No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause.
That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."
Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
The Fed kept making it clear that it was raising rates, and it seems like SVB just slipped quietly into that good night without lifting a finger to save itself. Which is bizarre and confusing and there must be more to the story (and details are coming out, like the risk manager role remaining open for nine months), but it does seem like crazy risks were taken. But not in pursuit of additional gains, like we are used to seeing, but it's looking more like negligence or a misunderstanding of their position.
> To fund the redemptions, on Wednesday Silicon Valley Bank sold a $21bn bond portfolio consisting mostly of US Treasuries.
https://www.theguardian.com/us-news/2023/mar/10/silicon-vall...
All your link shows is that Guardian, Reuters, and others have equally as bad reporting as commenters here, just parroting each other constantly...
SVB's actual announcement says "Additionally, earlier today, SVB completed the sale of substantially of its available for sale securities portfolio. SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023."
I haven't seen any evidence that there were substantial Treasuries sold, I just see MBS on their balance sheet.
Exactly, so don't lock it up. Glad you agree with me.
Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine.
In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
But that's literally what they did. They put it in 10 year treasuries that they had to sell for 87 cents on the dollar because every "thought leader" in Silicon Valley had the same idea at the same time and triggered a bank run on their own bank.
Everybody who has deposits will get 100 percent of their money back and everybody who holds equity in SVB will be (mostly) wiped out.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
If the SVB had been forced to recognize its loss sooner, then this government bailout wouldn't have been necessary. Perhaps they'd have succeeded in raising more capital, and survived as an operating business; or perhaps their shareholders would still have been zeroed and their creditors would have seen a partial recovery. The depositors would have been fine either way though, no government bailout required.
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
And FMV is less than par, so that's an undercollateralized loan. That's another component of the subsidy to SVB depositors, and also a subsidy to shareholders of other banks that overexposed themselves to long-term debt (though too late for the SVB shareholders). There's no rational economic basis for this change in policy, and it goes against all modern central banking theory.
https://twitter.com/DanielaGabor/status/1635167154042716161
I hope you don't think holding the bond to maturity somehow means the loss isn't real? All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of a bond is ultimately determined by the value of those cash flows to that person; so if the FMV went down, then that should be a clue that value was fundamentally lost, regardless of who holds it.
The SVB's problem was that their HTM accounting treatment didn't model economic reality. The government is leaning into that fiction somewhat here, out of some combination of favoritism and concern for systemic risk. That doesn't make the fiction true though, and it doesn't mean the loss disappears; it just means the loss gets socialized.
Borrow short, lend long. The latter necessitates 'locking money up'.
A well-managed bank will properly manage the risk of the short loans getting called.
A poorly-managed bank will go all-in on getting short loans from people who are likely all going to call them in at the same time (startups), while putting their entire lending portfolio into lending long in an environment where long-term loans are dropping in value.
You made the case that how you value it depends on the plan. So what was the plan?
The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
Like if it were me, I'd grudgingly buy long-dated assets to keep the doors open, but also look toward reducing maturity as rates increase and start acquiring customers. Problem is that, very roughly speaking, those things only work if rates increase more slowly than you can acquire new customers.
The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
If it cost nothing with no risk, surely a larger banking institution would have been willing to step in to solve it.
> Seems very much relevant to what the FDIC was created for
The FDIC was created to be an insurance corporation, not to bail out banks at their discretion.
To be clear, if banks can improve their risk profile for free, they will do that (because it frees them to invest in other risky stuff). A no-risk 5% return while the fed is giving out sub-5% interest rates is a no-brainer. The reason no banks are coming in to help is because it would be a bad investment.
On that point, the government does have an obligation to "provide for the common defense and the general welfare of the United States," and that is clearly one of the overarching purposes of the Constitution itself. I find it hard to argue that saving tens of thousands of jobs[0] but by making the depositors whole, when the assets of SVB, illiquid though they may be, can cover 60-90% of the cost, is at all the wrong thing to do. This is literally part of why we have a government, and why markets are regulated at all.
[0]: I couldn't find a good source on the number of jobs, but that seems like the correct order of magnitude, anyway.
