There seems to be this myth floating around that bond losses aren’t real. They are very real.
An 80 cent on the dollar (purchase price) bond is a loss of 20 cents. And it doesn’t matter if the holder holds to maturity.
Welcome to interest rates.
This is why the bond price falls - an outside party will not buy the SVB bonds because they can get a better return on a different bond. The bond price falls to make them equivalent.
What you are talking about is opportunity cost, not investment losses. If SVB could have held their bonds to maturity they would have gotten back every cent of the principal.
Interest rates rising means products with a fixed rate yield are worth less today. That value isn't gotten back by waiting until maturity. The nominal value is retrieved, yes, but the money in the future is literally worth less.
SVB was very poorly run. We can see that easily now in retrospect.
If you owe someone $1000 you owe them one thousand dollars. Not the value or purchasing power of one thousand dollars -- literally one thousand things called dollars.
So if you take $1000 in deposits, you buy $1000 in bonds, you wait until the bonds mature, and then your depositor withdraws $1000, you will be fine no matter if that happens in one year or a hundred years, no matter what the rate of inflation is. Your assets and liabilities will cancel out.
If your depositor tries to get their $1000 back before the bonds mature, you are screwed. That is what happened to SVB. If all of SVB's bonds had been mature by last Friday it would have been fine. Pretty much every article in the financial press about this fiasco has made that point.
It is amazing to see people twist themselves up in knots about opportunity cost and inflation when this is so basic. If liquid assets equal liabilities in the literal number of dollars, you are even, you are solvent, and your depositors get their money back.
> A loan today would need to be at below market rate interest in order to match up with the value of the bonds held to maturity.
Well, it's a government loan, so they can do that if they want to.
However, it also proves that holding bonds to maturity is different from selling them at market rates. It demonstrates the distinction between solvency and liquidity. Every financial publication has made this point when discussing SVB in order to educate their readership about the problems of duration risk and explain how a bank with enough assets to cover liabilities can still fail.
Now, the nice thing is, the government has time to wait for the bonds to mature. So the government can take the bonds, pay off the depositors, and get the money back when the bonds mature. The government won't lose money if they do it right -- just like they didn't lose money with TARP in 2008.
Also, at some point the difference between opportunity cost and investment loss becomes rather semantic. In a liquid market, you should be able to sell and rebuy your positions every day, which you generally don't do of course, but it does mean that the decision not to sell is similar to the decision to buy: if you wouldn't buy under these circumstances, you should sell.
With these bonds, their low interest makes them less attractive than newer bonds with higher interest, so nobody will want to buy these lower interest bonds at face value when higher interest bonds are available. They'll only buy these at a discount that would make their profit comparable to those of higher interest bonds. So the value drops, so that's a loss.
Personally I've never seen the point in buying low-interest bonds. But then I'm not a banker.
If I can claim inflation as a loss I need to go redo my taxes…
What matters is that principal is returned in full when bonds mature, but if you can’t wait until maturity you might have to sell them for less than the principal. That is exactly what happened to SVB.
What's stopping my Local Bank from crashing this week?
Enough consumer confidence to prevent a bank run is the only thing that prevents a run on any bank, including the largest banks in the world.
1. Give 80 cents on the dollar to each depositor and say tough-luck. 2. Give $1 dollar to each depositor upon bond maturity [for sake of example let's say 10 years].
Option 1: Depositor takes the cash, buys a new bond with the same maturity [but it would have higher yield, say closer to 4%] at current market price. At maturity they have $1 dollar
Options 1 and 2 are equivalent, minus the bid-ask spreads which are very tight for treasuries. This is time value of money.
Not anymore. Now the question is, how does the government make depositors whole? I doubt they will go flog the bonds on the open market or get loans at market rate like idiots. The point of this intervention is to bypass the market mechanisms that caused this and put the government as a backstop.
Thank you, great concise explanation, lightbulb moment for me. I understood it but couldn't clearly communicate it.
So to make depositors whole today, you need to borrow money today, and the extra interest paid to borrow the money is more than the interest you get when the long-term bonds finally mature. The difference is the loss.
