The collapse of SVB exposes the largest crack in the economy

http://www.brooock.com/a/svb-collapse-exposes-cracks-in-economy

291 287 3 years ago

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion.

Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable.

European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole.

For those interested, FT Alphaville describes this in ample detail:

Silicon Valley Bank is a very American mess https://on.ft.com/3ywMURD

xwdv• 3 years ago

The exemption should still be allowed, as it led to great banking innovations for startups.

The exemptees just need to be fucking careful with this advanced mode of operation.

rco8786• 3 years ago

The exemptees just need to be fucking careful with this advanced mode of operation.

How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.

talideon3• 3 years ago

So, you're essentially proposing a weaker, informal version of Basel III. In which case, why have such an exemption in the first place? What innovations does it lead to? Restrictions on banking typically exist for a _really_ good reason. After all, we saw what happened when retail and investment banking were allowed to mingle because it 'lead to [...] innovations'. If you're going to advocate for something beyond saying 'but look, innovation!', you need to be more explicit about what those innovations are, because European banking is plenty innovative within the constraints of Basel III.

layer8• 3 years ago

The exemptees just need to be fucking careful

You mean “need to have sheer luck in their gambling”.

bequanna3• 3 years ago

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

MrMan4• 3 years ago

nonsense - what banking innovations do startups need? is there really any such thing as a startup? or are we just talking about small businesses some of which grow into larger still unprofitable businesses? hopefully this mythologizing stops

Forgeties792• 3 years ago

“The exemption for dumping hazardous materials should still be allowed, as it led to great manufacturing innovations for startups.

The exemptees just need to be f**ing careful with this advanced mode of operation.”

This sounds tongue in cheek I know, but SVB’s situation has created real world consequences even for me, someone who has no money tied up with them. My go-to for bonded cellular networks (so i can run a livestream for my employer, a small tech start up) had to tell all of us who use them to pause payments immediately today as this unfolded and are not taking new rentals in the meantime. They’re literally not getting paid right now. This is not a holding pattern that can last long and is highly disruptive for them and, consequentially, me. A video content guy at a small start up on nearly the other side of the country.

Jensson3• 3 years ago

Downside: this also means bank is going to be less profitable.

What are the downsides to society if banks are less profitable? They invested in T-Bills, I don't see how that investment served society in any way.

PKop4• 3 years ago

Literally funds the government lol

dragontamer4• 3 years ago

They invested in T-Bills

They invested in T-Bonds (10Y or longer) and MBS (mortgages) it seems like, not T-Bills (1Y or shorter)

The distinction is extremely important in this case. If they were trading T-Bills, they would have survived. Instead, they took on much riskier T-Bonds (probably hoping to make more money).

AnimalMuppet• 3 years ago

There is no downside to society if banks are less profitable. There is a definite downside to the banks, though. And given the chance, at least some banks will try to get out of that downside.

gumby• 3 years ago

What are the downsides to society if banks are less profitable?

Because they touch money they have all sorts of woo-woo respect. Really they are just service providers like lawyers, gardeners, and doctors.

The whole public perception of the finance sector (and its own sel-regard) is backwards.

JumpCrisscross• 3 years ago

What are the downsides to society if banks are less profitable?

The minimum viable size of a bank increases. Small, community banks can't implement Basel III. That's why they were exempted. How SVB was in a bucket with the Bank of Jackson Hole, however, is another question.

cm21873• 3 years ago

They charge more for credit.

talideon3• 3 years ago

Your username is both very ironic and apt in this particular case. Also, your analysis is spot on.

nayuki• 3 years ago

On Reddit they call this phenomenon beetlejuicing. (Subreddit, Know Your Meme, Urban Dictionary)

worik6• 3 years ago

SVB used an exemption from Basel III,

Really?

That is interesting. Why? How? Who else?

toomuchtodo• 3 years ago

https://archive.is/Fx1is

rr8082• 3 years ago

Are you sure that is the problem? I see lots of comment today they lost a lot of money on long dated treasuries. Which is "safest" asset.

dragontamer4• 3 years ago

No.

