We are entering a "Golden Period" for fixed income investing

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Freedom56 said:
Will KPMG be the next casualty of SVB?

“Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warning, is trouble for the auditor,”

https://www.wsj.com/articles/kpmg-faces-scrutiny-for-audits-of-svb-and-signature-bank-42dc49dd
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hope we arent getting to far off topic here but...

i read they (internally run by the bank) dont do the ALM test (rates increase is included) on that sized bank. That being said the board is supposed to report any risks of stability quarterly and its obvious from their board meetings, stock sales and their CRO bailing that they knew something was up. So they didnt report the risks as well as their solution and they didnt alert the auditors. Some random guy on a forum says the auditors do not investigate or weigh in on "how they invest their money or is it risky"... which seems odd to me. All that being said, I sure hope they (the banks, auditors, regulators) are all held accountable so my future investments are safe.. :popcorn:
 
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Freedom56 said:
Will KPMG be the next casualty of SVB?

“Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warning, is trouble for the auditor,”


https://www.wsj.com/articles/kpmg-faces-scrutiny-for-audits-of-svb-and-signature-bank-42dc49dd
Click to expand...
It is intriguing that they audited all 3 banks with highest levels of uninsured deposits.

But the bank runs were unanticipated-by anyone frankly. If the financials were not presented fairly then that is an issue, but no one has suggested that. At least not so far.

I suspect one of the things KPMG relies on is reports from regulators-they are the subject matter experts.

Of course if KPMG issues a qualified opinion on the financials because heightened risk of a bank run exists, they may create that reality. I suspect again they defer to bank regulators there.

They could have their liability insurance tested by investor lawsuits, for sure. But not sure they are at fault based on what is now known.
 
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Montecfo said:
It is intriguing that they audited all 3 banks with highest levels of uninsured deposits.

But the bank runs were unanticipated-by anyone frankly. If the financials were not presented fairly then that is an issue, but no one has suggested that. At least not so far.

I suspect one of the things KPMG relies on is reports from regulators-they are the subject matter experts.

Of course if KPMG issues a qualified opinion on the financials because heightened risk of a bank run exists, they may create that reality. I suspect again they defer to bank regulators there.

They could have their liability insurance tested by investor lawsuits, for sure. But not sure they are at fault based on what is now known.
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It's clear SVB management understood that they were technically insolvent when they attempted to raise capital to cover the shortfall for the bond portfolio sale that they wanted to proceed with simultaneously with the sale of equity, Moody's also gave them advance warning of a debt downgrade before it went public so that they could shore up their capital. The run on the bank happened after they declared the $1.8 billion loss had not compensated with a capital raise. The $1.8 Billion capital shortfall did not happen overnight and in fact the worst period would have been in October and November of last year when the 10 year treasury hit a peak. This was also the period for the audit. Having the CEO of SVB as a board member of the San Francisco Fed was also a serious conflict of interest.
 
Freedom56 said:
It's clear SVB management understood that they were technically insolvent when they attempted to raise capital to cover the shortfall for the bond portfolio sale that they wanted to proceed with simultaneously with the sale of equity, Moody's also gave them advance warning of a debt downgrade before it went public so that they could shore up their capital. The run on the bank happened after they declared the $1.8 billion loss had not compensated with a capital raise. The $1.8 Billion capital shortfall did not happen overnight and in fact the worst period would have been in October and November of last year when the 10 year treasury hit a peak. This was also the period for the audit. Having the CEO of SVB as a board member of the San Francisco Fed was also a serious conflict of interest.
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OTOH they have shown an ability to raise capital. And the losses were no doubt disclosed along with the capital ratios in the financials.

Board very politically connected also probably did not help.
 
Freedom56 said:
Will KPMG be the next casualty of SVB?

“Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warning, is trouble for the auditor,”


https://www.wsj.com/articles/kpmg-faces-scrutiny-for-audits-of-svb-and-signature-bank-42dc49dd
Click to expand...

While the article was paywalled, for the reporter to interpret an unqualified audit opinion as "a clean bill of health" shows that the reporter has no idea what the audit report really means. My common sense is that the reporter is clueless.

As long as there are no material misstatements in the financial statements or reasons to believe that the company will not continue in business for another year then the auditor would have no reason to qualify their audit report. Nothing that I have read would indicate that the audit was flawed.

FWIW, the the audit opinion was issued on February 24, so KPMG's fieldwork was probably completed in early to mid February. SVB disclosed the bond sales that realized the losses that started the whole collaspe on March 8.
 
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pb4uski said:
While the article was paywalled, for the reporter to interpret an unqualified audit opinion as "a clean bill of health" shows that the reporter has no idea what the audit report really means. My common sense is that the reporter is clueless.

