SVB lessons

[1nvest]

Just to clarify, SWR involves a percentage of the initial portfolio being drawn at the offset, but where once started you just increase that £££ value by inflation as the amount drawn in subsequent years, so a regular inflation adjusted income. I use ii as my broker that provide a 'free' trade each month, so I pro rata that to monthly withdrawals, so its like a regular inflation adjusted monthly 'wage'. Log in and sell some shares the week prior to end of month, and T+2 days later that money is available in the brokerage account, so log back in again and transfer that cash to your regular (linked) cheque (debit) account in time for 'pay day' (end of month). In practice I'm not that organised/regimental, and simply just sell/transfer as/when i.e. when my debit card account is 'running low' ... more on a ad-hoc basis.

I believe the figures also look to 95% confidence rather than 100%, so for instance from https://www.bogleheads.org/wiki/Safe_withdrawal_rates



4% SWR and 30 years had a 95% success rate, whereas 75/25 stock/bonds had a 98% success rate. The choice of a 95% confidence/success-rate is perhaps based on there being less of a chance of a 65 year old retiree actually getting to live until age 95. Or if they do perhaps not having any marbles left and at which time their living costs are perhaps funded out of having sold their home to fund all-inclusive care-home costs for their remaining time.

If in the worst case you secured stock at a 20% discount to the worst case, i.e. stocks declined shortly after another started a 4% 30 year SWR withdrawal from a prior peak/higher-price, then that suggests that the later investor who bought at a 20% discount might reasonable see the support of a 4 / 0.8 = 5% SWR, or that might have also run with a 4% SWR but with a higher probability of success/residual-surplus at the end of the 30 years.

SWR is the simplest measure/method. Others employ Variable Percentage Rates that are suggested as being safer/better. Where if its running well the amount of income drawn is increased, or if things aren't running well you modestly cut back on withdrawals; And also adjusts for how much time you envisage you have left https://www.bogleheads.org/wiki/Variabl ... withdrawal

[floyd3592]

So I'd say a 5% forward SWR based on a 30 year horizon (65 year old living to 95), more if fewer years (75 year old might perhaps look to a 20 year horizon and as such could draw more). Whilst holding a diverse range of assets/styles (integral sets of IT's, HYP ...etc.) traded via single clicks (single ETF/fund that serves as a FTSE250 tracker).

Wow interesting! Many thanks for the detailed response...

[88V8]

This is making me consider the bank bonds, PIBS and prefs I hold. None of which appear to have moved (yet), other than perhaps NWBD and ELLA. Maybe it might be prudent to do a bit of pruning? In particular I am thinking of Metro 5.5%. This might turn out to be a good time to take some banking risk off the table and "rebalance" into equities.
Anyone else minded to do anything?

This surprise situation may give some interesting clues as to how govts will handle the next banking crash.

The only thing I'm minded to do at present is to add to my banks, bonds, prefs, if the SP falls become worthwhile.

Having said that, at a rough tot-up our income is about 38% Financials, so I should really do some rebalancing, as an income investor the question is into what?

V8

[hiriskpaul]

This is making me consider the bank bonds, PIBS and prefs I hold. None of which appear to have moved (yet), other than perhaps NWBD and ELLA. Maybe it might be prudent to do a bit of pruning? In particular I am thinking of Metro 5.5%. This might turn out to be a good time to take some banking risk off the table and "rebalance" into equities.
Anyone else minded to do anything?

This surprise situation may give some interesting clues as to how govts will handle the next banking crash.

The only thing I'm minded to do at present is to add to my banks, bonds, prefs, if the SP falls become worthwhile.

Having said that, at a rough tot-up our income is about 38% Financials, so I should really do some rebalancing, as an income investor the question is into what?

V8

Co-op 11% 2025 - no longer owns a bank! Otherwise Enquest?

Not many good pickings out there at present for higher yield, other than financials, when you can get 4% on gilts.

I think you are right about the clues. The BoE is likely to go down the same route if faced with a similar situation. Protect uninsured depositors, burn bondholders (even senior). We have been warned

[GeoffF100]

A lot of people have been saying that the Fed failed to regulate the banks properly. The Fed is not to blame for that:

https://finance.yahoo.com/news/elizabet ... 36749.html

(We have got lots of threads on this. I put it on the economics board, which is probably where it should be.)

[wanderer]

Lessons for me:

1. Never, ever be tempted to buy bank shares again. They are serial value destroyers. Why I still hold Lloyds and HSBC is a mystery really.
2. Bank runs happen a lot quicker in the digital age than when you had to queue up at the bank. It makes Northern Rock look positively quaint.
3. Bank deposits with any mainstream bank seem to have a 100% implicit government guarantee
4. There are hidden risks with micro cap/unlisted stocks which are not always obvious at first. In this case, the lack of sophisticated treasury functions and poor risk diversification of financial suppliers. I wonder what other risks lie beneath?

I had an interesting weekend with my EIS and SEIS stocks. Some emailed on Saturday assuring me they didn't have a problem. Some emailed on Sunday saying they only had a little problem. The rest emailed on Monday and absent the action with HSBC pretty clearly would have had a big problem. That could have been a very painful lesson for me to learn.

[Adamski]

Curious why uk market overreacts in situations like this. Second day of losses in UK, but US down Friday after close but up Monday. Its like the UK traders are willing a credit crunch 2 which most commentators don't think going to happen.