> "provide for the common defense and the general welfare of the United States,"
We'll have to agree to disagree that bailing out well-off startup founders and employees is the best way to provide for the general welfare of the United States. I'd start with people undergoing medical bankruptcy, then about a million other categories of people before I got to them. Either way, I'd prefer the accounting to be transparent. The FDIC isn't acting as a corporation here, so they shouldn't be a corporation.
The bank managers and investors are not being bailed out -- they have already lost everything.
You seem to be attaching some kind of anger for some ill conceived and non existant "happy go lucky risk wall street bet" type of activity, when this is about buisnesses losing their operating accounts who did nothing wrong except for have accounts at this bank instead of the next bank over.
Please stop repeating this. It is 100% about risky investments. https://www.theguardian.com/business/2023/mar/11/silicon-val...
Also, if your entire clientbase is in a single groupchat, you should be much more prepared for a bank run. This is like common-sense stuff. The fact that this is a bad business model isn't really my concern.
> The bank managers and investors are not being bailed out -- they have already lost everything.
The bank managers will walk away having earned millions of dollars in salary and bonuses, funded by risky bets, and the investors will walk away without bearing the consequences of the risks SVB took. Their investments in SVB went to zero, but there's still money that's been lost.
Exactly. In Russia we had people who'd serially deposit money into the shadiest of banks offering highest returns. Deposits are ensured upto some amount, so they'd collect interest, get their money from the state after a bank bankrupts (while the bank owners are enjoying stolen money in a no extradition country) and go to the next bank.
I don't disagree that doing things like addressing medical debt are worthy ways to promote the general welfare, but let's not pretend it's an either/or, thing here, either. You don't seem to want to acknowledge the full context of the situation, which seems at least on the edge of disengenuousness. This as well, after you try to frame it as a "bank bailout" then backpedal when called on it.
Maybe they should care. Why shouldn't an employee care about financial stability of their employer?
As I said: maybe they should.
I care about stability in my employment situation as much as the next canine. I've worked at 4 startups, each with under 150 employees apiece. I've asked questions about funding, client base, growth plans, etc. All the normal "hard" questions you have to ask as a prospective startup employee. Not once have I ever asked where they banked. Not once has anyone I know asked where their employer banked.
I would submit that if the banking system becomes fragile enough that asking about such a thing is actually a good idea, we have bigger problems as a whole, which would make a prospective employer's answer to any such question irrelevant. And if that's the case, why ask?
Another way to put it: it's not employees and consumers putting "all eggs in one basket." It's the economy as a whole. If there's one thing that the 2008 financial crisis proved, it's that if the banking system gets gummed up, second and third order effects very quickly begin to set in and ruin things for everybody.
Now, if you know how to reconstruct the banking system to avoid this, I'd like to hear it. But as long as my employer's payroll funds aren't stored under the CEO's mattress, I think I'm good with that.
"we have bigger problems as a whole" I don't think so, at least based on Russia's experience. In the previous decade plenty of banks got closed with businesses losing money, but economy was ok and the banking ecosystem got healthier.
But the real problem I have is with special treatment. There's plenty of people out there who get screwed by their employer's negligence/malice but the only ones who get bailed out beyond the letter of the law are the ones with the networks, money, and influence to make noise about it.
> but let's not pretend it's an either/or, thing here, either.
But it is. You either spend money in 1 place, or you spend it in another.
> "bank bailout"
This isn't like a well-defined term as far as I'm aware, so 2 situations where banks/customers rely on the government to come to the rescue when risks don't pay out can both be called bailouts, whether or not the company remains in tact. You see plenty of media organizations and people calling this a bailout despite the fact that the bank is being dissolved, because it's a colloquial term.
This feels like you're agreeing with me. Is that the case? Receiverships have a pretty specific meaning, which explicitly does not include resolving liquidity issues using third-party funding.
Plenty of banks compete on benefits other than yield.
SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more.
I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV.
However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.
Like, for instance, your disproportionate share of startup clients easing off the cheap loans you had been offering them, because they’re no longer so cheap, and instead drawing down on (or moving) the balances that you had insisted they keep with you as collateral. Trouble was brewing on both sides of the business, not just on the asset position.