As long as there are no material misstatements in the financial statements or reasons to believe that the company will not continue in business for another year then the auditor would have no reason to qualify their audit report. Nothing that I have read would indicate that the audit was flawed.

FWIW, the the audit opinion was issued on February 24, so KPMG's fieldwork was probably completed in early to mid February. SVB disclosed the bond sales that realized the losses that started the whole collaspe on March 8.
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I can't really comment on the auditors, but am confident in stating that me, a lowly serf, knows a lot more about banking than the majority of SVB's board. That is a problem.
 
pb4uski said:
FWIW, the the audit opinion was issued on February 24, so KPMG's fieldwork was probably completed in early to mid February. SVB disclosed the bond sales that realized the losses that started the whole collaspe on March 8.
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Heck, it could have been KPMG auditors who mentioned their interest rate risk in water cooler conversation with SVB employees, who were ignorant of the fact.
 
Auditors have deep pockets. There will be lawsuits. The firms frequently settle.
 
RicDee said:
Any thoughts on
GOLDMAN SACHS GROUP INC MTN
6.00000% 03/22/2028
CUSIP 38150ARY3
Not call protected
Next Call Date 03/22/2024 and every 3 months
Trade Date 03/20/2023
https://fixedincome.fidelity.com/ft...e=FINewIssue&cusip=38150ARY3&ordersystem=AORD
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Not call protected and not FDIC insured.
You can get this: SIGNATURE BK CHICAGOILL CD 5.45000% 03/24/2028 (CUSIP DSN3E6330) at fidelity right now (not call protected, but FDIC insured). You can also get: MORGAN STANLEY PRIVATE BK NATL CD 4.90000% 03/23/2028 (CUSIP DSN3F2122) which is call protected, FDIC insured.

So the spread to get FDIC insurance is 6-5.45 = .55%, the additional spread to get call protection is 5.45 - 4.9 = .55%.

Thus the decision to you is how much is that government guarantee worth? How much is them NOT having the option to call it from you if rates drop further (like they are doing this week).

To me, not enough spread, but I am just SGOTI.

ETA: I have a bias in my fixed income investing towards SAFETY over RETURN. Why? Because if I want risk, there are plenty of places to find it with what I believe are superior possible returns in the equity markets. If I were 100% fixed, I would need to overcome this bias to achieve additional fixed return.
 
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Canadian Imperial Bank currently is offering a 10-year bond at 5% with five-year call protection. CUSIP 13607XFY8. I'm not crazy about ten years, but these days it's hard to get call protection for very long. Not sure if it's worth it.
 
Best deals runoff quickly

With a CIBC CD due 2026 5% non-callable, I pre-filled the 2026 rung of my ladder.

Now my CD coming due later this month will be reinvested short-term for equity portfolio (which is where these funds came from).
 
Freedom56 said:
That particular issue is a retail note with $1.5M outstanding. Retail notes normally don't trade and are held to maturity. The market is very illiquid for this notes. There are no bids and ask for that note, so when someone tries to sell the note in this case $5000 worth, it attracts low ball bidders with all the headlines. I have had this happen to me with Bank of America notes that I bought in 2009 with a maturity in 2019. In 2011 the notes fell off sharply as the market predicted the end of Bank of America. In the end it matured at par in 2019 and spent most of 2016-2019 above par. Bank of America is still alive and well. I also had this happen with GE notes after accusations of accounting fraud. They also matured at par after selling off sharply. It also matured at par.

https://finra-markets.morningstar.c...37069&startdate=03/16/2022&enddate=03/16/2023
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Interesting. Thanks for the info. I bought it at Ameritrade last Aug with a YTW of 5%.
 
copyright1997reloaded said:
Not call protected and not FDIC insured.
You can get this: SIGNATURE BK CHICAGOILL CD 5.45000% 03/24/2028 (CUSIP DSN3E6330) at fidelity right now (not call protected, but FDIC insured). You can also get: MORGAN STANLEY PRIVATE BK NATL CD 4.90000% 03/23/2028 (CUSIP DSN3F2122) which is call protected, FDIC insured.

So the spread to get FDIC insurance is 6-5.45 = .55%, the additional spread to get call protection is 5.45 - 4.9 = .55%.

Thus the decision to you is how much is that government guarantee worth? How much is them NOT having the option to call it from you if rates drop further (like they are doing this week).

To me, not enough spread, but I am just SGOTI.

ETA: I have a bias in my fixed income investing towards SAFETY over RETURN. Why? Because if I want risk, there are plenty of places to find it with what I believe are superior possible returns in the equity markets. If I were 100% fixed, I would need to overcome this bias to achieve additional fixed return.
Click to expand...

