The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement.
From the article:
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.
Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.
I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views.
Glad you found it helpful.
I agree that it is important to argue I good faith and help each other sharpen our views. Thank you for providing an important resource in the discussion.
While I still feel the instinct for vengeance or rage at SVB is counterproductive given that you showed evidence that the leadership of SVB knowingly, willfully, and with reckless disregard for the consequences, decided to invest in more long term securities than they were advised by their own team does justify some of that instinct.
That being said I still feel the system worked as expected. I think, given human nature as on display with SVB, the regulatory environment should go back to the stronger standard but I also think getting bank failures to 0 isn’t a laudable goal. Some failures will happen and as long as we eliminate the motivation for a run on the bank the system should allow for a degree of risk and failure.
So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.
It seems like SVB was perhaps a little more exposed to interest rate risk than others, and had a pool of depositors that were more likely to withdraw significant funds in lockstep.
All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons.
[0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
> that was one of the lowest risk assets they could invest in and still get enough
Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.
Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.
While there wasn’t counterparty risk with those assets, there was duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.