Posted on 09/09/2023 3:40:19 PM PDT by elpadre
Money isn’t free?
excerpted:
“...As a result of this lack of hedging, according to the FDIC’s quarterly report for the quarter ending March 31, 2023, unrealized losses on securities at U.S. banks stood at the staggering sum of $515.5 billion....”
Our national debt is around $32 trillion which takes more than $600 billion to service. What the hell is going on????
I guess risk management went out the window. Again. 2008 redux anyone?
Don’t know what to make of this. If banks match tenors of assets and liabilities (smaller banks in particular) they may not need derivatives (swaps) to hedge? Some institutions get into trouble trying to use derivatives and structured funding to speculate on rates or to cover short/long-funded positions.
I didn’t know Bankers live and Colorado Bankers life are in rehabilitation. Colorado life annuity holder will be lucky if they get 60% of their contracts back.
Hedging should only be used to protect against risk.
You pay your depositors close to zero percent interest and invest in 10-15 year government bonds at 1.5 -2.00%. Then we have 4% inflation and those pesky depositors want to be compensated for that inflation and earn at least 4% on their money market accounts and CDs at the bank. And U.S. short term bonds are paying about 5.0% and money market accounts offered by brokerage houses are paying 4.5% The bank will have a problem magnified a 1000 fold as current market rates on those 10-15 year bonds are now paying 4.5% and yours are paying 1.5%-oops. Huge losses on your bond porfolio.
One of the first rules in banking and persona finance as well. Match the maturity of the interest you pay your depositors to the interest you receive on your loans.
Don’t worry, everything will be fine, the banks won’t run out of money, We will just print more as we need it...
The problem in residential mortgage banking is that interest rate risk is one-sided in favor of the customer, not the bank. The customer can always refinance their mortgage when interest rates drop, but the bank doesn’t have that same option if interest rates rise.
Yes, excellent observation and that also presents a problem for bankers. The banks in California had problems since most of their investments were in those bonds paying 1.5% interest.
These are the same bankers who require my industry to hedge commodity price risk aggressively.
I am convinced, far beyond politics, its all a complete scam. I’m still not certain how or what’s holding it up, but the whole economy is a total illusion. The annual federal deficit is now nearly $1 trillion dollars ($918 billion). Debt service alone is now $600 billion. And the Feds keep spending like drunken sailors. How does this not collapse? How has it not yet collapsed? Whats is holding everything up? It’s a complete mystery to me.
Obadiah, the deficit for FY 2023 is $2+ Trillion…and nobody in DC gives a damn. We are heading to a $40 Trillion debt and a $2 trillion annual debt service cost, and nobody in DC gives a damn.
They are talking about interest rate risk. So they have a 10 yr bond and the bond only pays 4%. Right now the value of the bond is lower because you can easily get a 5% bond. But you don’t really need to care unless you are forced to mark to market and hit some arbitrary capital requirement. The reality is the fed makes up the arbitrary capital requirement. And it can (and does) give the bank credit for the purchased price up to the value of the bond. And that is why other banks are not going under. Also, banks are getting over 5.5% overnight rate from the fed. So they have no need to gamble on bonds.
Remember, the Fed owns more mortgaged backed securities than just about anyone. I wonder how far under water those things are?
Most banks, especially smaller ones, were dumping their paper as soon as the ink dried. There isn’t much good money in servicing loans.
Unless the customer took out an ARM.
In my case, I took out a special relocation ARM that was 5/15 @ 2%. That's a five-year fixed rate at 2% and then adjustable each year for the next 10 years.
When the five years was up, the loan adjusted upwards by 2% (the maximum allowed per year). I was able to do a loan modification to convert to a 10-year fixed rate at 2.625% in March of 2020 (the beginning of COVID-19).
Today, the rates are much higher than they were when most mortgages were taken out so the customer doesn't really have the option to refinance to a reduced rate. They may try to convert an ARM to a fixed rate to stop the growth, but they will still be locking in a much higher rate than a conventional loan would have charged them if they weren't attracted to the lower introductory rates of the ARMs.
-PJ
Staggering.
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