JPMorgan Chase Bank Assumes All the Deposits of First Republic Bank

https://www.fdic.gov/news/press-releases/2023/pr23034.html

by robbiet480 • 3 years ago

554 536 3 years ago

robbiet4802• 3 years ago

This means the feds did decide to make an exception to the rule that bans banks that have more than 10% of nationwide deposits from acquiring another bank.

Also this is the second largest bank failure in US history.

pearjuice• 3 years ago

Meaning JPM was also granted a new exemption to the 10% deposit cap in this acquisition? There are regulations[0] preventing banks with >=10% of US deposits to grow larger in size by acquiring other banks. Another win for TBTF theorists.

[0] https://corpgov.law.harvard.edu/2018/05/29/regulatory-reform...

skinnymuch• 3 years ago

A win for anti-capitalist theorists as well.

once_inc3• 3 years ago

Don't forget the cryptocurrency adherents..

eternalban• 3 years ago

Michael Barr's testimony - https://www.federalreserve.gov/newsevents/testimony/barr2023...

WSJ editorial on above - https://www.wsj.com/amp/articles/the-fed-absolves-itself-sil... - https://archive.is/drchc

TekMol4• 3 years ago

More centralization.

This just balloons up giants which are too big to fail.

The end result as always: More money printing.

The genie was let out of the bottle in 2008 and will not be put back:

https://fred.stlouisfed.org/series/BOGMBASE

JumpCrisscross32• 3 years ago

end result as always: More money printing

You linked to a chart showing a 10% decrease in the monetary base from peak, even including the run-up since February.

TekMol4• 3 years ago

https://xkcd.com/1321/

hospitalhusband• 3 years ago

Climate, meet weather.

throw_m239339• 3 years ago

You linked to a chart showing a 10% decrease in the monetary base from peak, even including the run-up since February.

You should compare today's figures with 2010 figures, not the ones from a year ago.

mise_en_place• 3 years ago

In this case it's due to a combination of owning long term debt locked into 10-30 years and depositors fleeing the bank.

It's precisely the opposite, because the money printer is now a money vacuum, a lot of banks have solvency issues.

Money printing would have saved FNB.

TekMol4• 3 years ago

    because the money printer is now a money vacuum

Depends on your definition of "now". (Related: "How Long Is the Coast of Britain?")

The printing of unprecedented amounts of money from 2008 to now created those low yields the banks are seeing. And now there was a tiny increase in yields the banks go under.

This would not have happened with a stable supply of the base currency.

emn132• 3 years ago

There are all kinds of differences between 2008 and now, but setting those aside - I think the genie was out of the bottle well before 2008 - it's just in 2008 everyone noticed. After all, it doesn't sound like many experts find it plausible that non intervention in 2008 was a realistic option assuming you want to avoid much worse consequences. At best, earlier intervention might have reduced the visibility and impact of symptoms.

The underlying issue is that even uninsured risks in banks must de-facto be largely covered by some central authority (whether FDIC or otherwise) otherwise the whole system is at serious risk of pretty catastrophic failure. The interaction of the lack of (formal) insurance for large deposits and the fluidity of those deposits make bank runs at the first sign of serious risk inevitable.

How important that problem is - I'm not informed enough to have an opinion on. But that problem didn't start in 2008, that's for sure. I am curious as to what actual subject matter experts think ideal solutions would be, and what haphazard lobbyist inspired patch-job we'll actually get.

JumpCrisscross32• 3 years ago

are all kinds of differences between 2008 and now

One huge, positive difference between 2008 and now: owners aren’t being bailed out. Stock and bondholders in 2008 got rescued. Not this time.

In February, First Republic had a $40bn enterprise value [1]. That is largely, if not entirely, gone. (JPMorgan acquired “substantially all of the assets of First Republic Bank,” so there will still be scraps to fight over.)

[1] https://ycharts.com/companies/FRC/enterprise_value

goodluckchuck3• 3 years ago

The risk of contagion is a systemic flaw that can and should should be fixed with a change to the system. Depositors do not have any real visibility, notice, consent, etc. to what happens with their money. Rational consumers would not put their money in a back that was A) lending it out, and B) Lending it out in a risky manner.

Just like cookies on a website, banks should be required to give depositors a clear and easy way to choose whether their money will be lent out.

Will that mean less lending overall? Yes. Will that be good for the economy? Yes, because it’ll couple inputs and outputs more closely.

Moreover, depositors who do use banks to lend should be given a prospectus and information comparable to stocks.

Deposit insurance is a moral hazard. It encourages people to be reckless with where they put their money.

eru2• 3 years ago

The chart you linked to has downward movement as well. So it's not all 'more money printing'.

Btw, the expansion of the monetary base has a lot more to do with the Fed paying interest on excess reserves than on rescuing a few banks here and there.

See https://www.cato.org/working-paper/floored or https://www.mercatus.org/macro-musings/floors-and-corridors

tzs• 3 years ago

This just balloons up giants which are too big to fail

This is good. We need to get everything down to a sufficiently small number of big banks so that "too big to fail" also means "so big that even the most ardent small-government anti-regulation leave everything up to the market people in Congress are afraid to deregulate them".

sidcool• 3 years ago

Nothing with JPMorgan in it can be good news.

slaw• 3 years ago

The FDIC and JPMorgan Chase Bank, National Association, are also entering into a loss-share transaction on single family ... The FDIC estimates that the cost to the Deposit Insurance Fund will be about $13 billion

So only estimated $13 billion will be printed.

JumpCrisscross32• 3 years ago

only estimated $13 billion will be printed

Not printed. FDIC would levy a special assessment on its member banks, including JPMorgan, if those costs are realised. (Note that up to $40bn of enterprise value [1] was also just destroyed.)

[1] https://ycharts.com/companies/FRC/enterprise_value

snake_doc3• 3 years ago

Technically, the Fed has been providing most of the liquidity to the FDIC in the last 2 months. The FDIC isn’t liquid. This most definitely is “printing” money as the Fed generates money in the system when it lends.

If you look at the Fed’s weekly lending (H.4.1), you can see the FDIC has borrowed upwards of 170B in the last 2 months, not including FRC deal. In the FRC deal, FDIC is giving JPM a 50B term loan, which is most likely again borrowed from the Fed.

There’s some speculation why this had to happen, ie the Treasury cannot provide the liquidity due to debt limit, etc…

https://bpi.com/the-mysterious-footnote-7-to-whom-and-on-wha...

neximo642• 3 years ago

Only the Fed can print money

bilekas• 3 years ago

Paper money only makes up around 10%. But it's just an expression to "print money"

senectus1• 3 years ago

The fed allowing banks to run fractional reserves is licensing the banks to print money on their behalf.

strstr• 3 years ago

The DIF is funded mainly through quarterly assessments on insured banks.

https://www.fdic.gov/resources/deposit-insurance/deposit-ins...

Mistletoe• 3 years ago

Yes but when have banks or any businesses not just passed expenses on to the customers?

ZeljkoS• 3 years ago

Three out of five largest bank failures in the United States happened in the past two months (SVB, Signature, and First Republic): https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...

JumpCrisscross32• 3 years ago

If you’re looking for a list, the eleven regional lenders Moody’s downgraded last week are good place start [1]. Given we have de facto uncapped the FDIC’s insurance limit, I’m not sure it’s a good place to stew unless out of personal interest.

[1] https://www.wsj.com/articles/moodys-downgrades-11-regional-b...

Dalewyn• 3 years ago

Given we have de facto uncapped the FDIC’s insurance limit,

It was never capped in any hard manner, remember the fine print is "up to at least" $250,000.00.