Which is why they had to take a loss on selling the bonds, as it's essentially the same loss. They are out money whether they sell the long-term bonds today, or if they borrow money today. Bonds are discounted appropriately by whomever buys them.
Question is, why didn't SVB do anything when they saw this coming? I've seen articles saying the board was aware of the risk issues for the past year. [1]
[1] https://www.forbes.com/sites/noahbarsky/2023/03/12/silicon-v...
If I buy $1000 worth of bonds at 2% interest rate for 10 years, my expected return is 1000 * .02 * 10 or $200, making the bond worth at maturity $1200. This bond is worth $1000 today and will return $200. If the bond price falls to $.80 on the dollar or $800 and I am forced to sell today to make my depositors whole, now there is a realized loss - $200 from the original price and $200 from the eventual returns.
If I can wait I have $400 more. If I can't and have to sell then I lose $400.
The distinction between insolvency and illiquidity is a red herring. People who have to sell their house in foreclosure will be discovering the exact thing you are describing here.
What's happening here is SVB is big enough that the authorities go "aaaaah, wait a second, this could blow up a bunch of other businesses and we wouldn't want that". And so they are taking the illiquidity interpretation and helping out the depositors, but at least they are not helping the shareholders.
One thing that may be a bit different in the case of a bank is that the general public does not know or consider deposits to be a loan to a bank. Which is what it is, but people don't think of it this way, and the aren't encouraged to either thanks to FDIC and other state level guarantees. If we change that by letting the depositors lose money, there's going to be chaos.
The problem SVB had is that there was no market buyer for their bonds at a price they needed today. They deserve to fail for that but that's not the part of the discussion I am responding to.
What I am responding to is the idea that there is a myth about the value of the bond. Here is what might happen, in a very simplified way:
- Depositors need their cash today - SVB can't sell their assets to meet this need, and so the bank is fails and is dissolved (already happened). Let's make this simple and say SVB owes the depositor $1000, can sell for bonds for $800 today. If they can have wait the bonds will return $1200 later. - The FDIC steps in with all their capital. They say ok - depositor here is your $1000 today and you are now whole. But we will not sell the SVB bond today to cover that $1000, instead we will hold the bond and wait for it to mature at $1200. Thus the depositor is whole, and over the long term no money is lost.
No regular market participant step in to provide the $1000 because they can get a better return on their money in other ways. But the government can do this because their goal is not maximizing return on capital, but instead stabilizing the system.
Of course, you can still argue that stabilising the system is worth it.
The US 10 year treasury interest rate is 3.7% right now. That means you can get $1200 in 10 years with $835 today at 3.7% compounding; 1200 / 1.037^10 = 834.44 and change.
So your $1000 worth of bonds is actually only worth about $835, at best, because that's the market price for a (close as possible to) risk-free investment which matches the return at maturity.
Inflation is the flip-side of this. You can reasonably expect $1200 in 10 years to be worth about what $835 is today. It might be less, it might be more, but it's an estimation with money behind it.
That's what I don't get. Why are bonds considered risk free if their value can drop when interest rates go up? Sure, they may be worth $1200 in 10 years, but they're only worth $835 now, when they were worth $1000 yesterday.
Risk may be lower than buying shares in a company at risk of bankruptcy, but it's hardly risk free. These things can go up and down just like normal share prices.
The important concept here is the time value of money.
But the govt. doesn't have this problem. They don't care about maximizing return - they care about containing contagion. So they can pay $1000 for a 2% return and not still not lose money over the long term.
It might then need more regulation as to what can be done with deposits, how much can be paid on them etc.
What really worries me is that the regulators might have seen these investments and not understood they were risky. Government bonds are pretty safe, right? Duration risk is sneaky and even though it’s obvious now, SVB was locked in back when rates were super low. Realizing the risk anytime after they got locked in is too late!
Applying the same stress tests to all banks regardless of the amount of deposits they have would be a good start.