My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average (https://investor.vanguard.com/investment-products/mutual-fun...)

A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.

twelve40• 3 years ago

so it looks like the bank run was not the root cause but a consequence of this mess, and all these people moralizing about not panicking were essentially advising small companies to keep funding wild practices of one adventurous bank CEO out of their pocket - how could it have ended in anything else?

cm21873• 3 years ago

Yes and no. LCR is basically requiring you to keep in cash and liquid assets the equivalent of a 30 day bank run. And it should work. A european bank had very large bank run last year and survived without even breaching its regulatory minimums. But that still leaves the bank in a weak position after the bank run, and you can't predict the exact magnitude of a run.

npunt• 3 years ago

What other banks that startups use have an exemption to Basel III? Would love to understand broader risk to startup ecosystem.

ta1243• 3 years ago

Why would a startup use a risky bank?

JackFr2• 3 years ago

Agree.

SVB was not small, but an order of magnitude smaller than the large money center banks (Citi, BofA, JPMChase).

That being said, nearly every other bank of that size submitted Dodd Frank Stress Test results to the Fed in 2022.

https://www.federalreserve.gov/publications/files/2022-dfast...

Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.

boppo1• 3 years ago

97% of depositors exceeded the FDIC limit.

ageek123• 3 years ago

I’m not sure you’re using the standard definition of “make whole”…

MrBuddyCasino• 3 years ago

This btw is Jay Ersapah, Head of Financial Risk at SVB. Apparently DEI & LGBTQ issues were more important than making sure their assets & obligations are balanced: https://twitter.com/the_real_fly/status/1634035956188688385

fidgewidge2• 3 years ago

At SVB UK, which is isolated apparently. Not that it reduces the impact of the image ...

djfobbz• 3 years ago

We are living in a REAL CLOWN WORLD!

Longtermvalue1• 3 years ago

It’s reported that SVB paid executives bonuses to grab cash right before they were shit down. Each of these executives names should be published & exposed as the grifters they are.

1980phipsi• 3 years ago

Come back when you have the entire risk mgmt org chart and show she is at the top. Then I would be interested.

throwayyy4790872• 3 years ago

SVB UK has now been sold to HSBC for 1 pound.

HyperSane3• 3 years ago

Glass-Steagall needs to be brought back. It was incredibly effective at preventing situations like this.

fshbbdssbbgdd2• 3 years ago

Glass-Steagal separated commercial banks from investment banks. As far as I can tell, SVB was just a commercial bank and the way it went bust has nothing to do with conduct that would have been prohibited under Glass-Steagal.

DeathArrow2• 3 years ago

What are other banks that exploited that loophole? Maybe it's time to short them for some easy money.

m348e912• 3 years ago

https://twitter.com/DavidSacks/status/1634292056821764099

Looking at the comments here, it's possible that this may trigger a run on banks.

tekla2• 3 years ago

There is no evidence of this

dragontamer4• 3 years ago

Why?

My money at VMFXX is almost entirely composed of safe Fed Repos with average maturity of 2-weeks. VUSXX is mostly Treasury Bills, again of maturity averaging like 2-weeks. My money at SWVXX is composed of AAA-rated bank notes, of similar 2-weeks-ish maturity average.

The idea of a bank, like SIVB, being composed of largely 30-year mortgages and 10Y or 30Y Treasury Bonds is insane. The bank deserves to die after taking such high duration risks. There should be _NO_ bailout. I can barely believe a bank was so stupid to keep customer deposits backed by something so risky.

----------

We've been preparing our financial system for the last 15 years (since 2008) for the next financial storm. We've got "stress tests" to see that various banks have severed contamination between each other, at least in theory. Lets see how good our preparations have held up.

No point giving up and bailing things out before we've even tested our new financial system regulations. We can afford to let some banks go under. Only if the contagion has a chance of spreading everywhere should we consider the last-ditch effort of a bailout.

cplusplusfellow5• 3 years ago

I couldn’t give two shits about banks that go under. The businesses that concern me are the ones who lose deposits.

qqqwerty• 3 years ago

He is suggesting that the Fed/FDIC make depositors whole, not necessarily bail out the bank.

