Proof that most stock analyst reports are suitable as bird cage liner and little else

[MWmetalhead]

I present to you the case of Silicon Valley Bank, the second largest U.S. bank failure in U.S. history, which occurred Friday when the institution was officially placed under FDIC receivership:

https://www.cnbc.com/2023/03/10/silicon ... osits.html

https://www.nbcnewyork.com/news/busines ... s/4146342/

SIVB placed way too many eggs in the venture capital / start-up basket from a lending practice vantage point. The tech-heavy sector to which it primarily lent was heavily exposed to supply chain issues (i.e. chip shortage) and vulnerable to interest rate hikes. Clients who were burning through cash due to poor P&L performance in 2022 and YTD 2023 were steadily drawing down noninterest bearing deposits held at the institution. When comparing December 31, 2021 to December 31, 2022, noninterest bearing deposits fell by more than 30 percent. That is a staggering decline! Eighteen percent of those deposits flew out the door in Q4'22 alone!

Interestingly, all key regulatory ratios looked pretty good on year-end 2022 financial reporting. See page 10 of the below link, where all regulatory capital ratios were deemed to be better than the minimum thresholds required to be deemed "well capitalized" :

https://s201.q4cdn.com/589201576/files/ ... -Final.pdf

It is possible an external auditor or a federal examiner conducted a review of the credit ratings for SIVB's commercial loan book after the mid-January earnings release and determined that numerous loans that should've been graded substandard or worse were not graded properly. After all, at year-end 2022, only 18 basis points (0.18%) of their total commercial loan book was deemed nonperforming. My guess is that same external auditor or examiner may have determined that the company's allowance for credit losses was too low.

Alternatively, the company's own internal forecasting may have portended significant growth in NPA loan balances or credit losses in the coming year. Companies with that type of credit risk profile are unprofitable and often in need of cash to remain afloat, meaning continued pressure on deposits was likely forthcoming.

In an effort to bridge the gap to ensure regulatory compliance from a capital ratio standpoint could be maintained and to ensure sufficient liquidity would be available to cover anticipated future deposit withdrawal volume, the institution decided to sell its long-term treasury security portfolio at a $1.8 billion loss in order to raise cash; the sale raised roughly $20 billion in proceeds.

That should've been the end of the ordeal, at least for now. But the company did an insufficient job of assuring its clients that any potential future liquidity and regulatory capital ratio issues were nipped in the bud. Instead, the Venture Capital firms who serve as a customer referral pipeline (SIVB also lends directly to many of these same VC firms) saw business headlines that painted a picture of the bank hastily selling off its LT treasury portfolio as a desperation move to shore up capital. So what happened next? Those same VC firms directed management at each of their portfolio companies to immediately withdraw all money deposited at Silicon Valley Bank! ("If you don't withdraw your money now, it might be gone for good come Monday!")

This was a true depression-era style "bank run." SIVB did not have enough liquidity on hand to satisfy the avalanche of deposit withdrawal requests. By Thursday night, SIVB had a negative cash balance of ($958 million). This, in turn, prompted California regulators on Friday to place the institution under FDIC receivership.

Those whose deposits are FDIC insured have nothing to worry about. However, those with deposit balances in excess of the FDIC insurance limit (which is $250,000 per depositor) definitely have cause for concern. Ability for those depositors to be "made whole" will be dependent upon the FDIC's luck in selling the bank's deposits and other salvageable assets to another institution. It is also possible the FDIC will choose to override the normal $250,000 insurance limit, although I cannot recall if it has authority on its own to do that. Finally, legislative remedies cannot be ruled out.

So, with the above backdrop in mind, let's take a look at some recent Analyst reports regarding SIVB stock, shall we?
https://www.benzinga.com/quote/SIVB/analyst-ratings

LMAO - look at all the "overweight," "outperform" and "buy" recommendations dating back to last fall!

Will we hear CNBC talk about how these experts were so clueless with regard to analysis of SIVB's stock value? I doubt it. Hope I'm proven wrong.

