Savings And Loan Crisis

David Goldsmith

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With the collapse of Silicon Valley Bank the situation is looking eerily similar to when FSLIC had to take over hundred of banks and form the Resolution Trust Corporation.

"Starting in October 1979, the Federal Reserve of the United States raised the discount rate that it charged its member banks from 9.5 percent to 12 percent in an effort to reduce inflation. At that time, S&Ls had issued long-term loans at fixed interest rates that were lower than the newly mandated interest rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could not attract adequate capital from deposits and savings accounts of members for instance. Attempts to attract more deposits by offering higher interest rates led to liabilities that could not be covered by the lower interest rates at which they had loaned money. The end result was that about one third of S&Ls became insolvent."

"The Resolution Trust Corporation (RTC) was a U.S. government-owned asset management company run by Lewis William Seidman and charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision (OTS) as a consequence of the savings and loan crisis of the 1980s.[1] It also took over the insurance functions of the former Federal Home Loan Bank Board (FHLBB)."

Of course there were a number of scandals uncovered along the way.

David Goldsmith

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Mortgage rates tumble in the wake of bank failures
The average rate on the popular 30-year fixed mortgage dropped to 6.57% on Monday, according to Mortgage News Daily.
If rates continue to drop now, buyers could return to the housing market once again.
"This mini banking crisis has to drive a change in consumer behavior in order to have a lasting positive impact on rates. It's still all about inflation," said Matthew Graham, chief operating officer at Mortgage News Daily.

The average rate on the popular 30-year fixed mortgage dropped to 6.57% on Monday, according to Mortgage News Daily. That's down from a rate of 6.76% on Friday and a recent high of 7.05% last Wednesday.

Mortgage rates loosely follow the yield on the 10-year Treasury, which fell to a one-month low in response to the failures of Silicon Valley Bank and Signature Bank and the ensuing ripple through the nation's banking sector.

In real terms, for a buyer looking at a $500,000 home with a 20% down payment on a 30-year fixed mortgage, the monthly payment this week is $128 less than it was just last week. It is still, however, higher than it was in January.

So what does this mean for the spring housing market?

In October, rates surged over 7%, and that started the real slowdown in home sales. But rates then started falling in December and were near 6% by the end of January. That caused a surprising 8% monthly jump in pending home sales, which is the National Association of Realtors' measure of signed contracts on existing homes. Sales of newly built homes, which the Census Bureau measures by signed contracts, also surged far higher than expected.

While the numbers for February are not in yet, anecdotally, agents and builders have said sales took a big step back in February as rates shot higher. So if rates continue to drop now, buyers could return once again — but that's a big "if."

"This mini banking crisis has to drive a change in consumer behavior in order to have a lasting positive impact on rates. It's still all about inflation," said Matthew Graham, chief operating officer at Mortgage News Daily.

Markets now have to contend with the "inflationary impact of consumer fear," he added, noting that Tuesday brings a fresh consumer price index report, a monthly measure of inflation in the economy.

As recently as last week, Federal Reserve Chairman Jerome Powell told members of Congress that the latest economic data has come in stronger than expected.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said.

While mortgage rates don't follow the federal funds rate exactly, they are heavily influenced by both the Fed's monetary policy and its thinking on the future of inflation.

David Goldsmith

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President Joe Biden sought on Monday to reassure markets and consumers that any collateral damage from the implosion of Silicon Valley Bank would be limited. As the government emphasized no taxpayer dollars would be used to clean up the mess (thus obviating any use of the word “bailout”), he also promised to hold responsible those behind the collapse of SVB as well as Signature Bank, whose crypto industry ties may have led to its undoing. “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Biden said at the White House.
Greg Becker, chief executive of Silicon Valley Bank Photographer: Lauren Justice/Bloomberg