Also, the FDIC insurance limit would be a lot higher than $250k if it followed inflation, but even if it did, a lot of businesses need to keep a lot of cash around to make payroll and float expenses. It doesn’t make sense for them to have the same type of insurance, and the same limits, as an individual person’s checking account.
Did you mean almost certainly not the only bank that invested money like this?
Note also although TARP was as derided as it was, the govt and the public made a fantastic return on their investment
If they believe they are helping, why does the response always emerge suddenly on the day of the crisis with no debate or well explained contingency plan being activated?
The whole system seems to be built on one group revealing a sudden crisis that have obviously been building for a while. Then another group of people explaining that they have a plan, there is no time to explain, no need to explain and the objections are all mean-spirited fools who don't understand the plan. The plan which will be clearly explained sooner or later.
They're acting like people running a scam. None of these crisises are that surprising. Raising interest rates were likely to lead to this sort of fireworks display at some point in the short term. If the panic is genuine they should all be removed on the basis that they can't spot a tree in a forest. This has to be a long-planned contingency.
> You can't let the banking system collapse and expect it will only hurt the people you don't like.
The hurt happened a while ago now; banking collapses are the market recognising that it was mistaken about actions that it thought were wealth-creating but turned out not to be. This isn't a question of trying to "hurt" rich people, whatever that means. This is about concentrating the pain on people with skin in the game.
If people with skin in the game eat the losses, losses will happen less often. If the losses are diffuse, then losses happen more often. They're trying to cover up for incompetents because they meet them at parties, go to the same schools and have the same friends. And invest in similar assets, one suspects.
Because that is what a crisis is, and it’s how crisis response works!
> This has to be a long-planned contingency.
You can believe that this was a long-running conspiracy or you can believe that the people involved are incompetent screwups, but how can you believe both? Someone would have talked.
Do you honestly believe that people with “skin in the game” aren’t being hurt by this? SVB shareholders lost everything.
Do you also honestly believe that you can restrict the fallout of a banking system failure only to those who caused it?
That isn't how regulators deal with crises. Governments either execute long-agreed plans or flounder for months before organising to do something half-useful. The financial regulators are unusual in that they seem to struggle with the idea of publicising their plans ahead of the event.
> how can you believe both?
It is pretty normal. One of the reasons a democracy usually does so well is it turns out that the ruling classes in non-democratic nations are both incompetent screw-ups and busy conspiring to keep themselves in power. Then the competition from more evidence-based leadership in a democracy outmanoeuvres them.
The system is supposed to purge itself when there is evidence that the powerful are making big mistakes. Instead we get people who believe "protecting the system" is a good in itself being given a printing press and being told that they can do whatever they need to do. Nobody is talking about printing money yet, but it is the US's response to almost literally every crisis these days so I assume it is coming.
> Do you also honestly believe that you can restrict the fallout of a banking system failure only to those who caused it?
No. Which is why it should have been allowed to fail 10-20 years ago when the damage would have been smaller. Low interest rates and easy money is building up bad habits and large points of failure.
Printing money is how the US finances everything. If USD wasn't the reserve currency backed by US war machine, the entire country would have imploded some decades ago.
Responses, by literal definition, occur after the fact and in response to a stimuli. Do you accuse ambulance personnel of being unhelpful because they weren’t there to prevent an emergency from occurring?
I'm not sure what you mean. The FDIC is the contingency plan to bank failure. The response involves the FDIC taking banks in receivership and then paying back depositors.
The debate was hashed out in 1933 when the FDIC was created and has continued since. See here,
https://www.fdic.gov/about/history/
It's like other emergency government responses: there is autonomy built into the agencies because it's understood that being able to act swiftly is required, and that democracy can happen after the fact. FEMA doesn't hold votes on whether relief somewhere is required, the president can command military force without acts of congress in some cases etc.
I personally think it's debatable whether the gigantic nation states with representative democracies that we have now are the best possible system. But in this particular case the FDIC is pretty much acting as it was chartered to.
>> it will only hurt the people you don't like.
>> people who are dumb enough to let the entire banking system collapse
when did gp expresses his dislike for people who banked with svb :D
The cost of the loans should be in the same ballpark as the losses on the long term bonds.
