but concentrated in the west.  That’s not unusual - 

So when was the last time the Regulators looked at their balance sheet - If it was in 202 - 2021 -  they probably would not have even raised a red flag even with all the longer term government bonds.

Their mistake was not diversifying more - but everybody (individuals, businesses, financial institutions) want to make as much money as possible off their money.  And at the time, what better place than government bonds.  

Last night on PBS they aired a documentary called “The Age of Easy Money” - it was great and explained a lot.  

Should there have been more over site - yes, maybe but would they have even found a problem - guess that depends on when it was done.

[Tonster521]

@nctarheel It will be interesting to find out what created the "run" on SVB. I suspect someone high up in Management who was aware of the financials for some time advised one or more large depositor(s) of SVB's to (as the song goes) "Take the money and run". After the initial horse leaves the barn, it doesn't take long before all the horses are leaving. It is hard to believe that hundreds or more small depositors came to SVB in a week or days demanding their deposit (money)  back. I don't know the allocation of SVB's investments. Perhaps they were over weighed (more than 50%) in commercial loans to the Tech sector. And, when the Tech sector started wobbling a few years ago, SVB saw Long term Treasuries the strategy to earn the 2% to 3% spread over deposits that they needed to keep the lights on, the doors open, and probably, the most important to Upper Management, annual bonuses. I am adding some info from the Corporate Finance Institute (CFI) regarding how securities deemed "Held To Maturity" (HTM) are recorded. https://corporatefinanceinstitute.com/resources/accounting/held-to-maturity-securities/   It will be interesting to find out why SVB deemed longer term Treasuries as HTM securities and not securities Available For Sale (AFS). My guess is that HTM are recorded at cost and AFS are "marked to market" (market value).

[Tonster521]

@nctarheel As you may or may not know, all Banks were not deregulated by the Economic Growth, Regulation Relief and Consumer Protection Act. The Act which was a bipartisan Bill that  became law in May 2018. I am not aware of any other deregulation during the period you indicated. At any rate, the Act amended some of Dodd Frank which was enacted in 2010. Dodd Frank was unfavorable and placed difficult and expensive requirements on small and medium size banks the same as large banks (aka Systematically Important Financial Institutions -SIFS) such as J.P. Morgan, Bank of America, etc. I recall the Act drew "a line in the sand" at $250 Billion of assets. Banks above $250 billion still follow Dodd Frank. Banks under $250 Billion received some relief in the area of "stress testing" and capital requirements. However, the Act did not eliminate Management from the job of managing the business. As time will tell, the bank failures that happened recently and will happen in the future are more of inept Management trying to avoid disclosing huge losses in their bond portfolios and their inability to replace those losses with cash or deposits or other assets. Obviously, there are more factors involved which need to be determined on a case by case basis. 

This current issue with Banks may cause Congress to revisit whether Banks should be required to "mark to market' certain assets especially if such assets decrease in value by a certain percentage (i.e., 20% or more,etc.). To illustrate this concept so other readers may understand as well, I will use the TLT, an exchange traded fund that invests at least 80% of its assets in longer term Treasury Bonds. Assume that the TLT represents a Bank's Treasury Bond portfolio. If you use July 2020 as the high value or about $177 per share, the TLT has lost about 38% of its value from July 2020 and is now valued at about $105 per share. Assume that a Bank may have bought TLT over various periods of time and has a cost basis of $135 per share. The Bank's balance sheet may still be indicating the $135 per share value when, in fact, that asset is currently worth only $105 per share or about 22% less. If the Bank was required to "mark to market", investors would have this important information available. So, retirees if also stockholders, invest at their own risk. It should be noted that retirees who are aware of the risks of equity investments should hold such investments in a brokerage account instead of an IRA or other tax deferred account. You can write off equity losses up to $3,000 per year and carry forward any remaining losses until one recoups the entire loss. You cannot reduce your income taxes for losses incurred in an IRA or other tax deferred account. Full disclosure; I worked as a Financial Consultant in the Banking sector from 2005 through 2010 and survived the 2008 - 2009 debacle and TARP (government bailout). Hope my reply helps readers understand some of the dynamics that are currently in play.

[GailL1]

@Tonster521 

I know that the SS Trust Funds are invested in “special interest bearing treasuries “    BUT could the same situation happen there since we have now started to cash them in to support the program.

I know it is not the same so I did look it up and yes, sometimes when cashing them it - we take a loss.

Good thing we can’t take a run on the Trust Fund.

Social Security Trust Fund FAQ

[Tonster521]

@GailL1 The Special Issue Treasury Bonds and Certificates of Indebtedness are not marketable. They do not trade. They are issued only to the SS Trust. They are redeemed at various times to provide money to pay SS benefits.because the SS Trust does not hold cash. I found a page at the SS website that provides some info https://www.ssa.gov/oact/progdata/specialissues.html I believe the SI Bonds and Certificates of Indebtedness are guaranteed by the Treasury. However, if redeemed before their original maturity date,they may incur a loss (opportunity loss) of future interest. They do not lose principal. On the other hand, Treasury securities (bills, notes, bonds) that trade daily may gain or lose value (principal) due to changes in interest rates. When interest rates increase, the market values will decrease. When interest rates decrease, the market values will increase. In any event, if held to maturity, principal is returned to the owner at face value with no gain or loss. Gains and/or losses only occur when traded before maturity.

There are other banks, insurance companies, pension funds,mutual funds, etc. that hold Treasury securities issued years ago at low interest rates. They may be better prepared because their Management(s) addressed the change in valuation over the past years when interest rates started increasing. I found another page at the SSA website that provides a history of increasing Special Issue interest rates. https://www.ssa.gov/OACT/ProgData/newIssueRates.html

With regard to the SS Trust, there are no provisions for taking your SS benefits in a lump sum. Unlike a Bank, you cannot withdraw all of your benefits in one payment. There will not be a "run" on the SS Trust even though it may be depleted in 2034 or 2035. Good question from a very thorough thinker.