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
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."