CONTAGION thread

Investment Analysis Clubs Macro Economic Trends and Risks
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A central thread to post up interesting things from the news in the next few weeks as the problem spreads.

https://edition.cnn.com/2023/03/11/business/stablecoin-circle-silicon-valley-bank?utm_source=business_ribbon

Stablecoin USDC breaks dollar peg after revealing $3.3 billion Silicon Valley Bank exposure

https://edition.cnn.com/2023/03/10/business/roku-svb-cash

These companies held money at Silicon Valley Bank and aren’t sure if they’ll recover the funds

Roblox also said in a filing that 5% of its $3 billion in cash was held at SVB.

Crypto lender BlockFi disclosed it held $227 million with SVB

Aerospace manufacturer Rocket Lab held almost 8%, or approximately $38 million, of its total cash at the collapsed bank, it said in a Friday filing.

Roku held approximately $487 million of its $1.9 billion in cash at Silicon Valley Bank

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My estimated loss: $99 million, assuming it was cash on deposit with SVB. If they were invested in SVB stock, things will be a whole lot worse. But then again, this is a garbage investment to begin with. Stable coin going under is probably doing society a favor.

As to the rest, I’ll categorize this under “fear mongering.”

My estimated loss: $4.5 million (about 0.15% of it’s total cash)

My estimated loss: $7 milliion

My estimated loss: $1 million (about 0.2% of their total cash)

My estimated loss: $15 million (about 0.8% of it’s cash)

From a more sober look at SVB numbers, depositors should get about 97% - 98% of their deposits back. Painful, for sure, but that shouldn’t be an existential threat to any of these businesses.

–Peter

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SIVB - hmm let’s see. Quick eyeballing.

  • core equity assets (120bn) invested in something like TLT from 2018 to today. Eyeballing it: $130-135. Value of TLT today: $105. Capital loss on that bit: 20-23%.

  • They have 3/4 (90bn) classed as ‘non-short-term, held to maturity’ but it is becoming ‘mark to market’ so that loss suddenly becomes real. I’ll takes 23% of 90bn. $20bn ish.

  • Total equity last annual report was: 16 billion.

  • Unknown: % debt loans going bad lately on (74 billion) lending. Loss provisions tripled last year. Assuming they double again that would be 1bn. Just a bad-case-sort-of-guess.

So on balance I’m inclined to agree it is probably fear-mongering.

  • total wipeout of shareholder equity, doesn’t affect savers.

  • maybe a further loss of 5bn, split among 195bn liabilities, so that’s about 2.5% loss.

  • if we assume half the customers got their money out early in full, that would be 5% loss for the remaining ones.

Nonetheless. The actual losses to bank customers were very low in 2008 too, other than shareholder wipeouts. Nonetheless, panic & contagion is a real effect. It’s not like any bank wants to have their shareholder equity zeroed.

If SIVB is bought out, I can even see a white knight bank agreeing to cover a few billion to ensure no one loses anything in exchange for the business.

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Here’s one more to add to the list.

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Hi, Lindsey, I’m Peter. A bit about me:

-California, widowed father of a disabled son
-I employ 1 person part time
-Used to drive a used Honda Odyssey, now have an even older Chevy Suburban
-The financial future of my company is OK because I use two different banks.

Since I’m a CPA/MBA, I have a couple of suggestions for you. Just guessing that you need about 150k a month to pay your team. They are the most important assets in your business. Be sure to take care of them.

On Monday, you will have $250k of cash available in your SVB accounts. Immediately take most of that cash and open an account at another bank. Doesn’t really matter which one - pick a bank convenient to you. Keep that cash available for payroll.

Call every other vendor you have, let them know of your situation, and negotiate for some additional time to pay any amounts you owe them. Whatever it takes to conserve your cash on hand. If you thought cash flow was tight before, you will need to make it even tighter than that for a while.

Whatever invoices you collect in the next couple of weeks, get that money into the new bank. You need your cash to be fully accessible again. Don’t put any more into the SVB accounts until everything is settled and you again have free access to your cash there.

If you need to make payments to SVB for any loans from them, make those payments from your SVB acccounts, even if it is in excess of the available balance. Pay them with their own funny money for the time being.

Plan on losing 3% of whatever the balance was on the bank’s books as of last Thursday evening. That’s gone. Don’t fret over it, don’t think you can change it, don’t waste any emotional capital on it at all. That is your tuition in this practical course on banking.

Then get on with whatever your business is about. Frankly, after reading the home page on your web site, I have no idea what you do. I think you might help handle the personal lives of rich people. Maybe. Or maybe you just have photos of people relaxing in various and sundry places. I’m not really sure. But I’m an accountant, not a marketer, so perhaps my observations on that particular subject aren’t that useful.

At any rate, deal with this bump in the road and get on with the business of your business. And always have a deposit relationship with two different banks. Never promise an exclusive relationship with any bank. Because you are always going to be the small fry and they are the big fish. They will stomp on you without hesitation if it makes them a buck or improves the odds of their survival. You need two different banks to help improve the odds of your own survival.

–Peter

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Bloomberg article on Yahoo

USD Coin is being backed up at this hour and has sprang back.

The issue is US paper. The FED may keep raising the FF rate but the more important thing is what happens to the long end of the yield curve. That is the risk. I am sure the FED/Treasury are running stress tests on the major banks and other financials. The other major countries holding long maturities not just US paper need to do similar stress tests.

If it was just something like $400 billion in longer maturity dates in the major banks most of them can hold out and make it. The issue would be if one or two of the major financials held say greater than $600 billion or more relative to how many trillion in assets they managed.

Then there is this…this is where the risk is…different pensions funds around the globe are based often on the longer duration bonds.

If the long end of the curve goes mad we can see big trouble.

Foreign bond holdings reached a record-high of 25.71% of GPIF’s assets under management in the October-December quarter, up from 23.46% in the previous quarter. Holdings of Japanese bonds reached a record low of 23.64% compared with 26.61% in the July-September quarter.

Hammering in Fixed Income
The sovereign investor got hammered in its fixed income portfolio, with corporate bonds providing a -11% return for the first half of 2022, government-related bonds at -11.3%, government bonds at -9%, inflation-linked bonds at -10.1%, and securitized bonds at -9.3%. The sovereign fund’s three largest bond holdings were of U.S., Japanese, and German government bonds. U.S. Treasuries accounted for 25.9% of fixed income investments and returned -5.1%, while Japanese government bonds made up 10.3% of fixed-income investments and returned -14.0%, and euro-denominated government bonds amounted to 8.9% of fixed income investments and returned -15.5%.

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