Why don’t banks hedge interest rates? Interest rate risk management seems obvious if running a bank. This is the problem.
Just for the record in 1929...a lot of what occurred then was the unrealized (non-existent) funds in the bank vaults and on the books...where the bank executives/clerks had taken a ‘cut’ of cash weekly/monthly/yearly, and the books had never been audited to show this problem.
When the customers felt that the bank might fail....they went to the banks to ask for their money, and rapidly emptied out the true cash reserves sitting at the bank.
A lot of smaller banks in the US didn’t fail...mostly because of honest intentions over the years prior. Bigger banks had simply hidden the lost reserves, in some cases, for decades.
Presently, one gets the impression that management has carried losses for years (even before 2008), and just trying to figure out a path to escape this approaching problem.
Not. Good.
The idiot fed dumped trillions into the system, and banks bought bonds and securities for the interest rate.
Then the idiot fed jacked up rates too fast, and these bonds and securities were under water.
Now what??? All it takes is a black swan spark.
US banks are much healthier than they were in 2008. They’re also much healthier than European banks which never realized anywhere near as many of their toxic assets nor took nearly as many write downs.
Here is how the unrealized losses have affected me personally. Each of the seven homes I’ve bought had been abandoned and taken over by the bank. I’d say, on average, these homes had been empty for seven years. Why did it take so long for the bank that had repossessed them to finally put them up for sale? As long as they don’t sell the home, then it’s on the books as an asset at X value. Once they sell it at, say, one half X then they book a loss. I’m pretty sure the only reason some of these homes were put up for sale is because the bank was being sold or offered for sale. The buying bank will not accept the bookkeeping shenanigans intended to keep the sale target looking good. To sell the bank and claim the repossessed house is valued at X would be a clear case of fraud.
Even if banks have unrealized losses on the books, can’t they start to “write down” these amounts on their balance sheets, so that we get a true picture of their financial situation?
As I recall from Accounting 101, the balance sheet must balance; it’s not optional. And if the liabilities( bank customer deposits) exceed the assets, the bank has negative net worth as an ongoing business.
So could some of this be resolved, if they actually reported the asset holdings at the actual value? As I understand it, some bank assets in the form of loans, are written down if those loans are not being repaid. Why don’t they do the same with these bonds and securities held by banks in their asset base?
In any event, it seems the financial records do not show the true financial health of these banks.
Anyone who invests understands the difference between realized and unrealized losses. Losses in the value of a stock price occur all the time, but if the fundamentals of the company and forward guidance are sound, nobody but the idiot day trader’s that show up on CNBC get panicked.
With bonds its even less a problem. If bonds are held to maturity, the principal and interest payments are paid exactly as stated on the bond. Nobody loses a dime, guaranteed.
If interest rates increase, investors evaluate whether it makes sense to sell the bonds at a loss and raise cash to take advantage of a better opportunity. The other reason SVP and other small banks had to sell long term bonds at a loss was because they had to raise cash to pay all their panicked depositors who stampeded into a run on the bank. They should have understood the first rule in the Hitchhiker’s Guide To The Galaxy. Don’t panic.
My grandfather was a finish carpenter & cabinetmaker back in the 1920s.
He employed two other men in the trade as well. It was a thriving business in its day.
My dad was just a very young boy back then, but he would help out in the shop by sweeping up sawdust, picking up debris, tools, etc....whatever a little fella could do to help and not get in the way to earn a nickel/week.
My grandfather had almost $5000 cash in the bank (everything was done with cash back then) that he used to further his business: payroll, materials, additional tools, etc....whatever was needed to keep the business going.
When the “crash” hit in ‘29, the bank permanently closed its doors overnight and posted armed guards to hold the people back. It never reopened, and he never got a single red penny of his money back...not a penny. It emotionally and financially destroyed him, not to mention the two families that depended on that business for income.
My dad NEVER trusted a bank from that day forward....ever. The whole time I was growing up, he’d literally stash paper money in a mattress and coin money would be sealed up in mason jars that he’d actually bury in the backyard. He kept a little hand-drawn pencil map as to where each jar was buried. My poor mother had an awful time with him in that regard. I can remember when she finally convinced him to dig em all up because they wanted to buy a nicer house. Our backyard looked like a prairie dog town when he was done digging em all up....I’ll never forget it...LOL
He told me the whole time I was growing up to NEVER trust a bank, not even trust their clock on the outside of the building, even if the whole U.S. government treasury stood behind it. He’d always say that anybody that would trust a bank with their life savings was outright utter fool. He went to his grave with that mindset.....I always thought he was just crazy.
Maybe he wasn’t so crazy after all.
One analyst said that’s exactly why he will never buy bank stocks.
Banks typically have low equity relative to their assets. So if assets decline by a “regular” amount for a “typical” American financial crisis, they are quickly technically bankrupt.
1. Federal Government funds Gain of Function research in Wuhan. Result: Covid-19 pandemic.
2. Covid 19 pandemic gives government an excuse to shut down business, run roughshod over liberty.
3. To address their destruction of business, government offers all sort of handouts to “help”. Huge federal borrowing, huge transfers to States to waste, huge corruption.
4. Biden/Democrats double down on deficit spending.
5. Biden/Democrats kill domestic energy production causing ncreases in energy costs. At the same time, wage hikes unconnected to productivity gains occur due to artifically created worker shortages and minimum wage increases.
6. Inflation predictably skyrockets.
7. In response to the hyper-inflation the Dems have caused, the Fed raises interest rates sharply.
8. Higher interest rates gut the value of bonds held by banks, diminishing their core capital, and making them extremely vulnerable to bank runs.
The banking problem is caused by government ineptitude (and lots of political cronyism, woke investment, etc. —all of which is not far removed from being government too).