I've heard multiple reports that one of their large investors got wind of their attempts to get a $2B loan so they wouldn't lose that money in their bond investments and thought it was a huge red flag and was the first to take out all of their money. The theory goes it was a large SV company, and news travelled on social media and the SV financial circles about they did and their belief that the bank was about to implode.
This created a long line forming on Friday morning of companies wanting to get their money out as well.
I agree, I'm not sure if the rumor was enough to spook people, or an orchestrated move by several companies, once one company found out what they were doing - but its very suspicious. Add in the founders were busy taking money at the same time they were liquidating their positions, which I'm sure the SEC will have something to say about as well.
Add in all the people who may have found out early and took out short positions as well who are now poised to possibly make a good chunk of money in all this chaos.
This is completely false. If the SVB (or any other bank) had been adequately capitalized on a MTM basis, then they could have borrowed from the Fed to withstand any bank run. The SVB was not:
https://www.bloomberg.com/news/articles/2023-03-10/the-balan...
The hold-to-maturity accounting allowed them to pretend otherwise, disregarding losses on long-term bonds when interest rates increased. They--and their regulators, since such accounting is perfectly legal--hoped this would let them ignore the problem until they could earn their way out of the hole. Instead interest rates increased further, the hole got deeper, and the SVB blew up.
It's not impossible that Thiel somehow benefitted from the collapse, though I'm not aware of any evidence for that yet. It's also possible that he simply didn't want his money in an insolvent bank.
Liquidity calculations for banks definitely include mark to market for HTM portfolios. But even then they were legally deemed sufficiently liquid. The run on the bank wasn’t expected or normal behavior.
If you hold a bond to maturity, you get it's Net Present Value at maturity which is actually Net Future Value. Mark to market of treasury bonds is essentially the NPV of the bond, considering current interest rates. When interest rates are near zero, sure, a dollar today and a dollar tomorrow are the same, with significant interest rates, they aren't. And there's the problem.
You can't give a depositor a $100 treasury bond, due in 2028, when they want $100 now. That's only worth $85 today (or whatever the value is, I dunno).
They were not holding sufficient tier 1 capital against a run or they would still be here today. The did, on the other hand, have enough to exceed regulatory requirements.
They apparently did not hedge at all and additionally, they invested heavily in mortgages which are well known to decline more in value in rising rate environments due to extension risk.
As an earlier poster noted, the primary reason to have a HTM portfolio is to avoid wild swings in reported earnings each quarter from a mark to market as their is no counter on the balance sheet that rises/falls in a similar manner.
You are probably correct in that if there was not a run it likely would be rear view. They would have done their capital raise and probably taken additional measures to improve their ability to withstand such an event. Of course, this all was trigger by a ratings agency and a few bloggers calling into question the unrealized losses in the HTM portfolio.
Then again, had the stress tests still be in place it is unlikely to have even gotten to the capital raise point.
Which, if you are being at all honest, means you calculate its present value by applying a discount rate in line with current risk free returns over the relevant time horizon, which will be a number suspiciously similar to the Treasury yield curve, and you will end up with something quite close to the mark-to-market value.
(And it has to be this way. Otherwise you could go buy two-year-old long dated bonds at a discount on the secondary market and make a killing, because the transaction would have an immediate NPV gain of 30% or more.)
Banks are a bit unique in that they can generally borrow at a cost much lower than the risk free rate due to the existence of non-interest-bearing and low-interest accounts, but IMO those should be thought of as a variable source of future profits, not as a reduction in the risk-free rate to be used for financial projections.
This is flawed logic. The NPV is not a real, tangible dollar amount. It is a calculation, based on the presumed yield of a theoretical set of alternative investment opportunities, of the Net PRESENT (today, right now) Value of the bond. This number is less than the sum of the bond's future payments, because the NPV is attempting to determine the current value of payments scheduled for receipt in the future.
In other words, if you are owed $1000 to be paid on Christmas Day of this year, the Net Present Value is less than $1000.
This is it. People are quick to point out mismanagement at svb, but it's only because of the run and the following collapse. After the fact, it's easy find data points to explain away anything. Holdkng on to low yield treasuries, really now, this is the telltale sign of a failing bank?
