Deja Vu All Over Again

You may have caught some news about the failure of Silicon Valley Bank. Now, the road from the Wharton School of Business to Wall Street is paved with everything I don’t know about finance, and my point isn’t going to be what led up to the SVB debacle, exactly, but I’ll try to briefly explain.

Bank caters to Silicon Valley, so very high level of business with Tech. Tech has bad year. Needs cash from Bank. Bank is backed up with a mix of assets unusually high in long-term bonds. These are like CDs, in a way. Bank has borrowed the money for a fixed rate, but bonds can be bought or sold on the markets. To cover withdrawals, Bank has to sell a bunch of these well before their term. Since interest rates are suddenly much higher, there are much better deals out there for bonds, so their value (and the asset sheet of Bank) is greatly reduced–it’s a fire sale.

About the time Bank is down about $2 billion, they decide they better own up to the situation (plus going public eases concerns over their insider selling of company stock, I would guess). In the land where everyone is a millionaire, 85% of Bank’s deposits are over the $250,000 federal insurance limit. Panic ensues. Bank runs out of cash.

Enough similar things are happening to banks worldwide that governments are immediately mobilized to come up with solutions, most essentially to quell a growing sense of unease over the safety of deposits.

Feds step in. Everyone will be covered. Not a bailout, of course. Stockholders are out (except the ones who already got out). Estimated $20 billion cost to come from FDIC funds–not from taxpayers, but to be reimbursed by future fees to member banks (set a reminder for five years from now to check on how that worked out).

But wait, there is still billions of dollars of stuff laying around FDIC/Bank. What to do about that?

You have an auction. Fair is fair, right? Somehow, nobody wants any part of it. You get one bid, which you don’t like so much. Maybe the package was unreasonable, so you say bad auction and try again. There are only two bidders, according to reports. Somewhere along the line, concessions are made. You quickly arrive at a deal with First Citizens Bank. Done.

Who are they?

First Citizens’ growth has accelerated in part through the purchases of more than 20 failed small banks since the 2008 global financial crisis, the report said. The acquisitions landed assistance from the FDIC, the agency that operates the deposit insurance fund for depositors at US banks.

Carla Mozée 
Mar 30, 2023, 3:25 PM

These folks out of, you might have guessed it, The Wharton School, seem to specialize in “landing” assistance from the FDIC, which has turned out to be a very cozy niche, indeed.

In my novel The Robin Spring, there is a bunch of stuff about the savings and loan crisis from the late 80s. Here’s a passage:

The bank didn’t technically fail. It was “resolved” by the FDIC, a new practice by which connected bankers cherry pick among damaged institutions retaining some marketable value. The new crowd, generally indistinguishable from the old crowd, provides the “expertise” to essentially set a discounted price to whatever they want, leaving the loss for The People to make up. However the cookie crumbles, the floor gets picked clean and the vermin fatter.

How much fatter? After announcing the deal last Monday, the shares of First Citizens BancShares holding company are currently up from about $500 to $973. This is a big bank. There are lot of shares. 13.5 million or so. That all adds up to just under $5 billion gained, if I’m seeing things right. The Feds did write a cut on equity appreciation into the deal, which amounts to about $500 million, or about a fourtieth of their $200 billion in estimated costs for the non-bailout of Bank. They really know how to drive a hard bargain over there at the FDIC.

Now, I get that there is a certain amount of “expertise” involved in taking over failing banks, but $5 billion in what are essentially consultant fees seems a little steep. And I know a contagion of panic could get very ugly–many, many banks are in similar positions, though generally to much lesser degrees. But once the FDIC had already set up an interim operation to service the depositors and things looked to be calming down, why the rush? Do you think maybe the FDIC might have gotten a better deal by taking more than two weeks shopping around a plum like this?

How do you get only two bids on a package potentially worth 100% gain to the bidders’ stockholders? Was that package ever really on the auction block?

At some point, that auction process sure seems to have shifted to sitting down with old friends from Citizens Bank.

But what do I know?

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