So who is to blame? The SVB failure has many pointing fingers at Donald Trump-era deregulation. Eight years ago, SVB Chief Executive Officer Greg Becker urged Congress to pass legislation that would let his firm skate on all the work that comes with stress tests and resolution plans. Legions of executives from other regional lenders made a similar case. Eventually, they got their wish. With more than a few Democrats joining Republican majorities in backing the measure, Trump in 2018 signed a law that allowed mid-sized banks like SVB to skirt some of the strictest post-financial crisis regulations. “We’ve known since 2008 that stronger regulations are needed to prevent exactly this type of crisis,” said Democratic Representative Ro Khanna, who represents Silicon Valley. “Congress must come together to reverse the deregulation policies that were put in place under Trump.” The policies Democrats want to reanimate stem from the famous Dodd-Frank bill that arose from the ashes of 2008. One of the deeper ironies of today’s news is that Barney Frank—the Frank in Dodd-Frank—helped oversee Signature Bank. —Natasha Solo-Lyons and David E. Rovella
I have to say I'm conflicted on these bailouts. I remember my grandfather being pretty perturbed by the Chrysler bailout in the '80s, for what he called a failed company with bad products.

All the banking regulations and other financial regulations, don't seem to be enough. Especially if you know the government's going to bail you out if you screw up royally.

I have a neighbor who doesn't have hurricane insurance (wind) down in Florida. When I asked him why, he said " in the unlikely event that wind does significant damage to my house, the government will come in and bail us all out".

That said I was very surprised to hear that individuals would exceed the insured amount by such large sums in a small institution like svb. I'm not that financially sophisticated, but I have been very concerned when I've reached the limits at Chase. Guess I'm a believer in Murphy's law.

David Goldsmith

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If you owe someone $80,000 it's your problem. If you owe someone $800 million it's their problem. Very rich, very important people left large amounts of money over the limits at SVB. Then VCs called for a run on the bank and caused its collapse. I'm willing to bet we will see some of those same people buying their assets at a discount in the liquidation.

Also remember that for under the $250,000 cap the banks pay for the deposit insurance.Over that they don't. So once again the taxpayer is bailing out rich companies who the insurance was never even paid for.

David Goldsmith

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Silicon Valley Bank Was a Wall Street IPO Pipeline in Drag as a Federally-Insured Bank; FHLB of San Francisco Was Quietly Bailing It Out​


If you want to genuinely understand why Silicon Valley Bank (SVB) failed and why Jerome Powell’s Fed led the effort yesterday to make sure $150 billion of the bank’s uninsured depositors’ money would be treated as FDIC insured and available today, you need to take a look at how the bank defined itself right up until it blew up on Friday. (That history is still available at the Internet Archives’ Wayback Machine at this link. Give the page time to load.)
This was a financial institution deployed to facilitate the goals of powerful venture capital and private equity operators, by financing tech and pharmaceutical startups until they could raise millions or billions of dollars in a Wall Street Initial Public Offering (IPO). The bank was also involved in managing the wealth of those startup millionaires or billionaires once they struck it big in an IPO.
Many of the former startup companies also continued to keep their operating money at the bank – in many cases in the millions of dollars, ignoring the fact that just $250,000 of that was insured by the Federal Deposit Insurance Corporation (FDIC). Last Friday, dozens of publicly-traded companies made filings with the Securities and Exchange Commission indicating that they had large sums of uninsured deposits now frozen at Silicon Valley Bank. Several indicated that the amounts represented 23 to 26 percent of the company’s cash and/or cash equivalents.
Roku, Inc., the publicly-traded manufacturer of digital media players for video streaming, reported the following to the SEC: “The Company has total cash and cash equivalents of approximately $1.9 billion as of March 10, 2023. Approximately $487 million is held at SVB, which represents approximately 26% of the Company’s cash and cash equivalents balance as of March 10, 2023.”
Publicly-traded Oncorus, Inc., a biopharmaceutical company focused on developing RNA-based medicine for cancer patients, reported the following to the SEC: “The Company informs its investors that it has deposit accounts with SVB with an aggregate balance of approximately $10 million, which is approximately 23% of the Company’s total current cash, cash equivalents and short-term investments. In addition, the Company has a standby letter of credit in place with SVB of approximately $3.4 million securing obligations under its lease agreement with IQHQ-4 Corporate Drive, LLC.”
In big, bold type on its website, Silicon Valley Bank bragged that “44% of U.S. venture-backed technology and healthcare IPOs YTD [year-to-date] bank with SVB.”
To put it bluntly, this was a Wall Street IPO machine that enriched the investment banks on Wall Street by keeping the IPO pipeline moving; padded the bank accounts of the venture capital and private equity middlemen; and minted startup millionaires for ideas that often flamed out after the companies went public. These are the functions and risks taken by investment banks. Silicon Valley Bank – with this business model — should never have been allowed to hold a federally-insured banking charter and be backstopped by the U.S. taxpayer, who was on the hook for its incompetent bank management.
We say incompetent based on this fact alone (although there were clearly lots of other problem areas): $150 billion of its $175 billion in deposits were uninsured. The bank was clearly playing a dangerous gambit with its depositors’ money.
Adding further insult to U.S. taxpayers, the Federal Home Loan Bank of San Francisco was quietly bailing out SVB throughout much of last year. Federal Home Loan Banks are also not supposed to be in the business of bailing out venture capitalists or private equity titans. Their job is to provide loans to banks to promote mortgages to individuals and loans to promote affordable housing and community development.
According to SEC filings by the Federal Home Loan Bank of San Francisco, its loan advances to SVB went from zero at the end of 2021 to a whopping $15 billion on December 31, 2022. The SEC filing provides a graph showing that SVB was its largest borrower at year end, with outstanding advances representing 17 percent of all loans made by the FHLB of San Francisco.
Loan Advances Outstanding at Federal Home Loan Bank of San Francisco, December 31, 2022

