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Envestnet, Inc. is an American financial technology corporation which develops and distributes wealth management technology and products to financial advisors and institutions.[2][non-primary source needed] Their flagship product is an advisory platform that integrates the services and software used by financial advisors in wealth management.[3]
Envestnet received controversy in 2020 when it was sued in a class action for its collection of consumer financial data. The company filed a motion to dismiss in November of 2020, which was partially granted but partially denied by the court.[4][5]
https://capitalmarkets.fidelity.com/brokered-certificate-of-deposit-underwritingThe financial institution [bank] makes principal and interest payments to the Depository Trust Company (DTC). DTC is responsible for passing the principal and interest to the broker-dealers. The broker-dealer is responsible for passing the correct amount of principal and interest to the owners of the Certificates.
Those are, I think, the main answers. But there is one other sort of dumb accounting answer. Most of SVB’s interest-rate risk came in its portfolio of “held to maturity” bonds. The idea here is that SVB bought a lot of bonds and planned to hold them until they matured. If it did that, the bonds — which were mostly US-government backed and so very safe — would pay back 100 cents on the dollar. So SVB didn’t need to worry about mark-to-market fluctuations in their value. If interest rates went up, and the value of these bonds dropped from 100 to 85 cents on the dollar, SVB could ignore it, because the value would definitely go back up to 100, as long as it held the bonds to maturity. (The problem is that it couldn’t: There was a run on the bank long before the bonds matured.)• 1) SVB had expenses, and it needed to make money. It had to invest its depositors’ cash to make that money. In 2022, if it had been earning short-term interest rates on that cash, it would not have made enough money to cover its expenses. The way that it made money was by investing at long-term interest rates, which were higher.[1] So it invested in long-term bonds, earned higher rates, and made enough money. “Hedging” would have meant swapping its long-term rates to short-term rates, which would have defeated its main purpose, making money. And in fact SVB did have some interest-rate hedges in place in early 2022; it took them off, though, to increase its profits.
• 2) SVB thought that it was hedged: It was buying long-term bonds, yes, but it was funding those purchases with deposits. Those deposits are technically very short-term: Depositors could take their money back at any time, and eventually they did. But it is traditional in banking to think of them as long-term, to think that the “deposit franchise” and the deep relationship between banker and customer would make customers unlikely to take their money out. SVB invested a lot in good customer service and good relations with its depositors; it also made loans to startups that required them to keep their cash on deposit at SVB. So it figured it had pretty long-term funding, and it matched that long-term funding with long-term assets. If it had swapped the assets to short-term rates, and then rates fell, it would lose money, and SVB thought that was the bigger risk. When SVB got rid of its interest-rate hedges in early 2022, it did so because it had become “increasingly concerned with decreasing [net interest income] if rates were to decrease”: It worried that the hedges would hurt it if rates fell.
Again, here the accounting standards line up with the way banks have historically thought about themselves, which is basically that they are in the business of holding long-term assets for the long term. “Why would a bank hedge interest-rate risk on its held-to-maturity portfolio,” the accountants ask, “if it is just going to hold that portfolio to maturity?”The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320,[4] which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.
It has $3.9 billion of swaps to hedge $3.9 billion of available-for-sale securities, out of a total of about $141 billion of available-for-sale and $170 billion of held-to-maturity securities.Charles Schwab Corp. started using derivatives to hedge interest rate-related risk during the first quarter.
The derivatives had a notional value of $3.9 billion as of March 31, the Westlake, Texas-based company said in a regulatory filing Monday.
Schwab, which runs both brokerage and bank businesses, has been ensnared in the tumult ravaging US regional banks after the Federal Reserve embarked on its most aggressive interest rate tightening cycle in decades last year.
The firm confronted swelling paper losses on securities it owns and grappled with dwindling deposits as customers moved cash into accounts that earn more interest. Schwab executives have said those withdrawals will abate. The pace of cash withdrawals is already starting to slow, Chief Financial Officer Peter Crawford said in a recent statement.