The limit can be as high as the FDIC's feeling that particular day, the only thing set in stone is the floor of $250,000.00.

DJBunnies2• 3 years ago

Anyone have an alt source for this

expertentipp• 3 years ago

...and it's all surprisingly orderly and moderate, exactly like public statements of Lavrov.

pranshum• 3 years ago

I wrote a couple of visual essays on the topic.

It's not entirely fair to compare bank failure sizes across times, even inflation adjusted [1]. The rate of asset price growth since 2008 far outstrips inflation.

IMO the frequency of bank failures is more worrying. They tend to come in waves [2].

1: On the size of bank failures: https://yarn.pranshum.com/banks 2. On the frequency of bank failrres: https://yarn.pranshum.com/banks2

ufo_yo• 3 years ago

Love it! Thanks for making this.

everybodyknows• 3 years ago

From https://yarn.pranshum.com/banks

Most banks hold more assets than deposits. So in theory, depositors should always be made whole.

No such theory is established; it's the central bank's money printing ability that can always make depositors whole. In the US, the Federal Reserve implicitly backs the Federal Deposit Insurance Corporation.

eru2• 3 years ago

You should probably adjust that list not for inflation, but perhaps for GDP?

blitzar2• 3 years ago

as of April 13, 2023, First Republic Bank had approximately $229.1 billion in total assets and $103.9 billion in total deposits

It seems a bit laughable that funny money accounting is allowed to be reported as facts. The loaf of bread I bought 4 weeks ago for $1 that is now stale and mouldy is neither worth $1 nor should be on my balance sheet as worth $1.

0xy• 3 years ago

If you own a building that could sell for $10m to the right buyer after a few months on the market or $2m if you had to fire sell it tomorrow, then that building is worth $10m, not $2m.

blitzar2• 3 years ago

Given the cost is estimated to be $13bn, after the assets are wound down "to the right buyer after a few months on the market" the $229.1 billion is pure fantasy

_s• 3 years ago

Unless you did have a fire sale and it went for $2M - that's what it's worth at that moment in time. Sure it could be worth $10M in the future, but it isn't right now.

JumpCrisscross32• 3 years ago

There were no fire sales of Treasuries. They’re actually just worth less. The problem is we treat HTM securities as both inviolable in value and liquid.

kgwgk• 3 years ago

If you own a building that it’s 100% certain to be sold for $10m in six months then that building is not worth more than $9.75m today.

CPLX3• 3 years ago

That’s not correct. Assuming the $10MM sale is a certainty then the building is worth just slightly less than that, accounting for six months of interest at the prevailing rate.

Assuming the interest rate is around 4-5% as it is now, that means the building is worth a couple hundred thousand less than $10MM. That’s the definition of “slightly less” in the exact scenario you set up.

If you think a couple hundred grand doesn’t matter you are free to wire it to me at your leisure.

Now make six months into six years or sixteen years and you understand the problem better.

makomk2• 3 years ago

This isn't a liquidity problem though - the actual fair market value of the assets that they can realistically expect to get has dropped due to interest rates rising. Someone with $10 million to invest in long-duration government bonds won't pay face value for bonds that pay out $10 million at maturity plus a small amount of annual interest when the government has issued newer bonds with much higher interest payments, they'll expect a discount that accounts for the lower amount of interest paid over the term, but banks have a bunch of bonds like that that are still on their books at face value and haven't been marked to market.

pavlov• 3 years ago

Long-term treasury bonds aren’t like stale bread because the bread doesn’t suddenly spring back to its original edible state after ten years have passed, but the treasuries will eventually repay your capital in full.

The problem is that this full repayment is a decade or more away, and in the meantime you’re receiving a pittance of interest compared to investments you could make today. So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to.

toast02• 3 years ago

So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to.

Bonds are easy to value if you assume full timely repayment, take the net present value of each payment, and that's what it's worth. (You may disagree about the NPV, if you disagree about the interest rate to use, but the shape of the calculation is clear) Sure, at redemption, it will be worth something else, but USD today and USD in a year are not the same unit, you need a conversion.

LudwigNagasena2• 3 years ago

The problem is that this full repayment is just objectively not a full repayment. In a standard economic environment with a positive rate of inflation, if I gave you $10 yesterday, and you returned me $10 today, I _lost_ money even though the numeraire suggests that I didn’t.

ipsum2• 3 years ago

First Republic had a market cap of $22 billion 2 months ago. It's not mentioned in the press release, do the investors get nothing?

boeingUH60• 3 years ago

They are getting wiped out...such is the risk of equity investments.

GalenErso• 3 years ago

This is the way.

JumpCrisscross32• 3 years ago

do the investors get nothing?

Correct. JPMorgan “is not assuming First Republic’s corporate debt or preferred stock” [1]. Including that debt, the total value vaporised could be up to $40bn [2].

That said, JPMorgan acquired “substantially all of the assets of First Republic Bank,” so there will be scraps to fight over.

[1] https://www.ft.com/content/0c61a540-e6be-4bca-8054-841d99837...

[2] https://ycharts.com/companies/FRC/enterprise_value

loeg8• 3 years ago

I'm surprised the debt got totally wiped out too on $220B in (HTM) assets vs $100B in deposits. Those assets have to be severely discounted to arrive at JPMorgan's $2.6B windfall figure. Just last week Levine was saying:

First Republic estimated as of Dec. 31 that its assets were worth about $27 billion less than their carrying value. So figure its assets are worth something like $206 billion on a good day.

So I'm wondering where the gap is.

Meanwhile it has ... about $105 billion of secured borrowing from the Federal Reserve and Federal Home Loan Bank system.

Presumably JPMorgan is assuming FR's debt to the these central banks?

anomaly_• 3 years ago

People not understanding the capital structure of a business strikes again!

SilverBirch6• 3 years ago

What I find interesting is that a lot of people are pointing to this and getting worried because these bank failures are the largest since the GFC. But aren't we actually so far seeing the opposite of what we should be worried about. In the GFC the problem that this all became a disorderly collapse. But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread. Sure, equity holders got wiped out, but that's what equity holders are risking in return for their higher expected returns. It's difficult to celebrate "well things haven't completely blown up so far"... but, well, it's possible that this particular problem is actually being handled in a better way than last time.

JumpCrisscross32• 3 years ago

it's possible that this particular problem is actually being handled in a better way than last time

It seems to be. Fingers crossed.

And we have solutions to keep it from happening again this way. I’ve seen smart proposals. One I like is banks get to choose: HTM securities are liquid and marked to market or inviolable in value, in which case they’re held at face but do not count as liquid. (One can also do something fancy in between, but that seems to invite trouble.)

echelon2• 3 years ago

I like your other comment down thread,

  >> slaw 51 minutes ago

  >> only estimated $13 billion will be printed

  > JumpCrisscross 46 minutes ago

  > Not printed. FDIC would levy a special assessment on its
  > member banks, including JPMorgan, if those costs are 
  > realised. (Note that up to $40bn of enterprise value [1]
  > was also just destroyed.)

"Equivalent exchange."

HWR_148• 3 years ago

As I understand, that proposal is pretty much the decision banks already make when purchasing assets. Assets are either marked as HTM and assumed to be illiquid and at face value or they are not marked as HTM and assumed to fluctuate in value.

_heimdall26• 3 years ago

One really important option that I've yet to see considered is rolling back a change from 2013 that allowed banks to buy securities directly from the central bank at any time.

Previously banks would only buy on the open market unless a specific lot of securities was put up for sale. The Fed was concerned that future increases in interest rates would be delayed if banks didn't immediately increase the cost/rates of securities to match so they wanted to be a direct player in the market. If the Fed can raise rates and then immediately start offering securities at the higher pricethe open market would have to follow suit.