Notably, another bank which had $14 billion of loans outstanding from the FHLB of San Francisco – First Republic Bank – saw its stock price plummet by 14.8 percent on Friday. In premarket trading this morning, its stock was down another 70 percent, despite the announcement of a new bailout facility last evening by the Fed.
Western Alliance Bancorp, also on the FHLB of San Francisco’s list of its top 10 borrowers, saw its stock close with a loss of 20.88 percent on Friday. It had lost another 29 percent in premarket trading this morning.
Another member of the top 10 borrowers at FHLB of San Francisco, Silvergate Bank, announced last Wednesday that it was closing shop and liquidating. Silvergate’s problem stemmed from the hot money it held in deposits from crypto companies heading for the exits as investigations began into its role in potentially laundering money for Sam Bankman-Fried’s collapsed house of frauds.
Another crypto-related bank, Signature Bank, was shuttered by New York State regulators on Sunday, with the FDIC being named the receiver. All of its depositors, including its uninsured depositors, will also be made whole, according to a statement from the FDIC yesterday. Signature Bank’s filings with federal regulators indicate that more than $79 billion of its $88 billion in deposits were uninsured at the end of the fourth quarter of 2022.
Signature Bank was also quietly tapping into ongoing bailouts from a Federal Home Loan Bank. In this case FHLB of New York. Its borrowings from FHLB of New York exploded in the fourth quarter of last year, rising to $11.3 billion. According to an SEC filing, as of September 30, 2022, it had total borrowing capacity of $23.4 billion from FHLB New York.
We’re starting to see a pattern here. If you want to know which banks are going belly up next, simply look at which ones took the largest loan advances from a Federal Home Loan Bank last year. That appears to mean that they were seeing an exodus of depositor money and needed to plug their liquidity holes.
The new emergency lending program set up by the Federal Reserve was announced last evening, as follows:
“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
The translation of the above is as follows: to prevent banks from further panicking the markets by taking massive losses on their underwater Treasury securities by selling them in order to meet depositor withdrawals, we’re going to accept these Treasury securities as collateral for one-year loans and pretend that their market value is par (the full face amount at maturity).
It’s not clear if this new emergency bailout program from the Fed complies with the statutory language of Dodd-Frank, which prohibits the Fed from setting up an emergency bailout program to bail out a specific financial institution; requires that it accept good collateral; and requires that any new Fed emergency facilities be broad-based across the financial industry.
Federally-insured banks that did themselves in with crypto deposits or functioned as an IPO pipeline to Wall Street, do not appear to us to represent a broad base of the federally-insured, commercial banking industry in the U.S. The Fed’s bailout program, once again, appears to be rewarding hubris and enshrining moral hazard in the U.S. banking system.
Equally troubling, both Silvergate Bank and Silicon Valley Bank were supervised by the Federal Reserve Bank of San Francisco. Why the San Francisco Fed’s bank examiners didn’t blow the whistle on the dangerous manner in which these banks were operating deserves its own investigation. For years now, Wall Street On Parade has warned that the crony Fed should be stripped of its supervision of banks.