That’s great, that means it’s zero, because there is no loss of principal on bonds held to maturity!
Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes.
The MtM losses are real.
If your bond 10y bond you bought two years ago pays 1.5% and you need to take on a loan at 3.5% for 8 years to be liquid, then you are still around 16% in the red. You will find that this is also roughly what the market will discount the bonds.
So if the taxpayers are paying interest to the fed, who then feeds those profits back to the trasury, and the treasury uses that money for scenarios such as this - doesnt that automatically mean the treasury/FDIC is using BOTH public taxpayer money (laundered through the fed back to the treasury) AND the bank payments to the FDIC in order to cover that?
Are these two separate piles of money - and they will not take from the "profits" the Fed made on taxpayer debt on money printed by the Fed to the USG, but only from the FDIC fund that the banks pay fees to?
Something always feels 'fishy' when you dont have a deep grasp of the structure... so, please ELI5?
So if the taxpayers are paying interest to the fed, who then feeds those profits back to the trasury, and the treasury uses that money for scenarios such as this - doesnt that automatically mean the treasury/FDIC is using BOTH public taxpayer money (laundered through the fed back to the treasury) AND the bank payments to the FDIC in order to cover that?
Are these two separate piles of money - and they will not take from the "profits" the Fed made on taxpayer debt on money printed by the Fed to the USG, but only from the FDIC fund that the banks pay fees to?
Something always feels 'fishy' when you dont have a deep grasp of the structure... so, please ELI5?
If SVB was paying 4.50% (as they claim on their website), then even if the customer takes a 5% loss, it would be only a 0.50% realised loss.
I genuinely don't understand why the regulator doesn't push for that unless there is some "lobbying" involved.
Correct. This is literally why bond prices move inversely to changes in interest rates.
The people criticizing you here are ignoring carrying costs (which are fundamental to finance math) and assuming that default risk is the only form of risk (which is obviously false).
From where do you think this money will, or has come from?
From Yellen's backside?
Depositors are the absolute last group to lose money in a bankrupt bank. When a bank collapses its assets don't just disappear, and depositors (and paychecks) get first scoop from the pot.
It would be nice if everyone didn't have such hostility towards personal responsibility. You never put all your eggs in one basket. You diversify where you keep your money.
The government can best help by doing what it does best. Let it invest in making bankruptcy courts super efficient. Set up automated systems to drip feed payouts to depositors as assets are sold.
The "heads you win tails we lose" deal we give to bankers, which we don't give to anyone else, is fundamentally evil, and we have to stop bowing to their terroristic threats that if you don't give us this deal you're all doomed.
If the banking system collapses most businesses will fail.
So much of this is built on trust, it’s literally the government’s job to step in and fix this before this explodes. Luckily, it sounds like SVB has the assets to cover the losses but not liquid so it will take time. Also, nobody is getting a bail out. SVB is dead, period. Depositors money belongs to them and they should be made whole. This could have been so much worse.
They mean the risky, overleveraged and marginally valuable businesses fail, and the conservative, careful, and valuable businesses survive and buy up their assets.
It's precisely the interference with this process that's exacerbating economic booms and busts in the first place.
Let those who played it safe now have their reward, and those who played it risky have their comeuppance - not the other way around.
Equity holders of three banks just lost all of it - that is exactly what you're asking for.
In fact nobody recommends holding one bank account, under any circumstances. Banks can and do freeze accounts for any reason. You always have some backups standing by.
You also don't keep all your assets that way. Businesses can hold reserves in stocks or bonds or gold or cash in a safe just like everyone else.
The VCs didn’t concentrate their money like this for no reason. They got some benefit out of it, surely (easier access to loans for their portfolio companies, I suspect). And VCs are, or should be, sophisticated enough to be accountable for concentrating their capital without purchasing insurance.
There’s no clear way for VCs to pay the price they should pay without some startups being collateral damage. I think that’s the crux of the disagreement about what should have been done.
Founders used SVB because regular banks, if they see you have a failed startup in your history, won't give you a home loan.