Unfortunately that's exactly what banks did in 2020/2021 when they were handed piles of cash. Now those securities are a risk and here we are. Without that rule change banks would have found other places to park the cash, they wouldn't have been able to load their books with too many low yield government securities.

peepeepoopoo5• 3 years ago

no contagion has spread

What are you talking about? This is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse, all of which have failed in recent weeks.

JumpCrisscross32• 3 years ago

is contagion from FTX/Silvergate/SVB/Signature/Credit Suisse

SVB joined that party de novo. Silvergate and FTX were coupled. Signature was to both crypto and SVB. First Republic to SVB. I haven’t seen a great source for linking First Republic and Credit Suisse, though I could see some shared funding channel being shrapnelled.

unicornmama• 3 years ago

Each of those bank failures taken individually did not cause the other banks to fail. They each failed due to their own issues in isolation. Thus it may be incorrect to say that there is a contagion.

mjfl2• 3 years ago

you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default now that the bond portfolios are becoming more and more concentrated. Basically the fed needs to slow the rate at which it is raising interest rates, even if inflation continues. The problem is it's going to take a long time to release this pressure, since the majority of the bonds that are in crisis have expirys in like 30 years. So we are looking at entrenched inflation for a decade long period or more, or an explosion of our banking system, or both!

JumpCrisscross32• 3 years ago

you should be worried about the case where inflation continues to rise and the unrealized losses from these bonds increases and may cause a much more consequential default

No, you shouldn’t. Duration is stress tested at the larger banks. The smaller banks lobbied to be exempted from liquidity coverage ratios in 2017 and got it, which is a large part of why we are in this mess. There is no evidence the Fed is constrained by bank balance sheets. (This could change, regionally, with CRE write downs. But again, money being destroyed.)

roenxi5• 3 years ago

But so far this has seemed... pretty orderly? No depositors have been wiped out, no contagion has spread.

Making disorder the enemy is something of a distraction tactic. General rate of growth matters a lot more and much has been sacrificed in the name of trying to make the market look pretty at the cost of keeping the incentives properly aligned. Disorder is more of a code word for the wealthy and powerful being at risk of losing their social standing. The rest of us should be worried about general wealth and prosperity. Which, I might add, is maximised by the occasional dose of collapse in badly designed systems. Joseph Gentile has been given 2 goes now at wiping out his creditors; there was no need for that - the 2008 bailouts just gave him cover to go and get people wiped out a 2nd time.

The real question now is who is actually eating these losses? Is it old people with pensions? Because while it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades, but that would still be a huge problem.

They should have let 2000 or 2008 play out to their natural conclusions to minimise the overall damage. This one is a bunch of people going bankrupt in ways that could easily be predicted a decade ago. These losses have been created by Fed policy. And we'll probably find when the dust settles that they have once again stuffed everything up, there is no reason to believe this time is different. There have been bank crisises to safely assume that this time will not be different unless, miraculously, hindsight shows they changed tack.

avoutthere• 3 years ago

it would be karmic justice to start wiping out elderly investors because they were the ones with political control ignoring all the problems building over the decades

Are you "ignoring all the problems" of today? Or do you just not have the "political control" to change things? What makes you think that "elderly investors" had more control during their lifetimes?

SilverBirch6• 3 years ago

I don't buy the argument that allowing maximal loss in 2008 would have been good in a practical sense. Yes, it would have been edifying to watch those bankers who screwed up face their comeuppance. But firstly, the bankers already got the bonuses during the good times and they don't personally own the assets that would go to zero. And secondly the process of unwinding all of that debt and those complex financial instruments in an uncontrolled open market would likely have seen plenty of perfectly good investments go to the wall simply because the market wasn't able to fairly value them. You can't just put the entire economy on hold for 12 months whilst an army of PhDs go through and re-value every single marketable instrument.

It's perfectly reasonable for the government to step in and say "We'll back stop this now, but we're going to examine this and put in rules to make sure this can't happen again"- and that's what happened here. The reason JPMorgan can step in is because they have stronger regulations on them that have made them safer than last time.

FormerBandmate3• 3 years ago

This is incredibly stupid. Letting just Lehman fail sparked 08 and bankrupted millions of middle class Americans, and banks are always sold after bank failures.

The Fed had an extremely similar approach to what you propose in the late 20s, it was called liquidationism. It sparked the Great Depression, which was a terrible tragedy that destroyed millions of people’s lives, and through global aftereffects is arguably one of the main causes of Hitler’s rise to power.

Destroying the economy is very bad

barrysteve• 3 years ago

An orderly collapse of a long standing glorious military is no less terrifying than all the big banks folding themselves into a singularity.

The pull into oblivion is quite agreeable to people, for some reason.

TheAlchemist• 3 years ago

It depends what do you call 'pretty orderly'. FRC was trading at 120$/share in January, 15$/share a week ago, and 1.5$/share on Friday after hours.

Pretty close to the Bear Stearns path if you ask me ! When Bear Stearns was bought by JPM, there wasn't an immediate collapse of everything - no contagion or anything. On the surface that is.

The underlying problems of this crisis are still there - JPM buying (or ... being forced to buy) FRC doesn't solve any of those problems. It's just buying time.

fallingknife6• 3 years ago

The difference is that in 2008 all the major banks had taken on exactly the same balance sheet risk as Bear Stearns. In this case, what brought down SVB was the risk they took on the left side of their balance sheet, and this was pretty unique. FRC was taken down in the resulting panic, not because they shared the risk of SVB. FRC went under because it has been a zombie since the SVB collapes collapse, and the final blow came because they had to publicly report the damage they took then. It's not because of any further deterioration since. That s why there is no panic now. I don't expect there to be any additional casualties from this in the near term as the panic is over.

In the longer term, though, I expect additional consolidation because of the fact that the government has all but instructed CFOs to move to larger banks through their statement that only "systemically important" institutions will be bailed out.

sschueller• 3 years ago

No depositors have been wiped out because we are changing the rules as we go. In the end it will be the little guy or the general tax payers that will get screwed while the ones that knowingly took dangerous risks got a defacto bailout by the rules being changed in their favor at the last minute.

matwood2• 3 years ago

Are you saying depositors knowingly took dangerous risks?

opportune11• 3 years ago

I doubt depositors who at best got a bit more yield more on savings accounts benefitted nearly as much in aggregate as FRB employees (who got big bonuses) or the people who got extremely good terms on mortgages from FRB (I’ve heard sub-3% even for jumbo)

astrange15• 3 years ago

Bank executives normally get fired and lose all their shares when the FDIC shuts down a bank.

xp842• 3 years ago

general tax payers

FDIC isn't taxpayer funded though, right? It's funded by insurance paid by banks. Personally I haven't given a dime to a bank my whole adult life other than mortgage interest, so I'm confident saying I'm not bearing the cost of FDIC covering depositors.

the ones that knowingly took dangerous risks got a defacto bailout

Depositors, the only ones who got "bailed out," were not informed of whatever investment choices were made by these banks. Occam's razor: Do you think they would have gotten any depositors at all if they'd advertised "There's a small chance our bank will fail and you'll lose everything if interest rates go up by about 400bps from their current all-time low"? Also these banks weren't paying like, insane 15% interest rates or something -- they may have been a bit better than average, but not in too-good-to-be-true territory.

opportune11• 3 years ago

Every time these banks fail, the value of your money gets a little less, and in aggregate the returns in your checking/savings accounts decrease.