There is a good chance that depositors will be made whole regardless, but even if it does require some intervention it is probably worth it to prevent this from spreading to other banks. There are very valid reasons why certain organizations would need to keep more than $250k in an account, and if everyone of them started transferring their money to a handful of the safest institutions, then things could quickly get out of control.

beezle5• 3 years ago

It is not insane at all. Banks match expected duration of their assets and liabilities. This bank made a number of errors and was caught in a classic liquidity squeeze. Not the first and won't be the last.

SketchySeaBeast• 3 years ago

As a rule let's not use Twitter comments as indicators of anything, but most I see seem to either be enjoying the chaos or confused as to how SVB's bad decisions leading it to fail will lead to other banks failing.

EwanG• 3 years ago

Is that universally a bad thing? Are all US Banks so thinly capitalized that none of them could survive a run? If so, then doesn't that make one question why you'd ever keep money in a Bank in the first place?

I get that the FDIC insurance is supposed to make you whole as long as you have less than $250K in a bank. But then you have to ask if the FDIC can actually cover that for several banks at a time - particularly at a time when the debt ceiling has not been raised and so Treasury can probably ill afford additional unplanned spending.

dougmwne2• 3 years ago

What you are talking about here is the financial apocalypse. If a hundred million people all lose the money in their bank accounts, then we go back to the barter system overnight. The thing you will be bartering will likely be seeds and ammunition.

7speter2• 3 years ago

Though I’ve never connected the dots the way you have, the last time major commercial banks (like WaMu) failed it was because of being caught swapping much riskier assets than this article is pinning the blame of SVB failing for. Also, when it was clear that there was a risk for cascade collapse of major commercial banks, fed leadership and potentially people from the fdic went to congress and told them to stop playing partisan football, and TARP was passed within a week.

If SVB really failed because it misstepped and believed it would make more money off of government bonds and didn’t, I don’t really see there being a risk of the major banks collapsing. If lots of smaller banks banked on (no pun intended) doing the same thing though…

fshbbdssbbgdd2• 3 years ago

The subtext here is David Sacks and his friends are investors in Silicon Valley companies. Lots of Silicon Valley companies are depositors of SVB and could lose money if there is a haircut on assets over $250k, or at least will lose temporary access to their cash. David Sacks wants SVB to be bailed out by a major bank so those deposits are made good. He’s talking about a wider economic impact because that’s an argument that such a bailout is necessary for the country, not just local VCs.

wpietri2• 3 years ago

The especially funny thing to me is that some VCs were telling their portfolio companies to get their money out of SVP first thing this morning. So Sacks is a VC asking for a bailout on a bank run triggered by VCs. Cry me a river.

It's nice that he took time from his busy schedule decimating Twitter to share his views. But in my opinion VCs can't simultaneously claim to be such financial geniuses that they deserve lower taxes (via the carried interest loophole) but such babes in the woods that they need Uncle Sam to bail them out for a bad financial decision. Pick a lane, buddy.

practice9• 3 years ago

friends

Chamath?

ohashi• 3 years ago

So gambler wants house to cover his losses because his friends and him won't be able to continue gamble if they lose.

cplusplusfellow5• 3 years ago

I don’t understand the disgust I’m reading for VCs and startups. Bailing out the bank doesn’t mean we let the bank CEO get richer off this transaction (like we did in 2008). It means the startup companies making payroll are going to survive and continue building the future of technology and healthcare.

What am I missing?

throwawayfky• 3 years ago

He and his buddies were talking about playing gambling and donating earnings.