Almost like some scam? Why should banks have such priviledge? Who gave them that?
I keep some of my money at the bank because I have to and because my employer is paying my salary through a bank account. The most of it is at some safer place.
Liquid deposits at low interest rates are useful. Home loans are useful. And banks can bridge the two successfully almost all the time. And even when banks can't, the biggest problem is probably panic.
In many countries, the solution has been to transfer the tail risk from bank depositors (not owners) to the state. The state then reduces this risk by regulating banks heavily, and by requiring them to pay into an insurance fund.
I am not a libertarian. I support the idea of government as a regulator and an insurer of last resort. I am 100% aware that banks can only exist because the government holds the tail risk.
I think that wiping out SVB's shareholders and unsecured creditors was the right move. If we can claw back some executive bonuses or recent insider stock sales, all the better. However, I also think that making depositors whole is the right move in this case, because lots of banks own long term T bills and mortgages locked in at low rates, making them vulnerable to bank runs. Our best chance of fixing the situation is to prevent short-term contagion and then to change the regulations on banks to eliminate this risk in the future.
But yeah, I think banks are a useful fiction created by state regulation and state-mandated insurance. If we no longer want to provide that particular economic fiction, then I would prefer voters to elect people who figure out an orderly plan to wind down banks, rather than just letting the system implode.
(Full disclosure: Neither me nor my employer has money in SVB. But my paycheck is handled by Rippling, which passed funds through SVB in the process. Had my paycheck been paid last Friday, it would have been held to at least Monday.)
No explanation other than "this is the way things are done".
They're saving customers to a large extent, who could have done more diligence when choosing a bank, you could argue. But they still feel pain going through this process. And not saving them would have worse consequences for the entire system.
No, they use taxpayer's money to save taxpayers.
I'm fine with that as soon as we save taxpayer's money and punish those who triggered the accident and replace them by people who are paid by taxpayers money, under direct control of the state.
There is no sensible reason to want the state to own every bank; that means you're accepting a silly amount of risk and not diversifying your investments. What you want is a social wealth fund, not owning a random industry you don't like.
SVB’s CFO was previously the CFO at Lehman, so whether he still has his job today seems to have no impact on whether the revolving door will continue to open for him or anyone else there.
Although in this case he did do it again.
Insiders file 10b5-1 plans with their brokers well in advance to automate the sale of their stock. It's very unlikely that the sales had anything to do with recent events.
The bankers sold most of the shares before it happened, because they knew it was coming.
Just shows that they knew even early SVB was fucked. I meant it was clear SVB was fucked since JPOW raised rates and SVB had dog shit assets on their HTM.
But instead of doing something they kept it afloat until they sold their shares which took about month to let it fail after they cashed out.
Right, that is the only reason why an insider would ever sell stock.
Here's the CEO's latest Form 4: https://www.sec.gov/Archives/edgar/data/719739/0001562180230...
He exercised stock options to keep his ownership roughly the same at about 26 Million USD. Wonder why he didn't cash that out.
> But instead of doing something they kept it afloat until they sold their shares which took about month to let it fail after they cashed
What should they have done? How did they manage to keep aflot? Why did they stop?
That’s not what’s happening here. The bankers — investors in SVB — are getting wiped out. The FDIC is protecting people and companies with accounts at the bank, not the bank itself.
Imagine another bank BVS of similar size that didn’t quite have the money. It has lost part of it in monkey NFTs or whatever. They have a loss similar to the mark-to-market loss of SVB.
Can they buy the same bonds that SVB has to patch the hole in their balance sheet? Can they then say “we have the money, we just don’t have it liquid right now because it's in bonds that won't mature for a while ”?
If not, why not? Both banks would have the same assets.
Unfortunately, in related news, the answer is 'yes', from the new BTFP.[1] I wouldn't say this is wrong but it does seem like the kind of bazooka-brandishing that makes financial-folk panic still more.
Unlike NFTs or whatever, the bonds held to maturity will pay out the full amount.
There is no difference at all between the assets of liabilities and the two banks in this example. I don’t mean just that the amounts are the same: every asset is identical.