We’ve also set a precedent for future recessions/shifts towards hawkish policy: if you’re a bank exec, be as reckless as possible while demand for loans is high and shift that value to yourself with stock incentivizes and bonuses. Markets are defined by activity at the margins so if it’s not you, it’ll be whichever other bank is ballsy or poorly managed enough to do it. You can even pass on some of the gains to consumers, who will know it’s unsustainable but that their deposits are protected, so you can write and hold as many unprofitable loans as possible on your books. When the music stops the only people screwed are shareholders and all the people whose money you devalued.

Or, the precedent is that the Fed gets scared of raising rates and basically ends up letting banks tell them if they’re allowed to raise rates. Which will mostly be answered with “no”

SilverBirch6• 3 years ago

Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC was worth $22Bn a few months ago and that's now gone to zero. So isn't it actually the case that the total money supply has gone down during this collapse, so the value of my money has actually gone up?

0zemp2c3• 3 years ago

you should be concerned that regulators, the financial press, large banks etc all seem to have guided this process

I see no reason why FRC couldn't have just gone on...shown a quarterly loss from time to time, lose and/or gain depositors, shrink or grow...

its as if it was "decided" that this bank will be sold off for literally 1 penny on the dollar

when the crisis deepens, The Fed will lower rates and all of FRCs bonds will be in the green again...and JPM got them for free

opportune11• 3 years ago

What? And how exactly would FRC have just gone on? They were insolvent.

The fed and regulators have to provide their current receivership terms (depositors will be made whole) to prevent banks runs and a liquidity collapse. Without these terms FRB would have collapsed long ago, as would have many other regional banks in the panic that would ensue as everybody takes their money to a TBTF bank.

The fed can only let you use those terms when you’ve failed, because otherwise they’d be massive money printers and accelerate inflation greatly (for the part that’s not funded by existing insurance terms, or bank fees, which btw are gonna have to go up each time this happens). And the Fed can’t let banks like FRC continue to operate after receivership because it’s essentially bailing out shareholders and execs with public money.

smileysteve• 3 years ago

when the crisis deepens

If, then when.

This is the gamble. With JPM getting them for free, the bonds pay out on a long enough time horizon OR if the federal reserve slows or changes direction.

_heimdall26• 3 years ago

I'm not sure I would call it orderly so far.

SVB failed so quickly the Fed couldn't go through their usual process. The Fed had to throw out the rules and effectively stare that FDIC limits don't matter and all deposits are fully insured.

They were then so concerned about First Republic failing quickly after SVB that they in all likelyhood helped orchestrate a $30B deposit by major banks to help provide liquidity. That move is extremely odd and really looks a lot like market manipulation and collusion. They also must have known that was a short term measure to delay the failure until they could let the smoke clear and find a buyer, banks would have provided First Republic loans or invested in the bank if they had any faith in it's long term viability, depositing cash is just a show of force.

bugglebeetle4• 3 years ago

More explicitly, the Fed is so committed to destroying wage growth that it will happily blow up banks and throw all of its ostensible rules out the window.

Rapzid6• 3 years ago

What rules did the FDIC throw out?

roflyear2• 3 years ago

Those same people are saying inflation has been 20% for the last decade.

tootie• 3 years ago

Basically yes. All things being equal it's better that banks don't collapse but this far regulators have done an excellent job containing the fallout and preventing contagion.

In 2007 the failures were amongst investment banks and there was no statutory authority to do an orderly liquidation (there is now) and the Bush admin was seemingly disinterested in responding. Thus a panic ensued.

This time we're applying well-tested and reliable procedures and they're working as expected.

anon291• 3 years ago

Order is hard; disorder is easy.

That is to say... everything is orderly until it's not.

chris123• 3 years ago

So much for fixing the TBTF problem. More and more centralization is not the answer. In fact, decentralization is the answer, and letting poor money managers, investors, woke companies, cities, states, countries etc. go broke. The capital will get reallocated into the hands of more capable people and companies, as it should be.

aliljet• 3 years ago

What did this cost JPMorgan? From the outside looking in, it seems like they walked away with assets and little to no liabilities.

consp• 3 years ago

Isn't the liability the accounts they also acquired? If the assets don't cover it whole?

DebtDeflation• 3 years ago

Yes. From the perspective of the bank, the deposit is the liability and the loan is the asset. People online always get this wrong because they look at it from the perspective of the individual/business on the other end of the transaction.

HPsquared4• 3 years ago

Bank deposit is a debt owed by the bank to the customer. So by assuming the deposits they assumed this debt. On the other hand they will also have assumed the assets of the bank (including these problematic bonds).

HWR_148• 3 years ago

They took over the bank, taking all its assets but also assuming responsibility for all its liabilities to its depositors.

xeromal4• 3 years ago

The assets being loans and such and the liabilities meaning the bank accounts people held?

loeg8• 3 years ago

They claim a net windfall of $2.6B, with projected $2B in future costs associated with the takeover. So in some sense it cost them negative $2.6B; in some other sense (if those cost projections are accurate), negative $600M.

dxhdr• 3 years ago

They claim a net windfall of $2.6B, with projected $2B in future costs associated with the takeover. So in some sense it cost them negative $2.6B; in some other sense (if those cost projections are accurate), negative $600M.

Additionally their own slides on the transaction highlight an "IRR > 20%." Who knows how they calculated that. Either way, JPM is definitely not losing money on this.

bwb10• 3 years ago

I don't quite get like this is making the front page of HN. Banking system working as intended, FDIC doing a great job like normal.

kenneth3• 3 years ago

The FDIC killed a bank that was absolutely fine. For the 3rd time in 2 months.

FRB was solvent and had plenty of liquidity if the FDIC didn't force kill it. The FDIC just wanted to flex its muscle because it didn't like the situation — but there was zero reason FRB couldn't have held all its good loans to maturity and been totally fine.

Fuck the FDIC and fuck Jerome Powell for causing all this unnecessary destruction.

JumpCrisscross32• 3 years ago

FRB was solvent and had plenty of liquidity if the FDIC didn't force kill it

This is totally incorrect. Face value and market value are a material difference when one faces a liquidity crunch. First Republic was in a slow death spiral for months, and everyone across its capital structure knew it for at least a week.

there was zero reason FRB couldn't have held all its good loans to maturity and been totally fine

You can’t tell depositors you won’t give them their money for ten years.

disgruntledphd22• 3 years ago

Well except for the $100bn of deposits they'd lost in the last month they were totally fine!

Tis but a scratch...come back and I'll bite your legs off ;)

bwb10• 3 years ago

I don't understand, the bank is having a massive run on it and collapsing. Thus the FDIC steps in per the norms of the last 50 years and fixes it. The system works like a charm?

How is this bank fine? They have lost confidence and everyone is pulling their money out. They would collapse if not for FDIC insurance and the system stepping in.

DonsDiscountGas2• 3 years ago

Yes the system is working and the FDIC did its job. The second largest bank failure (by inflation adjusted assets) in US history is still news.

bwb10• 3 years ago

why? IE, why does this matter for HN in your opinion? generally curious as it seems like a non issue

Adjusted for inflation is this in the top 10 versus the 80s?

vxNsr5• 3 years ago

Failure isn’t the system working as normal. The regulators supposedly in charge totally failed here.

kenneth3• 3 years ago

This is the fault of of one person: Jerome Powell. That man has done more damage to the US and the world than any of the biggest calamities that come to mind (9/11, Katrina, Trump/Biden/Fauci depending on your politics).