History still needs to be written on this one, don't discount the human factor, debtor's panic because of gossip run wild is not too far fetched.
When circumstances changed, they changed their plan. What do you normally do?
SVB had many opportunities to do hedge and honestly, why on earth should bank or anyone else "take the Fed at their word". People make mistakes, institutions make mistakes, people misunderstand and on and on.
If anything is damaging trust, it is banks and investors lobbying to loosen up regulations, claiming the banks are too small to pose systemic risks and then ask for special exceptions the moment it does not work out.
All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations.
SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.
Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run.
Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place.
It just wasn't part of anyone's threat model.
But those assets are typically hedges against long term fixed rate bonds issued by the bank, or are funded by a diversified (and mostly retail, ie more stable) deposit base with a large enough liquidity pool to sustain a period of stress, as mandated by liquidity regulations.
That appears to be untrue; the other banks hedged interest rate exposure.
https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-0...
See p6: "Larger banks are the predominant users of derivatives. ... Banks facing higher likelihood of financial distress manage their interest rate risks more - both by maintaining lower maturity GAPs and by engaging in higher derivatives activities. Consistent with the predictions of Froot et al. (1993), I find that the high growth banks and banks with less liquid assets engage in higher hedging activities"
Banks are subject to daily reserve requirements, so everything they invest in should also be market priced (aka mark-to-market) each day.
It did not hide them. This was in their financial statements (https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... at page 15):
> Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6, $6 and $7 (fair value of $76,169, $77,370 and $97,227), respectively
> December 31, 2022 | September 30, 2022 | December 31, 2021
> 91,321 93,286 98,195
This shows that they had assets on 12/31/22 with an amortized value of $91bn and a fair value of $76bn
https://www.reuters.com/article/us-usa-trump-dodd-frank/trum...
Funny that should come up. Minnesota Attorney General Kieth Ellison is blaming Kia and Hyundai for our rash of auto theft and associated crime.
https://www.startribune.com/minnesota-minneapolis-keith-elli...
> It’s true that investors had been aware at the latest since its 10-Q filing on Nov. 7 that it had sustained unrealized losses among its held-to-maturity (HTM) portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. While this would theoretically render it insolvent were they to materialize in full, SVB Financial was dismissive of the risks.
"SVB collapse highlights $620 billion hole lurking in banks’ balance sheets" -https://archive.is/qnwYh
Also short sellers worked it out a while back too
"A Silicon Valley Bank short seller explains how he knew the bank was in trouble months ago" - https://archive.is/XaKkt
Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail.
Don’t blame SVB’s failure on a bank run. SVB caused their own failure with their own risk management policies and it’s insolvency was probably inevitable for months.
Jail seems extreme for an error in judgement that neither killed nor maimed anyone.
I'd, for a change, like to see those responsible for massive business failures held to account personally and financially. The limitations on corporate liability are meant for investors, not executives or board members. And TBH, those accounts with over 100MM in deposit should probably lose the 10% or so under normal rules for this kind of thing, not be bailed out by the Fed, who will in turn likely need to be bailed out by taxpayers, or worse if this happens another couple times in the next couple years.
If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.
In a capitalistic system, money is power, and messing with it has serious consequences.
I'd rather be punched in the face than have all my savings drained, for example (as long as it's not Mike Tyson doing the punching).
Especially in a business such as finance where the job literally is to estimate risk, someone will make the (in hindsight) wrong decision.
No one is interested in the deal "if you get it right, you make some money; if you get it wrong, we obliterate you".
The move from caveat emptor to caveat venditor has coincided with everyone legally ringfencing things with corps & LLCs. People find ways back to a fair deal.
https://en.wikipedia.org/wiki/Incarceration_in_the_United_St...
or like being in possession of a gram of meth for personal use: something a person might legitimately believe isn’t “wrong”. the meth user didn’t get into jail for violating his own moral code: he’s there for an error in judgement, this error being that he didn’t understand how strongly the people around him would react to actions he thought were not that big of a deal.
sibling comment does good by calling attention to driving: enough people text while drive that it can be considered normal behavior, that people who do this don’t actively think they’re doing wrong. but that doesn’t save them from culpability when they roll the dice poorly and hit a pedestrian.
what’s the difference between “manslaughter” and “murder”: it’s intent. our justice system does consider intent, but it doesn’t require it.