One thing that I would say is that if this is right and you take it seriously, then it is pretty bad news for US regional banks. “Banking is an inherently fragile business model” is a thing that people say from time to time (when there are bank runs), but nobody quite means it. They mean something like “from a strictly financial perspective, looking at a balance sheet that mismatches illiquid long-term assets with overnight funding, banking is insanely fragile, and the whole business model of banking is about building long-term relationships with slow-moving price-insensitive depositors so that the funding is not as short-term, and the business is not as fragile, as it looks.” But if the relationship aspect doesn’t work anymore, then banking really is just extremely fragile. Without the relationships, banks are just highly levered investment funds that make illiquid risky hard-to-value investments using overnight funding. That can go wrong in lots of ways!In a world of electronic communication and global supply chains and work-from-home and the gig economy, business relationships are less sticky and “I am going to go into my bank branch and shake the hand of the manager and trust her with my life savings” doesn’t work. “I am going to do stuff for relationship reasons, even if it costs me 0.5% of interest income, or a slightly increased risk of losing my money” is no longer a plausible thing to think. Silicon Valley Bank’s VC and tech customers talked lovingly about how good their relationships with SVB were, after withdrawing all their money. They had fiduciary duties to their own investors to keep their money safe! Relationships didn’t matter.
The whole relationship aspect of banking is devalued; rational economic decisionmaking based on mark-to-market asset values has become more important. This makes banks fragile. What makes banks something other than highly levered risky investment funds is their relationships, and that support is weakening.For retail, for a period of years—years!—we took the sweat and smiles business, the work of literal decades, and we—for the best of reasons!—said We Do Not Want This Thing. That very valuable thing was, like other valuable things like churches and birthday parties and school, a threat to human life. And so we put it aside. We aggressively retrained customers to use digital channels over the branch experience. We put bankers at six thousand institutions in charge of teaching their loyal personal contacts that you can now do about 80% of your routine banking on their current mobile app or 95% on Chase’s. And then we were shocked, shocked how many people denied the most compelling reason to use their current bank and shown the most compelling reason to bank with Chase switched.
With regards to sophisticated customers, the answer is not primarily about mobile apps or how difficult it is to wire money out of an account. It is about businesses making rational decisions to protect their interests using the information they had. Sophisticated businesses are induced to bring their deposit businesses, which frequently include large amounts of uninsured deposits, in return for a complex and often bespoke bundle of goods they receive from their banks. The ability to offer that complex and bespoke bundle is part of the sweat and smiles of building a deposit franchise. …
Why did they suddenly trust their banks less about the near-term availability of the bundle? Contagion? Social media? I feel these are misdiagnoses. Their banks suffered from two things: their ability to deliver the bundle was actually impaired. They had “bad facts”, in lawyer parlance. Insolvency is not a good condition for a bank to be in.
And those bad facts got out quickly, not because of social media and not because of a cabal but simply because news directly relevant to you routes to you much faster in 2023 than in 2013. There is no one single cause for that! Media are better and more metrics-driven! Screentime among financial decisionmakers is up! Pervasive always-on internetworking in industries has reached beyond early adopters like tech and caught up with the mass middle like e.g. the community that is New York commercial real estate operators.
Transaction economics include the flow of object-level decisions—do we buy this Google click, spin up that EC2 instance, or accept this Stripe transaction—and a stock of expectations and trust slowly built up on both sides. It's essentially a form of reputational capital, and a company that's betting most of its revenue or operations on a counterparty that they can't have a conversation with is, in some abstract sense, undercapitalized.