Thankfully, Business Insider and the NY Post have already exposed Jim Cramer - perhaps the most well known of the various stock pickers out there - for the clueless asshole that he is:

https://nypost.com/2023/03/10/cnbcs-jim ... ank-stock/

https://markets.businessinsider.com/new ... 1032160650

Only an uninformed fool (or a corrupt asshole) would urge a "Buy" of shares in a commercial bank who saw 18 percent erosion in noninterest bearing deposits in a single calendar quarter. The deposit withdrawal trend clearly worsened, too, as the year moved along. About $5B were withdrawn in Q2, about $13.5B were withdrawn in Q3, and about $19B were withdrawn in Q4.

Did I mention Mr. Cramer was also a fan of buying Bear Stearns in early 2008? Oops; that didn't turn out too well, either, did it?

I can also remember him pleading with viewers not to buy Kohl's stock in spring or summer 2020 when it was priced at $12 per share (by the end of the year, it had more than doubled in value), to not purchase oil or natural gas ETFs, and to not purchase shares in mortgage backed security ETFs. Had viewers done the complete OPPOSITE of what Mr. Cramer recommended, they would've made a killing!

[Turkeytop]

So how soon will we be seeing calls for a bailout?

[MWmetalhead]

Depends what offers the FDIC receives from other super regional (or larger) banks to acquire SIVB's accounts.

[audiophile]

Good stuff MW!

Hers is another failing "industry":
https://www.msn.com/en-us/money/news/ca ... r-AA18tRtR

[MWmetalhead]

The cannabis industry got oversaturated with producers. I also question the business chops of some of the people involved in that industry. Significant consolidation will occur in that industry.

Getting back to SIVB, I think the economic ripple effect could be greater than many are anticipating. Roku - the streaming content provider - had nearly half a billion of its cash on deposit at SIVB!

If a very well capitalized buyer steps forward who agrees to assume and honor SIVB's commitments to depositors and others, then the economic ripple effect will be minor. On the other hand, if a buyer cannot be found and the FDIC is unable or unwilling to make depositors whole, then the impact could prove significant.

In situations like this, the acquiring bank can pay well below par value for the loan book, which is likely what will occur here given inherent uncertainty in that book's true collectability and time sensitivity (i.e. limited ability to perform deep due diligence). There's no way on earth SIVB's commercial loan credit grading reflected reality. Their loss allowances and nonaccrual loan percentages do not square with 30 percent noninterest bearing deposit erosion. That very significant loss in deposits is a red flag that many of their clients are suffering financial distress, whether caused by supply chain issues, wage increases due to the tight labor market, the interest rate environment, or other factors.

Good write-up from the Washington Post, republished by the Detroit News:

https://www.detroitnews.com/story/busin ... 997514007/

[TC Talks]

The cannabis industry got oversaturated with producers. I also question the business chops of some of the people involved in that industry. Significant consolidation will occur in that industry.

There are a number of small shops with owners lacking sufficient education that are teetering on the brink of bankruptcy. I think we all knew consolidation would occur shortly after the industry got off the ground, as it happens in many industries.

All one has to do is look at the tax revenue reports for 2022 and you realize it's quite a healthy industry. Lume has dropped prices to crush many of their competitors out in most of the markets they're located in. The Barnes family, who owns Lume also owns other significant businesses in the state. They know what they're doing and expect them to come out on top when this ShakeOut is finished.

I would suggest cannabis is much healthier than the radio industry in Michigan. It certainly has more Revenue apparently based on some of the things I've been told in the last month.

[TC Talks]

Depends what offers the FDIC receives from other super regional (or larger) banks to acquire SIVB's accounts.

The big tragedy in this situation is how many growing successful small tech companies aren't in trouble because they can't make payroll and have lost their Runway money. I think the Post article listed some of the higher profile tech companies that use this bank and it's worrisome. I'd hate to see Roku go down or others that are growing thriving businesses because this situation.

I would imagine there is pressure to get a short-term solution in place quickly. A lot of companies must payroll on Friday as one of the main payroll companies had their money in this Bank and that's not good for business.

