Crisis of HTM - Banks, Brokerages, Insurance, Pension Funds

yogibearbull

There is lot of negative news on the CRE exposures of smaller banks. The 3 US bank failures so far had high exposures to US Treasuries (HTM*, AFS*) and had industry concentrations in tech (private-equity, venture-capital) and cryptos. No US bank has failed yet for the CRE exposure, but if that happens, that may be the max negativity for CREs. Affected may be quarterly-liquid (TIAA) T-REA and illiquid/nontraded-REITs - BREIT, SREIT (typical limits 2% per month, 5% per quarter), etc.

Story is similar. The HTM portfolio is NOT marked-to-market. While that is "legal" and "allowed" by the accounting rules, it was clear to the "market" (but not to regulators?) that IF the HTM Treasuries were marked-to-market, the equity (the book values) of the failed banks would have been wiped out. When the bank runs happened, the HTM and AWS distinction basically disappeared. In the CREs, the revaluations are slow (e.g. T-REA), or not even done (some nontraded-REITs).

Another concern is that the HTM and AWS practices are also found among insurance/annuity companies and pension funds, not just among banks, credit unions, brokerages.

*HTM - Hold-to-maturity (these are not marked-to-market), AWS - Available-for-sale (these are marked-to-market)

Devo

Thank you @yogibearbull for starting this thread. I have a few questions on this. What is the maturity profile of CRE debt over the next few years? Will the rates be going up significantly or are the loans floating rate in the first place?

msf

it was clear to the "market" (but not to regulators?) that IF the HTM Treasuries were marked-to-market, the equity (the book values) of the failed banks would have been wiped out.

What does "clear to the 'market'" mean? Are we talking about the magnitude of the risk of being wiped out by a run? Wouldn't the market incorporate clearly perceived risk into an equity's price?

If stock price is a metric of risk perception, it looks like the risk wasn't clear to the market until after SVB virtually failed. On March 8, SVB announced to the world that during the day it had run out of AFS securities and needed to raise cash immediately.

The March 8th closing price of SIVB was $267.83, with volume in its typical range of well under 1M shares traded. The price was up 16% YTD. The next day trading volume exceeded 38M shares and the price dropped 60% while the market was open. It dropped further after the market closed before trading was halted.

https://finance.yahoo.com/quote/SIVB/history?p=SIVB
https://news.yahoo.com/svb-shares-slump-again-clients-105042807.html

Technically there are only two failed US banks, SVB and Signature. Admittedly, Republic Bank would have failed without extraordinary measures.
https://www.fdic.gov/bank/historical/bank/bfb2023.html

Signature Bank was different from SVB, because its involvement in cryptocurrency did make its risk apparent after SVB's collapse. Barron's wrote:

Signature also had a cryptocurrency business. While Signature didn't have loans backed by cryptocurrencies or hold cryptocurrencies on its balance sheet, it had a payment platform for processing crypto transactions. But deposits associated with the crypto platform had been dropping, prompting some concern from Wall Street.

Before SVB's failure, there wasn't too much concern. Signature had 10 Buy ratings out of 17 analysts listed on Bloomberg following earnings reported on Jan. 17. The average analyst price target was about $145 a share.

As the crisis at SVB mounted, Signature stock fell about 50%. The company reported deposit balances of about $89 billion and loan balances of about $72 billion on March 8.

https://www.barrons.com/articles/signature-bank-shut-down-collapse-a0adf63f

So far, I haven't found a report that Signature's security portfolio was loaded with Treasuries (not that I've looked that hard). As you noted, all types of long term securities are subject to interest rate risk - not just Treasuries, and not just illiquid securities. It would be interesting to know, strictly as a matter of curiosity, what Signature was holding.

yogibearbull

@Devo, I don't have the detailed data for CRE debt (rate or maturity schedules).

But the problem isn't limited to the CRE debt, it also applies to the CRE properties. Some prospectuses that I have read allow for infrequent property valuations, or just carrying them at historic values (initial or adjusted for depreciation). In fact, this is cited as one reason for the recent divergence between the performance of nontraded-REITs (or, private real estate) vs listed/traded real estate.