I think this concern is a little backwards. For one thing, I don’t love the terminology. As Morgan Ricks, a leading scholar of shadow banking, puts it: “‘Shadow banks’ originally meant nonbank financial institutions offering deposit substitutes and I still think it would be better to stick with that terminology, rather than using the term to refer to any nonbank lender.” Lots of companies make loans, and it is better to use “shadow banks” to refer to companies whose liabilities make them look like banks, who borrow short-term to invest long-term and thus have the same fragility and run risk as real banks.[6] I have spent a lot of time over the last year or so describing various crypto firms (exchanges and lending platforms) as “crypto shadow banks,” because they are in the business of issuing deposit-like claims and investing that money in crypto hedge funds or whatever. (Well, they were in that business. Then they all had bank runs.)That means businesses large and small may soon need to look elsewhere for loans. And a growing cohort of nonbanks, which don’t take deposits — including giant investment firms like Apollo Global Management, Ares Management and Blackstone — are chomping at the bit to step into the vacuum.
For the last decade, these institutions and others like them have aggressively scooped up and extended loans, helping to grow the private credit industry sixfold since 2013, to $850 billion, according to the financial data provider Preqin.
Now, as other lenders slow down, the large investment firms see an opportunity.
“It actually is good for players like us to step into the breach where, you know, everybody else has vacated the space,” Rishi Kapoor, a co-chief executive of Investcorp, said on the stage of the Milken Institute’s global conference this week.
But the shift in loans from banks to nonbanks comes with risk. Private credit has exploded partly because its providers are not subject to the same financial regulations put on banks after the financial crisis. What does it mean for America’s loans to be moving to less-regulated entities at the same time the country is facing a potential recession?
Institutions that make loans but aren’t banks are known (much to their chagrin) as “shadow banks.” They include pension funds, money market funds and asset managers.
Because shadow banks don’t take in deposits, they’re not subject to the same regulations as banks, which allows them to take greater risks. And so far, their riskier bets have been profitable: Returns on private credit since 2000 exceeded loans in the public market by 300 basis points, according to Hamilton Lane, an investment management firm.
It’s hard to come up with a better low-cost alternative than the highly regarded VWINX. Lots of good suggestions, In the end, it’s your decision. But changing horses mid-stream not always wise.”Since everyone’s situation is unique with respect to withdrawal needs., RMD, and investment horizon, the question is more on financial planning rather than a “drop-in” replacement with a different asset allocation fund.”
Good info.Last post @Bobpa posted on MFO was back in June 2022.
https://mutualfundobserver.com/discuss/discussion/comment/151173/#Comment_151173
In this post, he talked about his portfolio and holdings where VWINX is one of the larger allocation fund. Bobpa is in his retirement and he is looking for a replacement for some reason that he did not specify on this post. Since everyone’s situation is unique with respect to withdrawal needs., RMD, and investment horizon, the question is more on financial planning rather than a “drop-in” replacement with a different asset allocation fund.
On Tuesday March 7, Sen. Elizabeth Warren, D-Mass., chair of the Subcommitee on Economic Policy, held a hearing on the debt limit, in which experts assessed its economic and financial consequences. In prepared testimony at the hearing, Mark Zandi, chief economist of the financial services company Moody's Analytics, said a default would be "a catastrophic blow to the already fragile economy."
Zandi warned of consequences akin to the Great Recession, including a roiled stock market that would cause market crashes, high interest rates and tanking equity prices. He said even if the default is quickly remedied, it would be too late to avoid a recession. Waiting too long to act could cause severe economic turmoil with global impacts.
The testimony included Moody's simulations of what an economic downturn could be, should the government default, casting a bleak view of the prospect that includes:
• Real GDP declines over 4% and diminished long-term growth prospects.
• 7 million jobs lost.
• Over 8% unemployment.
• Stock price decreases by almost a fifth, with households seeing a $10 trillion decline in wealth as a result.
• Spiking rates on treasury yields, mortgages and other consumer and corporate borrowing.
Further, Zandi expressed skepticism that lawmakers would be able to resolve their impasse quickly, as evidenced in part by the difficulty House Republicans had in electing McCarthy as speaker of the House. It took 15 rounds of voting for McCarthy to succeed.