The last 3 years of monetary policy have been the biggest destructive f-up ever imaginable. Printing endless money causing the collapse of the value of the dollar, causing serious inflation, to an insane raise in rates to try to undo the damage which (1) not only destroys the entire banking sector and tech industry, and (2) did absolutely nothing to fix the destruction of the USD.

ideamotor• 3 years ago

uh huh

HPsquared4• 3 years ago

Raising the rates does help control inflation, e.g. Volcker. It's still negative real rates though (that is, interest rate minus inflation). Only just starting to become positive. The rates needed to follow inflation or you'd have a runaway unstable situation of inflation causing real rates to become more and more negative, feeding back into more inflation.

snordgren• 3 years ago

Americans worry about the dollar going to zero, meanwhile it was recently at a 20-year high against the euro, the pound, and the yen.

Inflation has dipped to 5% and unemployment is lower than in decades.

For all its faults, American monetary policy has been better than that of most other developed countries. The ECB went 11 years without raising interest rates.

TexanFeller3• 3 years ago

The current condition is not what we're worried about, it's ongoing stability which is an open question which I'm not optimistic about.

vxNsr5• 3 years ago

The best part is we’re gonna hear his praise from a certain political party and their media cronies (aka NPR specifically planet money, CNN, MSNBC, NYT) for the next 3 months. They’re gonna explain how this is all good and he’s doing a fantastic job. As if a bunch of banks failing under your watch is what’s supposed to happen.

TexanFeller3• 3 years ago

This is the fault of of one person: Jerome Powell.

The Fed chair is nominated by the president. The last president used his bully pulpit repeatedly to strongly criticize Powell for not lowering rates to zero like other countries. I suspect there was other behind the scenes influence taking place too. The current president and Congress basically doubled down on inflationary activity, helicoptering even more money to individuals and corporations. Powell was probably not operating independently as the Fed is supposed to.

snake_doc3• 3 years ago

The spoils go to…

“As a result of this transaction, JPMorgan Chase expects to:

Recognize an upfront, one-time, post-tax gain of approximately $2.6 billion, which does not reflect the approximately $2.0 billion dollars of post-tax restructuring costs anticipated over the next 18 months

[…]

The transaction is expected to be modestly EPS accretive and generate more than $500 million of incremental net income per year, not including the approximately $2.6 billion one-time post-tax gain or approximately $2.0 billion of post-tax restructuring costs expected over the course of 2023 and 2024.”

https://www.jpmorganchase.com/ir/news/2023/jpmc-acquires-sub...

hparadiz• 3 years ago

Lol.

People acting like the world is ending when the reality is this is a classic run on banks. There's still a ton of outstanding loans that will be now paying Chase for the next 20-30 years. Larger banks can more easily accommodate depositor withdrawals.

It's not like the subprime mortgage crises at all but even that turned out a net profit for the feds when all was said and done.

nologic014• 3 years ago

This is bad news on two fronts:

* the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates. This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking

* the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks) - as if we don't have enough examples (Lehman, Credit Suisse that this is not so). In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure

It is all so egregiously non-sensical and sub-optimal. People famously have the political systems that they deserve. In turn this perpetuates the banking systems that they deserve.

papito2• 3 years ago

"Larger banking behemoths" is NOT the solution - it's the result of deregulation and gutting of oversight - also referred to by libertarians here as "small government".

These banks should have been aggressively audited and diversification should have been enforced, as it used to be. We just keep going in this "deregulate-collapse-regulate" cycle.

peyton2• 3 years ago

They took a 40% hit to deposits. What do you want them to do? It’s not survivable. This is just how our banking system works.

jameshart• 3 years ago

Split large diversified banks into small banks with correlated asset portfolios and you will get MORE banking collapses, not less.

HPsquared4• 3 years ago

The banks know that all they need to do is become too big to fail. I.e. if I owe a thousand dollars it's my problem, if I owe a billion dollars it's the other guy's problem.

once_inc3• 3 years ago

If you owe a billion dollars, it's everyone's problem.

yieldcrv• 3 years ago

People famously have the political systems that they deserve.

Partisans invalidate people that care about the ways both sides are the same.

We know which ways the parties are different, it is perfectly fine to be more frustrated in the ways they're the same.

opportune11• 3 years ago

Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders. I wonder how much this paradigm contributes to bad outcomes as it could easily incentivize short-termism and recklessness. Poisoning the books with bad choices that won’t take effect for multiple years or a decade, or comes with individually asymmetric risk less than the business’ asymmetric risk (10% of bank failure just means 10% I retire early) seems really tempting when it means years of big bonuses.

Given that banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations trying to stop them from doing so, and the current trend indicates in the future we’ll be left with just a few blessed TBTF banks, I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added. It’s the least-worst outcome, because otherwise people are going to turn to crypto to avoid the for-profit oligopoly subsidized by repeated debasement and access to Fed lending/liquidity tools unavailable to the public.

CPLX3• 3 years ago

banks seem to have an uncanny ability to destroy themselves in spite of an ever increasing set of regulations

That’s the opposite of what is happening. Regulation has been decreasing.

borissk3• 3 years ago

There's too much money in the finance industry, creating very strong incentives for the players to resort to shady tactics. A strong government can enforce regulations, but given the current political situation in the US that's not very likely.

This is pretty much the main reason BitCoin and many other coins were created - remove the corruption and the unfair advantage some actors in the finance industry enjoy. Why do you think that people resorting to crypto is a bad scenario?

The US government providing basic bank accounts is never going to pass in Congress - the republicans are going to be against it based on their small government ideas and many democrats are depending on the money from sponsors in the finance industry. The Fed is owned by the banks anyway.

pjc505• 3 years ago

I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added

This is simple, straightforward, and disintermediatory, so I imagine everyone involved will fight to the death to prevent it happening.

JKCalhoun• 3 years ago

I think we ought to consider a system where the Government or Fed provides the core functionality...

I have been told that the Chinese government own the big Chinese banks. Is this a good or bad thing? (Or am I mistaken?)

whatever1• 3 years ago

Banks and natural disaster insurance companies have super fat risk tail.

In the worst case everyone comes asking for their money right now, and we know this is impossible to be satisfied.

philip1209• 3 years ago

I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added.

https://www.history.com/topics/us-government-and-politics/ba...

ComputerGuru• 3 years ago

Ironically banks are some of the least shareholder friendly businesses, they direct a lot of profits to their own bonuses during good times rather than expanding their balance sheet or returning the profits to shareholders.

From what I can see, private equity firms are actually even worse. It’s curious that no major shareholder has sued any of those for breach of fiduciary duty.

BurningFrog3• 3 years ago

expanding their balance sheet

I keep seeing this jargon, and I have to admit I don't know what it means?

throw0101a• 3 years ago

[…] I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free […]

The Odd Lots podcast recently had an episode "Is It Time For Public Checking Accounts at the Fed?":

When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size. But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School. She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby. That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly "out there" view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.

* https://www.podchaser.com/podcasts/odd-lots-40661/episodes/i...

* https://www.youtube.com/watch?v=3Zkzpz9aK3I

* Also on Apple Podcasts, etc.

Transcript:

* https://www.bloomberg.com/news/articles/2023-03-23/transcrip...

* https://archive.is/9yROE

anchochilis• 3 years ago

I think we ought to consider a system where the Government or Fed provides the core functionality of “let me put $X in an account so I can use $X in the future” for free and banks compete based on value added.

Don't credit unions already provide this service?

stephenitis• 3 years ago

TBTF = To Big To Fail

smabie• 3 years ago

This is called a T-note? And it is issued by the government?

echelon2• 3 years ago

* the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.

It's a failure to diversify investments and adequately respond to a changing interest rate environment.

* the solution seems to be to create ever larger banking behemoths (on the premise that they they can better manage risks)

Regulation alone can fix it. Just place further controls on how banks can invest their funds (ie. recommended allocation percentages per instrument and risk type), require stringent reporting, and perform stress tests to verify compliance.

