/biz/ - Business & Finance

>>54233767
And most of the time the bank bops along like this, in its cloud of probabilities. But occasionally a thing will happen to collapse the probabilities and force it to find a real number. Occasionally a bank will have to, in effect, sell all its assets over a weekend. Often the thing that causes this is bad: a bank run, a loss of confidence, an emergency. When this happens, the assets will probably sell at a discount. If the discount is more than about 10% — more than the equity cushion — then the shareholders get nothing. If you are in the sort of emergency that requires you to sell all of your assets over a weekend, it is arguably a little surprising to do better than a 10% discount.

Credit Suisse Group AG filed its 2022 annual report last week. It reported about 531 billion Swiss francs of assets and about CHF 486 billion of liabilities, leaving about CHF 45 billion of shareholders’ equity (about 8.5% of assets). When it filed the report last week, its stock was trading at about CHF 2.24 per share, for a total market value of the stock of about CHF 9 billion (about $9.7 billion).

One way to put this is that the market thought the stock was worth 20% of its book value. [2] But another, more useful way to put it is that the market thought that the assets were worth 93.2% of their book value: Credit Suisse’s CHF 486 billion of liabilities were real enough, so if the market priced the equity at CHF 9 billion then that implicitly meant that it valued the assets at about CHF 495 billion. The market thought that the reported asset value was off by 6.8%. But if the reported asset value was instead off by 8.5%, the stock would be worthless. The cushion was very very thin.

>>54146953
Obviously announcing the capital raise without having buyers lined up led to a disaster, but announcing a Moody’s downgrade without any capital raise would also have led to disaster. Announcing “Warren Buffett put $4 billion into our stock from his bathtub” would have avoided disaster, but requires Warren Buffett to actually do that, and apparently he didn’t.

Elsewhere in Goldman:

>As an adviser to Silicon Valley Bank, Goldman Sachs last week tried to pull off a last-minute capital raise to save the firm from collapse. But the Wall Street giant also had another role in the bank’s final days, for which it’s expected to collect a massive fee: It bought a cache of the bank’s debt in a deal that ultimately led to concerns about the bank’s viability.

>Goldman’s payday: In exchange for buying $21.4 billion of debt from Silicon Valley Bank — which the failed lender booked at a loss of $1.8 billion — Goldman is likely to make more than $100 million, DealBook has learned.

I mean the basic issue is that if Goldman is going to buy a $21.4 billion bond portfolio from you all at once, it is going to buy it at a discount, because reselling that portfolio will drive the price down. Except that the actual result of this transaction was (1) people panicked about SVB, (2) there was a flight to safety and (3) the value of that bond portfolio went up. When it announced the capital raise last Wednesday, SVB also said that it had sold a portfolio of $21 billion of Treasury and agency securities with a duration of 3.6 years. Since then, Treasury rates have fallen by something like 90 basis points, meaning that this portfolio has gone up by something like $600 million in the last week. [6] Presumably Goldman hasn’t just held onto all those bonds the whole time, but if it did, great trade, for Goldman anyway.

>>54126095
NOT NOW CREDIT SUISSE!
Come on:

>Credit Suisse Group AG said it found “material weaknesses” in its reporting and control procedures for the past two years, after questions from US regulators last week.

>The Zurich-based bank said Tuesday it will take steps to fix ineffective checks on the process it follows to pull together its financial reports. But the firm said its statements for 2022 and 2021 “fairly present” its financial condition.

There is never a great time for a bank to announce “hey turns out we don’t really know what’s going on at our bank,” but this week does feel like a particularly bad time.

>>54101231
Now we have to talk about accounting. Oversimplifying, there are two main ways for a bank to account for its assets:

1. The traditional way is to account for them at cost, the price you paid for them. If you lend a customer $100, you have a $100 asset — the loan — on your balance sheet. (You deduct something for the possibility they won’t pay you back, but let’s ignore that.)

2. The other way is to account for them at their fair market value. If you buy a bond for $100, you can go look at the market price for that bond at the end of the quarter; if it’s $97.75, then you have a $97.75 asset on your balance sheet. The other $2.25 is gone. [4]

The first approach gives you a reasonable picture of a bank that is continuing to operate as a bank: In my example, if you have $100 of bonds and $100 of deposits and the loans pay 2% and the deposits cost 3% and you are losing $2.50 per year, your financial statements will say that. Your balance sheet will say that you have $100 of bonds, so you will ultimately have enough money to pay back your depositors, but your income statement will say you are losing money each year.

The second approach gives you a reasonably accurate picture of a bank that has to shut down today: In my example, your balance sheet will show that you have $87 of bonds at fair market value, so you don’t have enough money to pay back all your depositors if you have to do it today.

>>54032965
6/10
But there is another, subtler, more dangerous exposure to interest rates: You are the Bank of Startups, and startups are a low-interest-rate phenomenon. When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off. Your clients who were “obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities” stop doing that. Your customers keep taking money out of the bank to pay rent and salaries, but they stop depositing new money.

This is all even more true of crypto — I mean, the Fed raised rates once and the entire crypto industry vanished? [4] — but it is not not true of startups. But if some charismatic tech founder had come to you in 2021 and said “I am going to revolutionize the world via [artificial intelligence][robot taxis][flying taxis][space taxis][blockchain],” it might have felt unnatural to reply “nah but what if the Fed raises rates by 0.25%?” This was an industry with a radical vision for the future of humanity, not a bet on interest rates. Turns out it was a bet on interest rates though.

>>52651783
BIG SHORT, SMALL MISTAKE?

Imagine that you thought in early 2008 that subprime mortgages would be trouble, so you bought a large credit default swap on mortgage bonds. In September 2008, Lehman Brothers files for bankruptcy, subprime mortgage bonds are in trouble, and you decide to settle up your bet for a big profit. You pull up the CDS contract to get the contact information for your counterparty, so you can call them up and ask for your money, and, whoops! Your counterparty is Lehman Brothers. You could call them, but they won’t send you the money. You made the right bet, but with the wrong person.

>>18296846
And here's one last thing to consider; Oil was only going to increase in value as it was limited in supply (peak oil) and its usefulness was only going to increase its price, making oil investment a great idea. THEN technology progressed and we started fracking oil like mad, and suddenly everyone's expected to leave all their oils (most of which are still traditionally extracted) in the ground or it becomes practically valueless.
Imagine what would happen if China or Russia or Canada started fracking.

What's going to happen in your grandchildren's time is that Elon Musk's grandchildren will open up the solar system, and oops there is gold in ridonkulous quantity in it, not to mention all the gold on Earth that's just too technologically challenging to reach. So gold, like oil in the next 5-10 years or sooner, loses practically all its value due to being common as dirt.
Which is what it is; really shiny atomically super-stable dirt.

>>17921794
Shouldn't GOLD be mooning?

How's Bitcoin doing as a safe haven?
The Goldbugs certainly aren't having fun.