Dalal.Holdings

I'm amazed that it seems interest rate risk wasn't added to this year's "stress tests"...

https://www.bloomberg.com/news/articles/2023-06-07/druckenmiller-says-he-could-own-nvidia-for-years-bloomberg-invest?srnd=premium Remember, this is the guy that went all in at the top of the tech bubble and got fired by Soros for it. It's not a story that Druck worshippers would tell you...

“As long as the music is playing, you've got to get up and dance,” --Citi CEO before it all went Boom

wow

Maybe members of Congress are asking themselves the same question to trade around their self created disaster

https://www.bloomberg.com/opinion/articles/2023-05-10/companies-are-allowed-to-do-bad-mergers Matt Levine wrote about this--his take is that for a bank to purchase assets/liabilities from the FDIC, purchased Assets - Liabilities must yield a significantly positive number (equity value) so that the bank doing the purchasing does not end up poorly capitalized. While that might be a valid take, there is no reason the gap needed to be that large as to generate immediate large boost to earnings/etc for these banks (I mean look at their stock prices since the deals were announced...). Furthermore, instead of giving away such "free equity" to these banks, FDIC should have gotten something in return--maybe preferred stock ? USG took preferred positions in banks during GFC. Levine also says that purchaser needs to get positive equity from these deals because otherwise the banking system would remain poorly capitalized....but guess what? The FDIC's losses will be an equivalent cost to the banking system in the form of assessments anyway so I don't see how it spares the banking system of taking the loss. The loss is just spread across the FDIC members...

FCNCA is now up about 51% YTD. Compare that to all other bank stocks. Tell me how the FDIC receivership sale process isn't a total giveaway to bank buyers...

That’s my point—why would any would-be buyer want to buy a bank alive anymore ? They get such a good deal on dead banks… This will cause equity/debt of these banks to get discounted which hampers ability to raise capital and reflexively increases probability of failure. That’s why PACW suggesting a sale caused the stock to crash. The feds have no idea what harm they are causing…

Our regulators are incompetent and don’t understand the concept of Reflexivity. They are essentially broadcasting with a megaphone that anyone who wants to buy a U.S. bank will get a helluva deal in receivership. Is there any wonder why TD got out of the FHN deal? They can pick up a U.S. bank at the FDIC’s fire sale soon ! This kind of stuff will get more banks killed.

Anyone know who regulates California/Western U.S. Banks ? Anyone ? Bueller ? Bueller ? No bank wants to be rumored to be up for sale now because "For Sale" means the FDIC will taken on losses, wipe out common/pref/bonds and give the buyer a sweet deal.

Even Billy Boy Ackman gets it

https://www.cnbc.com/2023/05/03/pacwest-falls-40percent-after-hours-on-report-bank-is-weighing-sale.html Here we go. As I stated earlier...now that PacWest has announced it is exploring a sale, the market has figured out that receivership is the likely scenario (because why would anyone want to buy them outside of receivership?). By quickly selling off Signature, SVB, FRC on sweetheart terms to buyers (JPM, FCNCA, NYCB stock prices are all significantly UP for a reason since their sweetheart deals with the Feds...), a message has been sent to any would be buyers of struggling banks... Remember: all banks are in a confidence game and no bank can withstand a flight of deposits from a confidence scare and the collapse in equity price of PACW and PACWP signals that lack of confidence and panic (George Soros would call it Reflexivity). It's not just the bad banks that will get caught up in the maelstrom... Like I said, Feds may have saved money by selling off SVB/FRC/Signature on sweetheart deals, but the overall cost to the FDIC/gov't may prove much higher as a cascade of banks can now fail that otherwise would not have--many of which were not "bad banks" like SVB/FRC...

Re Juiciness: explain why Dimon is taking a victory lap on this if it’s really “$10B more than they should have” on positive tangible book and earnings impact on JPM… Here’s the problem: a quick receivership and sale via giving JPM a good deal increases the probability of future bank failures. So, while quick receivership may have lowered the cost of FRC’s failure to the FDIC, it may have increased the number of upcoming failures that the FDIC will have to deal with. If banking sector consolidation is to occur, now it’s best for the acquirer to let the FDIC take it under and take on losses on their behalf. The FDIC has set risky precedents here: that a bank in receivership is more attractive to a buyer than a bank that’s alive. And also that all depositors will be saved. They may have also caused a discounting of bank common/preferred equity and corporate bonds given the increased risk of these getting zeroed out (which hampers the ability of banks that are still around to raise capital). These are precedents that may prove very expensive to the depository insurance fund overall, more expensive than a slow wind down of FRC and SVB.

And I’m out now !