The scary thing now is that banks with depreciated assets know they're in this zombie state. They just haven't been pushed over yet.

It'd be easy to find out which banks these are.

Might make for a questionably ethical opportunity to short banking stocks...

sokoloff• 3 years ago

Why would it be questionably ethical to short the stock of a company that your analysis shows is significantly overvalued?

That seems entirely ethical to me.

HWR_148• 3 years ago

Big banks are better risk hedged! In this case because the government requires them to be as a result of post-2008 laws. SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago.

JumpCrisscross32• 3 years ago

SVB lobbied successfully to get the burden for complying with those regulations not to apply to small under 250-billion dollar banks when coincidentally they were just under that number a few years ago

To be clear, the rules they lobbied out of wouldn’t have forced them to hedge. They would have drawn attention to the problem much earlier.

fallingknife6• 3 years ago

My tinfoil hat view of this is that it's part of a creeping state takeover of banking in everything but name.

1. assume the liabilities of the banking system (complete in 2008)

2. induce consolidation of the industry into a few megabanks with the "systemically important" designation making small banks dangerous (in progress)

3. use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law. e.g. effective censorship of entities the government doesn't like by cutting off from the banking system entirely (the goal)

ikekkdcjkfke2• 3 years ago

More like the other way around

ThunderSizzle2• 3 years ago

use the government protection as leverage to make these few remaining banks obey government priorities without ever having to pass a law

Ala fascism. Government control of private business without government actually owning those businesses.

HWR_148• 3 years ago

Step 3 doesn't make sense. All banks have government protections (eg FDIC). The government already has KYC and AML laws that apply to all banks. Consolidation doesn't make the banks more susceptible to government influence. Big banks can afford to outspend the government on lawyers pushing back, it's small banks that just agree to do what the government says.

loeg8• 3 years ago

This is dumb because step (3) is already the state of the world. Banks are essentially extensions of the government. It's a public-private partnership. Yes, the government absolutely wants to cut off some entities from the banking system (terrorists, criminal cartels, etc). This is "censorship" only in some extremely naive and reductive sense.

lamontcg• 3 years ago

Dunno how you can see the problem of massive corporate consolidation and yet miss the entire mark so badly.

The regulatory toothlessness of the government means that the businesses can de facto write their own laws.

Same thing is happening in healthcare with the takeover there by a few religiously affiliated corporations, which will affect everyone's choices about their own healthcare.

We've been screaming about how the government is horrible since Reagan in the 1980s and we're on the cusp of really bearing the fruits of that decades long shift of power to completely unaccountable corporations.

But yeah, its the government which is still obviously the problem.

ikekkdcjkfke2• 3 years ago

Having anything deposited over the secured amount is giving another private entity an unsecured laon, just like pre-paying for unrecieved goods

lordnacho2• 3 years ago

Well I agree with your two asterisks. The thing that gives rise to it is that people who are deciding on what to do about the rising rates are all incentivized the same way: write new loans or lose your job. Each bank has its own set of customers, strengths in marketing, and so on. The loan officers then choose the best of that pool. If that means firms that are at greater risk to rising rates, they still pick the better credits out of the ones they are presented with. It's basically a mugs game.

Gathering everything in a big bad bucket is indeed just hiding it until the next crisis. Gotta wonder what size of crisis this will eventually cause, not sure if I want to be around when it happens.

But:

People famously have the political systems that they deserve.

I'm not sure most people through history or right now really have had much say in what political system they live under.

once_inc3• 3 years ago

More centralization would mean more government interventions and bailouts. That means socializing the losses.

If the excrements hit the atmospheric propulsion devices, governments can always re-institute a gold standard, but that just moves the pain from the haves to the have-nots.

markus_zhang3• 3 years ago

People cannot wait for the aristocracy to surrender power to them. Throughout history there is exactly one way to make some say in the political system.

Varqu• 3 years ago

I struggle to understand why there is no "deposit banks" category which would include heavy regulation, with full reserves required.

There is certainly a significant number of people who just want to keep their money safe. They would happily pay 50 or 100 USD per month for an actual bank service where your money is just stored and not lend out to someone else.

r00fus4• 3 years ago

So the big problem was the Fed increasing rates quite dramatically, signaling this, and the banks not properly having a t-bill ladder (ie, buying a mix of short&long term securities instead of just long-term treasuries)?

Adding lots of high-value accounts & making lots of loans is one thing, but diversifying the investment appropriately should be mission #1 for funds.

tclover• 3 years ago

Everything goes according to this book https://en.m.wikipedia.org/wiki/Imperialism,_the_Highest_Sta...

MichaelMoser1232• 3 years ago

the book says there is no technological progress because the bad capitalists are living off their rents, or something like this. However we have seen some technological progress since 1916... (and the planned economies used to be stagnant)

slashdev2• 3 years ago

Yes, concentrating all the power and all the risk in a few giant banks that also tend to do risky investments as well seems like a terrible idea for both customers and stability.

Canada has a system like this, although it is very well regulated and hasn’t so far blown up. What it does do though is give very little competition or choice to the consumer. The Canadian bank oligopoly is only slightly less horrible than the Canadian telecom oligopoly. Both are as anti free market competition as you get. It looks like the U.S. banking system is headed the same way.

_heimdall26• 3 years ago

Is that what made it so easy for Trudeau to freeze banks accounts of protrsters at the trucker rallies?

gshulegaard2• 3 years ago

I think this comment is missing a key bit of context in that regionals/smaller banks were exempted from some of the regulations of Dodd-Frank.

https://www.npr.org/sections/thetwo-way/2018/05/22/613390275...

So it's not that we assume bigger banks can better manage risk, we are simply, currently regulating them to manage risk better.

alistairSH• 3 years ago

Isn't the answer then to require small banks to conform to the same rules as big banks? Instead of allowing them to fail and be acquired by big banks?

kyrra• 3 years ago

WSJ opinion pages have been publishing a lot of great things on this front trying to show possible reasons for these failures:

* https://www.wsj.com/articles/deposit-insurance-encourages-ba... - argues the FDIC and Fed encourages poor investment of money by banks.

* https://www.wsj.com/articles/the-silicon-valley-bank-bailout... - attacks the decision makers in the Fed and Treasury.

* https://www.wsj.com/articles/president-biden-bank-failures-s... - argues the government is lying when it says it won't tax Americans to bail out these banks.

* https://www.wsj.com/articles/barney-frank-signature-bank-fai... - highlights Bernie Frank (of Dodd Frank) interviews saying the Fed has it in for crypto.

* https://www.wsj.com/articles/a-proven-way-to-avoid-moral-haz... - the FDIC should not fully pay our deposits beyond the limits. (Written by a former FDIC chairman)

* https://www.wsj.com/articles/the-fdic-should-act-like-a-real... the FDIC should act like a normal insurance company and base cost to insur based on risk. (Former currency comptroller and FDIC member)

* https://www.wsj.com/articles/federal-reserve-michael-barr-se... and https://www.wsj.com/articles/the-fed-absolves-itself-silicon... say the Fed is deflecting blame from itself. The article basically blams the Fed for being asleep at the wheel.

brookst3• 3 years ago

I agree we should not have gotten here, but given the situation we are in, I'm not sure there was a better outcome possible. Let FR fail to teach uninsured investors a lesson? That has some moral appeal but not sure it would be a better long term outcome.

nologic014• 3 years ago

Short term actions are constrained by realities on the ground. Long term actions are only constrained by ideology, vested interests and disregard for collective welfare.

flakeoil3• 3 years ago

I'm pretty sure the companies and people who held their money in First Republic would survive losing the money they had with them (in most cases it's only a part of their assets). I'm also quite sure the owners of the First Republic stock could afford losing the value of those stocks.