Signature Bank was taken over by FDIC a few days ago, and it is my understanding that the bank that takes it over has the ability to cancel CD's or change the terms of them. If you choose to not like the new terms, you can withdraw penalty free. Seems like a lot of uncertainty and potential hassle, not to mention the unilateral risk of having them dump the CD rate at a time when rates are lower, leaving you with reinvestment risk.
 
aVTObAN said:
Canadian Imperial Bank currently is offering a 10-year bond at 5% with five-year call protection. CUSIP 13607XFY8. I'm not crazy about ten years, but these days it's hard to get call protection for very long. Not sure if it's worth it.
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This doesn't sound like a good deal to me. You can get a 4.9% CD (with FDIC protection) for 5 years from JM Private today. With the above bond, if rate goes down after 5 years, they will likely call the bond. If rate goes up, you will have to hold the bond longer. A spread of 0.1% between any company bonds vs a CD or Treasury is not worth the risk, I would say.
 
copyright1997reloaded said:
Not call protected and not FDIC insured.
You can get this: SIGNATURE BK CHICAGOILL CD 5.45000% 03/24/2028 (CUSIP DSN3E6330) at fidelity right now (not call protected, but FDIC insured). You can also get: MORGAN STANLEY PRIVATE BK NATL CD 4.90000% 03/23/2028 (CUSIP DSN3F2122) which is call protected, FDIC insured.

So the spread to get FDIC insurance is 6-5.45 = .55%, the additional spread to get call protection is 5.45 - 4.9 = .55%.

Thus the decision to you is how much is that government guarantee worth? How much is them NOT having the option to call it from you if rates drop further (like they are doing this week).

To me, not enough spread, but I am just SGOTI.

ETA: I have a bias in my fixed income investing towards SAFETY over RETURN. Why? Because if I want risk, there are plenty of places to find it with what I believe are superior possible returns in the equity markets. If I were 100% fixed, I would need to overcome this bias to achieve additional fixed return.
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Signature Bank Chicago is an unrelated bank to the one that got shut down.

https://www.signaturebank.bank/
 
Echard said:
Signature Bank was taken over by FDIC a few days ago, and it is my understanding that the bank that takes it over has the ability to cancel CD's or change the terms of them. If you choose to not like the new terms, you can withdraw penalty free. Seems like a lot of uncertainty and potential hassle, not to mention the unilateral risk of having them dump the CD rate at a time when rates are lower, leaving you with reinvestment risk.
Click to expand...

As mentioned by jim584672, not the same bank.

Really, my post wasn't to push a particular CD, it was intended to discuss relative pricing in terms of FDIC insurance premium, non-callable/callable premium.

Regarding takeovers of failed banks, yes the institution taking over can (generally) terminate/change the terms on certificates of deposit.

You should also note that some corporate bonds have provisions regarding change of control.
 
Freedom56 said:
That particular issue is a retail note with $1.5M outstanding. Retail notes normally don't trade and are held to maturity. The market is very illiquid for this notes. There are no bids and ask for that note, so when someone tries to sell the note in this case $5000 worth, it attracts low ball bidders with all the headlines. I have had this happen to me with Bank of America notes that I bought in 2009 with a maturity in 2019. In 2011 the notes fell off sharply as the market predicted the end of Bank of America. In the end it matured at par in 2019 and spent most of 2016-2019 above par. Bank of America is still alive and well. I also had this happen with GE notes after accusations of accounting fraud. They also matured at par after selling off sharply. It also matured at par.

https://finra-markets.morningstar.c...37069&startdate=03/16/2022&enddate=03/16/2023
Click to expand...
As with equity markets, it's not wise to panic out of a position.
 
RicDee said:
Thanks Freedom for all of your input. If GS 6.0% 5 year 3/2028 were available would you buy them?
Click to expand...

I have a very large concentration of Goldman Sachs notes right now with coupons ranging from 5%-6.75%. If I didn't have that concentration I would buy it. If it had more call protection, I would also buy it. The "too big to fail" banks are right now the beneficiaries of the regional bank panic.

Barron's has an article today on the big banks.

"Banks Survived Another Week—and the Biggest Ones Look Like Winners"

"Further industry consolidation seems inevitable. The U.S. still has more than 4,000 banks, while the United Kingdom and Canada each are dominated by just six institutions."

Goldman Sachs has the lowest bond losses at of all the major banks and was the buyer of the SVB bonds which appears to be a profitable trade for Goldman Sachs.

https://www.barrons.com/articles/big-banks-stocks-b4f183f1?mod=hp_HERO
 
pb4uski said:
Ended up doing it. Sold 3 different callable agency bonds yielding 4.4%, 4.7% and 5.0% for total proceeds of around $200k and then bought 2 $100k non-callable CDs yielding 5.35% and 5.3%. Less call risk and better yield... gotta love it when market dislocations result in bargains.
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What is the duration of the CD?

If inflation keeps increasing, CD rates my just keep increasing as well.
 
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