Devo

@yogibearbull my column on TIPRX Bluerock Real Estate a few months ago was focused on this but I clearly didnt have the wisdom to extrapolate to it to everything else that was not marked. Need to push the mind.

yogibearbull

@msf, I count Silvergate Bank under voluntary liquidation in my 3 failed US banks, although it doesn't make the formal lists of failed banks. SI is still trading as a shadow of its former self. https://finance.yahoo.com/quote/SI?p=SI&.tsrc=fin-srch

I am not saying that these unrealized/potential HTM-losses are the only problem, or that these should even be meaningful. But the investors ("market") have suddenly become aware of this issue, or were unaware that this was even going on.

Devo

The concern is that there is a lot of Twitter stuff on how this is going to destroy regional banks and eventually fdic fund. So it is important to throw light on this matter

rforno

Devo said:

The concern is that there is a lot of Twitter stuff on how this is going to destroy regional banks and eventually fdic fund. So it is important to throw light on this matter

And all it takes are a few well-known Twitterers or shark investors (eg, Bill QUACKMan) to start posting their thoughts (correct, well-meaning, or otherwise) and I suspect we'll see more bank runs taking place.[1]

But given how much CRE is held by pensions directly or indirectly, does anyone see this situation requiring a massive 'bailout' down the road to save things? Or will there be a sudden arbitrary rewriting of various accounting rules to better reflect the present day realities?

On a semi-related note, it's interesting that practically every statement these days by Powell, Yellen, etc keep saying "the financial system is strong" ... at what point does that start sounding like "thoughts and prayers" or "inflation is transitory" and lose all meaning?

[1] https://finance.yahoo.com/news/wall-streets-most-ruthless-investors-100300271.html

Crash

"Still strong." Ya, to the extent that IS true, it's no thanks to Congress. Both Dems and Reps voted to loosen regulations. Bags of pus. Talk about regulatory capture!

sma3

@Crash

Barney Frank is your Democratic poster boy for that

Many on GOP side. Take your pick

Crash

+1.

msf

I might have pointed to Larry Summers as the Democratic poster boy for deregulation.

Between 1992 and 2001, Summers held various positions in the US Treasury Department, including that of Treasury Secretary from 1999 to 2001. Summers has described the 1990’s as a time when “important steps” were taken to achieve “deregulation in key sectors of the economy” such as financial services. He has also said that during this period government officials and private financial interests collaborated in a spirit of cooperation “to provide the right framework for our financial industry to thrive.” Summers recommended before he left the Treasury Department that removing policies that “artificially constrict the size of markets” should remain a priority for the US government.

Along with Robert Rubin and Alan Greenspan, Summers brought about elimination of key US financial regulations including the Glass-Steagall Act. He was particularly aggressive in his efforts to block regulations of derivatives, regulations that might have prevented the economic meltdown the US suffered in 2008. According to economist Dean Baker, "The policies he promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face."

https://www.sourcewatch.org/index.php/Larry_Summers

That's some of what Summers did while he was working in the government. In contrast, Barney Frank had left Congress years before attempts were made to weaken Dodd-Frank. As a private citizen, and as the bill in question was reaching the House for a vote, he wrote an opinion piece titled: "Why I would vote 'no' on Senate bill to amend Dodd-Frank".
https://www.cnbc.com/2018/03/01/barney-frank-why-i-would-vote-no-on-senate-bill-to-amend-dodd-frank-commentary.html

Though while objecting to the bill, he did not excoriate it. One of his objections was that the threshold for subjecting "large" banks to the most stringent level of examination was set too high. He would have preferred $125B, as opposed to $250B.

Both Dems and Reps voted to loosen regulations. Bags of pus
The opposition to the legislation, though in the minority, was also bipartisan. One Republican voted no.

If calling that bipartisan sounds a bit weird, consider that 83% of the Democratic representatives voted against the legislation, while 99.6% of voting Republican representatives supported it.
https://clerk.house.gov/Votes/2018216