Seems the difference is small. Shareholders still lost everything, depositors lost nothing instead of 10% but that's a minor difference.
Guess one difference is how long it'll take before depositors can access their money. Now they'll get it immediately. If they were waiting for liquidation of the banks assets, that would probably take longer.
SVB is down ~10% but that doesn't mean everyone would have actually been made whole from the money.
For the record, "1 year treasury bonds" are 52 week Treasury Bills. They would not be buying off the run old debt.
Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision.
As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things).
Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was completely ignored.
It was worse than not having good risk managers... They didn't have a CRO at all for 8 months, until 2 months ago.
> In the run-up to all this, SVB’s proxy statement, filed earlier this month, reveals that the firm’s chief risk officer stepped away from her role early last year, and the bank did not hire a replacement until this past January.
https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...
They had no chief risk officer for 8 months. They argued publicly against stress testing banks. Their complete absence of hedging guaranteed that time bomb that would have gone off now or later.
And how are the losses being socialized? The assets of the bank are collateralizing the lines of credit they’re getting to stay solvent. It won’t cost anyone a thin penny, other than bank management and shareholders.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
I mean, a “special assessment” is just a different word for a one-time tax, and it being directly on all banks and indirectly on everyone who banks, or does business with entities who bank, makes distinguishing the payers of this tax and “taxpayers” ludicrous hair-splitting.
But at some point, there was a cause very close to the material problem you’re looking at. In this case, that’s the compounded risk that SVB took on in courting a concentrated clientele and trying to balance their books with unusually long-term purchases.
If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.
I think it's time we stop imagining that financial institutions will ever do anything that they are not legally required to do. This was a failure of regulation. Calling it personal responsibility is about the same as getting mad at the dog for getting into the garbage. It's our fault for not taking out the trash.
And I kind of agree. Yes, the mistake was not hedging MBS and treasuries interest rates.
But are they really the only bank in the world doing that mistake?
What truly made it fatal is the VCs. That's also why nobody is coming to buy them. The speed at which the bank run happened, showed exactly how much they valued the bank.
If you're swimming with sharks, it's a big mistake to bleed. But let's not pretend the sharks are innocents. Bleeding isn't usually so fatal.
Which is why I don't think the sharks deserve a bailout.
I’m not sure that looking to the financial sector for examples of fiscal responsibility is actually reasonable, but I’d guess that they’re the only bank that’s “too-big-to-fail” that could possibly fail because of a single slack discussion.
Just because government bonds are unlikely to default, that doesn't make acquiring them "conservative". If you're a bank, with an entire function dedicated to making sure that assets match liabilities ("treasury"), and that ought to be aware of things like "DV01" and "duration risk", then you're supposed to know this.
They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds.
The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.
The problem is they bought a bunch of long dates securities yielding 1.5-2% and when the deposits flooded in they started paying more than 1.5-2%.
They have been better off buying T bills or something else without duration risk and paying something less than Fed Funds. This is what most banks do.
The only thing that's broken is the financial system. A customer should be aware when depositing money that that money might be locked away, and agree to those terms, and get a cut.
This is SVB gambling and losing the bet, simple as. Everything else is just a pathetic excuse, don't enable it.
Just look at the term "excess liquidity", that's newspeak. I expect the bank to have my 100$ the day I ask for it. I'm not a using bank because I want to, but if I store it under my bed I get to deal with the IRS. They make themselves necessary to live, then expect my deposits to work for them.
There are financial instruments like interest rate swaps specifically for banks to hedge against this exact scenario.
Let’s not extrapolate some simplified personal finance advice to financial professionals who should have known better
And if you escape civil action by IRS, the fed or local government can simply take it as civil asset forfeiture without accusing you of wrongdoing.
.gov really really hates big piles of printed currency and if they find out you have it the temptation for them to take it can become overwhelming to various entities that survive off of the taking.
Because criminals/tax evaders do that.