I saw it as a promotion for gambling. Listening to them talk about it made me sick

Americans love for gamlbing and alcoholism is beyond my comprehension. Like all bad things it's very bad in the long run

happytoexplain• 3 years ago

I don't use Twitter. The Tweets I see when I click this link are 80% political shitflinging from one side of US politics (even the replies to each one are 100% one-sided), and 20% non-political. Why?

danielheath• 3 years ago

Because that’s estimated to maximise the chance of you signing up?

quickthrowman• 3 years ago

Twitter attempts to manipulate your emotions by showing you controversial things to keep you looking at ads as long as possible, just like every other social media company.

spamizbad• 3 years ago

Sorry, but the systemic risk here is vastly overstated. Yes, this will be painful to the tech sector but they made some truly awful decisions and have to pay the piper.

We should also consider the moral hazard at play here. How are future tech CEO's going to go into work every day and completely crush it 200% if they know that the government will bail them out if their monkey jpeg startup fails? A bailout will only breed lazy entrepreneurs, taking hard-earned tax dollars away from America's job-doers.

7speter2• 3 years ago

Dunno if you’re being intentionally tongue in cheek, but a monkey jpeg startup is pretty lazy/scammy/bs-y

yieldcrv3• 3 years ago

all I’m seeing is that the monkey jpeg startup just needs to never take VC capital from Andreesen Horowitz and then won’t be tied to using that one bank

just stick with selling directly to collectors and you already have enough money

bagels• 3 years ago

I don't think the statement is completely misplaced as other comments on this thread indicate. Everyone has to be wondering if their bank is next. Just an anecdote, but, I'm sitting here wondering if I should sell the bank bonds I bought because the counterparty risk just skyrocketed. It doesn't take much to get the snowball going.

lotsofpulp• 3 years ago

Did he delete this tweet?

https://twitter.com/TheyCallMeTarz/status/163431641123228877...

nodesocket• 3 years ago

A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar

Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.

dougmwne2• 3 years ago

Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate.

So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.

JohnFen8• 3 years ago

they are destroying the principle of every existing bond on the market

What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised.

It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.

quantgenius• 3 years ago

They would have gotten their principal back but missing out on interest for 10 years is a huge cost, particularly if you have to pay out interest in the interim to your depositors.

headsupftw• 3 years ago

That's just another way of saying "that's why its price is down 20%".

stefan_• 3 years ago

Just so we are all fully aware: SVB bet in ~2020 that interest rates they offer could be well below 1% (given their operating costs and what not) for 10 years. Obviously, by 2023 already, depositors were expecting much more.

So, yeah, these MBS will probably pay out when held to maturity, but their customers didn't buy MBS, they deposited their money in a bank.

beezle5• 3 years ago

Let us hope that the bank did not "bet" and instead had a decision making process.

nostromo3• 3 years ago

Owning bonds that pay 1% for 20 years when inflation is running at 7% is a great way to lose lots of money.

You’ll get that money back come 2041, it just won’t be able to buy you much.

TacticalCoder• 3 years ago

Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.

100% back in, say, 9 years at 1.5%. Or take the 20% hit today, buy back bonds giving 4% yearly and end up with the same amount. I mean: it's literally how the price drop is calculated right?

worik6• 3 years ago

If they could have held the entire term they would get back 100%.

What counts is the real, not nominal, value

projektfu2• 3 years ago

I noticed that he conflated the safety of a T-note* with the asset price. US Treasuries are AAA-rated super safe guaranteed returns because they're not expected to default or miss a coupon payment, and they'll be redeemed for the full value when they mature. That doesn't mean they don't have market prices that fluctuate.

*T-bills are up to 52 weeks maturity.

brockwhittaker• 3 years ago

Thanks for the note! I'll change the wording in my article WRT bills/notes. :)

With regards to safety, I noted that I think there are two types of safety to note here:

1. Default risk. 2. Asset price volatility.

Ultimately if someone is willing and able to hold to expiry, they aren't subject to #2, but this clearly wasn't the case with SVB and may also be the case with other institutions. I think it lacks nuance to not consider the middle states between the purchase of a bond and the full return of the bond upon expiry.

atomicnumber3• 3 years ago

Heh I was wondering if someone else would spot that too. Who said finance people aren't fun at parties?

beezle5• 3 years ago

Responding more to the quote:

First off - it is not a 10Y T-bill. T-bills extend to 52 weeks. From that point through 10Y are "notes" and everything longer are bonds.