It might have been a little tough for some of them, but most would just shrug it off. I do not understand why government and other banks are so anxious about a bank or two failing? Is it because all other banks are also rotten and leveraged?

dasil003• 3 years ago

Investors did lose their money. Depositors did not.

sdfghswe2• 3 years ago

Bigger banks are more regulated. SIVB wasn't subject to the same regulations.

zitterbewegung• 3 years ago

This was a last minute effort to avoid the bank to become bankrupt and the FDIC stepping in and using their reserves and paying out to the depositors.

I agree with you that the solution could have been just the FDIC assuming control of the bank which would have put pressure on the FDIC's reserves but, large banks generally have been buying out smaller banks to become larger and this has been going on for decades. What could have been going on behind the scenes is that large banks were being pressured to buy it out similar to 2008.

loeg8• 3 years ago

JPMorgan is actually prohibited from buying other banks in general due to their size. The FDIC gave them an exemption in the process of soliciting bids for First Republic over the weekend and maybe last week.

api• 3 years ago

Our industry is the same. Example: "Individual authentication systems are often insecure, so lets pool all our permission management under the umbrella of two or three huge companies that manage all authentication for everything in the entire world via mechanisms like OIDC."

We apparently like to trade noticeably frequent (but still fairly infrequent) small failures for rare catastrophic failures. The key here is that these rare catastrophic failures are rare enough that we can pretend they won't happen. Enough time goes by between incidents that we have time to forget and claim ignorance.

Eventually humanity will pool all risk in one basket so big that when it breaks we will go extinct. The end.

nologic014• 3 years ago

Gigantism has many "features" going for it:

Like you say, it pushes risks to the tail (lower probability). Low probability - high impact events are easily mis-priced and thus this becomes a rent extraction channel.

Removing competition by acquisitions means the market can be distorted more easily. Another source of non-earned profit.

But there are also subtler benefits:

Gigantism creates de-facto regulatory capture (how could a lowly government bureaucrat go against the "giant"?). Such leverage versus rule-makers can be tweaked to optimize... wait for it, further risk-less profit.

Finally, "giants" can offer excess compensation and prestige to attract key talented individuals, essentially a scorched earth strategy to suppress any other actors.

All-in-all a horrible pattern that doesn't really offer any benefit (besides to the few insiders in the top of the pyramid). Delivering innovative products or services requires a certain scale but that is typically an order of magnitude smaller than observed sectoral concentrations.

Why is it happening if it is so toxic? Well, society is stupid. More stupid in fact than many (if not most) of its individuals.

The hope is that there is a sufficient number of independently evolving societies so that low-IQ societies imbibing on toxic stuff go extinct (not physically, as a cultural pattern).

MuffinFlavored• 3 years ago

This concerns such a basic aspect of bank risk management one wonders how this sector could even call it self banking

I feel like message boards like reddit/HackerNews are notorious for over-simplifying any topic. It's "reductionist".

"How could these paid professionals consider themselves qualified?! As somebody not in that field without any insider knowledge or specific details into why hard decisions with tradeoffs were made, I know better, it's taught in economics 101!"

300bps2• 3 years ago

notorious for over-simplifying any topic

My last employer we managed money for community banks. I actually created the system that generated interest rate shock reports that showed the impact to a portfolio of fixed income assets for interest rate shocks of -300 to +300 basis points.

Nobody thought interest rates would go +300 bp in such a short amount of time, especially in the short end of the yield curve.

Banks essentially have 2 portfolios. Their loan portfolio is where they take the risk and it goes up and down with the traditional business cycle. Their fixed income portfolio is supposed to be almost no risk.

They were whipsawed by the fed that lowered interest rates so quickly that it forced banks to buy longer-duration securities to just find any kind of yield within the regulatory constraints they were allowed to buy. Then the fed raised interest rates even more quickly causing staggering losses in the "almost no risk" fixed income portfolios of banks.

Expect a lot more banks to be taken over even with the emergency backstops the fed has put into place. Look what the Fed did:

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

In 2008 the Fed flooded the economy with $2 trillion. In 2020 the Fed jumped up and flooded the economy with an additional $7 trillion. In September 2022 they started taking that money back (which incidentally led to tech company layoffs). As of March 2023 they removed about $600 billion. Then they suddenly put over half of that right back into the economy when SVB failed.

It's impossible to predict or even appropriately react to what the Federal Reserve is doing.

BiteCode_dev• 3 years ago

Well, as somebody who is currently coding a calculation service that will handle a 500 billions portfolio, I can tell you this: the specs require the data to be interpolated + extrapolated left and right. And they use that to estimate risks and take huge decisions. And when they don't have enough data to interpolate from, they create a synthetic instrument from other instruments that have enough data, and use that to estimate risks and take decisions.

The only thing that makes the whole jenga tower stable is the fact it's all interdependent. E.G: to diminish your exposure, you take a swap with some other entity, and if everybody do that enough, the risk is averaged on the entire economy.

So from the inside, it's worse than it looks from the outside.

And mind you, the client I do that for is one of the most serious in the business. They are extremely risk adverse, and they have been acting nothing but honestly, at least at the level I can observe.

They are so by-the-book we have once found an error in $FAMOUS_DATA_PROVIDER calculations, because we thought we made a mistake, and we looked for it until we realized the data we compared ourselves to was wrong.

So if they manage half a trillion by using excel FORECAST.LINEAR and Matlab interp, imagine what is done by JP Morgan.

jmyeet• 3 years ago

the risk driver for these ongoing smaller bank failures is (reportedly) the rise in interest rates.

Ultimately it's poor risk management. If you take depositor funds and buy 10-30 year bonds with them then you're exposed to a run on the bank and rising interest rates will devalue your bonds. The bank instead could've rolled 30-90 day Fed funds instead but they didn't. Why? Lower yield.

Put another way: the bank took a risk with depositor funds and they get wiped out because of it while depositors are fine.

the solution seems to be to create ever larger banking behemoths

Yes and no. At the heart of this is fractional reserve banking, which has been wildly successful. Like any kind of risk-spreading business (including insurance) bigger is generally better because variance is less and everything becomes more predictable.

I understand (and agree with) concerns about consolidation creating an oligopoly.

Ultimately though, what backstops the entire financial system is the government. This was true before and it's true now. The Federal Reserve is even called the lender of last resort.

indymike• 3 years ago

In fact this aggregation only commingles all sort of risks inside a gigantic opaque pool, makes the private-public dependency (TBTF) and all its perverse incentives even more entrenched, and ultimately creates the conditions for systemic failure

This is the real issue. Bigger institutions aggregate risk.

ineedasername4• 3 years ago

The solution could also be to require banks to be more cautious, which was actually the case before 2018. But the US political system rolled back precautions that were put in place in the aftermath of the 2008 crisis.

hristov• 3 years ago

The difference was that the larger behemoths were required by law to manage risk better. They were subject to a stricter ongoing regulatory regime. The medium banks convinced the corrupt Trump administration and a bunch of corrupt law makers to pass a law that subjects them to a much lighter regulatory regime.

Their reasoning was that if a bank with "only" 250 billion of deposits fails it will not have a systemic effect on the economy. That reasoning was really dumb and now that a couple of medium banks failed the stupidity of that reasoning is obvious for everyone to see. Of course wiping out 250 billion dollars of deposits will cause a bank panic and will have an overall negative effect on the economy, and the fed is working hard to make sure this does not happen.

