Daily Brief - 🌩️ Is the bank run over?

TLDR: A firebreak is a gap in vegetation or other combustible material that acts as a barrier to slow or stop the progress of a bushfire or wildfire. It sacrifices a small amount of vegetation - firefighters usually chop it up and dig a trench - in order to protect the area beyond it. This, more or less, is what the government did over the weekend when it announced it would protect even uninsured deposits at the SVB. Why?

First, let’s review what happened. VCs kept throwing money at SVB’s customers (startups with world-changing ideas), and they kept depositing it at SVB. These customers didn’t need loans because trucks full of cash were backing up into their offices before the ink was dry on the term sheet.

When you have all this customer cash you need to do something with it. Keeping it in Treasury bills was not a great choice back in 2021. They yielded virtually nothing. So as a prudent bank that takes its fiduciary duty seriously you buy longer-dated, but also very safe, securities like Treasury bonds and agency mortgage-backed securities. Same thing, right? And they yield more.

Except it’s not the same. Because while they have the same credit risk these securities had MORE duration risk. And that’s where it gets interesting.

In traditional banking, you make your money by taking credit risk. You get good at knowing your customers, and how much (and whether) to lend to them - at variable interest rates so that when interest rates go up, you make more money.

Instead of making loans to risky corporate borrowers, SVB bought long-term bonds backed by the US government. It took less credit risk in exchange for taking an unusual amount of interest rate risk (or duration risk, in WS lingo).

Duration risk is the risk that changes in interest rates will either increase or decrease the market value of a fixed-income investment. Because payments on a 5 year US Treasury security are fixed, if the interest rate changes, then the market value of the investment will change. And if interest rates go up, the value of that security must go … down. Why?

Well, if you’re holding a bond that pays 2 percent, and interest rates move up so that most new bonds are paying 4 percent, your old bond becomes about as desirable as a pet scorpion. And in 2022 rates did go up quite a bit.

It turns out SVB was far from alone in nursing huge losses on their portfolio of otherwise safe securities. The chart above shows the huge losses across the banking system on their investment portfolios. A rapid run on SVB showed that other banks were vulnerable to any hint of bad news stemming from their balance sheet losses.

The government couldn’t take the risk that a headline “depositors loses half their cash in SVB debacle” could cause to the banking system. It may take a small loss - it claims it won’t - on the SVB move but it’s likely this “firebreak” will have saved a lot of the non-systemic banks.

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TOGGLE Leading Indicators: One more bullish indication

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General Interest: The end of the Oscar movie

The times, they’re ah-changing.

Even without all the SVB-related excitement, many might have missed the fact that Sunday was Oscar night. For a while now, Oscars have seen a decline in interest from the broad public.

The reasons are many and probably connected to the end of the age of the movie theater - in favor of the black mirror. Be it as it may, the profile of Oscars winners is changing.

In the words of the Financial Times:

“And so the Oscar for Best Picture, gleaming yardstick of excellence in modern history’s most popular art form, now seems set to go to a film that asks what life might be like were our fingers made of hot dogs.“

The FT goes on an interesting analysis of the shift in culture and taste amongst consumers and producers of media alike.

Read more about it here on the FT ($) or The Verge (free).