Well-known member
If you owe someone $80,000 it's your problem. If you owe someone $800 million it's their problem. Very rich, very important people left large amounts of money over the limits at SVB. Then VCs called for a run on the bank and caused its collapse. I'm willing to bet we will see some of those same people buying their assets at a discount in the liquidation.
The issue at this bank, and several others, is that they leveraged heavy into Freddie/Fannie MBS paying a fixed 2% or so for the next (up to) 30yrs. At the root of it, that’s what caused them to collapse. The bank management thought it a good idea to lever 6x into assets yielding 2% for the next 30yrs and then stuck to their guns as the position’s risk became more and more untenable. And the regulators stood idly by and allowed it to happen. Eventually, depositors caught on.

The bank had around ~$15B of capital and ~$190B of deposits. They kept ~$40B in cash and short-term securities, loaned out ~$65B through lending channels, and lent out ~$100B of through MBS (!!!). When the value of the MBS dropped by ~$20B because of rising interest rates, they had zero equity left. But accounting rules allow them the fantasy of not reporting a ~$20B loss. In fact, they reported a $1.5B gain for 2022.

The run started when people understood the fact that the bank had zero equity. If the bank actually had equity, selling or borrowing against highly-liquid MBS would not have been a problem to meet depositor demand for cash. It’s unwise to lend money to imprudent investors with zero equity so they can hold risky assets backed by your lending. Saying that people pulling out money “caused” the collapse sounds like blaming the victim to me. The blame lies squarely with the bank for taking the risk, the regulators for allowing it to happen, and both for not raising (or forcing) a capital raise much earlier.

David Goldsmith

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An ‘existential weekend’: How two bank collapses roiled real estate​

Latest episode of TRD’s Deconstruct streaming on Apple, Spotify and more

First, Silicon Valley Bank collapsed. Then Signature Bank shut down. A few days later, 11 banks extended First Republic Bank a $30 billion lifeline — which proved insufficient.
Real estate investors, brokers and developers were left asking, “How does this affect me?”

On the latest episode of The Real Deal’s podcast Deconstruct, hosts Isabella Farr and Suzannah Cavanaugh and senior reporter Keith Larsen explain the catalysts behind the bank collapses and the lasting impact on regional banks, real estate lending and the Fed’s next steps.
From what happens to the banks’ letters of credit to landlords’ scramble to move deposits from Signature, Deconstruct breaks down how these two banks were intertwined in the real estate industry.

For many multifamily owners in New York, Signature Bank was one of the main sources of capital. That could wreak havoc with the normal course of business for many landlords.
“If other regional lenders don’t have enough deposits on hand to make loans, landlords will have to go to the big banks,” Cavanaugh said on the podcast. “The problem, though, is that in a high-interest-rate environment, regional banks were offering really competitive rates.”

In San Francisco, all eyes are still on First Republic Bank and whether the $30 billion deposit infusion will be enough to keep the regional bank, and major real estate lender, afloat. Early indications are that it won’t be.
Tune into the full episode, now streaming on Apple, Spotify and wherever else you get your podcast fix.

Note: After this episode was recorded, the Federal Deposit Insurance Corporation announced New York Community Bank would assume all of Signature Bank’s deposits and a portion of its loan portfolio.


David Goldsmith

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What do John Belushi, River Phoenix, Chris Farley, Heath Ledger and Phillip Seymour Hoffman have in common?

Powell Explains the Fed’s New Regime: Rate Hikes & QT to Fight Inflation while Offering Liquidity to Banks to Keep them from Toppling
by Wolf Richter • Mar 22, 2023 • 20 Comments
An enormously important new regime gets engraved into central-bank handbooks. The ECB and Bank of England are also on board.


Well-known member
A lot changed for a bank over the course of 2022.

Very roughly, for each share they used to have $1000 of assets (in the form of loans) and $900 liabilities (ind the form of deposits), meaning $100 of equity. They used to collect $30 interest on the loans, pay $0 interest on the deposits, spend $20 on salaries & whatnot, leaving $10 profit for the shareholders.