"Odds that lawmakers are unable to get it together and avoid a breach of the debt limit appear to be meaningfully greater than zero," Zandi said in the testimony.
What would happen if the U.S. defaulted on debt?
If the default lasts for weeks or more, rather than days, it could trigger a fire-and-brimstone, Armageddon-level financial crisis for the U.S. and global economies.
A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs. The real gross domestic product, or GDP, could also fall to levels not seen since the Great Recession.
The U.S. has only defaulted once, in 1979, and it was an unintentional snafu — the result of a technical check-processing glitch that delayed payments to certain U.S. Treasury bond holders. The whole affair affected only a few investors and was remedied within weeks.
But the 1979 default was not intentional. And from the point of view of the global markets, there's a world of difference between a short-lived administrative snag and a full-blown default as a result of Congress failing to raise the debt limit.
A default could happen in two stages. First, the government might delay payments to Social Security recipients and federal employees. Next, the government would be unable to service its debt or pay interest to its bondholders. U.S. debt is sold to investors as bonds and securities to private investors, corporations or other governments. Just the threat of default would cause market upheaval: A big drop in demand for U.S. debt as its credit rating is downgraded and sold, followed by a spike in interest rates. The U.S. government would need to promise higher interest payments to justify the increased risk of buying and holding its debt.
Here’s what else you can expect to see if the U.S. defaults on its debt.
A sell-off of U.S. debt
A default could provoke a sell-off in debt issued by the U.S. government, considered among the safest and most stable securities in the world. Such a sell-off of U.S. Treasurys would have far-reaching repercussions.
Money market funds could sell out
Money market funds are low-risk, liquid mutual funds that invest in short-term, high-credit quality debt, such as U.S. Treasury bills. Conservative investors use these funds as they typically shield against volatility and are less susceptible to changes in interest rates.
In the past, investors have sold out of money market funds when the U.S. ran up against debt ceiling limits and signaled potential government default. Yields on shorter-term T-bills go up because they are impacted more compared with longer-term bonds, which give investors more time for markets to calm down.
Federal benefits would be suspended
In the event of a default, federal benefits would be delayed or suspended entirely.
Those include:
Social Security; Medicare and Medicaid; Supplemental Nutrition Assistance Program, or SNAP, benefits; housing assistance; and assistance for veterans.
Stock markets would roil
A default would likely trigger a downgrade of the United States’ credit rating — the S&P downgraded the nation’s credit rating only once before, in 2011 when it was approaching default. The default combined with the downgraded credit rating would in turn cause the markets to tank, the White House’s Council of Economic Advisors said in 2021.
If current debt ceiling talks continue for too long, the markets are likely to become more volatile than they already are.
Interest rates would increase
As debt ceiling negotiations linger, Americans could see rates increase on consumer lending products, including credit cards and variable rate student loans.
Credit lenders may have less capital to lend or may tighten their standards, which would make it more difficult to get credit.
Depending on the timing of a default and how long the effects are felt, rates could increase on new fixed auto loans, federal or private student loans and personal loans.
Tax refunds could be delayed
If the debt ceiling isn’t raised, it could take more time for tax filers to receive their refunds — usually within 21 days of filing. If the government defaults, those who file late run a risk of not receiving their refund.
Housing rates would increase
A debt ceiling crisis won’t impact those with fixed-rate mortgages or fixed-rate home equity lines of credit, or HELOCs. But adjustable-rate mortgage, or ARM, holders may see rates rise even further than they already have — more than four percentage points on rate indexes since spring 2022. Those in the fixed period of their ARM can expect to see rates rise when reaching their first adjustment.