The key question—did the “sale” occur on similar “juicy” terms as SVB and FRC? No, because Sheila Bair actually had a spine and worked to minimize losses to the deposit insurance fund. With the current admin, there is no such effort. https://www.ft.com/content/b860ebb6-f202-4ec6-a80c-8b1527c949f4

You’re right that insolvent banks should remain insolvent and equity holders in a highly levered company like a bank should be hosed. However, the rapid receivership and sale of SVB and FRC on juicy terms to the buyer (First Citizens and JPM) may have unintended consequences — If you are a bank looking to acquire a struggling lender, why not wait until receivership now? In the past you might have bought the struggling bank for single digit (low market cap) common stock price (preferred/debt holders would be spared). This is what happened with Bear and Credit Suisse. Now there is no incentive to bid on a struggling bank until after it fails. After all, in receivership, the FDIC will gladly take on some of the losses from you so now you get a much better acquisition price. Meanwhile the politicians will say this is “not a bailout” when in fact the “FDIC assessments” are in effect socialization of losses onto the bank’s customers (ie. the taxpayer).

Anyway, I bought some PACWP in the 10s

Our regulators are total clown shows. Not only have they furthered moral hazard, but they have made every other bank in danger now because they’ve announced to everyone that any bank can be easily taken under with a total wipeout of common, preferreds, and debt & the FDIC will gladly just hand off the good stuff to a well connected buyer. Even when JPM bought Bear the gov’t/shareholders forced them to raise the bid. And even the Swiss forced UBS to ascribe some value to Credit Suisse’s common (though AT1 rightfully got washed). Now the ability of remaining banks to raise capital via common, preferreds, and corporate debt is taking a hit.

So what a hilarious turn of events. JPM gets a sweetheart deal for FRC with FDIC taking some loss and preferred/corporate debt of FRC wiped along with common. This is after SVB was “sold” in similar fashion to another bank. Now those holding PACW, WAL, etc are wondering—why would anyone ever buy a bank before receivership? The common, preferred, and debt are taking a hit as this is digested. And Dimon said “the crisis is over” after he secured his good deal…

Since the report became public on 4/17, WFC and USB are pretty much neck and neck (both down around 3.8%). Guess that pair trade (long WFC/short USB) wasn't a slam dunk. A wonder how many hedgies out there generate "alpha" by taking positions and then going public with their thesis to try to push the market towards their trade. The Bill Ackman model... In exchange for this "alpha", they trade in their own long term credibility. As Warren says, takes a lifetime to build a reputation and 5 minutes to lose it...

The rules will be "phased in" over a couple of years. USB was already planning on needing to meet more stringent requirements by end of '24 because it projects it will become a category II bank around that time.

Yeah if you are buying a holdco carcass to pull a fast one on the FDIC then the remaining net tangible assets might matter, I’m not sure it matters in this case as much (and yes BAC doesn’t look great on that standpt). They also seem fine on liquidity standpoint and stated their AFS duration is down to 3.8 years now. Mgmt also stated they got swaps/etc during the qtr to mitigate long end interest rate rise. What’s amazing is that folks are drumming up worry about capital ratios today when back in the day it was quite common for big institutions to be levered 30 to 1, even 40 to 1 for long periods holding god knows what kind of “risk weighted” assets. Relative to those days, banks are flush with capital holding safe & liquid securities, so I’m not getting this fixation on CET1 which is a highly scrutinized metric. If there is a bank implosion, I don’t think it will be due to CET1 ratio problems… If you have sticky deposits (unlike SVB) and don’t have massive credit risk (which is what the stress tests are designed to detect), where is the point of failure going to be ?

So we've seen the 10 year U.S. treasury yield drop from a YTD high of 4.07% to 3.37% today. On Dec 31 (when bank balance sheets show their 10-ks), it was ~3.88%. As for the 30 year note, it's down from YTD high of 4.02% to 3.64% today. On Dec 31 it was ~3.98%. If you took a bank's balance sheet today (and likely on 03/31/23 which 10-Q for Q1 will record), there should be a decline in unrealized losses. Some banks might even have been able to unload some loans/securities at decent terms in order to generate liquidity. Meanwhile, some of those proceeds can be parked in ultra short term Treasuries yielding north of 4.5%... Interesting to consider that if long end of the curve keeps falling how much of the banking "problem" of unrealized losses gets solved and how quickly.

Do you know a lot of small businesses? Because those would be the large (much more than 250k) deposits to worry about. If those are steady, then the concern is limited. But few individuals have > 250k in bank accounts. In fact, the avg American has far, far less...

That's the thing about all these simplistic spreadsheets and scatterplots--some are only looking at HTM or only looking at securities (and ignoring loans--that much bigger other asset banks hold). Some banks have zero HTM securities but still have long duration on their AFS securities. While these charts/sheets might reveal outliers and which banks to avoid, I don't think they give you clear idea of which banks to invest in. In order to get a good idea of that, you need to dig much deeper.