Can both use the “I have the money but just not right now” excuse or not?
You lost me there.
> Can both use the “I have the money but just not right now” excuse or not?
No.
The bonds lose 20% (for simplicity the t-bills gain 0%)
Bank 1 ends with $1000 in t-bills and $800 in t-bonds (face value $1000)
According to some people Bank 1 can say “I have $2000 it’s just that I don’t have them right now”
Bank 2 starts with $1800 in t-bills and $200 in NFTs
In the same period the NFTs lose 100%
Bank 2 still has $1800 in t-bills, sells $800 and buys $800 of those t-bonds which are trading at a 20% discount to par
Bank 2 ends with $1000 in t-bills and $800 in t-bonds (face value $1000)
Bank 1 and Bank 2 are in the same exact situation
Bank 1 can say “I have $2000 it’s just that I don’t have them right now” but Bank 2 cannot do the same?
If you're trying to say "look, 'taxpayer' isn't mentioned, all good", you're either in self-delusion or you're playing dumb. It doesn't matter how you dress it - "taxpayer money", QE, Sammy's piggybank - the inflationary repercussions will affect everyone.
> On top of that, SVB has the money to pay back almost all of the depositors. They just don't have it liquid right now because it's in bonds that won't mature for a while and would need to be sold for a loss.
This is a self-contradiction, yet it's written as an explanation. Bravo.
> You can vote for people who are dumb enough to let the entire banking system collapse because they want to hurt rich people. But of course that would probably put "peasants" out of work while the rich get slightly less rich.
This isn't about "hurting rich people", you can throw away that straw man (along with the twitter favorite "it's not a bailout, the bank equity goes to zero!"). It's about the response to a complex system's failure. Most would agree injecting liquidity ASAP is mandatory in the short-term, but that does not mandate insuring 100% of deposits. Any sort of response has negative repercussions, but it isn't a matter of fact that the banking system would collapse otherwise.
Nobody has "the answers", it's a complex system. The VC tech bro take draws a line in the sand and cries wolf for any approach that doesn't cover them 100%, and it's done under the guise of looking out for others; "the workers", "the banking system", "the economy", "a generation of technological progress evaporated".
Is it possible that the best thing to do for the long-term is to allow a worse short-term outcome (affecting a small part of the economy more drastically), so that the system is altered in a way that actually fixes/improves it? Even if we grant that hypothetical, should it be done? It's a complex question with no right answer.
The VC tech bro take on technological advancements that have negative short-term side effects, wiping industries and causing people to lose jobs usually falls in the range of "learn to code" to "that sucks, but we must march forward". There is a poignant sense of hypocrisy when grandstanding holier-than-thou "technologists" who claim in abstract that progress and efficiency trump all, find themselves on the other side and act oh so predictably.
The cynical responders aren't partaking in the question of "what is the correct response", but just because they don't gobble up the predictable VC tech bro take as gospel doesn't make them dumb.
The only problem with this line is that a ton of people on here are explicitly against social safety nets. Now that they need one, all kinds of equivocation and hand waving.
Safety nets for all (or none)! FWIW, I prefer the former.
> If these statements are true, can someone explain how it's possible that despositors are fully protected, far beyond what FDIC insures, without the taxpayer bearing any of the burden?
"The FDIC is not supported by public funds; member banks' insurance dues are its primary source of funding. When dues and the proceeds of bank liquidations are insufficient, it can borrow from the federal government, or issue debt through the Federal Financing Bank on terms that the bank decides."
https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...
On top of that, SVB has the money to pay back almost all of the depositors. They just don't have it liquid right now because it's in bonds that won't mature for a while and would need to be sold for a loss. So the obvious and sensible thing to do is have the government lend money to cover the time until the bonds mature, in addition to using the FDIC's money which did not come from public funds.
> And please inform him the recourse he has should he disagree with sharing your loss.
You can vote for people who are dumb enough to let the entire banking system collapse because they want to hurt rich people. But of course that would probably put "peasants" out of work and living the street while the rich get slightly less rich.