Dividends and Before SVB’s fall, the Fed spotted big problems

Whenever something goes wrong there are tendencies to throw the blame around or throw the spaghetti at the wall till it sticks. The first blame is management because people are paid to manage and when there are losses, what was management doing? In the famous scene from the Roman empire – Nero was fiddling away with Rome burnt. Management has responsibility in both good and bad times. The next blame to go around is the government through government regulations. All companies have a regulator of some type and the issue is what did they know and equally what did they do or not do given government bureaucrats are paid to do some type of regulations. Anyone who needs to fill in forms and send the information to the government believes some information is good, but the government asks for too much and lobbying groups for the industry try to lessen the flow of information. Was the lobbying for the regulations without any penalties part of the problem? or is it a combination of the above?

In an article by Jeanna Smialek of the New York Times News Service, Silicon Valley Bank’s risky practices were of the US Reserve’s radar for more than a year.

The Fed repeatedly warned the bank that it had problems. It 2021, a review found serious weakness in how the bank was handling key risks. The Fed issued 6 citations.

The bank did not fix its vulnerabilities, the Fed placed the bank under a set of restrictions that the bank could not do any mergers and acquisitions until it fixed its governance and control.

Senior leaders at the Fed went to Senior management at the bank to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose. It became clear to the Fed, SVB was using bad models to determine how its business would fare as interest rates rose. The models at the SVB showed higher interest rates helped the bank, this was different from reality.

To the fed, SVB had issues which were very troubling, 97% of its deposits were uninsured or above $250,000 which meant at the first sign of trouble – the depositors were likely to move their money. Most of the depositors were in the technology sector which after years of investing in potential earnings, investors wanted to see real revenues to make profits. In addition, SVB had a large long term bond portfolio which the market rate had declined as interest rates were rising.

The House Financial Services Committee meetings are scheduled for March 29 and the Fed is doing an inhouse review scheduled to be released to the public in May. Does the Fed need more authority to ensure the bank measures up to its standards?

Linking to dividend paying stocks, large corporations have a love hate relationship to regulations, they would love to have less, but sometimes more ensures competition can be stifled. Companies want to have more if they get into trouble to ensure the government helps them out of the rough times. There is a reason why the management team is involved in politics at the local, state and national levels. When you invest in a profitable company, one of their many expenses is lobbying. As an investor sometimes you like it, sometimes you prefer less. Do you know the relationship the management team has with the people it lobbies?

There are more questions than answers, till the next time – to raising questions.


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