Second anyone involved professionally in the markets understands the duration (not maturity) of bonds and how coupon rate and market interest rate will effect the price of said bond. [those interested can google terms like 'modified duration']. So there is absolutely no shock that the price of 10yr paper with a 50bp coupon would be near 80 in the current rate environment.

bjornsing3• 3 years ago

If they could have held the entire term they would get back 100%.

Yes. But those "100%" wouldn't be worth as much, due to inflation. There's also an opportunity cost to consider: if you sell now with 20% loss you get a chance to invest that money wiser.

Apocryphon• 3 years ago

So between the tech angle and the housing-related investment vehicles, are we remixing 2000 with 2008 now?

cplusplusfellow5• 3 years ago

Self inflicted wounds this time, though. There is nothing wrong with a bank purchasing 80bln of MBS with their depositors money. The issue becomes when the fed suddenly raises rates faster than any time in their history while still failing to fight inflation (which is a result of having a stronger economy).

testfoobar2• 3 years ago

SVB failed to hedge their interest rate risk.

worik6• 3 years ago

The issue becomes when the fed suddenly raises rates faster than any time in their history

No. That is a fact. But it does not collapse properly run banks.

throwaway2847• 3 years ago

Nobody forced SVB to buy up long bonds at negative real yields.

beezle5• 3 years ago

No, please do not even try to imply that this was the Fed's fault.

They did not raise "suddenly". The move away from ZIRP was well telegraphed. Once they did the first hike the only question was how fast and how far. Most in the market initially expected an end rate around 3% (ie, 100bp over their target inflation rate of 2%). As it became increasingly clear that the inflation was not just about supply chain disruptions that end rate target went to 4% and higher.

Further - every bank has a team with one responsibility - asset and liability management. They are responsible for not just the product choices (ie, MBS vs Treasuries, etc) but also matching durations. The Treasurer of the bank is also responsible for oversight, including whether or not any of these positions should be hedged and to what extent.

This is entirely on the bank staff and management.

UncleOxidant3• 3 years ago

Not the Fed's fault. SVB's fault for going all-in on 10year duration MBS. If they had mixed in a good amount of shorter duration tbonds/tbills they would've been fine.

rufus_foreman2• 3 years ago

The issue becomes when the fed suddenly raises rates faster than any time in their history

The Fed funds rate was 9% in July of 1980 and 19% in December of 1980.

narrator• 3 years ago

Boom and Bust is a feature, not a bug in western fractional reserve banking. In China, where they have a different system, the central bank would electronically print debt free money and recapitalize the bank and execute any bankers violating lending guidelines or otherwise giving "illegal loans" in order to prevent the moral hazard this would otherwise create. Being a banker and screwing around is an extremely serious crime in China.

The only reason the boom/bust cycle is implemented thus in the west is so the banks can periodically redistribute assets of their least successful borrowers to other people. In China, the reorganizations are more market priced since the ownership and control of distressed assets is written down by the central bank and they are resold for pennies, while in the west it tends to go through bankruptcy court, which is a slow complex bureaucratic process and tends to destroy what was left of the company.

yalogin• 3 years ago

As someone that is not following this as closely as I would like, does the collapse of this bank have nothing to do with FTX and Crypto?

morelisp4• 3 years ago

Only indirectly; the tide is receding for the first time in many years, and it's exposing a variety of... issues.

UncleOxidant3• 3 years ago

naked swimmers.

tekla2• 3 years ago

FTX was simple fraud. This isn't really related and is more standard bank taking on wayy too much risk.

thepasswordis• 3 years ago

FTX was because they took customer deposits and gambled with them, lost the gamble, and therefore lost the money.

jandrese• 3 years ago

Only indirectly. They released a statement after the FTX collapse saying effectively "don't worry, no problem here", which caused a bank run that they couldn't manage and forced the collapse.

kevin_thibedeau• 3 years ago

Jedi mind trick only works if you're a Jedi.

timy2shoes• 3 years ago

They are related in that crypto (and ftx) and the massive explosion of start-ups are a low-interest rate phenomena.