The game is rigged. Give me a bank where I just deposit my funds, and nobody touches it and I'm happy to pay for the service. Maybe I want a portion of it to grow and I'll allow it to be lended, for interest.
The bank should work in my interest, not their investors.
While strictly true, they did decide to go with long dated bonds that would tie up those funds for years potentially. Typically banks will buy bonds of shorter duration.
SVB however couldn't resist the higher interest rates of those long dated bonds. IIRC they had an average maturity of six years, whereas most banks are typically under one year.
As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure that's going to be a fun situation should they face even a slight liquidity crisis of, say, more retirees pulling money out than there are young people depositing into pensions and whatnot.
I wish to see the proof of reserve implemented for traditional banks, or the trust will just keep eroding...
The fact that many other banks were prescient disproves this point handily.
They bet billions on zero interest rate policy and didn't hedge that bet.
Glut or no glut, would have failed just like LTCM or any other huge bets that failed to consider tail risk.
But you are not your mom. you don't have to share on the disgust and shame, however you may chose to do so if you want.
the points being: the disgust is your mom's not necessarily yours. whether to partake on your parent's shame of being called a libertarian is a choice.
therapy for me has been about finding subconscious choices like those
on the other hand, sorry for you... why would one choose to feel negative emotions like shame?
Sure but they could have bought shorter bonds instead of a bunch of ten years, there's no reason to take so much duration risk.
Every intro to financial engineering class includes a "build a Treasury ladder" exercise, it's not rocket science.
Admittedly, I still don't fully understand the link between investing too cautiously and seeing poor returns and there being a run on the bank.
I agree it’s peculiar to phrase it as the government is to blame. Except perhaps to the degree that the government in 2018 relaxed risk test requirements that would otherwise have included SVB, those requirements were originally set after and in response to the 2008 collapse.
But ultimately the blame lies with the bank executives.
'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes
http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable.
As shown in https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been.
The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds.
If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021).
And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?count...
But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
This point is lost on everyone. They will get their money back, in 10 years. That's why it's a called 10 year note.
They messed up not considering they'd need the money sooner, and failed to seriously consider that no one would want to buy their notes if interest rates went up, because there would be much better deals out there.
They made a 10 year bet that interest rates wouldn't go up significantly. They bet wrong.
Note that Planet Money is intended more for accessibility and entertainment than hard hitting economic news... but they still get their facts right.
Wrong. You're forgetting about inflation. Interest rates increased because inflation spiked. In 2022 alone, that nominal payout at maturity has lost 8% of its real value.
However, it will still pay out exactly what it said it would pay out when it was purchased. Compare this to buying a stock in say... RBCN (went bankrupt and delisted in December) where any of the stock you had is worth nothing.
There is no risk that a bond won't pay out the amount that it says (other than the government really messing up and defaulting).
I will certainly be willing to say "a purchase of 10 year bonds would be short sighted and failed to account for possible risks from changing cash flow or increased rates over the next 10 years."
And yet a bond is still going to pay out what it says on the label when it was purchased when it pays out.
Now, if its not a hold to maturity type portfolio and you want to trade them, then its a whole 'nother ball game where prices will go up and down as it becomes easier or harder to make money in various markets. And whoever holds a $100 ten year note at ten years time will get paid exactly that amount.
'What this means going forward
An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years.
If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
From SVB's bio of President and CEO Greg Becker at https://www.svb.com/profile/greg-becker:
"He is a Class A Director for the Federal Reserve Bank of San Francisco"
The above scheme requires far less government regulation as well, but it does need some, mostly an extension of the idea of theft to encompass fractional reserve banking.
That's revisionist and silly[1]. Spending all your liquidity on long term bonds isn't "conservative" if you're a bank. It's not your money! It's your customer's money that you're just holding for them, and you just dropped it all in a vehicle that doesn't mature for 10 years. What if the customers want their money back? Yeah, we just found out.
No, the conservative option if you can't invest it is just to sit on it. That's what banks do. They sit on other people's money. That they are allowed to spend some of that money on speculation is a reasonable optimization, but it's just that. Obviously just sitting on it wasn't going to get the returns they'd promised to investors though. So they placed bets instead.