[Dod101]

A lot of people have been saying that the Fed failed to regulate the banks properly. The Fed is not to blame for that:

https://finance.yahoo.com/news/elizabet ... 36749.html

(We have got lots of threads on this. I put it on the economics board, which is probably where it should be.)

It is immaterial to me whether the Fed is to blame or some other body but the fact is that here once again we had a bank operating in an environment that was clearly very under regulated.

It is currently having a material effect on my financial shares. The trouble is that no matter what we do here it can affect us as well.

Sadly simply avoiding bank shares is not really an answer to the problem.

Dod

[GoSeigen]

Curious why uk market overreacts in situations like this. Second day of losses in UK, but US down Friday after close but up Monday. Its like the UK traders are willing a credit crunch 2 which most commentators don't think going to happen.

Read the previous post. Personally I am glad there is so much bearishness around, it's very contrarian bullish for the stocks and explains why prices are still so attractive.

GS

[BondSquared]

Lessons for me:

1. Never, ever be tempted to buy bank shares again. They are serial value destroyers. Why I still hold Lloyds and HSBC is a mystery really.
2. Bank runs happen a lot quicker in the digital age than when you had to queue up at the bank. It makes Northern Rock look positively quaint.
3. Bank deposits with any mainstream bank seem to have a 100% implicit government guarantee
4. There are hidden risks with micro cap/unlisted stocks which are not always obvious at first. In this case, the lack of sophisticated treasury functions and poor risk diversification of financial suppliers. I wonder what other risks lie beneath?

I had an interesting weekend with my EIS and SEIS stocks. Some emailed on Saturday assuring me they didn't have a problem. Some emailed on Sunday saying they only had a little problem. The rest emailed on Monday and absent the action with HSBC pretty clearly would have had a big problem. That could have been a very painful lesson for me to learn.

excellent analysis

[BullDog]

Lesson #1.

Bank shares are toxic and should never be bought.

Lesson #2.

When another bank inevitably goes pop, everyone suffers anyway.

Lesson #3.

Never forget lesson #1.

[Dod101]

Lesson #1.

Bank shares are toxic and should never be bought.

Lesson #2.

When another bank inevitably goes pop, everyone suffers anyway.

Lesson #3.

Never forget lesson #1.

So who should never buy them? Would you like to see them all nationalised? That is the only real alternative unless we are going to go back to the days of building societies. Not buying bank shares will not protect you from their misdeeds. Buying share, any shares, is a risky business.

Sadly I think all of that is much too simplistic.

Dod

[hiriskpaul]

A lot of people have been saying that the Fed failed to regulate the banks properly. The Fed is not to blame for that:

https://finance.yahoo.com/news/elizabet ... 36749.html

(We have got lots of threads on this. I put it on the economics board, which is probably where it should be.)

Warren's original article is here https://www.nytimes.com/2023/03/13/opin ... -bank.html

She makes some very good points. This would not have happened had the US banking regulations not have been softened and it would not happen under UK or EU regs. One good thing that might come out of this is that the calls to lighten up on UK banking regs post Brexit should fall on deaf ears and this should be positive for bondholders.

The way SVA resolution is going to take place strikes me as grossly unfair to senior bondholders and I wonder whether lawsuits may follow. Under the resolution rules uninsured depositors and senior bondholders should be treated the same way, but the Fed have upended the hierarchy. Losses, should there be any, that would otherwise have been shared with uninsured depositors will now fall entirely on bondholders.

This is likely to have a detrimental affect on bank senior unsecured and from what I can tell there has been a small effect, but maybe this is being masked by the drop in bond yields. It seems to me then if the defacto hierarchy is to burn senior unsecured ahead of depositors, that is going to require banks to pay a higher premium in future for senior unsecured.

The only senior unsecured I hold at present is Vanquis 5.125%, maturing in October and that has not been affected. In future though I will not be buying senior unsecured without a decent premium.

PIBS and subordinated don't seem to have been affected much, which makes sense as they would have been burned anyway. Ordinary share prices have fallen, which I can understand as regulators may decide that banks need more capital and the cost of issuing senior bonds will likely have risen.

[scrumpyjack]

It is good that in this case bondholders and shareholders were wiped out. That minimises the moral hazard of bailing out depositors but this seems fairly low cost in this case.

I do hope the US authorities go after the executives who sold shares just before the collapse. That must count as insider dealing.

The lesson from this is that with banks the priority of interests is 1 depositors, 2 management, 3 management, 4 management etc. Ordinary shareholders are nowhere

[hiriskpaul]

It is good that in this case bondholders and shareholders were wiped out. That minimises the moral hazard of bailing out depositors but this seems fairly low cost in this case.

I do hope the US authorities go after the executives who sold shares just before the collapse. That must count as insider dealing.

The lesson from this is that with banks the priority of interests is 1 depositors, 2 management, 3 management, 4 management etc. Ordinary shareholders are nowhere

I cannot see how the action minimises moral hazard. Had the strict resolution rules been followed, shareholders would have been wiped out anyway along with the small amount of subordinated (probably). Then depositors and senior bondholders would have shared the remaining burden of losses. No moral hazard as everyone would have got what they signed up for. Moral hazard has now been introduced by protecting uninsured depositors. If that is the new hierarchy then it really needs to be enacted in law rather than requiring bondholders and depositors to have a guessing game.

[GeoffF100]

Here is the latest Pensioncraft video:

https://www.youtube.com/watch?v=Xjwt8Dk0rc0

Ramin's take on the bond holders is a little different to hrp's, but he often gets details wrong.