UncleOxidant3• 3 years ago

Given the timing one wonders if Silvergate had more impact on SVB. SVB claimed to have minimal crypto exposure, but one wonders what might come out as the FDIC digs deep into their books.

But mostly this was because they bet the farm on long duration bonds just before a period of rising interest rates. It's not like nobody saw that rising rates were on the horizon.

dehrmann• 3 years ago

I'd say they're unrelated. This situation could hit any US bank that placed the wrong bet. What's somewhat unusual, and might shelter other banks, is the bank run was viral among VC-backed firms. They also had a stronger incentive to withdraw a lot more because their funds weren't insured. A bank with lots of retail customers doesn't have this issue.

marcopicentini• 3 years ago

In 2008 we learned “cartolarization”.

In 2022-23: “Bond convexity”.

This word is still not on headlines yet, so maybe more loses has to come.

SideburnsOfDoom• 3 years ago

In 2008 we learned "cartolarization"

Did we? So what the hell is it?

astrange8• 3 years ago

Italian-English for securitization?

rationalist• 3 years ago

A misspelling of "collateralization"?

rehitman• 3 years ago

Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.

jschveibinz• 3 years ago

Just something to consider…

A casual look at the regional bank index ETF will show that starting about two weeks ago, the price started to steadily decline and then a sudden drop with SVB. I’m not sure if this decline is well correlated with the total market index over the same period, but if not, it suggests that some people “saw this coming” a couple of weeks ago and the other shoe may still need to drop. Was it just good analysis? Was there some whispering going on? If so, I hope the SEC is watching.

markus_zhang• 3 years ago

This kind of things usually have someone or some people pushing from behind. I'm sure there are some sharks around the corner. Of course you have to have blood to attract sharks but human sharks can easily buy social media and newspaper to exploit small wounds.

This might be just the beginning of a large hunting campaign, let's wait and see.

MrMan4• 3 years ago

this bank stuck out as troubled far before this event

snewman• 3 years ago

These bonds were supposed to be "safe" in the sense that they would be repaid on schedule. And that's been fine, AFAIK there is no suggestion that they won't be repaid.

The problem is that SVB, knowingly, took on "interest rate risk" by buying long-term bonds (average 6.2 years, I read) that lock in an interest rate. The money to purchase those bonds came from deposits, which can be withdrawn at any time. When everyone started withdrawing their money SVB had to sell the bonds, and they took a loss because interest rates have increased and the bonds they were selling were not longer worth as much.

kqr2• 3 years ago

https://www.marketwatch.com/story/20-banks-that-are-sitting-...

drawkbox• 3 years ago

The problem wasn't really the bonds, it was the influx of 3-4 times the money from 2019 to 2021 that essentially made SVB make basic and bad decisions chasing profit. The influx was essentially a pump and then they leveraged themselves to current markets not future even with a safe vehicle. SVB's whole premise was that interest rates wouldn't go that high, a very bad bet in high inflation.

The dump trigger wasn't even an action/attack it was the lack of additional influx of VC/private equity/sovereign money, probably mostly from foreign markets that slowed or stopped, that tripped them up.

Then larger investment groups filled with startups like Founders Fund and Union Square Ventures doing a margin call across all their funds/investments caused a big enough dump that it was over. The run was started at this point and days later the bank is over.

Ultimately this is SVBs fault, but also regulators because concentration like this where they are responsible for so many companies and one type of money VC/private equity, is an attack vector just sitting there. It wasn't wise for investment groups to run the bank either because now this harms companies across the board, but may also be a consolidation move, shaking out companies they don't back.

HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.

The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]

Superefficient businesses create the potential for social disorder.
A superefficient dominant model elevates the risk of catastrophic failure.
*If a system is highly efficient, odds are that efficient players will game it.*

It is CLEARLY time for some anti-trust busting at the funding level.