[1] And I'm not going to touch the idea that the "authorities" somehow forced them into this. No. Just no.
Well this “safe bank” actually falls foul of US banking regulation - there are regulatory requirements for minimum levels of “speculation“ as a bank.
Now clearly SVB got in over their heads here with risk. But just sit on all the money isn’t a legal alternative.
However once the VCs panicked started a bank run, they folded. Just like literally any bank would. ~45b of net withdrawals in a single day is going to cause any bank significant trouble.
Instead, they were the ones buying the MBSs and taking on the long-duration risk.
They could have taken a look at inflation and the glut of liquidity and bought shorter dated bonds but instead they locked them money up for 3-10 years at paltry interest rates.
No, they bought MBS, yielding 1.6% at the time, which aren't conservative. What they should have done is bought 1 month - 1 year Treasuries, yielding 0.10%. Then they couldn't give out above-market interest returns, in excess of 0.5% compared to other banks, which SVB depositors pocketed during the upside, and then failed to realize the risk during the downside, being bailed out by the government.
Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. The institution would have lost equity value, but would be a going concern.
However, in the above case, the depositors would not have been at risk. Instead, once their unrealized losses piled up, they rolled the dice hoping things would turn and effectively bet depositor money.
This is not the customers/depositors' fault.
This is not the government's fault.
This is not the Fed's fault.
This is the fault of bank management, specifically risk+accounting+exec teams.
To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
Note that many customers had their excess funds not in bank deposits, but in US treasury bills / short term bonds via a Money Market Sweep Account. Except it turned out the assets of the MM account were not in their name but in SVB's name via a custodial account, and hence is locked up, and would have been locked up in bankruptcy.
They did try to originate more credit, but couldn't.
But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds.
EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.
Filling up on 10-year bonds is not "the conservative way." It's gambling that the interest rate will stay low for 10 years.
I highly recommend this video by Patrick Boyle for a primer on SVB: https://www.youtube.com/watch?v=GdfYnqyu7v8
As I understand it, the reason they failed is because they gambled on interest rates staying low and chased returns to maximize profits to shareholders.
Shareholders deserve to lose money when they are pushing - or even remaining silent on - increasingly risky corporate behaviors as absentee owners.
That's not clear to me.
I think the purpose of banks is to handle funds well. If a bank is "made" to "see itself with a glut of funds" it's needs to be able to figure out how to handle that.
I'm not endorsing the last several decades of federal monetary policy, but regardless, it doesn't make senses that it should necessarily focus on making things simple for regional banks.
No it's not.
SVB bought 10 year MBS a couple of years ago to hold capital. They could've instead just rolled 90 day Fed debt and thus have been largely immune to interest rate changes. What they did was they took a risk with custodial assets. This is 100% the bank's fault.
Why did they do that? Because 10 year MBS had a higher yield than 90 day debt. So they took a risk. Why? For the benefit of executives and shareholders.
SVB did this to themselves, possibly with Thiel instigating a bank run for whatever reason.
Stop giving these guys a pass just because of your residual (and justifiable) skepticism about fiscal/monetary policy. I have similar doubts about how government manages public finances, but I also know that depending on a low-yield bond purchased before a pattern of graduated interest rate hikes is gonna leave you with a cash flow problem.
Indeed. Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed, up until last Friday. If anyone had some insight about what federal monetary policy was doing, he should have.
Isn't this like a massive conflict of interest? How is this legal?
https://news.ycombinator.com/item?id=35011402 (March 2023)
https://news.ycombinator.com/item?id=30880163 (April 2022)
Are most people here too young to remember the Global Financial Crisis of 2008?
It couldn't because that's not how banks works. Banks create deposits by making loans.
When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves.
What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price.
Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door.
Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.
Someone could argue that they could have foreseen that this abundance of liquidity in the markets, along with the supply chain issues, would eventually lead to inflationary pressures and that once inflation has shown its ugly face, those bond's market value would be discounted, and that they could become vulnerable to a bank run.
But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.
That said, please don't confuse me with a libertarian; I am just raising a somewhat contrarian point. Being called a libertarian would be an enormous source of shame and disgust for my mom.