[audiophile]

Yellen just no bailout of SVB.

[MWmetalhead]

Absolutely right, TC Talks.

The credit risk reporting practices of SIVB need to be thoroughly scrutinized. Their loan book doubled in nearly two years. It's highly unlikely they had the credit risk monitoring apparatus in place to proficiently monitor credit risk trends on a client by client basis when the loan book has grown so aggressively.

I would love to know, too, how loan officers were evaluated and compensated. I suspect there was an enormous bent toward loan volume, and credit risk officers were probably hamstrung severely.

Did the company intentionally deceive stakeholders in how it reported its financial performance and strength? Completely possible.

Finally, the way FDIC depository insurance works needs to be addressed. A one size fits all limit of $250k per depositor per institution is moronic. For most individuals, that limit probably makes sense. For many businesses, it does not. Insurance limits for business should be adjusted based on size. Gearing of those limits could be based on some percentage of annual payroll, annual sales or total asset size.
Amazon, Walmart and Exxon-Mobil should all be entitled to much higher levels of federally guaranteed deposit insurance.

[TC Talks]

Think about the small tech companies that had VC's with inside information vs those who didn't. I read where the CEO's of these tech companies found themselves standing in lines out the door at branches to get a wire transfer completed before collapse. Crazy to think about the guy who was on a vacation who is cooked today.

250,000 for an individual seems reasonable but perhaps a more real time monitoring system could be put in place for banks that would allow for a larger guarantee. Lower the risk, and increase the guarantee.

[moldyoldie]

Excellent précis, Mr. Metalhead! Thank you.

Did the company intentionally deceive stakeholders in how it reported its financial performance and strength? Completely possible.

I had heard that SVB Bank was intending to hold those long-term treasury bonds to maturity. Since they were purchased during the recent era of ultra-low interest rates, they dropped precipitously in price during the more recent rapid rise in rates. However, it's been said the bonds weren't marked-to-market on the balance sheet, instead they were marked at face value. If true, would this be considered "intentional deception" on the bank's part?

It's interesting that the stocks of most small and regional banks across the country also took a bath last week (a minor one in comparison!) as if this SVB episode was just the tip of a national iceberg. I have my doubts about that, seeing it as just another case of panic selling.

A good ongoing discussion among the Bogleheads beginning here.

[Rate This]

Another bank failed in the wake of the SVB failure… Signature Bank.

[MWmetalhead]

Signature Bank, based in New York, an institution about half the size of Silicon Valley Bank, was closed today by the Fed:

https://www-cnbc-com.cdn.ampproject.org ... -risk.html

I'd keep my eye on CT-based Webster Bank and CA-based First Republic Bank. I've not reviewed these institutions' financial statements personally, but they have a lot of exposure to the VC space.

Also, the Fed just announced access to deposits in excess of the normal insurance limits at both SIVB and Signature, but those details remain sketchy.

[MWmetalhead]

I had heard that SVB Bank was intending to hold those long-term treasury bonds to maturity. Since they were purchased during the recent era of ultra-low interest rates, they dropped precipitously in price during the more recent rapid rise in rates. However, it's been said the bonds weren't marked-to-market on the balance sheet, instead they were marked at face value. If true, would this be considered "intentional deception" on the bank's part?

Treasuries that are intended to be held to maturity do not need to be marked to market on banks' financial statements, is my understanding.

I do indeed believe SIVB originally intended to hold those instruments to maturity.

Something prompted them, though, to change course abruptly. Certainly, erosion of noninterest bearing deposits to the tune of 18 percent in a single fiscal quarter did not help the cause. They needed liquidity to be able to honor those withdrawal requests.

The "fraud" or "negligence" questions, in my view, are most applicable to their risk management practices. I think their commercial loan credit quality reporting is extremely questionable. I think they may have purposely underreported the extent of loan credit quality issues to make regulatory capital ratios look better than reality in public reporting.

[MWmetalhead]

The fact Jim Cramer is co-anchoring CNBC's live continuing coverage is a distasteful piece of irony.