[1] https://hbr.org/2019/01/the-high-price-of-efficiency

delfinom2• 3 years ago

Bonds weren't the problem. The financial strategy employed to use those bonds was the problem.

You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.

denimnerd42• 3 years ago

you can transfer your treasuries to a broker and then sell them. i do see your point though. if your emergency is you need your life savings TODAY then yeah you'd have a problem. but you could probably find a source of credit while you sell.

twblalock• 3 years ago

Every sophisticated bond investor knows about duration risk. We expect banks to be sophisticated in that way. This was a really boneheaded investment to make at a time when interest rates were at historic lows.

guhcampos• 3 years ago

This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds?

I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on.

Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?

jfengel• 3 years ago

The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.

You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.

gruez3• 3 years ago

The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.

You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/

bjornsing3• 3 years ago

I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1].

1. https://www.schwab.com/learn/story/treasury-inflation-protec...

inconceivable• 3 years ago

there are interest rate swaps (insurance, basically) but i think there may be some kind of regulation against banks engaging in derivatives trading?

marcosdumay• 3 years ago

AFAIK, variable rate bounds aren't common anywhere else. They are more of an inheritance of the hyperinflation times, and the government really hates them.

But people do love buying them, exactly because they never lose nominal value.

ThrustVectoring• 3 years ago

You only get paid to take on risk. If SVB hedged away the interest-rate risk that they take on by buying long-term bonds, they would no longer be taking on as much risk and thus no longer potentially earning as much profit.

cezart• 3 years ago

Or so little profit, as in this particular turn of events

rich_sasha2• 3 years ago

Every bank in existence fundamentally borrows short-term at a low, floating rate, and lends back out long term at a higher rate. The lending rate can be fixed or floating.

This kind of thing is bank risk management 101. For example, in Europe, banks tend not to lend out long term at all at a fixed rate, precisely for reasons like this.

Broadly this is called "duration marching" IIRC, duration being the name of sensitivity to interest rates. Ideally a bank would have no duration risk - they don't care if rates are going up or down. You can achieve it with a variety of tools: IR swaps, issuing long-term deposits/bonds, floating rate loans etc.

You're right, if SVB in 2021 just bet the farm that interest rates will stay so low for a decade, this is basically moronic.

Scoundreller5• 3 years ago

this is basically moronic.

No, it’s smart! If it works out, you cashout and go on the speaking circuit patting yourself on the back for your ygenius. If it doesn’t, you’ve limited your own liability and someone else comes in and cleans up your mess.

1vuio0pswjnm7• 3 years ago

The author myopically tries to extrapolate this incident to "the economy" and "other industries". SVB's customers panicked. But who are SVB's customers. For the most part, VC, PE and non-profitable "tech" startups. Not surprising they would panic. They produce nothing themselves, conduct surveillance, sell advertising services, pay employees from funding rounds and call this a "business model".

This is not "the economy". This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie.

Among other things, the parasite needs "zero" interest rate borrowing to survive.

"The economy" is not synonymous with Silicon Valley nor the SV mind virus.

soundsgoodtome• 3 years ago

Hey can we save this kind of comment for Reddit? Literally the majority the tech you use today was born from companies that were unprofitable and leveraged VC funds at some point.

I don’t know about you, but I come to HN for discourse that I could not get on race-to-the-bottom social media sites.

MrMan4• 3 years ago

HN is much worse than many sub-reddits. Look at the belligerent ignorance on display not just here, but that which is demonstrated by the VCs who seem to collectively lack a sufficient knowledge of finance and other things. The decline in quality is evident here, and it doesn't stack up well compared to places where people mostly know what they are talking about.

tgv• 3 years ago

Well, Intel, Apple and Microsoft, to name a few, have (nearly) always been profitable. But isn't VC supposed to invest in things that are likely to return a profit? There's some risk, which is offset against the ROI, but I don't see a good reason to invest in companies that run a loss.

izacus• 3 years ago

It absolutely was not.

jnmandal• 3 years ago

I disagree. The poster has an interesting point and contrarian perspective. Is it a grandiose metaphor? Probably. Can we learn from the discourse? Definitely.