Now, interest rates are up but they’re still collecting only $30 interest on the $1000 loans. From a fair value perspective, those loans are only worth $850 now. But they still owe $900 to depositors. So if they sold the loan portfolio today, they couldn’t cover what they owed. How much would you pay for ownership of that?

Alternatively, you can consider the fact that the bank does not have to sell its $1000 loan portfolio for $850. It can just hang onto it, collecting $30 interest for the next 10 years and eventually collecting its $1000 in principal after 10 years. The problem is that depositors now expect more than $0 interest on $900 in deposits — they want (say) $30. Good news is that you can keep it afloat, offsetting the $30 collected with the $30 paid. Bad news is that you still need to spend $20 a year to operate & pay everyone’s salaries. That’ll cost $200 over the next 10 years, burning through $100 of equity and then some. The main hope is that interest rates go down, and the bank gets out of the hole it dug for itself.

The question you should be perhaps asking is not why it went from $170 to $12 over the past few weeks, but rather why that didn’t happen earlier when all this became readily apparent.
When you know how to do the math, it's a pretty transparent game. But I think most retail buyers are just looking at price action. No kidding, I had at least three or four friends send me text messages, what do you think about buying first republic (no idea why they're asking me?) Of course I said I had no idea, because I didn't.


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I tend to poke into mortgage records of NYC home purchases. I hadn't really ever heard of First Republic until I started seeing their names on a material fraction of mortgage records, which were pretty much all jumbos. These are what they are presumably holding in their books.

I can't help but note the parallel between FRC and home buyers.

First Republic borrowed at 0% (from depositors) to lend at 3% (to home buyers), hoping to net 1% after operating costs in a ZIRP-forever environment. Their borrowing costs went up, both immediately and in terms of long-term prospects, meaning they were looking at the prospect of long-term negative carry and losing money slowly. No one really cared: people were perfectly willing to pay old prices (more or less) for the portfolio of assets and liabilities that comprise FRC, despite the vastly-soured negative carry prospects. Until one day, they no longer did.

In my corner of the RE world, owners borrowed at somewhere between 0% (from themselves) to 3% (from banks) hoping to net a 2% in benefit (against rent, effectively). Now borrowing costs have gone up to 5.x%, whether one borrows from themselves or the banks, meaning homeownership has a prospect of long-term negative carry and losing money slowly. But no on really cares: people continue to be perfectly willing to pay old prices (more or less) for homes despite vastly-soured negative carry prospects.


Well-known member
A few interesting excerpts:

First Republic had $33 billion of fixed-rate residential real-estate loans at the end of last year. It had $62 billion of hybrid-rate residential real-estate loans, which can switch from fixed to an adjustable rate.

That matches my experience looking at NYC jumbo loans, where I had previously said ARMs outnumber fixed-rates by 2:1 or so. Drastically different than the conforming market, where most reports say ARMs are less than 10% of the mix. I guess it's not only banks who took leveraged positions on ZIRP lasting forever.

The bank said that $4 billion of loans within its overall hybrid and fixed-rate portfolios will either mature within one year or are within a year of adjusting from their fixed-rate period. First Republic’s residential real-estate loans yielded 2.89% for full-year 2022.

Yeah, that's not gonna help them too much.

That creates a couple of challenges, firstly for the bank’s future net interest income, which is the interest it earns on its assets minus the interest expense it pays for funding. Last year, the average rate paid across all First Republic’s deposits—of which more than 40% on average were checking accounts that didn’t earn any interest—was effectively 0.4%. Now, First Republic said Thursday that its recent borrowings from the Federal Reserve were at an overnight rate of 4.75% and that its increased short-term borrowings from the Federal Home Loan Bank were at a rate of 5.09%.

It'll be interesting to see what their average rate of funding will be going forward.
First Republic is also known for being somewhat easier to deal with in buildings with less than ideal financials. At least in the past the bank was more concerned with the net worth / income of the borrower, a little bit less concerned with the subject building.

We have a deal closing with First Republic next week, there was a little bit of a scare when all this started happening. Buyers had a financing contingency, however not a funding contingency (very difficult to secure in New York City). Happily we're on track to close.

David Goldsmith

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But no on really cares: people continue to be perfectly willing to pay old prices (more or less) for homes despite vastly-soured negative carry prospects.
Until they don't.