This brings us to Possibility 4. Possibility 4 is that stock investors were pushing down the prices of regional banks in order to cause them to fail. Here is a Twitter thread from Bob Elliott stating the case:Weaker profits degrade the value of its shares. But the current fear of wider instability has made these problems more dangerous by creating a feedback loop: Falling share prices make depositors more skittish, funding costs rise further, profitability worsens and around it goes again.
The point here is not just “people are shorting these bank stocks for no good fundamental reason,” but also that this can create fundamental problems. Elliott goes on:Regional bank 'crisis' shifting from deposit runs driving equity declines to speculators engineering equity declines to increase the risk of deposit runs.
This new phase divorced from fundamentals risks creating a metastasizing crisis rewarding speculative attacks. ...
Since last week there has been acute downward pressure across regional banks stocks, particularly focused on $PACW and $WAL.
What has been driving those losses? Short selling & put activity. …
The reality is that it doesn't take much flow at this point to create big moves given the market caps are on the order of $1-2bln. Tiny companies relative to their macro impact right now. ...
Their funding conditions have remained *stable* through this period. Incremental information about fundamentals isn't driving the decline. Looks like speculators trying to engender a panic.
I am temperamentally not disposed to believe any theory like “short sellers are dishonestly manipulating this stock in order to cause the company to fail,” but I have to admit that, with regional banks (unlike most companies!), that could kinda work. Banks do rely on confidence, and a plunging stock price that gets a lot of attention is bad for confidence. And people do seem to be taking this theory seriously. Reuters reports:In most industries if this sort of dynamic happened where there was a big hit to the stocks which didn't reflect a change in underlying fundamentals, there wouldn't be much impact on the business. It would keep doing its thing, and eventually the stock would simply reprice.
But banks are a very different sort of business. They are a confidence business more than anything. And big stock price declines are a problem for confidence.
At some point these declines *will be enough* to start to worry uninsured depositors who are paying attention.
And when that happens the fundamentals will deteriorate, which will further reinforce the equity market action. Shorts will get paid for being the very folks inducing the bank run.
And at Semafor, Liz Hoffman asks, “Should the U.S. ban bank short selling?”U.S. federal and state officials are assessing whether "market manipulation" caused the recent volatility in banking shares, a source familiar with the matter said on Thursday, as the White House vowed to monitor "short-selling pressures on healthy banks." ...
"State and federal regulators and officials are increasingly attentive to the possibility of market manipulation regarding banking equities," the source said.
White House press secretary Karine Jean-Pierre said the Biden administration was closely watching on the situation, but any possible action would be taken by the Securities and Exchange Commission.
"The administration is going to closely monitor the market developments, including the short-selling pressures on healthy banks," Jean-Pierre told a White House briefing.
The American Bankers Association on Thursday called on the SEC to investigate significant short sales of banking shares and social media engagement that it said appeared to be "disconnected from the underlying financial realities."
Incidentally there are stronger and weaker forms of Possibility 4. The strong form is something like “dastardly short sellers are knowingly shorting stocks of regional banks with the goal of causing panic and driving them into failure, so they can take profits.” The weak form is something like “rational market participants look at the stocks of regional banks and conclude that they are overvalued, because they honestly (correctly or incorrectly) believe that earnings will be lower or failure more likely than the market thinks, so they short the stocks, which might cause them to fail and generate profits for the short sellers.” The effect can exist with or without the intent.In September 2008, U.S. and U.K. regulators temporarily banned investors from selling short financial stocks. “Unbridled short selling is contributing to the recent, sudden price declines,” then-SEC Chairman Chris Cox said, noting that banks (at the time, investment banks were the problem) are uniquely vulnerable to “panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business.”
Swap depositors for counterparties and you’ve pretty well got the current problem. And investors seem to be getting ahead of customers in their rush for the exits. PacWest and Western Alliance actually added deposits in April, after the collapse of SVB and Signature. Fed Chair Jerome Powell said yesterday that the deposit outflows at regional banks had stabilized.
Depositors are no longer panicking, but investors are. It might be time to consider another temporary ban.
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