Even if the hyperbolic claim you made was true (it's not - see below if you want), why should we all be polite, pious disciples of Silicon Valley? It's ok to critique things, even when they provide some good.

N.B. I think it's more accurate to say the actual majority of tech we use is born from government funded research à la the entrepreneurial state. One should not confuse R&D with commercialization.

PKop4• 3 years ago

In the short term, it is interesting to see if this problem grows[0]...if Fed keeps rates at high levels for longer, there is going to be a gravitational pull into treasuries which will cause more banks to fail.

It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1]

[0] https://twitter.com/TOzgokmen/status/1634329176554520576

[1] https://archive.ph/Fx1is

mullingitover2• 3 years ago

In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset.

That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008.

Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...

PaulHoule• 3 years ago

Interest rates were going to go up at some point anyway.

pasquinelli• 3 years ago

this is a response to the title: the crack that just appeared must be the largest!

rcme2• 3 years ago

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s?

Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.

phlakaton2• 3 years ago

So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed).

I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!

caddemon3• 3 years ago

You get back your money plus a garbage interest rate relative to what you could've gotten if your money were available now though. That is why it is cheaper, it's not like it's an irrational market dip due to a panic, where the time-value will eventually recover. Unless interest rates go back down very soon the time-value on this thing is definitely a loss.

And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.

Ataraxic2• 3 years ago

I think you're suggesting that somehow SVB a large and sophisticated bank could not contemplate that the fed would raise interest rates. Not to mention despite the size of their bet, they could have unwound this position for the last couple years since their initial bet.

And they bought safe assets with that money.

The point is that you can't buy 100B of bonds and say "oh bonds are safe". When you buy low yield bonds with a 10 year maturation you're inherently betting that rates aren't going to rise since their valuation will go down if rates rise.

When you're a bank risk management does not involve hoping the fed doesn't raise interest rates. Sometimes you make the wrong bet but you recognize your mistake, take the loss and sell those T-Bonds earlier. Then you plan your communication to clearly explain why so that a bank run doesn't happen.

It seems the one of the pieces in the chain is that there was a big disconnect between the internal perception of the magnitude of the problem and what was communicated. Silicon Valley VCs and startups are twitchy right now and they tried to exit this position too late with too little explanation and got hit with a very old and very traditional bank run.

rcme2• 3 years ago

I think you’re simplifying things too much. The issue wasn’t that SVB couldn’t foresee higher interest rates. There were a number of other issues, almost all caused by the Fed and the federal government:

1. Covid stimulus vastly increased the amount of cash at the bank.

2. Artificially low interest rates plus the cash infusion caused inflation.

3. While inflation was beginning, the Fed somehow got it in its head that inflation was “transitory” and rate hikes weren’t needed.

4. The Fed waited too long to raise rates, so they needed to spike rates as quickly as possible once they changed their opinion on inflation.

Basically the government gave banks hundreds of billions of dollars to lend via stimulus spending, and then made those loans worthless by spiking interest rates less than a year later. Whose fault is that really?

senorrib• 3 years ago

It only takes one bank to default, and an infinite amount of articles like this are instantly published. Urgh.

weeksie• 3 years ago

I dunno. Fucking duh, a government bond that pays you a fixed amount of interest is going to lose value when inflation is higher than the loan rate.

chernevik• 3 years ago

There are LOTS of financial players looking for low credit risk long-term assets who can tolerate the associated interest rate risk. Pension funds and life insurance companies have highly predictable long-term cash outflows and often happily buy long-term bonds to match up inflows. They do not care that the market value of their holdings has been hammered by interest rate increases because the assets were selected to fund a future liquidity need.

Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn't mean any of this is new to the rest of us.

DeathArrow2• 3 years ago

I thought Bear Stearns going under was exposing a crack. Same for New Century Financial Corp. declaring bancrupcy.

Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.

The collapse of SVB exposes the largest crack in the economy

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