But generally speaking smaller banks are not by nature riskier. They only got riskier because they passed themselves this law that allowed them to get riskier. And now they will get a reputation for being riskier, and since in banking reputation is everything, they will become riskier.

iancmceachern• 3 years ago

And where is the accountability? The facts seem to point to poor management, but in the case of SVB all the leaders there were all over linkedin acting like they were the victim, not the perpetrators.

d_burfoot• 3 years ago

People famously have the political systems that they deserve.

This sentiment is widely expressed, but it seems absurd and offensive to me. Citizens of countries such as Finland, Switzerland and Singapore enjoy much superior quality of government to what we have in the US. Does that mean Americans are ethically or intellectually inferior to Finns, Swiss, and Singaporeans? The government of Pakistan is not very good: does that mean Pakistanis are less ethical or intelligent?

MichaelZuo• 3 years ago

I've always thought the implication of the saying is that in aggregate they are.

I don't think that necessarily translates to the median individual.

nologic014• 3 years ago

Unless you believe in overlords or secret societies the quality of government is more or less a direct result of the ethical constitution of a society - at least for a sovereign nation.

The difficulty is that it is a collective phenomenon - as you can establish fairly easily by picking somebody from society X and embedding them in society Y.

Ofcourse there is no collective without individuals, so ultimately it is aspects of individually adopted ethical codes and behaviors that it is responsible for a poor collective organization.

A standalone computer that operates reasonably but is connected to other computers via a broken API's will lead to overall broken network operations.

There is also something we might call a society's "intellectual constitution", the collective ability to execute required changes, devise institutions and tools etc. But this is subordinated to the ethical dimension (where there is a will there is always a way).

slt2021• 3 years ago

in US its not people who have government they deserve. It is Corporations have the government they pay/lobby for.

only in the US there are voters and political donors/lobbyist.

Other developed countries only have voters decide on election outcome & policy.

blackoil• 3 years ago

One aspect is that these behemoths have more stringent regulations than the likes of svb

lvl102• 3 years ago

All these recent bank failures due to lack of oversight by the Fed. As we learned in 2008, you can’t just blame financial institutions because they’re going to take the easiest route every single time. The Fed is there for a reason. They completely failed to do their job with Powell leading that organization. They internally knew what they intended to do with their rate policy but did not do any stress tests for banks. I find that incredibly incompetent.

More to come.

peyton2• 3 years ago

Yeah. I was surprised to learn Powell is older than Bernanke. Some of Yellen’s comments around SVB weren’t very confidence-inspiring either. I don’t think the Powell-Yellen duo is up to the task.

robbiet4802• 3 years ago

JPM has just released a press release with more details [0]

- Acquisition of the substantial majority of First Republic Bank’s assets, including approximately $173 billion of loans and approximately $30 billion of securities

- Assumption of approximately $92 billion of deposits, including $30 billion of large bank deposits, which will be repaid post-close or eliminated in consolidation

- FDIC will provide loss share agreements covering acquired single-family residential mortgage loans and commercial loans, as well as $50 billion of five-year, fixed-rate term financing

- JPMorgan Chase is not assuming First Republic’s corporate debt or preferred stock

https://www.jpmorganchase.com/ir/news/2023/jpmc-acquires-sub...

drumhead• 3 years ago

It's one of the dominoes, the attention of the market is going to turn to the next target now, and this will keep going until there's a general government/ market solution to the regional bank problem. The same people saving the bank are going to be the same people pushing the next bank to crisis.

qaq• 3 years ago

soon there will be like 5 banks

morkalork• 3 years ago

Welcome to what life is like in Canada! Do you want to bank with the blue, green or red one?

xmcqdpt27• 3 years ago

Actually there are two blue ones and two red ones! So you can keep the colour you like and still switch to a competitor! All you have to do is book an appointment in advance to go in person to a branch between 9 and 5pm on a work day to close your account.

INGSOCIALITE• 3 years ago

At this point why even bother having separate banks? If one fails they just roll the deposit accounts over to another, bigger bank?

LudwigNagasena2• 3 years ago

Soon all your money will be held at your personal account directly at the central bank.

toomuchtodo2• 3 years ago

This sounds fine. Probably the same or better customer service then I get from JPMC. Never let a crisis go to waste.

https://www.congress.gov/bill/116th-congress/senate-bill/357...

fnord77• 3 years ago

schwab bank is next

nickpinkston2• 3 years ago

RIP First Republic - I hope something of their customer service culture stays on. Unsure that's realistic, but maybe JPM could have kind of "private business banking" or something?

I was a customer there for ~12 years through multiple companies. Hope everyone I've worked with is okay.

ericpauley• 3 years ago

JPMC will give you arbitrarily special treatment depending on your assets. They have Private Client products for larger depositors, but obviously it goes up from there.

nickpinkston2• 3 years ago

Yea, I assume so, but my company's several million of cash may not qualify as that material for them haha. Fingers crossed it works out okay.

umeshunni• 3 years ago

Private Client is their mass market product for anyone with over 150K (aka the Mass Affluent): https://upgradedpoints.com/finance/chase-private-client/ https://en.wikipedia.org/wiki/Mass_affluent

Private Bank is their product for HNW clients (https://privatebank.jpmorgan.com/)

MichaelMoser1232• 3 years ago

so will it now be harder to get credit? What do the experts say?

One of the problems of the last bank run: the remaining banks were unwilling to grant any new loans - because they were afraid to take up any new risks. Is it possible that we will we see something similar?

peter4223• 3 years ago

Every loan banks give out now helps their balance sheet since interest rates are higher. Don't think they'll stop.

photochemsyn• 3 years ago

One Bank to rule them all, One Bank to find them.

One Bank to bring them all, and in the darkness bind them.

Financial monopolization of the economy will not end well.

Spivak• 3 years ago

Or it will work out since at this point large national banks are regulated to the point of de facto control by the government where failing stops having the same meaning.

SeanAnderson• 3 years ago

Does anyone have a clear picture of how this affects the employees and office footprint of FRB in the short and long term?

FRB had announced 25% layoffs last week. Is that still on the table? Does it go higher?

FRB is one of the largest leasers of commercial office space in SF at 150,000 sqft*. Is it expected that there will be significant reduction here? Or business as usual?

* https://www.crexi.com/insights/the-san-francisco-commercial-...

bragr• 3 years ago

Typically in these kinds of situations, most of the customer facing branch employees keep their jobs but no so much with the back office people.

ineedasername4• 3 years ago

Seems like yet another example of a disaster that (might) have been avoided if congress, in 2018, hadn't rolled back pieces of Dodd-Frank. Before that, banks with > $50B had to take stronger precautions, but that limit was raised in 2018 to $250B. FRB had assets around $220B.

peter4223• 3 years ago

No bank in existence could handle losing 40% of their deposits in a few days. You can't possibly protect against that while also operating the business of being a bank as we think of it.

ineedasername4• 3 years ago

Would people panic & withdraw their deposits if the bank had been more cautious? That's the main question. It can't really be proven either way, but it seems fairly plausible that a bank with much less risk would have far fewer panicked depositors.

ultrasaurus• 3 years ago

As always, Matt Levine is ready with the numbers:

https://www.bloomberg.com/opinion/articles/2023-04-26/first-...

https://archive.is/zJsPo

moutansos• 3 years ago

If anyone wanted to keep on top of these bank failures and be alerted when it happens, I built a very simple bank failure API/RSS feed from the data coming off of the FDIC website: https://benbrougher.tech/projects/bank-failures/ It's nothing fancy, just a for fun project

JPMorgan Chase Bank Assumes All the Deposits of First Republic Bank

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